Capital Gain (or Capital Income) is a lot more than interest on a loan or a deposit. In total, between 1/4 and 1/3 of the GDP is Capital Income. Capital Income itself is a capitalist tax on work, "the taxman" is anyone who owns Capital Assets.
1. Interest
Definition: Payment for the use of borrowed money (debt capital). The borrower pays the lender a percentage of the principal over time.
Examples: Bank deposit interest, bond coupons, loans to companies or individuals, government bond yields.
Economic role: Compensates the lender for time preference, inflation risk, and credit risk.
2. Dividends
Definition: Distribution of a company’s after-tax profits to its shareholders (equity capital).
Examples: Cash dividends, stock dividends, special one-time dividends.
Economic role: Returns to owners of equity, representing a claim on residual profits after all expenses and debts are paid.
3. Rent (Economic Rent)
Definition: Income from allowing another party to use an asset that is not consumed or degraded by that use. In economics, “rent” also includes surplus earnings from unique or scarce resources.
Subtypes:
Land rent: Payment for use of land or natural resources (e.g., farmland lease, mining royalties).
Housing rent: Rental income from residential or commercial property.
Intellectual property rent: Royalties from patents, copyrights, trademarks, or franchise fees.
Equipment rent: Lease income from machinery, vehicles, aircraft, etc. (often called “leasing” income).
Note: In national accounts, “rent” is often separated from “operating surplus” but is a core part of capital income.
4. Capital Gains (Realized and Unrealized)
Definition: The increase in value of a capital asset over time. While some definitions exclude unrealized gains from “income” until realized, many economists include realized capital gains as capital income.
Examples: Selling a stock for more than you bought it, selling real estate at a profit, appreciation of art or collectibles.
Economic role: Reflects revaluation of assets; often taxed differently than interest or dividends.
5. Retained Earnings (Undistributed Profits)
Definition: The portion of a company’s after-tax profits that is not paid out as dividends but reinvested in the business.
Treatment: For the shareholder, retained earnings increase the value of their shares, leading to future capital gains. In macroeconomics, retained earnings are considered capital income accruing to owners even if not paid out.
6. Royalties
Definition: Payments to the owner of an intangible asset (patent, copyright, mineral right) for the right to use that asset.
Examples: Oil extraction royalties paid to a landowner, licensing fees for a patented technology, music streaming royalties to a songwriter.
7. Imputed Rent (Owner-occupied Housing)
Definition: The estimated rental income that homeowners “pay to themselves” for living in their own home. It is included in GDP and national income statistics as a form of capital income.
Example: If you own your house, national accounts impute a rental value equal to what you would pay if you rented a similar home.
8. Mixed Income (for Unincorporated Businesses)
Definition: Income of self-employed persons and small family businesses that combines both labor and capital. Statistical agencies often split this into a labor component and a capital component using imputation methods.