Everything is Income?
by Tom deSabla | August 11, 2008
PrintLet’s try a mental exercise: What if you were tasked to create a free country from scratch – a place where individuals could prosper and grow, and where they couldn’t become slaves of their government? Would you allow that government the power to intrude far enough into their lives to monitor and tax all their individual financial gains of every type? Would you simply say, “Well, of course, in this new free country I have just created, the government gets a piece of everybody’s action - every kind of action - and that’ll work indefinitely”? You should be saying “No” loudly right now.
However, Congress and our supposedly “conservative” president have already said "yes." As I wrote last week, the IRS reporting provisions contained in the “Housing Bill” represent a breathtaking acceleration of government control over our lives. Starting in 2009, credit card companies will begin reporting transactions to the IRS, which can only mean that the IRS will use that information to accuse both borrowers and vendors of having more “income” than they are declaring. Some savvy commentators have complained about this new provision; but I still don’t think the full implications of it have been grasped by the public.
One big reason is that we are in denial - we still haven’t faced the glaring contradiction at the root of our entire tax paradigm – the conflict between our basic values of individual freedom - enshrined in the Declaration and the Constitution, and the current popular perception that all economic activity by every person in America is rightfully taxable by the federal government. If that were the end of it, and everyone could still live happily-ever-after, while forever ignoring this contradiction, it wouldn’t matter – but this paradigm is inherently unstable and unsustainable. It cannot endure.
The reason is that our government is out of control. Way out of control. It’s taking more liberties and power in bigger and bigger chunks – with less and less opposition. Examples could fill a library, but I think the news that government is now asserting the power to search our laptop computers at the border - for no reason - will prove the point all by itself. They can literally take our computers to some undisclosed location, and examine the entire contents at their own will and leisure. If they can do that, in a clear violation of both the letter and intent of the 4th Amendment, then their power is truly unlimited.
Now, let’s deal with all the counterarguments and/or rationalizations in favor of the “everything is income” paradigm that tend to emanate from a number of ideological/professional points on the spectrum. These arguments usually come from people who self-identify themselves as one of the following (of course there will be some overlap - with some notions being supported by more than one of the below listed folks):
The “realist”
The “practicalist”
The “patriot”
The “economist/financial expert”
The “Constitutionalist/legal expert”
The “realist” will say things like “The income tax is what it is - we just have to deal with it.” Such faux-realist sophistry overlooks the constant increases in government power being exercised by the IRS. Something can’t “be what it is” if it is always growing more powerful and more intrusive. How can you just “deal with” something that is materially growing worse and worse? Calling more and more activities “income” is not a steady state of affairs type of thing that we can just accept and then forget about. It would be like swimming in the ocean, seeing an ever-growing number of sharks circling, and then saying that sharks are just a fact of life that just has to be accepted.
Also, the “realist” will often point at other countries and say, “They’re all doing it too.” This offends me, because I don’t care what other countries do – unless it’s working. I don’t think the European model of VAT taxes and income taxes is working. Their economies are mostly stagnant, and several are in trouble just as we are. Indeed, most of them have followed our lead right to the edge of the abyss. They bought our subprime poison just like they bought our post-Bretton Woods fiat poison, and it’s making them sicker and sicker. Not even the Swiss are immune.
The only countries we should emulate are those with stable and growing economies, and there are precious few of them out there – Ireland, with its low taxes, comes to mind, but nobody else really. Well, it is worth pointing out that even China does not pretend to tax capital gains – yet. I am quite sure that the answer is not to be found abroad, or in globalism, with its attendant call for international tax “harmonization.” No, the answer is right here in the good old U.S.A. – we must revive our own matchless traditions of individual freedom and entrepreneurship. We can’t do that with this “everything is income” tax paradigm growing and festering like a malignant cancer.
