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America's Counter-Revolution
The Constitution Revisited

From the back cover:

This book challenges the assumption that the Constitution was a landmark in the struggle for liberty. Instead, Sheldon Richman argues, it was the product of a counter-revolution, a setback for the radicalism represented by America’s break with the British empire. Drawing on careful, credible historical scholarship and contemporary political analysis, Richman suggests that this counter-revolution was the work of conservatives who sought a nation of “power, consequence, and grandeur.” America’s Counter-Revolution makes a persuasive case that the Constitution was a victory not for liberty but for the agendas and interests of a militaristic, aristocratic, privilege-seeking ruling class.

Saturday, January 13, 2007

Are Wages Income?

I've been reading the petition for rehearing in Murphy v. Internal Revenue Service, the significance of which I discuss here. I'll have more to say about the government's juicy petition, and the plaintiff's response, later. For now I want to bring attention to footnote 11 of the petition.

To set the context, the government is responding to the plaintiff's claim that compensatory damages for nonphysical injury (mental distress and loss of reputation) are not income, and thus not taxable, because they were intended merely to make her whole; that is, to put her back in the condition she was in before she was harmed. Since her mental well-being and reputation are not taxable, plaintiff argued, neither should her compensation be considered taxable income. In other words, there was no gain because the award was merely a "return of capital."

The government responds that "A return of capital is excludable from income only to the extent of the taxpayer's 'basis' in the property.... Because taxpayer here does not have a basis in her 'human capital,' all damages received on account of an injury thereto are an accession to wealth."

In other words, selling labor for money is not like selling stock as far as the government (and its courts) are concerned. The "basis" of a share of stock is its original purchase price, and the tax is computed on the difference between that price and the later sale price. But the basis of labor (human capital) is zero (in the government's view). Therefore wages are all gain, and the government may tax the entire amount. As the petition puts it:
But the human capital analogy merely supports the notion that an individual might be entitled to damages for nonphysical injures in the first instance. At issue here, however, are the tax consequences of the receipt of those damages, and, in that context, tax concepts must be considered. That taxpayer may have only been returned to the status quo ante does not answer the far different question whether, for tax purposes, she received income subject to tax. . . .

Any determination to exclude such damages from income is not required by the Constitution or driven by tax considerations, but is one of policy based upon value judgments.... Such determinations are the sole province of Congress....
Here's where the footnote comes in:
The human capital concept has also been advanced to support the contention, frequently made by adherents of the tax protest movement, that wages are not income within the meaning of the Sixteenth Amendment, on the ground that wages constitute nothing more than the return of personal capital exhausted by one's labor. That argument has been uniformly rejected as frivolous. E.g., United States v. Connor, 898 F.2d 942,943-44 (3d Cir. 1990); Coleman v. Commissioner, 791 F.2d 68, 70 (7th Cir. 1986. [Emphasis added.]
As I've pointed out before, every claim the tax-denial movement makes shrivels to nothingness when examined even halfway closely. We won't get rid of income taxation by legal sleight of hand.

9 comments:

Stephan Kinsella said...

"As I've pointed out before, every claim the tax-denial movement makes shrivels to nothingness when examined even halfway closely. We won't get rid of income taxation by legal sleight of hand."

Great comment, Sheldon. I've noted before Brian Doherty's great comments on this too. James Ostrowski had a good piece on this on LRC recently, Protesting the Tax Protesters. Stephan

Sheldon Richman said...

Brian's and James's articles are excellent. Thanks, Stephan.

Anonymous said...

The links in the comments go nowhere so Brian and James must not have made that big of an impression. I will point out that you are relying on a government petition footnote to prove that the guy is in the wrong. If you actually read the cases in question they both point to the definition of gross income according to 26 USC 61 Section 61(a)(1). To paraphrase it says gross income is the income from all sources including compensation from services. What it doesn't say is that all of the compensation for services is income, just the the income from the compensation can be taxed. This is a long way from defining wages as income which is one of the big questions the tax deniers are claiming. I have done some research and this, and note that I am not a lawyer, but it seems like you guys are far off base by just saying wages are income. You seem to forget that if that actually true there should be some documentation showing it correct?

