Calculating disposable income is an important operation since disposable income is associated with the money companies can use after-tax obligations.
Although there are broad definitions, available profit generally is associated with the benefit that arises after subtracting taxes and duties charges from the company’s income. In short, we can theoretically use this money for consumption or savings.
How disposable income is calculated
It is not possible to calculate personal income without calculating national income. Therefore, when we talk about obtaining individual available rent, we necessarily go through the concept of national disposable income, which we will see later.
Calculating national income must add up the revenue generated by all the country’s productive factors. Here we include wages, capital income, and the so-called land rents. The difference between taxes on production and imports is also included, and subsidies are subtracted.
In this process for obtaining the net national income, what is done is subtract depreciation. The final adjustment comes with the aggregate income of national production factors that get income abroad and with the inverse subtraction, i.e., foreign production factors that receive payment in our country.
A series of parameters are subtracted when the gross national income is obtained. We start with direct taxes, indirect taxes, social security contributions, and undistributed profits by companies. To this is added a section of others that is usually very broad.
Also, and additionally, we will subtract the contributions made by the State in the form of pensions such as retirement, disability pensions, widows’ and widowers’ pensions, etc.
From a broader point of view, which includes families, this concept is transferred to what is called national disposable income. In the case of a company, unlike the family’s available income, it was also necessary to subtract depreciation in addition to tax obligations.
It must understand that this is a very relevant figure since it is considered to be the budgetary part of the companies that can be devoted to consumption or savings: the money on which the movements and demands in the private economy are based.
That means that it becomes a very important indicator for calculating the real state of a country’s economy, for example. The reason is simple: it gives us clues about companies’ purchasing power of savings.
It is from this operation that the national disposable income arises. The importance of this calculation is clear since it will make it possible to determine the reality of the companies’ payment and consumption capacity. That, in turn, allows the generation of patterns more adjusted to the country’s economic reality.
Why national disposable income?
Although it would be possible to calculate personal disposable income on an individual basis, if it is not inserted in a real spending environment, it is not valid beyond data on expenses and income. For this reason, the calculation of national disposable income provides averages which, although they do not adjust exactly to all individual economies, allow decisions to be made and, above all, a check of the economic pulse regarding spending and consumption options.
We should bear in mind that when we speak of national income, we are referring to the sum of those incomes that the owners of factors of production receive. These can be obtained from the Gross Domestic Product, to which we add the income earned by the country’s residents in the rest of the world.
Therefore, while the gross domestic product as a criterion uses production within the country, the national disposable income will consider the nationality of the owner of the production factor. That is why this income is also called gross national product.
Once the national disposable income has been determined, we can calculate the personal profit, i.e., the average rent of the business economies. We must differentiate that this is what is assumed to be received by households and companies when they are not corporations.
The way to obtain it is to subtract from the national income the profits that have not been distributed by the companies, the taxes on corporate income, and the social contributions. To this must be added the interest on public debt and current transfers that companies may receive from the public sector.