In-Depth Essay

Earned vs. Unearned Income

by Peter Barnes

Part Two (in case you missed Part One, click here)

Observe another change that has occurred. The factory owner is no longer an original investor; he has become what might be called a second-generation appropriator. Whereas original investors are often risk-takers and innovators who contribute to the advan cement of society, second-generation appropriators tend to accumulate wealth largely at the expense of others.

Consider the sturdy New York apartment building I once lived in, which was constructed around the turn of the century and had paid for itself many times over before I moved in. The rents, far from decreasing after the building was paid for, were climbi ng all the time. Property taxes and maintenance costs, of course, were rising, but these should have been more than offset by the disappearance of financing costs. The problem was that financing costs did not disappear, but, in fact, grew, because the apa rtment house was sold and resold every few years, and each new landlord had to collect a return on his investment. None of the resales added anything to the joys of living in New York City; they merely saddled the tenants with somebody else's financing ch arges and profit margins.

These examples barely touch upon the possibilities for garnering unearned income in America. Bookstores abound with titles such as How To Get Rich While You Sleep-Let Real Estate Do Your Work. Magazines bring us wondrous tales of fortunes made t hrough the use of leverage (i.e., other people's money), of conglomerates whose paper values far exceed the sum of their parts, of tax-sheltered investments that effortlessly increase the wealth of the already wealthy.

There are, at least in my mind, two prime criteria for judging whether a person's income, or gain in wealth, is earned or unearned: (1) Does the activity which generates the income add to the supply of goods and services available to society? (2) Is th e income a result of its recipient's efforts, or is he merely reaping the benefits of others' exertions? By these criteria, all income from productive labor, except for inordinately high executive salaries or professional fees, is earned. Income from the ownership of wealth is not, ipso facto, unearned, but is likely to contain a large unearned element. The precise categorization of income from wealth is somewhat complicated by the separation, in practice, between the earning agent and the beneficiary. A rise in GM stock may, from GM's standpoint, be partially earned; but from the standpoint of the absentee stockholder, who does nothing but open his mail, the increment might be considered unearned. Government handouts and subsidies should undoubtedly b e considered unearned.

This essay is part of a series written by Peter Barnes for The New Republic magazine in 1971-72. We think you'll be pleased -- and perhaps shocked -- to see how timely and insightful the essays are for today. Each essay will be republished, in installments, by The Progress Report.