The real truth that destroys the faux-realist argument though, is simply that the very attempt to track and tax each individual person’s every activity is itself unrealistic. In fact, it is impossible, which is why our government has burst from its Constitutional bounds, arrogated massive powers, and yet still strains for more power. Such absolute taxation powers simply cannot be sustained for the long term. Not in a free society. Not while retaining the right to private property. As to the importance of the latter, John Adams said, “The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.”
As to the “practicalist,” her arguments are similar to the “realist” – often claiming that taxes are “the price we pay for civilized society.” This is claptrap. Weren’t we civilized in 1930? We had cars, phones, planes, etc (not to mention manufacturing), and back then, the regular guy would laugh at the notion of the Feds getting a cut of his daily earnings. And, didn’t the Nazi’s have taxes? Oh yes, and they were pretty uncivilized too, with gas chambers and all. In any case, Ron Paul has pointed out that even if we eliminated the “income” tax, we could still have the same size government we had in 1995. That would be civilized enough for me.
Another rationalization for our tax paradigm is that it is needed to honor some kind of “social contract.” By now, given the outrageous obligations we have accumulated, it should be obvious what a selfish idea it really is. Does the “social contract” enable us to saddle each one of our children with hundreds of thousands in government debt as we have done? No. How can young Americans be forced to honor a lifetime contract they had no part in negotiating - a contract that amounts to virtual slavery? The answer is they can’t. They will revolt, as well they should. The “social contract” is a total fraud.
The “patriot” uses the above arguments, but adds a twist – when confronted, he will accuse his opponent of “complaining” or “whining” about his country, and failing to appreciate that we “live in the greatest country in the world.” Often he will conclude by suggesting that the “complainers” simply leave the country if they are so unhappy with the current taxation paradigm. Theirs is a particularly odious form of self-deception and denial. To begin with, if everyone had taken this attitude in 1775, we wouldn’t even have an America to complain about now – after all, the British Empire was the greatest in the world, and maybe those complaining colonists should have just shut up and appreciated what they had, too.
Another key flaw in the views of the faux-patriot is this – if we were to refrain from criticizing our government simply because it was still the best out there, then, by the time it would be “allowed” to criticize ourselves, it would mean that we had already fallen to the same level of other nations, and the job of regaining our prior greatness would be that much more difficult. It amounts to an acceptance of mediocrity. They seem not to realize that even the greatest nation cannot remain great if the people don’t aggressively keep the government within its proper bounds.
The “patriots” also seem unable to look inward to see problems; instead, they are obsessed with foreign “threats” of every kind imaginable. Even the flag-waving Republican party has been totally corrupted by this unreasoning obsession with false threats, resulting in a number of foolish doctrines, including the “preemptive war” doctrine, the “War on Terror” and the creation of our huge new security apparatus, with its warrantless searches, database-driven no-fly lists and “total information” programs etc, all of which are making us less secure, not more. The “progressives,” despite their oppositional rhetoric, have eagerly gone along with it all.
The real lesson of the 9-11 attacks is not to do a better job of searching and disarming folks, but to allow people like Todd Beamer to arm and protect themselves and their fellow Americans. That would have prevented the hijackings from being executed they way they were – for free, and with no additional government needed. Ditto for the Beslan and Va. Tech massacres. Some problems just cannot be solved by more government - only by less government and more individual freedom. However, neither party has it in their DNA to solve a problem by having the government do less – you might as well ask them to shoot themselves in the head.
It is my belief that the “love it or leave it” phony patriots should be told that they have it backwards. If they want to live in a country that isn’t free, where everyone reports on everyone else to the IRS, then they should be the ones who leave. It’s our country too, and we have a duty to fix what’s wrong; and if they aren’t going to be part of the solution, then they are part of the problem. They ought to shut up and get the heck out of our way, because we aren’t going anywhere – period. Those of us who defend the freedom of the individual are the real patriots, and we are the people that America desperately needs now.
