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Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in
monetary Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are ...
terms. Income is difficult to define conceptually and the definition may be different across fields. For example, a person's income in an economic sense may be different from their income as defined by law. An extremely important definition of income is Haig–Simons income, which defines income as ''Consumption + Change in net worth'' and is widely used in
economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...
. For
household A household consists of two or more persons who live in the same dwelling. It may be of a single family or another type of person group. The household is the basic unit of analysis in many social, microeconomic and government models, and is i ...
s and individuals in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
, income is defined by tax law as a sum that includes any
wage A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as ''minimum wage'', '' prevailing wage'', and ''yearly bonuses,'' and remune ...
,
salary A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis. F ...
,
profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...
,
interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
payment,
rent Rent may refer to: Economics *Renting, an agreement where a payment is made for the temporary use of a good, service or property *Economic rent, any payment in excess of the cost of production *Rent-seeking, attempting to increase one's share of e ...
, or other form of earnings received in a calendar year.Case, K. & Fair, R. (2007). ''Principles of Economics''. Upper Saddle River, NJ: Pearson Education. p. 54. Discretionary income is often defined as gross income minus taxes and other deductions (e.g., mandatory
pension A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
contributions), and is widely used as a basis to compare the welfare of taxpayers. In the field of
public economics Public economics ''(or economics of the public sector)'' is the study of government policy through the lens of economic efficiency and equity. Public economics builds on the theory of welfare economics and is ultimately used as a tool to improve ...
, the concept may comprise the accumulation of both monetary and non-monetary consumption ability, with the former (monetary) being used as a proxy for total income. For a firm, gross income can be defined as sum of all
revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive rev ...
minus the cost of goods sold.
Net income In business and accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest ...
nets out expenses: net income equals revenue minus cost of goods sold, expenses,
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...
, interest, and taxes. Barr, N. (2004). Problems and definition of measurement. In ''Economics of the welfare state''. New York: Oxford University Press. pp. 121–124


Economic definitions


Full and Haig–Simons income

"Full income" refers to the accumulation of both the monetary and the non-monetary consumption-ability of any given entity, such as a person or a household. According to what the economist
Nicholas Barr Nicholas Barr FRSA is a British economist, currently serving as professor of public economics at the London School of Economics (LSE). He received his Ph.D. in economics as a Fulbright Scholar from the University of California, Berkeley and h ...
describes as the "classical definition of income" (the 1938 Haig–Simons definition): "income may be defined as the... sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights..." Since the consumption potential of non-monetary goods, such as leisure, cannot be measured, monetary income may be thought of as a proxy for full income. As such, however, it is criticized for being unreliable, ''i.e.'' failing to accurately reflect affluence (and thus the consumption opportunities) of any given agent. It omits the utility a person may derive from non-monetary income and, on a macroeconomic level, fails to accurately chart social welfare. According to Barr, "in practice money income as a proportion of total income varies widely and unsystematically. Non-observability of full-income prevent a complete characterization of the individual opportunity set, forcing us to use the unreliable yardstick of money income.


Factor income

In
economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...
, " factor income" is the return accruing for a person, or a nation, derived from the "factors of production": rental income, wages generated by labor, the interest created by capital, and profits from entrepreneurial ventures. In
consumer theory The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their pref ...
'income' is another name for the "budget constraint," an amount Y to be spent on different goods x and y in quantities x and y at prices P_x and P_y. The basic equation for this is :Y=P_x \cdot x + P_y \cdot y This equation implies two things. First buying one more unit of good x implies buying \frac less units of good y. So, \frac is the ''relative'' price of a unit of x as to the number of units given up in y. Second, if the price of x falls for a fixed Y and fixed P_y, then its relative price falls. The usual hypothesis, the
law of demand In microeconomics, the law of demand is a fundamental principle which states that there is an inverse relationship between price and quantity demanded. In other words, "conditional on all else being equal, as the price of a good increases (↑), ...
, is that the quantity demanded of x would increase at the lower price. The analysis can be generalized to more than two goods. The theoretical generalization to more than one period is a multi-period
wealth Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...
and income constraint. For example, the same person can gain more productive skills or acquire more productive income-earning assets to earn a higher income. In the multi-period case, something might also happen to the economy beyond the control of the individual to reduce (or increase) the flow of income. Changing measured income and its relation to consumption over time might be modeled accordingly, such as in the permanent income hypothesis.


