The Myth of "Unearned" Income

One of the ways that politicians compete in the battle of ideas is by defining things. The definition always carries a subtle positive or negative spin such that it sways the casual observer into accepting that spin as the truth, without alerting them to the positive or negative connotations of the spin. One such spin is the "Unearned" label that statists use to refer to income that people earn from investing their already taxed money. Anytime you see that term used it should immediately alert you to the point of view of the user. They wish you to think that investment income is somehow undeserved and should be taxed or otherwise confiscated as if it is some sort of ill-gotten gain. Of course as soon as the statist confiscates the money it really does become "unearned income" for them. They can then turn it around and distribute it to their cronies to further their political cause and buy favoritism. They can also use it to polish their image by giving some amount to legitimately needy people, thereby enhancing their Robin Hood persona while gaining the loyalty of that portion of society. Now that I think of it, none of the people that end up with the confiscated money earned it, so maybe that is where the name comes from. But I digress.

Why is investment income a legitimate form of earned income? Doesn’t earned income require some form of good or service in exchange? The answer is always yes in a free society, otherwise there would be no incentive for the two parties to come together and form the contract that is the investment. So what is the service provided? The main one is risk.

The investor places their money (already taxed as income) at risk with the investment. That risk can vary depending on the safety of the investment. Let’s say the investment is a house. The risk is that the house will be damaged by natural disaster. There is the risk that the value will decrease due to the type of surrounding land use. There is the risk that the local government will tax the property at such a high rate that it becomes too expensive to live in that community. There is the risk that the house won’t increase in value enough to offset the required maintenance. In every case the investor stands to lose some or all of the initial investment. Their willingness to take that risk benefits society by providing somebody a place to live. The taxes on the home help the local community provide services needed by all. If the home is well kept the neighborhood benefits and others enjoy living in the community. All of that is a service that is worthy of the income the investment can produce.

There are many other types of investments. In a free society the diversity of investments is enormous. Anytime two people come together to form a contract where one person gives some form of wealth to another so the other can use that wealth for their purposes, the money returned on that investment is investment income. There is no coercion, as in a tax. It is two entities freely associating for their mutual benefit.
Sounds like a good thing to me. So why does the statist need to put a negative spin on one side of that contract? The answer to that question is a much larger story. The short answer is the statist seeks power, and must get that power through convincing as many people as possible that his motives are noble and his enemy’s motives are not. The statist wants you totally disarmed to their intentions of confiscating that wealth to further their gains. It is nothing short of lust for power and control. So next time you hear the term “Unearned income” I hope you remember this short discussion and are better informed of the motives of the person making the statement.

Investment income is not evil. Investment income represents freedom. Freedom to contract without interference is what our founders meant when they wrote that people have the right to life, liberty and the pursuit of happiness. Virtually everybody will make an investment in their life with no malice in their heart, only the desire to increase their wealth so that they can pursue their personal form of happiness.