The economists/financial experts of the contrarian persuasion – the goldbugs, if you prefer, have the clearest heads of all. I think that any successful opposition to the destructive and unsustainable tax paradigm we suffer under must start with them. In a recent article by John Rubino - "Time to Start Honing the Message“ – he rightly says that things economic are about to get ugly, and when they do, there ought to be as many people as possible that understand what has happened and why. I agree, which is why I am particularly interested in helping to “hone the message,” as Rubino says.
To that end, I say all the festering problems that America and the world are suffering from, including but not limited to economic ills, can be boiled down to one thing – statism. Not greed; not politics, not foreigners, not liberals, not conservatives, not too much or too little God. None of these gets to the root of everything, because they are all either a subset of statism, or they are unfortunate yet normal problems that have been exacerbated by statism and thus turned into far more serious and dangerous issues than they otherwise would have been.
Some people might like to see an example of such an exacerbation, and so perhaps the reader will permit me a brief digression to provide one. How about abortion? Sure, there were deaths from illegal abortions before Roe v Wade, with some claiming over 10,000 deaths a year; but that problem, objectively, is nothing compared with the problem of over 48 MILLION documented abortions since the government got involved with the issue. I think that those millions of deaths prove that the problem was severely worsened by government, i.e. statism, unless the much-celebrated freedom of those women to abort trumps the lives of all those babies.
Statism is the manifestation of our innate desire to use force to control others, and freedom is our innate desire to be free of that control. For example, this global fiat money “system” and all of its harmful consequences are nothing but a subset of statism, as they are just another manifestation of our desire to control others by force. Even with all the known negative economic and moral results of fiat “systems” - the shrinkage of the actual productive economy, the encouragement of speculation and gambling instead of hard work and savings, and plenty else, fiat money is still only a result of the larger and more pernicious whole of statism itself.
Every single economic control that the contrarian financial community complains about is just another manifestation of statism. After all, only the government has the power to exercise these controls. I know this community realizes that these controls are getting more numerous and more onerous. What I don’t know if they know – is that all this stuff is really the same force manifesting itself in a million different ways. Ever-increasing powers of income taxation are a truly terrible development hiding in plain sight among all the other great risks they rightly warn us about.
Economic experts must realize - since our economy is 70% consumption-based, any reduction of consumption is a grave danger to us. There are two reasons why the new reporting provisions in the “housing bill” are so deadly – firstly, to the extent that current non-filers, or “under-reporters” continue to use or accept credit card transactions as they have in the past, the IRS will attempt to tax them more, causing an increased transfer of wealth to the government. Only free-associating people make profits and generate wealth. Governments never do – so the more of society’s wealth that gets transferred to government, the poorer we all get. The history of failed communist and socialist nations is nothing but the history of this process happening over and over.
Far worse, however, will be the chilling effect once this reporting begins. Once these people begin receiving letters from the IRS, many will stop spending, thereby shrinking our consumer-based economy more radically than any single previous measure has ever done. Much of our consumer spending comes from under-the-table earnings, and a lot of that is now being done with credit cards. Nobody has tried to mess with that spending before; but as statism is a progressive disease, that progression is now finally reaching out with it’s long dark arms to report and tax that spending. This is something that could really send us into an economic tailspin all by itself, without even considering everything else that is happening.
By focusing overmuch on business and “flation” cycles, as if what goes down always goes up again with no lasting damage to society, some may be overlooking the cycle of statism - the cyclical rise and fall of great nations from the progressive, destructive effects of increasing government power. There may be “a great deal of ruin in a nation” as Adam Smith once said, but the question for us is - just how much ruin is left in ours before it becomes unrecognizable? Not much, based on what deterioration has already occurred, and on the greater deterioration likely to occur after the election with the ascent to power of Barack Obama, who openly wants more IRS powers, and his socialist supporters who are, likewise, ignorant of how real prosperity is created.
The constitutionalist/legal experts I deal with at the last, because in this area of scholarship resides both the greatest ignorance and denial, and also a great, though largely unknown, opportunity to regain our freedom. Now it comes to it – is this “everything is income” taxation paradigm really legal and constitutional? Few people can honestly answer this from their own knowledge, because, among all the experts out there, hardly anyone has actually read the actual federal tax laws. Of those precious few, even fewer still know the real history of them and the Supreme Court decisions that shape and explain these laws, and their lawful constitutional scope.
