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Income

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Income is the money or other value that a person, household, business, or country receives over a period of time, such as a week, a month, or a year. This page is general information for learning, not financial, tax, or legal advice.

Definition

Income is a flow, measured per period. Wealth is a stock, the value of what someone owns minus what is owed at one moment.[1] The U.S. Census Bureau defines money income as regular income before taxes, excluding noncash benefits.[2]

Main types of income

  • Earned income. Wages, salaries, and self-employment earnings.
  • Capital income. Interest, dividends, and rent from owned assets. Personal income statistics leave out stock price gains.[3]
  • Transfer income. Pensions, unemployment benefits, and public assistance, which give cash or in-kind help from government.[2]
  • Business and profit income. What owners keep after costs.
  • Imputed and non-monetary income. Value with no payment attached, such as the housing services of an owner-occupied home, which national accounts estimate as imputed rent,[4] and household production like cooking and childcare.

Measuring income

Gross income is before taxes, and net or disposable income is after taxes.[3] Nominal income uses current money, while real income divides by a price level to show what the income can buy.[5]

Income can be counted per person or per household. An equivalence scale weights members so different household sizes compare, for example by dividing by the square root of size.[6] The median splits a population into halves, while the mean is the total divided by the count and rises with a few very high incomes.

For an economy, gross domestic product counts production, and gross domestic income counts the incomes earned in producing it.[3] Purchasing power parity converts currencies using the prices of a similar basket of goods.[7]

Income distribution and inequality

Households split into five ranked groups, called quintiles, can be compared by income share. The Lorenz curve plots cumulative household share against cumulative income share, and a more bowed curve means a more uneven spread.[8] The Gini coefficient condenses it into one number, where 0 means equal incomes and 1 means one person has everything.[9]

A poverty line is a minimum adequate income. In the United States a family is poor if its income is below the threshold for its size and composition.[2] The World Bank reports poverty at international lines in dollars per day, adjusted for purchasing power.[10]

What affects income

Education and skills raise productivity, a link economists call human capital.[11] Experience, occupation, location, labor market conditions, and technology also shape pay. Discrimination can create gaps between similarly skilled groups. Institutions such as minimum wage laws and unions set the terms of work, and bargaining power affects how revenue splits between pay and profit.

Income and taxation

A progressive tax takes a higher rate as income rises, a proportional tax takes one rate throughout, and a regressive tax takes a larger share from lower incomes.[12] A tax wedge is the gap between what a buyer pays and what a seller receives after tax. For labor, it is the gap between the cost of employing someone and take-home pay.[13]

Smoothing, saving, and insurance

Consumption smoothing keeps spending steadier than income by saving in good periods and drawing on savings in lean ones.[14] The life cycle hypothesis says people borrow when young, save while earning, and spend savings in retirement. The permanent income hypothesis, published by Milton Friedman in 1957, says spending follows expected lifetime income more than temporary changes.[15] Insurance pools risk. See Emergency fund planning.

Income security, basic income, and tax credits

A universal basic income is a regular unconditional payment to everyone in a population, with no means test or work requirement.[16] A negative income tax pays people below an income threshold and taxes those above it.[17] The U.S. Earned Income Tax Credit is a tax break for low to moderate income workers.[18]

Four large United States income maintenance experiments in the late 1960s and early 1970s measured effects of cash transfers on work.[19] Research on the Alaska Permanent Fund dividend, paid since 1982, found no employment effect and 1.8 points more part-time work.[20] In Finland, 2,000 unemployed people received 560 euros a month in 2017 and 2018, with no first-year employment effect and better perceived wellbeing.[21] A trial in two United States states paid 1,000 people 1,000 dollars a month for three years, with a 4.2 point fall in labor market participation and 1 to 2 fewer weekly work hours.[22] Designs differ, so findings may not transfer. See Basic income experiments around the world and credit union basic income.

Automation, AI, and income sources

Effects on income are uncertain. An International Monetary Fund staff note said incomes could rise for most workers if AI productivity gains are large, while labor income inequality could grow if AI complements high-income workers.[23] See Post-scarcity economy and Energy costs and the path to abundance.

Beyond income

Wealth, time, and health also matter. The capability approach asks what people can actually do and be,[24] and the Human Development Index treats capabilities, not growth alone, as the ultimate measure of development.[25]

Data sources

The U.S. Census Bureau reports income and poverty, the Bureau of Labor Statistics wages and prices, and the OECD cross-country statistics. The World Bank platform covers over 170 economies.[26] The Luxembourg Income Study holds harmonized microdata from about 50 countries.[27]

Discussion questions

  • Why can a household with high income have little wealth?
  • When might the median describe a group better than the mean?

Essay ideas

  • Compare income and wealth as measures of wellbeing.
  • Explain how nominal and real income can move in different directions.

AI prompt ideas

  • Explain the life cycle and permanent income hypotheses with a made-up example, then quiz me.
  • Give me ten invented incomes and walk me through the median, the mean, and quintiles.

Readings from Wikipedia

See also

References

  1. ↑ Wealth, Wikipedia
  2. ↑ 2.0 2.1 2.2 Income, U.S. Census Bureau
  3. ↑ 3.0 3.1 3.2 Income and Saving, U.S. Bureau of Economic Analysis
  4. ↑ Imputed rent, Wikipedia
  5. ↑ Real income, Wikipedia
  6. ↑ Equivalisation, Wikipedia
  7. ↑ Purchasing power parity, Wikipedia
  8. ↑ Lorenz curve, Wikipedia
  9. ↑ Gini coefficient, Wikipedia
  10. ↑ Gini index, World Bank Data
  11. ↑ Human capital, Wikipedia
  12. ↑ Progressive tax, Wikipedia
  13. ↑ Tax wedge, Wikipedia
  14. ↑ Consumption smoothing, Wikipedia
  15. ↑ Permanent income hypothesis, Wikipedia
  16. ↑ Universal basic income, Wikipedia
  17. ↑ Negative income tax, Wikipedia
  18. ↑ Earned Income Tax Credit, Internal Revenue Service
  19. ↑ Overview of the Final Report of the Seattle-Denver Income Maintenance Experiment, ASPE
  20. ↑ The Labor Market Impacts of Universal and Permanent Cash Transfers, NBER
  21. ↑ Basic income experiment, Kela (archived)
  22. ↑ Employment effects of a large cash transfer experiment in two U.S. states, NBER Working Paper 32719
  23. ↑ Gen-AI: Artificial Intelligence and the Future of Work, IMF
  24. ↑ Capability approach, Wikipedia
  25. ↑ Human Development Reports, UNDP
  26. ↑ Poverty and Inequality Platform, World Bank
  27. ↑ About LIS, LIS Cross-National Data Center
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