Talking Over the Beefed-Up IRS

Scott Horton and I discussed the ominous changes in store for middle-income taxpayers under the Inflation Reduction Act. Listen here.

TGIF: The Coming New and Improved IRS

The brilliant people in the Biden administration and the U.S. Congress have decided that one thing America really needs is an Internal Revenue Service (!) fortified by 87,000 more employees and 80 billion more dollars so it can help reduce the inflation that currently menaces us.  

You don't believe it? Oh, ye of little faith!

How is that to be accomplished? By auditing rich individuals and corporations, of course, thereby harvesting tons of hitherto uncollected revenue and forcing the shirkers to pay their "fair share." (No one ever says how we know they aren't already paying it.) The law's advocates also say that with its outright tax increase on corporations and cutting of energy and health care costs, inflation will be lowered still more. I wouldn't take that too seriously.

You might suspect that the government's story is not exactly kosher -- and you would be right. Even though the Biden people insist that the IRS provisions of the just-enacted Inflation Reduction Act will leave people making less than $400,000 unscathed, nothing in the law guarantees that, and the defensiveness of the White House and congressional spokesmen seem to confirm that the nonrich are not safe. Last year the Congressional Budget Office said all taxpayers would face higher audit rates under an earlier, larger version of the Inflation Reduction Act. (It was then called Build Back Better.)

This stands to reason that all taxpayers will be at risk. The highest earners have battalions of the best tax lawyers and accountants who surely advise their clients how to (legally) avoid, not evade, taxes. (News flash: the tax code is complicated, even vague, and will become even more so under the new law.) When you combine that fact with the regrettably small number of really, really rich people, you have to figure that the newly beefed-up IRS won't be anywhere near able to squeeze out the expected sums without going after lower hanging fruit. That's the rest of us: additional audits of people of more modest means. (Just for the record: with the exception of any actual thieves, wealthy people also have a right to their money.)

How many times before have presidents and legislators promised to raise badly needed, deficit-shrinking revenue by stepping up IRS enforcement against the rich? It's how progressives lull the middle class into accepting always-increasing spending.

But strangely, the deficits never shrink and stay shrunk. So either the revenue estimates were unalloyed bunk or the government spent the additional revenue on new projects. I'm sure it was a combination of both. Surprise, surprise! Birds gotta fly. Fish gotta swim. Politicians gotta spend.

At any rate, the deficit and debt (monetized by the Federal Reserve, our inflation engine) have grown without relief. Isn't that likely to be the case this time? It's surely the way to bet.

According to Forbes, "Democrats say the legislation will raise close to $740 billion in tax revenue over the next 10 years and devote $300 billion of that money toward reducing the federal deficit." That's 2 percent of the deficits expected over the next 10 years. You should realize that last year's budget deficit was $2.77 trillion, the second highest after the 2020s $3.13 trillion. 

But let's remember that these revenue projections are really predictions about how people will behave -- and how much taxable income they will produce -- in an altered institutional environment. The prognosticators make their predictions with inherently dodgy computer models. Remember how well such models predicted the climate and covid catastrophe? In truth, we don't know how creative, entrepreneurial people will adjust to changing tax and regulatory conditions. Individuals discover things when they face new situations. They are not robots. 

Another thing to keep in mind is that corporations do not pay taxes. They collect them. Only people pay taxes. So which people pay the corporate income tax, which will go up under the new law? Economists have long known that the tax is paid by consumers through higher prices, employees through lower wages, and shareholders, most of whom are not wealthy, through lower returns to their retirement funds. The corporate tax is one of those great political deceptions that seems to be a permanent fixture of the landscape. By the way, taxes on savings and investment invariably constitute double and even triple taxation, stifling innovation and wealth creation. Thus the general welfare, and not only justice, suffers.

Will the Inflation Reduction Act really act to reduce inflation? No bloody way. Inflation is not merely a general price rise. That's only the symptom. The cause is an inflation of the money supply by the government's central bank.

When the government spends more than it collects in taxes, it borrows money to cover the budget deficit. The Federal Reserve will buy the government debt, creating money out of thin air to do so. When the conjured-up money is spent or lent, we have the proverbial more dollars chasing the same amount of goods and -- voila! -- a general rise in prices. The new money also will tend to push interest rates lower than the free-market level, which in turn will distort the calculations of investors -- interest rates are key signals to producers, after all -- resulting in unsustainable malinvestment. (This is one of the monumental theoretical achievements of the Austrian school of economics, featuring Ludwig von Mises's and F. A. Hayek's work on money and banking.)