Most people just pretend they know the law, including the IRS itself. Included in this pretense are tax “practitioners” (whom the IRS, interestingly, calls “external stakeholders,” which begs the question – what, exactly, do they have a “stake” in?); Congress; and the financial community. Almost no one really knows it. Of all the things to research, the most daunting of all are the tax laws, not just because of the vastness of the IRS code, but also because of the assumption of futility that accompanies such an investigation. After all, why undertake such an arduous task when there is no hope of a useful discovery, since the paradigm already tells us that everything is “income.”
These days, constitutional analysis of the income tax begins and ends with the 16th Amendment, which seems to confirm the paradigm:
“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
Subsequently, nearly everyone thinks that before the 16th Amendment, there was no income tax, including such luminaries as Ron Paul, Walter Williams, and many other highly educated people. They are all wrong. There most certainly WAS an income tax before the 16th Amendment, and even more amazingly, the Amendment conferred NO NEW POWER OF TAXATION AT ALL.
The implications of this are many, but let’s start with the stated intent of Ron Paul and others to end the income tax by repealing the 16th Amendment. What a shock they would have in store for them if they were to succeed, and then discover that the income tax they so hated didn’t depend on the 16th Amendment after all, and could therefore remain in force after the repeal, just as it had been since 1862 - over 50 years prior to the ratification of the Amendment!
The next question to be considered is this – if the constitution has always allowed an income tax, and if we’ve had one since 1862, then why is it a matter of historical fact that less than 4% of Americans filed income tax returns as recently as 1936? The answer is simple. The other 96% didn’t owe any tax under the law, and unlike us – it never occurred to them that they might. The 16th Amendment was already in place in 1936, so did the law change in some other way since then? No, but a lot of time has passed, and a regime of government-encouraged deception and obfuscation has since taken root and grown over the real legal and constitutional nature of the income tax.
However, that nature is still unchanged, because it cannot change. The main body of the Constitution still rules on the issue. There are, and have always been, two main types of constitutional taxation – direct, and indirect. A direct tax is a tax directly on the head of the person, which is why it has always been called a “capitation” or head tax. These kinds of taxes have always been - and still are - specifically forbidden to Congress under the Constitution unless they are apportioned. There are many people, the IRS included, who state, unofficially of course, that the current “income” tax is a direct tax, and that the 16th Amendment allows it.
Wrong. Our income tax is, and has always been since 1862, an indirect tax, which classification includes “imposts, duties, and excises.” The income tax, specifically, is an excise tax. Such taxes are, by definition, taxes on certain privileged activities, not on people’s heads like a capitation is. The rule that governs excise taxes has always been - and still is - the rule of geographical uniformity, meaning that the tax must be administered uniformly in all areas of the union. So, the income tax does not violate the requirement for apportionment, because it isn’t a direct tax, and it doesn’t violate the uniformity requirement for excise taxes either.
So, then, since the income tax is an excise, does that mean that Congress can simply dictate, as they seem to have a history of doing, that any activity they name may be taxed with this excise? Keep in mind what our modern taxation paradigm tells us – that if we work for anything of value, or we are given something, or if we sell something, or if we bequeath something to our children – these are all reported to the IRS and considered taxable events. If we gamble and win, even those proceeds are considered “income.” Can all these activities really be constitutionally excise taxable?
No. What activities can lawfully and constitutionally be taxed with an excise tax? To answer that, let’s be very clear on what an excise tax is – a tax on the exercise of a privilege. There can be no doubt of this, as it has been confirmed by numerous Supreme Court holdings, including Flint vs. Stone Tracy Co. 220 U.S. 107 (1911), and by many other courts over the years. So the answer is, only the activities involving the exercise of a federal privilege may be excise taxed. Even though this may be astounding to some readers, it is nevertheless incontrovertibly true. Moreover, as I said, no act of Congress has ever altered this truth, because no act of Congress could legally do so.
