Simple Liberty  

 

     
   
     

The American Income Tax

Chapter 19

Robbing Both Peter And Paul

Written by Darrell Anderson.

The necessary result, then, of the unequal fiscal action of the government is, to divide the community into two great classes; one consisting of those who, in reality, pay the taxes, and, of course, bear exclusively the burthen of supporting the government; and the other, of those who are the recipients of their proceeds, through disbursements, and who are, in fact, supported by the government; or, in fewer words, to divide it into taxpayers and tax-consumers.

John C. Calhoun, Disquisition on Government

Taxes are levied and collected in one manner or another in every town, village, city, and county of every state of America. Despite the widespread use of taxes, few people understand taxes, why or how taxes are used, or even the basis for any taxation at all. This lack of knowledge does little to motivate most people to investigate, instead spurring often repeated murmurings as each individual complies with the demand to pay the bill. Human nature and history demonstrates that people often will suffer rather than change. Thomas Jefferson, in the Declaration of Independence, aptly noted this tendency to grumble rather than act:

. . . and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed.

Theoretically, in a representative society people authorize legislators to enact laws, including tax schemes. Yet, nowhere does an individual have authority to empower people within a political system with authority to tax under the assumption of seizing property if the tax is unpaid. Unfortunately, many people believe that people at all levels of the political system are blindly provided the alleged complete and plenary power to tax. Indeed, read any typical state constitution and the document will “humorously” declare that the power to tax never will be “surrendered.” Consider Article X Section 1 of the Minnesota constitution:

The power of taxation shall never be surrendered, suspended or contracted away.

This is typical wording for many newly adopted state constitutions in the past few decades. Most modern constitutions are based upon a model provided by the Campaign for Responsible Government. Despite reasonable intentions, flawed foundations create flawed charters. Such a statement is truly an amazing psychological sleight of hand. The problem with such blanket “authority” is when almost all people advocate legal plunder schemes — knowingly or unknowingly — few people then recognize such legislation as legal plunder. Few will recognize legal plunder as “legalized” theft. Even fewer will object. The old adage explains how Peter is robbed to pay Paul, but Paul is also robbed to pay Peter. Such a system can be nothing but inefficient, confusing, and frustrating.

In a rational world, for most people taxes would be minimal and all such taxes would be levied and collected fairly, judiciously, and honestly, and such taxation would not be abused. There would be full disclosure about how the taxes were used. Certain rights, such as enjoying the fruits of labor and property ownership, would be honored. In such a rational world, such taxes would be low, as those taxes would be collected only as necessary and only for those services deemed essential and truly common to all, specifically the protection of rights and property. Not a dime more, not a service more. Taxes would be levied and collected only through the explicit consent of those being taxed.

There are two ways to abuse taxing schemes. The collection of taxes can be abused, and the spending of taxes can be abused. Typically, abusing the spending of taxes causes the abuse of collecting taxes. When people within political systems start spending revenues for purposes not delegated or authorized, those same people must then attempt to collect more revenues. Today’s taxation systems at all levels are being abused — grossly, both in spending and collection.

Whether right or wrong, most people can and will tolerate nonabusive, noncorrupt, noninvasive indirect methods of taxation. After all, such taxation often can be avoided and more importantly, force and coercion do not threaten loss of property. Therein lies a clue to the limits of that toleration — the protection of property. When political systems become abusive and property is easily lost through tyrannical tax or asset forfeiture systems, then property is no longer sacred. Asset forfeiture is an euphemistic way of saying theft under color of law. People will tolerate tax systems only as long as their property remains secure.

Direct taxation, regardless of definition, is difficult to avoid. Yet, unlike under the Framers who understood that a direct tax was a one-shot effort, direct taxation is used today to supply a continual stream of revenues. Unlike other taxes, direct taxes today do not serve or act as a severance tax — simply because these direct taxes are today levied continually, rather than periodically. The result is slavery and feudalism.

The Framers understood the dangers of direct taxation. Direct taxation is easily abused. Direct taxation is the forced taking of property. Direct taxation is an invasion of privacy. Direct taxation easily can be used to enslave, and thus destroy. Direct taxation should be used only in times of emergency or crisis, and then only with the explicit consent of people.

Those people liable for paying a direct tax have a difficult time escaping the tax. Revenues collected through direct taxation are used today to fund numerous efforts, and are rarely used solely for the intended function of protecting rights and property.

Without consent all forms of taxation are coercive transfers of property. Forgetting this straightforward maxim opens the door to abuse and tyranny.

To those people who believe that the nature of the income tax is an indirect tax, the point made here remains the same. Understanding the nature of the income tax is important but so is the effect of the income tax. Regardless of the nature, the effect of the income tax is the same as any direct tax. This discussion is not about legal definitions, but about cause and effect.

