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What Is Economic Income?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 August 2014
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Economic income is a term that is used to describe the amount of income that an entity can comfortably spend during a specified period of time and be in essentially the same financial position at the end of the period as at the beginning. Sometimes referred to as surplus, this type of income is what is left over after all basic financial commitments are fulfilled, and can be spent freely without endangering the entity’s financial standing in any way. Both households and businesses generate economic income, and can choose to use this income in several different ways.

When the concept of economic income is applied to the household budget, the term usually refers to the amount of income that remains after all essentials have been purchased for the period. Essentials include such items as food, clothing, and shelter, making the minimum payments on outstanding loans and credit card bills, or handling any other standing obligation that comes due during the period. Once these basic living needs are settled for the period, the household is free to make use of the any remaining income as it sees fit.

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A household can choose to do any number of things with economic income. Some may choose to take a portion of this income and place it into an interest bearing account, such as a savings account or a certificate of deposit. Others may choose to use the surplus as a way of purchasing items that are wanted but not necessarily needed for the operation of the household. With either scenario, spending this extra income does not pose a threat to the stability of the household.

Businesses use the same basic model when determining what is and is not economic income. Any profits that remain after paying taxes, all expenses associated with the operation of the company, and other standing obligations would be considered economic income. These funds could be used for anything from throwing a party for the employees to providing charitable donations to the community.

It is important to remember that economic income can include both realized and unrealized income. This means that any type of return on an investment that is earned during the period would be considered economic income along with the net income received from a job. For example, if the monthly wages or salary that is left after paying taxes and covering all essentials amounts to $1,000 in United States dollars, and the value of stocks owned by the household increases by $120 USD, then the household has economic income of $1,120 USD for the month. This is true even though the money earned as interest on the stocks is still setting in an investment account, and will not be realized until the shares are sold.

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subway11
Post 3

Sneakers41- I also want to say that when taxes are raised businesses tend to hire less. If businesses hire less, the economic employment goes down which results in a high unemployment rate.

Income employment and economic growth are related. When incomes go up people tend to spend more money which spurs economic growth.

Businesses are more successful and expand and provide more jobs as people purchase more things.

It is like a cycle that continues as long as the market economic conditions remain positive.

The flipside could be said when taxes are raised. For example, in the mid-to-late 70s when Jimmie Carter was president, the top tax rate was 70%. There was also double digit unemployment.

However, when President Reagan took office, he dropped the top tax rate to 28% and as a result, American disposable income grew 15%. This also created 20 million jobs and cut interest rates in half. Economic employment works best with supply side economic policy.

sneakers41
Post 2

SurfNturf- Many have even proposed a flat tax. A flat tax would be a consumption tax, and it would be based on purchases made.

Critics of this plan feel that it would be a burden to poorer people because it's much harder for them to come up with tax than it would for a wealthier person.

In addition, the critics feel that homes and cars would be exorbitantly expensive as a result. The critics feel that the progressive tax system that we have now is best.

surfNturf
Post 1

The effects of income taxes on economic growth can be great. When a government raises income taxes, it limits the disposable income of the taxpayer.

Although the government gains tax revenue, it loses in the long run because when taxes go up people generally spend less money in the economy. This also results in a drop in tax revenue for the government over the long term.

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