Now that we have this background, let us finally and definitively dispose of the purpose of the 16th Amendment. When someone exercises a federal privilege, the activity may be taxed with an excise, and around the turn of the century, on of the biggest activities going on was the construction of railroads. Many wealthy people, (read: “robber barons” if you wish) were investing in these railroads by means of purchasing the bonds issued by the corporations building them. These corporations were federal instrumentalities. So, therefore, the gains from those bonds were excise taxable.
However, in Pollock vs. Farmers Loan and Trust 157 U.S. 429 and 158 U.S. 601 (1895), it was ruled that, since those bonds themselves were private property, to tax the gains from them would amount to a direct tax, and therefore must be subject to the rule of apportionment. Since this ruling had the effect of excluding vast amounts of revenue from taxation – revenue that, despite the fact that it was “derived” from private property - was still the result of the exercise of a federal privilege, Congress passed the 16th Amendment, for the express and limited purpose of declaring that if a federal privilege was being exercised, then that income was taxable, regardless of the source it came from. That’s all, folks.
The true nature of the income tax never changed at all. This fact has been repeatedly and exhaustively confirmed by the Supreme Court, most notably in Brushaber v Union Pacific R. Co., 240 U.S. 1 (1916), which clearly, if busily, states that plaintiff Brushaber’s conclusion that the 16th Amendment “provides for a hitherto unknown power of taxation; that is, a power to levy an income tax which, although direct, should not be subject to the regulation of apportionment applicable to all other direct taxes” is erroneous. And, that his conclusion, if true, would result in causing “…one provision of the Constitution to destroy another; that is, they would result in bringing the provisions of the Amendment exempting a direct tax from apportionment in to irreconcilable conflict with the general requirement that all direct taxes be apportioned.”
To state this clearly and unambiguously, the passage of the 16th Amendment DID NOT repeal or modify Article 1 Section 9 Clause 4 of the Constitution, which states:
“No capitation, or other direct, tax shall be laid, unless in proportion to the census or enumeration herein before directed to be taken.”
That clause remains in force; no new taxing power was added, and no Constitutional rules were changed. The only thing that was clarified was simply that it didn’t matter what the source of the income was, all that mattered was the nature of the activity at issue.
The relevance of this case to our current situation is further clarified by a “doomsday clause” first stated in Pollock and reiterated in Brushaber:
“…taxation on income was in its nature an excise entitled to be enforced as such unless and until it was concluded that to enforce it would amount to accomplishing the result which the requirement as to apportionment of direct taxation was adopted to prevent, in which case the duty would arise to disregard form and consider substance alone, and hence subject the tax to the regulation as to apportionment which otherwise as an excise would not apply to it.”
They were being a little bit coy about the issue, even back in 1916, but the real meaning is clear – if the income tax were ever to become enforced as a direct tax, then it would need to be apportioned, regardless of the 16th Amendment clarification. Basically, they were drawing a line in the sand – essentially saying, “go ahead Congress, but watch yourselves, because if you ever step over this line, this excise tax will no longer be Constitutional as such, and will need to be apportioned.”
Well, we’re there right now, aren’t we? Because, simply put, the government cannot declare everything we do to be a federally privileged activity. That would be a sick, twisted, and utterly tyrannical abuse of the Constitutional limitations and rules governing the legitimate taxing power of Congress. Yet, that is the paradigm we are operating under in 2008 – everything we do, all that comes in, is now regarded as excise taxable. Yet, we still have a right to exist, and as part of that rightful existence, to earn money and trade goods and services.
So, then, are the tax laws unconstitutional? How can they not be? Amazingly, they aren’t unconstitutional as written. How can this be so? As part of the deception and obfuscation I mentioned above, a sinister, yet technically lawful misrepresentation and reporting process has progressed steadily over the years, which these new credit card reporting provisions are just the latest example of. The game is simply this in a nutshell: encourage one person or business to report on another as having received “income” and force the target person to prove that their earnings or gains aren’t income.