Legal definitions


Definitions under the Internal Revenue Code

26 U.S. Code § 61 - Gross income defined. There are also some statutory exclusions from income.


Definition under US Case law

Income is an "undeniable accessions to wealth, clearly realized, and over which the taxpayer has complete dominion." Commentators say that this is a pretty good definition of income. Taxable income is usually lower than Haig-Simons income. This is because unrealized appreciation (e.g., the increase in the value of stock over the course of a year) is economic income but not taxable income, and because there are many statutory exclusions from taxable income, including
workman's compensation Workers' compensation or workers' comp is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee's right to sue his or her emp ...
, SSI, gifts, child support, and in-kind government transfers.


Accounting definitions

The
International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent accounting standard-setting body of the IFRS Foundation. The IASB was founded on April 1, 2001, as the successor to the International Accounting Standards Committee (IASC). It ...
(IASB) uses the following definition: "Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants." .70(IFRS Framework). Previously the IFRS conceptual framework (4.29) stated: "The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent. 4.30: Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an entity. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element in this Conceptual Framework." The current IFRS conceptual framework (4.68) no longer draws a distinction between revenue and gains. Nevertheless, the distinction continues to be drawn at the standard and reporting levels. For example, IFRS 9.5.7.1 states: "A gain or loss on a financial asset or financial liability that is measured at fair value shall be recognised in profit or loss ..." while the IASB defined IFRS XBRL taxonomy includes OtherGainsLosses, GainsLossesOnNetMonetaryPosition and similar items. US GAAP does not define income but does define comprehensive income (CON 8.4.E75): Comprehensive income is the change in equity of a business entity during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. According to John Hicks' definitions, income "is the maximum amount which can be spent during a period if there is to be an expectation of maintaining intact, the capital value of prospective receipts (in money terms)”.


"Nonincome"


Debt

Borrowing or repaying money is not income under any definition, for either the borrower or the lender. Interest and forgiveness of debt are income.


Psychic income

"Nonmonetary joy," such as watching a sunset or having sex, simply is not income. Similarly, nonmonetary suffering, such as heartbreak or
labor Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the la ...
, are not negative income. This may seem trivial, but the noninclusion of psychic income has important effects in economics and tax policy. It encourages people to find happiness in nonmonetary, nontaxable ways, and means that reported income may overstate or understate the wellbeing of a given individual.


Income growth

Income per capita has been increasing steadily in most countries. Many factors contribute to people having a higher income, including
education Education is a purposeful activity directed at achieving certain aims, such as transmitting knowledge or fostering skills and character traits. These aims may include the development of understanding, rationality, kindness, and honesty ...
,
globalisation Globalization, or globalisation (Commonwealth English; see spelling differences), is the process of interaction and integration among people, companies, and governments worldwide. The term ''globalization'' first appeared in the early 20t ...
and favorable political circumstances such as
economic freedom Economic freedom, or economic liberty, is the ability of people of a society to take economic actions. This is a term used in economic and policy debates as well as in the philosophy of economics. One approach to economic freedom comes from the l ...
and
peace Peace is a concept of societal friendship and harmony in the absence of hostility and violence. In a social sense, peace is commonly used to mean a lack of conflict (such as war) and freedom from fear of violence between individuals or groups. ...
. Increases in income also tend to lead to people choosing to work fewer
hours An hour (symbol: h; also abbreviated hr) is a unit of time conventionally reckoned as of a day and scientifically reckoned between 3,599 and 3,601 seconds, depending on the speed of Earth's rotation. There are 60 minutes in an hour, and 24 hou ...
.
Developed countries A developed country (or industrialized country, high-income country, more economically developed country (MEDC), advanced country) is a sovereign state that has a high quality of life, developed economy and advanced technological infrastruct ...
(defined as countries with a "developed economy") have higher incomes as opposed to
developing countries A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...
tending to have lower incomes.


