Capital income is income that comes from capital, which is to say, comes from wealth itself, rather than any specific production or direct work. Examples are stock dividends or any sort of capital gains, as well as income an owner gets from a business he owns but not from the work he does there. The phrase may also be used to mean any revenue that is used for capital expenditures, although this sense is not as commonly used.
As defined by the United States' Internal Revenue Service (IRS), income can be classified either as a capital gain or capital loss, depending on whether there is a net gain or loss. For example, if a piece of land is purchased for $500,000 US Dollars (USD) and a year later is sold for $600,000 USD, the seller has a capital gain of $100,000 USD, which is included in his or her capital income for that year. If, on the other hand, the land was sold for $400,000 USD, a capital loss of $100,000 USD is said to have occurred.
In the United States, this form of income is actually taxed significantly less than ordinary income, which is to say, income that is derived from hourly labor or salary. This is believed to help create an incentive for capitalists to invest more heavily. In fact, there are frequently suggestions put forward to eliminate taxes on capital gains altogether, replacing them with a consumption tax. Under a consumption tax, only the purchasing of goods and services would be taxed, so that people would be taxed on however much they use, rather than how much wealth they generate.
Traditionally, the difference between capital income and regular income was phrased as a difference between unearned and earned income. The concept behind that phrasing was that income from capital, derived as it was simply from the ownership of wealth, was not earned in a strict sense of the word. Labor, on the other hand, was looked upon as earned income. In the 19th century, particularly, there was a strong backlash against unearned income, which saw voice in many anti-Capitalist ideologies of the era.
In the United States historically, unearned income was actually hoped to be taxed at a significantly higher rate that earned, or regular, income. When the original proposal for the federal income tax was put forward in the latter-part of the 19th century, it included a higher tax on unearned income. In 1913, when the modern income tax was passed, a provision was introduced to tax earned income at a lower rate than capital income, but this was not accepted. Later, such a provision was passed, but it was repealed a year later.
One argument against allowing the proliferation of capital income is that it tends to build upon itself, leading to a greater and greater imbalance in the distribution of wealth. Since capital is allowed to generate more capital, any block of starting capital, such as that derived from inheritance, will create more capital, increasing exponentially over time. On the other hand, earned income, since it is limited by wages and the amount of hours a person can work, will increase at a much slower rate.