If the laws were simple and clear, this would be impossible, of course, but Congress, being an organization completely driven and animated by statism – has deliberately confused us by creating a huge and incomprehensible body of tax law, which, as I said, fewer and fewer people have been able to decipher over the years. To see the truth of this, realize that if our current paradigm were enshrined in the law – all the income tax code would need to say is this:
“All proceeds to any person from any activity at all are income, minus these exempted amounts.”
Think about it with an open mind, and you will realize that I am correct. Instead, if one actually looks at the law, as I have done - and I encourage everyone else to do so, too - one finds that every common term we use without thinking about it, is really custom-defined to have a specific limited meaning in the tax code. Worse, the IRS and its “external stakeholders” encourage us to think that those terms still have their common meanings, when they don’t. To illustrate all these examples would fill a book, and this article is already the longest I have ever written, but I will offer some of them to prove my point. For a more detailed explanation, please read, “Cracking the Code” by Peter Eric Hendrickson.
Let's start with a "wage". Without the receipt of what is LEGALLY DEFINED as "wages" under the relevant statutes, most of us should have nothing withheld from our paycheck, because that kind of withholding is specifically confined in its application to legally-defined "wages" and nothing else. Now, follow me down the rabbit hole…
A wage, defined in Section 3401(a) of Chapter 24 of Subtitle C of Title 26 (IRS Code) is defined as “all remuneration (other than fees paid to a public official) for services performed by an employee for his employer…” Sounds pretty straightforward so far, except that, if you scroll down, you will find that in 3401(c) an “employee” is defined as including “…an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term ''employee'' also includes an officer of a corporation.”
Uh oh - not so straightforward now, is it? How about operating a “trade or business”? Many of us do that, don’t we? Not so fast – because in Section 7701(26), Chapter 79 of Subtitle F we find the following, which applies to the entirety of Title 26, “The term "trade or business" includes the performance of the functions of a public office." I could go on and on, but you all must realize that there is an obvious intent to mislead going on here. The reason these laws are written they way they are is quite clearly to give us the impression that everything is income, while silently telling us otherwise in the actual laws as they are written.
For those wondering about the constant use of the words “includes and including” – they too, are an attempt to make it seem like the laws can specifically include someone by definition, but that everyone else is somehow included too, by mere implication. However, it is a long-established legal precedent that when one thing is specifically included in a legal definition, everything else not included is specifically intended to be excluded. The legal expression of this is:
“Inclusio unius est exclusio alterius. The inclusion of one is the exclusion of another…” Blacks Law Dictionary, 6th Edition.
Where does this leave us? It is simple. The Founders never intended to set up the “everything is income” tax paradigm we are suffering under, and neither the Constitution nor the tax laws support that paradigm. Everything is not “income” and all we have to do is follow the law and the Constitution as written, and STOP FALSELY REPORTING ON EACH OTHER. Without this false reporting, the scheme would fall apart like a house of cards.
Every time that anyone issues a W2 or W4, or a 1099 or 1098 form without making absolutely sure that the earnings they are reporting are truly a result of the exercise of federal privilege, they are breaking the law by characterizing someone’s earnings as “income” when they aren’t. The only entity that should be issuing these forms is the federal government itself, to it’s own “employees”
If we don’t get together and stop meekly submitting to it, this taxation paradigm that has been foisted upon us will become ever more restrictive until we are all literally slaves. Bank on it. We’re almost there already. No other reform; no other economic analysis, nothing else at all will matter anymore. Statism is the real threat, and it encompasses and nourishes every evil in this world. It has long obscured the real Constitutional limitations on taxation, and these new reporting provisions prove that statism is still growing. Worse, its growth is clearly accelerating. Our freedom will not survive and possibly, neither will we if we don’t get educated, hone the message, and act before it’s too late to do so.
Copyright © 2008 Tom deSabla
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