Income inequality

Income inequality is the extent to which income is distributed in an uneven manner. It can be measured by various methods, including the
Lorenz curve In economics, the Lorenz curve is a graphical representation of the distribution of income or of wealth. It was developed by Max O. Lorenz in 1905 for representing inequality of the wealth distribution. The curve is a graph showing the prop ...
and the Gini coefficient. Many economists argue that certain amounts of inequality are necessary and desirable but that excessive inequality leads to efficiency problems and social injustice. Thereby necessitating initiatives like the United Nations
Sustainable Development Goal 10 Sustainable Development Goal 10 (Goal 10 or SDG 10) is about reduced inequality and is one of the 17 Sustainable Development Goals established by the United Nations in 2015. The full title is: "Reduce inequality within and among countries".Unit ...
aimed at reducing inequality. National income, measured by statistics such as net national income (NNI), measures the total income of individuals, corporations, and government in the economy. For more information see Measures of national income and output.


Income in philosophy and ethics

Throughout history, many have written about the impact of income on
morality Morality () is the differentiation of intentions, decisions and actions between those that are distinguished as proper (right) and those that are improper (wrong). Morality can be a body of standards or principles derived from a code of co ...
and
society A society is a group of individuals involved in persistent social interaction, or a large social group sharing the same spatial or social territory, typically subject to the same political authority and dominant cultural expectations. Soc ...
.
Saint Paul Paul; grc, Παῦλος, translit=Paulos; cop, ⲡⲁⲩⲗⲟⲥ; hbo, פאולוס השליח (previously called Saul of Tarsus;; ar, بولس الطرسوسي; grc, Σαῦλος Ταρσεύς, Saũlos Tarseús; tr, Tarsuslu Pavlus; ...
wrote 'For the love of money is a root of all kinds of evil:' ( 1 Timothy 6:10 ( ASV)). Some scholars have come to the conclusion that material progress and prosperity, as manifested in continuous income growth at both the individual and the national level, provide the indispensable foundation for sustaining any kind of morality. This argument was explicitly given by
Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——� ...
in his ''Theory of Moral Sentiments'', and has more recently been developed by Harvard economist Benjamin Friedman in his book ''The Moral Consequences of Economic Growth''.


Income and health

A landmark
systematic review A systematic review is a scholarly synthesis of the evidence on a clearly presented topic using critical methods to identify, define and assess research on the topic. A systematic review extracts and interprets data from published studies on t ...
from
Harvard University Harvard University is a private Ivy League research university in Cambridge, Massachusetts. Founded in 1636 as Harvard College and named for its first benefactor, the Puritan clergyman John Harvard, it is the oldest institution of highe ...
researchers in the
Cochrane Collaboration Cochrane (previously known as the Cochrane Collaboration) is a British international charitable organisation formed to organise medical research findings to facilitate evidence-based choices about health interventions involving health profess ...
found that income given in the form of unconditional cash transfers leads to reductions in disease, improvements in food security and dietary diversity, increases in children's school attendance, decreases in extreme poverty, and higher health care spending.


History

Income is conventionally denoted by "Y" in economics. John Hicks used "I" for income, but Keynes wrote to him in 1937, "''after trying both, I believe it is easier to use Y for income and I for investment.''" Some consider Y as an alternative letter for the phoneme I in languages like Spanish, although Y as the " Greek I" was actually pronounced like the modern German ü or the phonetic /y/.


See also

*
Basic income Universal basic income (UBI) is a social welfare proposal in which all citizens of a given population regularly receive an unconditional transfer payment, that is, without a means test or need to work. It would be received independently of ...
*
Comprehensive income In company financial reporting in the United States, comprehensive Income (or comprehensive earnings) "includes all changes in equity during a period except those resulting from investments by owners and distributions to owners". Because that use ...
*
Income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Ta ...
*
Unpaid work Unpaid labor or unpaid work is defined as labor or work that does not receive any direct remuneration. This is a form of non-market work which can fall into one of two categories: (1) unpaid work that is placed within the production boundary of ...
*
Revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive rev ...


References


Further reading

* D. Usher (1987). "real income", ''The New Palgrave: A Dictionary of Economics'', v. 4, pp. 104–5. {{Authority control