In-Depth Essay

Earned vs. Unearned Income

by Peter Barnes

Part Three (Parts One and Two are available here)

How large, in a given year, is the unearned segment of national income? Assuming that unearned income is operationally defined as all income other than that earned through labor, before-tax unearned income in 1970 was roughly $200 billion (national income, $800 billion, minus reported wages and salaries, $600 billion). This includes poor people's welfare, and, if we might call it that, rich people's welfare. A comparison between these two components is interesting. The total amount paid out by federal, state and local governments for aid to dependent children, general relief and other noncontributory welfare programs for the poor, disabled and aging was $16 billion. By contrast, the unearned income going to wealthowners included $34 billion in interest ($19 billion on the national debt alone), $25 billion in dividends and $23 billion in rent. And let's not forget unrealized capital gains and appreciations in land value, which are omitted from reported income. These aren't trifling amounts: the National Commission on Urban Problems, chaired by former Senator Paul Douglas, estimated that land values rose an average of $25 billion per year during the 1960s, while a study by James D. Smith of Pennsylvania State University found that, in 1958, top wealth-holders enjoyed a net capital gain of $57 billion.

Rich people's welfare, besides being more plentiful than the poor's, is concentrated among fewer people. According to IRS figures for 1966, fewer than two percent of all taxpayers received 74 percent of all dividends and 76 percent of all capital gains. A large number of wealthy welfare recipients have done nothing more to qualify for their unearned income than to have the right parents. According to a study by the Federal Reserve Board, inherited wealth accounted for a "substantial portion" of total assets of 57 percent of those with income of $100,000 or more.

Rich people's welfare has many advantages over the poor's. There's no legal ceiling, no humiliating means test, no prying by social workers, no questions about men in the house, no public opprobrium, no danger of cutoff. You can hire accountants, lawyers and lobbyists to do your chiseling, and best of all, you don't lose a penny if you get a job.

If you happen to be one of those less fortunate millions who do have jobs, you will notice that rich people's welfare beats working, too. There's no boss to contend with, no unsafe working conditions and no need to be competent at anything. You can sleep late in the morning and not worry about rush-hour traffic. You needn't fear illness, sexual discrimination or getting fired. And to top it off, you're eligible for a dazzling array of tax breaks and subsidies.

That many forms of unearned income should be more lightly taxed than earned income may appear incongruous in a country that, according to the President, sanctifies the work ethic, but the explanation is not hard to fathom: wealthowners have more political power in America than nonowners of wealth. The list of tax privileges that wealthowners enjoy runs the gamut from the petty to the grandiose. The initial advantage is that taxes on unearned income are not withheld automatically, as are taxes on wages and salaries. Unearned income is also exempt from social security and other payroll taxes, which are the fastest growing federal taxes. In 1963, payroll taxes raised only 42 percent as much as personal income taxes; in 1973, the proportion will be 68 percent.

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.