ABSTRACT
§ 1. A PROPOSAL to cancel the discrimination in the taxation of earned and unearned incomes will doubtless arouse strong opposition. In order to justify it I must show that the ability to pay does not substantially differ in the two cases. But I would point out at the outset that the Income-Tax Commissioners, in distinguishing all interest as unearned, and as therefore possessing a higher ability to pay than the high income of a business man from profits, or of a professional man from fees, are resting upon two quite erroneous suppositions. The first is contained in the curious adoption of the Socialist view of all interest as ‘ unearned/ in the sense that its production involves no personal effort or sacrifice on the recipient. Now, under an economic system, when saving has to be effected by inducing individuals to forgo certain amounts of present enjoyment which their incomes would enable them to procure, in order to bring into existence and maintain in productive use the means and instruments of future production, a good deal of the saving and the maintenance of capital does involve a postponement of present enjoyment and an effort of will on the part of certain classes of investors which, as we have seen, requires a minimum rate of interest to be regarded as a ‘ cost of production/ Though the effect of this abstinence may be negligible in the case of the rich, While the rate of interest actually obtained may often be larger than is required to evoke what effort is involved in saving, it is distinctly untrue that all interest is ‘ unearned ‘ within any meaning reasonably attributable to that term. On the other hand, as we have seen, a great deal of other income which comes to the well-to-do classes, as profits, wages of management, salaries and fees, is ‘unearned/ in the sense that it consists of excessive payments for goods or services, obtained by the restraint of free effective competition, and unnecessary to evoke the use of the personal productive services which are supposed to have earned it. It is, in effect, the rent of inequality of opportunity just as much as is the differential rent of land, and has no more title to be regarded as earned. The fact that it is associated with some voluntary productive activity on the part of a business or professional man does not affect this judgment.
