Question

Does the economist's concept of recognizing income differ from the concept used in measuring taxable income?

Answer 1

Economic income or loss recognizes all gain and losses whether realized or unrealized.and taxable income or loss recognizes realized gain and lsses and does not recognize unrealized gain and losses.

here s a simple example dealing with the individual regarding taxable income vs economic income .imagine arpit earns$ 50000 per year salary ,after tax ,and has $10000invested in a stock market .at the end of the year ,his stock market investment is worth $15000.

because arpit has not yet sold his stock and collected the profit ,the increase in value of the investment is considered unrealized.

consequently ,it is a paper prfit.at the end of the year arpit has a realized income of $50000 from his salary .his total realized income is$50000 .he has unrealized profit of $5000. his combined realized and unrealized income equal $55000.

in this example , arpit taxable income would be $50000 and his economic income woul be $55000 .according to taxable income increased value of te stock invesment do not count as actual income becase investor has not actually sold the stock ,completed the profit .

according to economic income ,the increased value of the stock investment to count as actual income because the real value of the asset has gne up .the assets are worth more now then they were at the beginning of the year .in this sense ,arpit has earned the full $55000 income .