Understanding the Two Fundamentals of Income in Economics

Income is a term rooted deeply within the realms of economics and finance, often misunderstood or misrepresented. The concept of income, as defined in legal and economic contexts, can be quite nuanced. At its core, income refers to gain on capital, often best explained by the definition provided by U.S. Courts. This article delves into the fundamental concepts of income, capital gains, and the implications of tax liabilities. We will also explore how inflation impacts the purchasing power of income over time.

Income as Gain on Capital

The term 'income' is frequently used to describe the gain on capital in economic and legal contexts. From a legal perspective, the U.S. Courts define income as 'gain on capital.' This definition is particularly relevant when discussing financial assets, such as investments, properties, or physical commodities. For example, if you purchase a one ounce silver coin for $18.00 in 2020 and sell it for $36.00 ten years later, you have realized a gain on capital. This gain would be subject to capital gains tax in many jurisdictions.

Monetary Exchange and Labor Income

It is important to distinguish between different forms of income. When an individual exchanges their time, labor, energy, and intellect for money, it is not traditionally considered 'income' in the legal definition. However, governments often attempt to argue that all forms of money received are considered income. This distinction has been a point of contention, especially since around 1776, when the principles of economics began to be more formally studied and applied.

Capita Gains and Taxation

The capital gains tax, a key part of income taxation, is based on the difference between the purchase price and the sale price of an asset. In our hypothetical example, you would pay 15% on the $18.00 difference, resulting in a $2.70 tax liability. However, it is crucial to understand that the increase in the asset's value may not reflect an actual increase in purchasing power.

Inflation and Purchasing Power

Inflation is a critical factor that can influence the purchasing power of capital gains. Over time, the purchasing power of the U.S. dollar has significantly declined. For instance, a one dollar silver coin could buy the same value of goods and services in the early 1900s as an $18.00 silver coin does today. This is an alarming 97% loss in purchasing power over the past century. This decline in purchasing power can impact how much value you can extract from your investments.

Real Estate and Inflation

The effects of inflation are not limited to monetary investments. The value of real estate can fluctuate due to economic conditions and inflation. After the 2008 financial crisis, real estate values dropped drastically, only to return to 2008 levels in recent years. This demonstrates how the value of the U.S. dollar has fluctuated, influenced by both external and internal economic factors.

Conclusion and Ethical Considerations

While logic and ethics may not always dominate the tax courts, it is important to recognize the broader economic context. Capital gains tax and the impact of inflation on purchasing power are complex issues requiring a nuanced understanding. As with the example of the silver coin, it is essential to consider the true value of your investments beyond the nominal gains reported.

For further reading, consider exploring the following resources:

Investopedia's Guide to Capital Gains Understanding the Effects of Inflation on Purchasing Power The Real Estate Values and Their Impact on Inflation