Income
Income
Income is often defined as the amount of money received during a given period of time by a person, household, or other economic unit in return for services provided or goods sold. Although this is certainly a serviceable definition, working economists need a more precise one. Many economists use a comprehensive definition of income attributed to Robert Haig and Henry Simons, that income is equal to a person’s (household’s) consumption plus the increase in his or her net worth (Haig 1921, p. 7; Simons 1938, p. 50). The two definitions differ in several respects; most notably, the informal definition refers to money received, whereas the Haig and Simons concept refers to changes in net worth.
There are important distinctions between money received, as in the informal definition of income, and changes in net worth, as in the Haig and Simons definition. For example, person A may give person B a dozen eggs for performing a service, and suppose person B uses the eggs to make breakfast. Because no money has changed hands in this example, there is no income according to the informal definition of income. In terms of Haig and Simons’s definition, however, person B’s income has changed his consumption; therefore, his income has increased by the value of the eggs. In other words, barter income is included in Haig and Simons’s income. To take another example, suppose a person buys a stock for $100 and its value increases to $150; unless he sells the stock, no money is received and his income from this asset is zero ($0.00). In terms of Haig and Simons’s income, however, his or her net worth has increased by $50, and thus there is income of $50 though no money has changed hands. In other words, accrued capital gains are included in Haig and Simons’s income.
It is useful for analytical purposes to distinguish between sources of income. Thus, economists, journalists, and policy makers often talk about wage income, dividends and interest income, transfer payments, and so on. Labor income is the income generated from working for a set wage, including tips and fringe benefits. Financial income is the income obtained from financial markets, which includes accrued capital gains, interest income, dividends, and retained earnings. Retirement income refers to pensions and retirement transfers. Government income refers to government transfers such as social insurance payments. Other sources of income include bequests, prizes and awards, and alimony payments received.
EMPIRICAL SIGNIFICANCE
Defining income is important to the analysis of public policy. Using a measure that is not comprehensive could alter the outcome of the policy, and as such may result in poor decision making. For example, if a tax administration such as the U.S. Internal Revenue Service taxes only wage income at a single rate, then the burden of such a tax would take a higher proportion of the total income of low-income households than high-income households, because low-income households obtain a greater share of their income from wages than do high-income households. Another area of research is in the distribution of income and income inequality.
Table 1 shows the distribution of income by source for a variety of countries. The similarities in the shares of income by source among these countries are noteworthy.
| 2005 Gross Income by Source | |||||
|---|---|---|---|---|---|
| SOURCE: http://stacks.gsu.edu:2422/womdas/ | |||||
| Gross income from employment | Tax and social security contributions | Gross income from investments | Gross income from benefits | Gross income from other sources | |
| Canada | 62.75% | 18.49% | 5.46% | 10.87% | 2.43% |
| China | 64.52% | 14.91% | 1.63% | 17.78% | 1.16% |
| France | 46.86% | 25.03% | 5.49% | 22.26% | 0.36% |
| Germany | 47.25% | 25.04% | 10.51% | 14.99% | 2.21% |
| India | 75.61% | 4.36% | 2.67% | 3.97% | 13.39% |
| Italy | 47.04% | 22.03% | 13.83% | 14.98% | 2.12% |
| Japan | 59.82% | 22.43% | 1.80% | 12.48% | 3.48% |
| Mexico | 58.97% | 6.67% | 4.65% | 6.20% | 23.51% |
| Russia | 67.55% | 13.63% | 5.69% | 11.62% | 1.51% |
| Spain | 56.56% | 23.52% | 6.84% | 9.85% | 3.22% |
| United Kingdom | 52.52% | 22.55% | 6.38% | 14.94% | 3.61% |
| United States | 62.49% | 15.29% | 12.00% | 6.28% | 3.94% |
Although there appears to be considerable variation in income from employment, which varies from a low of 46.86 percent in France to a high of 75.61 percent in India, income from employment and taxes and social security contributions (payroll taxes) shows much less variation, with the smallest share being 65.64 in Mexico and the highest share being 82.25 percent in Japan. Many economists believe that tax policy may explain the relative shares of gross income from benefits. Because benefits such as contributions to retirement accounts and health insurance are generally not taxable, one would expect that people living in high-tax countries such as France would prefer to receive income in the form of untaxable benefits rather than taxable sources such as wages; in contrast, in low-tax countries such as India, people would prefer to receive income as wages. This pattern is borne out in the table.
SEE ALSO Inequality, Income; Interest Rates; National Income Accounts; Policy, Fiscal; Profits; Stocks and Flows; Taxes; Wages
BIBLIOGRAPHY
Birdsall, Nancy. 2006. Rising Inequality in the New Global Economy. International Journal of Development Issues 5 (1): 1–9.
Haig, Robert M. 1921. The Concept of Income: Economic and Legal Aspects. In The Federal Income Tax, ed. R. M. Haig. New York: Columbia University Press.
Piketty, Thomas, and Emmanuel Saez. 2006. The Evolution of Top Incomes: A Historical and International Perspective. American Economic Review 96 (2): 200–205.
Simons, Henry C. 1938. Personal Income Taxation. Chicago: University of Chicago Press.
Taylor, Lester D. 1971. Saving Out of Different Types of Income. Brookings Papers on Economic Activity 2: 383–407.
Mark Rider