The so-called police powers should not be used to force or coerce the collection of revenues. Such force and coercion perverts the very purpose of the concept of government — to protect the rights and property of people. Paying taxes is a transfer of property title and rests solidly upon the principle of explicit consent, and force and coercion conflicts with that principle. When public servants use force and coercion to extract revenues, they no longer are acting like servants but rulers. The concepts of self-ownership, rights, property, contracts, and consent become meaningless.

Quick Solutions

This discussion should illustrate the utter futility of trying to distinguish between direct and indirect taxation, or trying to define concepts such as income. If you are left confused by the contents of this discussion, perhaps you should relax by reading Alice’s Adventures in Wonderland and Through the Looking-Glass. In the latter story Humpty Dumpty declared that words mean whatever he said they mean. Legislators and court judges play by the same rules. Readers probably will find the contents of those stories to be more understandable and credible than trying to decipher the madness of the income tax.

Few people win this “game.” The court judges insist upon upholding the fraud. If an individual argues A the Court justices respond with B; if an individual argues B the Court justices respond with A. The legal debate about whether the income tax is a direct tax or an indirect tax is irrelevant. If collected as a direct tax — which the income is — the rule of apportionment does not apply to the specific property of income. If collected as an indirect tax then the rule of apportionment again does not apply. If the tax is collected as a direct tax then no rebuttal argument applies because there are no rules to restrict or limit collection. If the tax is collected as an indirect tax then the only plausible question is asking about the identifiable excisable activity. The only plausible answer to that latter question is that the tax is being levied on the exchange of tangible objects — the products produced from the human process of labor. Because the 16th Amendment allows the tax to be collected “from whatever source derived,” the argument for requiring an explicit statute to identify the excisable activity is empty. To add salt to that wound, the Supreme Court justices have effectively killed any such argument with their opinion in Glenshaw Glass.

Tax protesters have discovered this insane world. Although many wild and scary theories abound in this environment, one observation is sure. The ideas and theories of many protesters are no more idiotic, strange, or colorful than the many respective Supreme Court decisions passed down through the years.[1] The problem with this tax is not only that resisters and protesters are zealous in this fight, but other than the compulsively honest, just about all people seek ways to avoid and evade this tax. [2] Even if their actions are deemed statutorily “illegal,” one is hard-pressed to argue that such a response is morally incorrect or insane. This effect was predicted in 1909:[3]

As to the general policy of an income tax, I am utterly opposed to it. I believe with Gladstone that it tends to make a nation of liars . . . .

Possibly the most frustrated tax protester or resister is the person who wants only to live a quiet and peaceable life but sees rampant extortions and abuse throughout this system. Even if such a person philosophically opposes all taxation, such people probably would never pose a problem if only the extortions were nominal and politicians and voters exercise some semblance of fiscal restraint. The income tax is contemptible and fails to qualify as a reasonable tax to support any political system, let alone a “limited government.” The concepts of self-ownership, rights, property, contracts, and consent become meaningless.

Exemption ceilings or not, there simply is no way to view a tax on wages and salaries, even alleged “excess” wages and salaries, as anything other than a direct tax that diminishes one’s ability to sustain life. Not to provide an exemption ceiling that covers the ordinary and necessary expenses of life — and to provide some breathing room for some semblance of quality of life and not bare survival — is nothing short of tyranny and oppression. Every human possesses a right to seek a quiet and peaceable life and such a tax negates that fundamental right and hope. Feudalism is alive and well in the 21st century, regardless of what history teachers and spin doctors try to argue.

The income tax needs to disappear. Period. But getting there from here probably is not going to happen quickly in today’s parasitical social system where Peter is busy stealing from Paul and Paul is busy stealing from Peter — all under the color of law. Nor are legislators likely to kill their goos that lays golden eggs in terms of the most successful revenue-raising system in history.[4] Nonetheless, within the limited intellectual discussion of maintaining an income tax, meaningful solutions are easy to derive.

The first solution is to eliminate withholding at the source. Who cares if this mechanism is efficient for the politicians and bureaucrats? Eliminating withholding immediately would reveal the tax bite each person pays with this tax. Because of the significant amounts paid by each person, would many people pay the tax at the end of the year without withholding? Probably not, and that observation alone would be sufficient for momentous reform.

Meaningful political solutions are possible. Eliminate the personal standard deduction and exemptions. Statutorily exempt wages and salaries, including the wages and salaries of independent workers, artisans, professionals, and small-scale proprietors. Then explicitly identify certain activities as being subject to the income tax. Explicitly limit the tax to organized business profits, certain excisable activities, and only passive gains in the nature of unearned income such as certain investments. Such an effort would eliminate the original confusion introduced in 1913 of trying to create the illusion of gain by taxing an alleged “excess” received by independent workers, artisans, professionals, small-scale proprietors, and wage and salary earners. Such an effort would avoid the sleight-of-hand of trying to categorize every person and entity as either an employee or “trade or business.”