It's even worse. This century's massive money creation has been accompanied by the depressed production of goods brought about by the economic lockdowns during the covid pandemic. It's not just more money chasing the same supply of goods, but a smaller supply of goods. Thank you, politicians throughout America, for your service.  

A real inflation reduction act would do nothing but slash spending -- assuming we think the government should spend anything at all. After all, it ultimately obtains its money at gunpoint, that is, by theft. Slashing spending means rethinking big government, that is, -- top of the list -- the warfare and welfare state. 

So the touted Biden achievement is the just same old snake oil in new packaging. The government is out of control, and I don't see how that will soon end. Taxation is a blank check for politicians. The income tax is especially bad because it requires all to account to the government for their income-earning activities under threat of penalty. This inquisitorial device ought to be seen as intolerable in a theoretically free country. (For more, see my book Your Money or Your Life: Why We Must Abolish the Income Tax.)

The Tax Code Should Not Be Used to Influence Home Buyers

My penultimate column for the American Institute for Economic Research is "The Tax Code Should Not Be Used to Influence Home Buyers."

Whose Money Is It?

My latest column at the American Institute for Economic Research is about tax reform: "Whose Money Is It?"

Income Tax Day

If you hate the income tax (among others), damn the Rats (Federalists) and praise the Anti-Rats (Anti-Federalists). Ignore those who blame someone else later in American history. Don't let the original bad buys off the hook.

As Lysander Spooner said,

But whether the Constitution really be one thing, or another, this much is certain – that it has either authorized such a government as we have had, or has been powerless to prevent it. In either case, it is unfit to exist.

For details see America's Counter-Revolution: The Constitution Revisited.

Abolish the Income Tax and IRS

For some time now we’ve lived with the scourge of civil asset forfeiture, under which the police can seize a person’s property on the mere suspicion it was used in a crime and without having to charge the owner with an offense. Since the authorities have no burden to prove guilt beyond a reasonable doubt, the burden of proving innocence falls on the hapless citizen who wishes to recover his property.

Amazingly, people describe as free a society that features this outrage.

Now it comes to light that the Internal Revenue Service does something similar. The New York Times reports that the IRS seizes bank accounts of people whose only offense is routinely to make deposits of less than $10,000. If you do this enough times, the IRS may suspect you are trying to avoid the requirement that deposits of $10,000 or more be reported by the bank. The IRS keeps the money, but the depositors need not be charged with a crime.

You read that right.

Read it here.

TGIF: Abolish the IRS -- and the Income Tax with It

My take on the IRS scandal.

Also see TGIF: No Intervention in Syria.

Interview on Tracesofreality.com

Guillermo Jimenez interviewed me for Tracesofreality.com. Here's the video:

Podcast on the 16th Amendment

Steve Stanek of the Heartland Institute interviewed me recently about the Constitution, the 16th Amendment, and the income tax. Listen here.

Misunderstood 16th Amendment Is 100 Years Old

Today is the 100th anniversary of ratification of the 16th Amendment, the so-called income-tax amendment. Contrary to popular myth, it did not legalize taxes on wages and salaries, because such taxes had never been ruled unconstitutional. For details see my series "Beware Income-Tax Casuistry."

Taxpayers Aren't Stationary Targets

My latest piece at the Project to Restore America website is "Taxpayers Aren't Stationary Targets."

Actor Gérard Depardieu's decision to flee France for Belgium to avoid a 75 percent marginal tax rate on incomes above $1.3 million sends a message we here in America should heed: Those who are singled out for tax increases are not stationary targets. The means of avoiding and evading the taxman are legion.

Read it all here.

Don't Repeal the Sixteenth Amendment!

Surely any champion of freedom wants to get rid of the income tax. And surely the way to really get rid of the income tax is to repeal the Sixteenth Amendment to the U.S. Constitution. Right?

Wrong.

Repealing the Sixteenth Amendment would be a waste of time because its disappearance would change nothing. Alas, Congress could continue to tax incomes (and anything else).

The rest of this week's TGIF, "Don't Repeal the Sixteenth Amendment!," is at the Foundation for Economic Education website.

Leave the Browns Alone!

Ed and Elaine Brown's constitutional argument against the income tax is balderdash. But the tax violates their -- and everyone's -- rights. The government should leave them alone.

Health Hazard

Back in the days before America had an income tax (yes, son, I've read there really was such a time), proposals to impose the tax were met with warnings that it would be "inquisitorial." Opponents apparently didn't see its potential for manipulating behavior. But what more effective carrot and stick is there than an income tax?

... The tax system has no doubt distorted the medical industry along with lots of other things. But any piecemeal way out will surely introduce its own distortions by upsetting long-standing plans and depriving people of their money. The early critics were right: The income tax is poison to a society that values freedom and spontaneous order. We should have never gotten started with it.