If anyone can find such documentation I would be very interested in reading it (and I am sure I will find it eventually if it's out there). Also note that the 16th amendment only states that Congress can tax income from any source, but still doesn't specifically define wages as income. I have found some websites claiming that there are court decision showing that wages are in fact seperate from income in a legal sense, but I haven't been able to find the ruling anywhere but on these websites so I for now I am taking it with a grain of salt.

The only thing I do agree with is "We won't get rid of income taxation by legal sleight of hand.". While I don't agree that asking for an actual definition is legal sleight of hand its undeniable that if you don't pay your taxes you will be taken to court and you will lose and plugging your ears and saying its not fair isn't going to get you anywhere. I will be keeping an eye on this page to see if anyone can provide some actual facts, but after reading the comments above I don't have much hope.

Sheldon Richman said...

Anon, have no fear.

Ostrowski's article is here.

Here is one of Doherty's articles on the tax. The other one is here.

You write: "To paraphrase it says gross income is the income from all sources including compensation from services. What it doesn't say is that all of the compensation for services is income, just the the income from the compensation can be taxed."

This is typical of the Talmudic hairsplitting that is the entirety of tax deniers' case. Convince a judge and get an injunction against the IRS.

What do you mean by documentation? The tax code lists compensation for services as gross income. The courts have said over and over that wages and salaries are taxable. You don't seem to understand the Constitution game. What would satisfy you?

GeoPorcupine said...

The tax code lists compensation for services as gross income.

No, it lists gross income as income from any source, compensation for services included. That means that compensation for services is not income, but a source of income. Just because income can come from a source, doesn't mean that all things coming from that source are income.

GeoPorcupine said...

Another way to visualize it:

Except as otherwise provided in this subtitle, gross cars means all cars from whatever source derived, included (but not limited) to the following items:

1. The Honda Factory
2. The Nissan Factory
...

The tax code lists The Honda Factory as gross cars.

No, it lists gross cars as cars from any source, The Honda Factory included. That means that The Honda Factory is not cars, but a manufacturer of cars. Just because cars can come from a manufacturer, doesn't mean that all things coming from that manufacturer are cars.

Anonymous said...

Heres what I don't get if income includes compensation for wages as a source of income. How are wages your employer pays you not income from that source.

Anonymous said...

wages are not income because they do not provide you with anything that you did not already have, there is no net gain, which is what taxes are concerned with. that's why we subtract cost not value from the amount gained in a sale of goods or services. however, in the case of wages, cost and value are perfectly equal. the cost to you is your time, and the value of your time is determined by what you get payed for it, and the government doesn't provide you with the means to possess time, therefore it doesn't get a share of your equal trade of your time for someone's money. now, if you were self employed as some kind of house service repairer (electrician, plumber, whatever) you might charge a certain amount for a given "service" like a specific kind of wiring or certain sewage routing because it requires a certain amount of material cost and expertise, and the money you get for those services rendered would be income (deducted by the cost of materials or education for such services) but if you also charge an hourly rate just for showing up (because time is money) then the money from that would not be income because the cost to you is equal to the amount you'll get payed for it.

Sheldon Richman said...

"there is no net gain. . . . in the case of wages, cost and value are perfectly equal."

Of course there is a net gain. The things exchanged cannot be perfectly equal. No exchange takes place unless both transactors expect to gain from the exchange, that is, each prefers what he gets to what he gives up. This is called the double inequality of value. When A exchanges labor services for money with B, A has decided that he prefers the money to whatever else he could have done with his time and energy. He obviously comes out ahead according to his subjective valuation. The same is true for B.

No gain, no exchange.