Some people will argue that a certain minority of people who realize abnormally large salaries, such as professional athletes, various celebrities, certain highly paid professionals, etc., would escape taxation. But that argument fails to acknowledge that no other individual worker is paying an income tax either. Hence the jealousy argument fails. However, if legislators want to maintain an illusion of gain with respect to “excessive” wages and salaries, with the term excessive being arbitrarily assigned by statute, they should index the standard deduction to maintain pace with the very currency inflation they induce upon everybody. Starting with the original 1913 $3,000 exemption per person, and using an average annual inflation rate of 3.5 percent, as of the year 2006 the standard deduction would be $71,061. Recall that the original 1894 and 1913 exemption ceiling was 3 to 6 times the average annual wages and salaries of typical workers. This amount allowed for plenty of room to prepare for rainy days and emergencies, as well as long-range planning such as retirement and college education for children. From these numbers one can see that the current standard deduction and exemptions comes nowhere close to sustaining the basic costs of living. The effect is indeed a direct tax.

Wages and salaries are income with respect to the common usage of the term, but even if including wages and salaries as income for the purposes of taxation, a person cannot realize a gain until after satisfying the expenses of daily living. Whether itemizing or choosing the standard deduction, these expenses include mortgages and rents, food and groceries, health care, training and education, clothing, and all non-income taxes.

Like any business that is allowed research and development expenses as “ordinary and necessary” expenses of doing business, so too must humans be allowed to deduct similar expenses. Such expenses are ordinary and necessary for developing the future of a business and the same thinking must apply to humans. Businesses are allowed to deduct the cost of internal investments or capital expenditures, and humans must be allowed to do likewise. To prepare for retirement, all investments explicitly identified and earmarked for such purposes should be tax exempt until those funds are withdrawn. There should be no penalties for withdrawing those funds — just pay the tax on the amount withdrawn.

The income tax is based upon the concept of “an ability to pay.” An ability to pay necessarily requires first covering all ordinary and necessary expenses. Humans are not allowed these same considerations as are artificial entities. Within the context of taxation income has always meant gain, and a gain is realized only after deducting all ordinary and necessary expenses. Within the context of taxation income has always meant net income.

Legislators and income tax proponents can argue that the standard deduction and exemptions already cover such costs, but only a fool would actually believe any such argument. The current standard deduction and exemptions utterly fail to cover the ordinary and necessary expenses of life. At least the 1894 and 1913 legislators understood the issue and provided an adequate ceiling. These observations raise serious social and moral questions about the income tax. Much of the resistance and protest of this tax rests on these grounds — even if poorly pleaded. Running through these arguments is a sense of social injustice and unfairness. Many people reject the entire concept of coercive taxation, but others accept limited taxation to one degree or another. Those latter people merely expect and demand basic fairness and equity. When a tax fails to allow for the basics of life, and some semblance of a quality life, then the tax is oppressive and enslaving. Such a tax creates a parasitical, legal plunder social system rather than a mutually beneficial and reciprocating system. And this is the core argument of those who resist and protest this tax.

The 16th Amendment rendered the apportionment debate dead with respect to the property of incomes. The critical remaining question, the foundational social question, is why aren’t individual humans allowed to deduct the same ordinary and necessary expenses as artificial entities before deriving any alleged gain? Apportionment, direct vs. indirect taxation, etc., are not the issues. Hindsight reveals the concepts of apportionment and direct vs. indirect flawed. The fundamental issue is one of common sense and fairness. Humans must be allowed to cover the ordinary and necessary expenses of life before trying to calculate any alleged gain.

Regardless of how one wants to define the term income, these easy administrative change would modify dramatically how Americans perceive the income tax system and immediately eliminate overwhelming stress, discontent, and hatred caused by the tax. The latter modification would see everybody continuing to issue information returns, at least for the short-term, but if the total amounts reported are less than the statutory standard deduction, then such people would not be expected to file any tax return. Most small-scale proprietors, artisans, professionals, and independent workers would need not file tax returns either. Formally registered businesses, such as corporations, limited liability companies, partnerships, and some proprietorships formally registered as Doing Business As (DBA) entities, would be expected to continue filing returns even if they owe no tax. Certain passive unearned income gains, such as stock dividends or interest payments would be reported and subject to an income tax, but only if in excess of the statutory exemption ceiling. Incomes received from property rentals, if realized as an organized business or DBA would be subject to taxation as income, but rental property owned as “mom-and-pop” private property would not.

In addition to these ideas, another idea used in other countries is to distinguish between earned and unearned income and provide different tax rates.