Read the rest of this week's TGIF column at the Foundation for Economic Education website.

Cross-posted at Liberty & Power.

A More Progressive Tax

The Treasury Department (pdf) says George II's proposed limited tax deduction for medical insurance will make the income tax more progressive.

I thought he favored the flat tax.

Hat tip: TaxProf Blog

Cross-posted at Liberty & Power.

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.

A Mysteriously Overlooked Tax Case

Addendum below

The U.S. Court of Appeals for the District of Columbia Circuit issued an important tax decision last August, but I haven't seen it discussed on any of the tax-denial websites. Tax-deniers routinely take parts of judges' opinions out of context to make their case that the courts have held that wages are not income and hence non-taxable. And the opinion in Murphy and Leveille v. IRS (pdf) has a few choices lines just begging to be taken out of context, such as:

At the outset, we reject the Government’s breathtakingly expansive claim of congressional power under the Sixteenth Amendment -- upon which it founds the more far-reaching arguments it advances here. The Sixteenth Amendment simply does not authorize the Congress to tax as "incomes" every sort of revenue a taxpayer may receive. As the Supreme Court noted long ago, the "Congress cannot make a thing income which is not so in fact."

Yeah, the deniers could have a field day with that, assured that most people won't read the full case. But some of us will--and have.

A bit of background. Marrita Murphy worked for the New York Air National Guard. She complained to the U.S. Department of Labor that, in violation of "whistle-blower" rules, she was blacklisted by her employer after she informed state authorities about environmental problems at air national guard base. Her complaint succeeded, and her case went to an administrative law judge for determination of compensatory damages. She was awarded $70,000 -- $45,000 for "emotional distress or mental anguish" and $25,000 for "injury to professional reputation."

On her 2000 tax return, she included the $70,000 as gross income and as a result paid an additional $20,665 in taxes. She then sought a refund of that money (plus interest; you go, girl!) on the grounds that § 104(a)(2) of the Internal Revenue Code states, "gross income does not include . . . damages. . . received . . . on account of personal physical injuries or physical sickness."

The IRS told her to take a hike.

Instead, Murphy filed suit. The U.S. district court backed the IRS.

To cut to the chase, the court of appeals sided with Murphy, holding that although her compensatory damages were not for physical injury (which the IRS concedes would be excluded from gross income), the IRS's refusal to exclude compensation for nonphysical injuries is unconstitutional "because compensation for a non-physical personal injury is not income under the Sixteenth Amendment if, as here, it is unrelated to lost wages or earnings."

If that's not clear enough, the judges went on to say:

Murphy’s compensatory award [for nonphysical injuries] in particular was not received 'in lieu of' something normally taxed as income; nor is it within the meaning of the term 'incomes' as used in the Sixteenth Amendment. Therefore, insofar as § 104(a)(2) permits the taxation of compensation for a personal injury, which compensation is unrelated to lost wages or earnings, that provision is unconstitutional. [Emphasis added.]

Thus implying that taxing compensation that is releated to lost wages, and hence the wages themselves, is indeed constitutional.

Q.E.D.

Addendum, Jan. 7, 2:25 p.m. CST

In the comments Thomas Bell helpfully refers to an update I missed. Thanks! Here's the skinny from Wikipedia:

The Department of Justice asked for a rehearing en banc (i.e., a hearing before all the members of the Court, rather than before only the panel of three judges who made the original decision).

The original three judges then agreed to rehear the case themselves, and also vacated the August 2006 judgment. The matter has been set for a hearing (before the three judge panel) for April 23, 2007, at which time the appellant (the government) "must raise all issues and arguments in the opening brief."

The August 2006 Murphy decision was mandatory precedent only in the District of Columbia. If significant components of the vacated 2006 decision are reinstated after the April 2007 rehearing, this could have a significant effect on litigants in employment, tort, and defamation suits, and in related areas of law where emotional distress and loss of reputation claims are possible.

This is interesting, but apparently not quite accurate. I've read elsewhere that the original three-judge panel will rehear the case, not the full compliment of the circuit's appellate judges. This seems to be unusual, indicating that the judges may be acknowledging they overlooked something. If the judges reverse themselves, it will be a win for the IRS.

Bear in mind, however, that what is not at issue is whether wages are taxable income. That was never the issue in the case. All that is in dispute is whether compensatory damages that do not replace lost wages are taxable. So a loss for the IRS does nothing to help the tax-denial movement.