The most significant issue with the income tax — if one accepts the concept of coercive taxation — is the dual meaning of the term income. There simply is no way to merge the two concepts into one tax. One definition explains a direct tax — that imposed upon wages and salaries, and the other an indirect tax in the nature of an excise — that imposed upon business profits and unearned passive income. The problem arguably originated with the Pollock decision and certainly was entrenched in 1916 with Brushaber and Stanton. The legislative shenanigans during World War II forever confused the two meanings. A more palatable and honest approach is to identify a particular “income” tax by nature:

  • Gross receipts business tax
  • Business net profits tax
  • Real estate rental profits tax
  • Personal property rental profits tax
  • Wages and salary tax
  • “Excess” wages and salary tax
  • Earned income tax
  • Unearned income tax

Notice how such descriptions more easily identifies the nature of the tax without the confusion that exists today and for the past many decades.

These proposed changes are legislative in nature and if recent times are any indication, most people should not place much hope in that remedy. Significant tax reform is unlikely without a national crisis or emergency. The only remaining solution, therefore, is to create such a crisis through civil disobedience. Regardless of what one believes the law actually states or requires, legislators can be encouraged into action through peaceful civil disobedience. The Prohibition amendment was repealed largely because people refused to convict their peers in trials and the court dockets filled beyond any reasonable capacity. A similar approach would function well today.

Unfortunately, much of the action that takes place in the income tax extortion business is through civil actions rather than criminal trials. Still, people can clog the administrative process by learning how to challenge the utter lack of evidence and can clog the courts after exhausting those administrative remedies because revenue agents and attorneys seldom can authenticate their evidence or affirm their numerous presumptions. Employers can refuse to play the withholding game and refuse to file W-2 information returns. Independent contractors can refuse to disclose a taxpayer identification number and clients can refuse to request that number. Clients can refuse to file 1099 information returns. Bank managers and investment brokers can refuse to hand over interest and dividend payments upon request of phony levy notices. Wage earners would still suffer withholding, but could clog the system simply by refusing to file a return.

The time is ripe for a peaceful tax revolt. Even U. S. Presidents have called for such a revolt. Discussing the abhorrent nature of the income tax and of “tax cheating” and modern American morals:[5]

Thirty and forty years ago you didn’t hear people brag at social get-togethers about how they got their tax bill down by exploiting this loophole and engineering that credit. But now you do. And it’s not considered bad behavior. After all, goes this thinking, what’s immoral about cheating a system that is itself a cheat? That isn’t a sin, it’s a duty . . . Our Federal tax system is, in short, utterly impossible, utterly unjust, and completely counterproductive. It’s earned a rebellion, and it’s time we rebelled . . . .

Reagan’s predessor, Jimmy Carter, during his Democratic Party nomination acceptance speech, had no kind words about the income tax system:[6]

It is time for a complete overhaul of our income tax system. I still tell you: It is a disgrace to the human race.

Would a grass roots revolt topple the political system for lack of money? Hardly. Most of the financing provided today is through the central banking mechanism. The income tax system continues in large part to mask that process. What about those people who believe they need to pay their “fair share” of expenses? “Fair share” of what? The majority of the alleged expenses are for wars nobody needs and robbing Peter to pay Paul and vice-versa.

A primary challenge with the income tax, like all taxes, is not a desire to pay for certain alleged “common goods and services” — whatever those might be. The problem is a keen desire by most people to get something for nothing — the idea of legal plunder and coercive wealth redistribution. The Framers well understood this problem and called this the tyranny of the majority.[7]

The primary problem with the income tax — with any tax system — is that people learn to become politicians first, and producers and consumers second. They learn to rob from Peter to pay Paul and to rob Paul to pay Peter. The process is not only awfully inefficient, but socially destructive. The true solution is to whittle the political system such that the urge to steal under the color of law no longer exists. And the first step toward that world is to ensure people retain more of what they earn such that they are not motivated to steal under the color of law in order to compensate or recover that which was stolen in the first place.

The final result? The camel would be out of the tent.

Finis.

Terms of Use

Next: Chapter 20 — Tariffs

Table of Contents

Bibliography

Endnotes

[1] Adams, Those Dirty Rotten Taxes, p. 189.

[2] Adams, Those Dirty Rotten Taxes, p. 154.

[3] Congressional Record, New York Representative Sereno E. Payne, chair of Ways and Means Committee, p. 4390, July 12, 1909.

[4] Crane, “The Income Tax and the Burden of Perfection,” p. 174.

[5] Remarks at the “Prelude to Independence” Celebration in Williamsburg, Virginia, May 30, 1985.

[6] Jimmy Carter, Nomination Acceptance Speech, July 15, 1976.

[7] For example, read Federalist No. 10.