Income Tax Flim-Flam

For those who are interested in the flim-flammery of the so-called "tax protester" movement, i.e., that collection of con men who tell the gullible that the government never passed a tax on wages and therefore they can escape the tax with impunity, I recommend a July 31 New York Times story, "Facts Refute Filmmaker's Assertions," found here ($$).

A few tastes:

Not mentioned in the film is that Mr. [Aaron] Russo has more than $2 million of tax liens filed against him by the Internal Revenue Service, California and New York for unpaid federal and state taxes. Mr. Russo declined to discuss the liens, saying they were not relevant to his film....

Near the film's beginning Mr. Russo says, and others appear on screen asserting, that the Internal Revenue Service has refused every request to show any law making Americans liable for an income tax on their wages.

Yet among those thanked in the credits for their help in making the film is Anthony Burke, an I.R.S. spokesman. Mr. Burke said that when Mr. Russo called him asking what law required the payment of income taxes on wages, he sent Mr. Russo a link to documents, including Title 26 of the United States Code, citing the specific sections that require income taxes be paid on wages. Title 26 says on its face that it is law enacted by Congress, but Mr. Russo denied this fact....

One tax protester featured in the film, Irwin Schiff of Las Vegas, is now serving his third prison sentence after being convicted of tax evasion crimes. Mr. Schiff introduced into his criminal case the notes of his psychiatrist, who wrote that Mr. Schiff was a successful tax shelter salesman until a con artist ripped him and his clients off. The psychiatrist concluded that Mr. Schiff became delusional, believing he alone could properly interpret the tax code, as a way to avoid acknowledging reality.

Later, one of Mr. Schiff's confederates, who was also later convicted and sent to prison, sent e-mail messages to supporters saying that the psychiatrist's notes were introduced as part of a ruse to help Mr. Schiff escape prosecution.

Excellent Income-Tax Information Website

I mentioned this below but I don't want it to get overlooked. For quick refutations of the major contentions of the bogus tax-protester movement, see this website. It's by a professor at the George Washington University Law School. He's apparently not a libertarian or anti-tax per se, but he exposes the baseless assertions made by people who prey on the gullible among libertarians.

Hat tip: Kent Hastings

The Tax-Protester Movement

Updated 12/27/06

In this post I linked to three articles of mine titled "Beware Income-Tax Casuistry," which were first published in Freedom Daily (The Future of Freedom Foundation) and now are posted on FFF's website. In these articles I make several points, namely, that:

1) while the income tax is immoral and illegitimate (in the sense of violating individual rights and natural law), it is not unconstitutional or "illegal" (in the narrow sense of being an enactment of government).

2) the courts have consistently held that the U.S. government -- from the founding -- had a "plenary" and "all-embracing" power of taxation; that is, it had the constitutional authority to tax anything and everything, including incomes, subject to two restrictions.

3) the Sixteenth Amendment had one purpose: to remove one of those restrictions. In other words, the Sixteenth Amendment did not give the federal government a power it did not possess previously. It only let the government impose a tax on some kinds of income (from real and personal property) in a way it was prohibited from doing previously. In still other words, the Amendment was not needed to permit the taxation of income from labor. As a corollary and contrary to popular belief, no Supreme Court ever ruled that a tax on wages was unconstitutional.

4) most of the claims of the so-called tax-protester movement (TPM) are bogus, specifically, the claim that the income tax -- as currently enforced -- is unconstitutional.

Also implied, but not discussed, in the article is that by conventional legal and constitutional (though not by libertarian) standards, the government has indeed imposed a tax on incomes "from whatever source derived." This view is contrary to the TMP, which has turned out reams of paper arguing that in fact there is no income tax on the books and that if there is, it is illegal and unconstitutional.

Having read much of the TPM literature and the relevant court cases, I find no merit to their arguments. I wish it were otherwise. I would love to be able to believe that the government never really passed the tax, or passed it in a way that honest courts would find illegitimate. But it's not true.

This has upset some people. Why do I raise the issue? I do so because, first, I don't want to see gullible and wishful-thinking libertarians led astray. They might go to prison if they pursue courses of action endorsed by the TPM.

Second, the movement discredits serious libertarian objections to taxation and government -- so much so that were I conspiracy-minded, I would suspect the TPM was an IRS front set up to subject libertarians to ridicule. That's how ridiculous its grounds for protest are.

As I say in the article, we won't beat the income tax by legal sleight of hand before some judge. We'll only beat it by convincing a critical mass of people that taxation is theft and that government is organized aggression.

Make no mistake about it: I believe the income tax (like all taxation) is theft and in conflict with natural rights and natural law. But something immoral can be constitutional and "legal." Libertarians shouldn't have to be reminded of that.

For more information see this excellent website.