Preamble

I'm not a nutter, nor am I trying to get out of paying "my fair share." I recognize that the laws of society cost money to enforce and that there are a few natural monopolies that tend to be better served by the public sector. I am not against taxes morally, though I am against some uses of the taxes. I dislike taxes on labor and trade for pragmatic reasons, they put a governor on the engine of satisfaction of desires: they are a tax on good behavior.

There are many attacks on the federal income tax and, with the byantine nature of the code, who knows how many are valid. If we have a nation of laws and not of men, it should only matter what the letter of the law says - I expect all assertions made by the IRS and those fighting it be logical and cogent. I dismiss out of hand any appeals to fear, authority, "we need the money," "this would cause chaos," or "I don't want to pay."

That said, my understanding is that INCOME itself is not defined in the regulation. As a Georgist, my understanding is that, after the LVT movement was subverted in the early 1900's, Henry George Jr., and others worked toward an income tax that would try to recover money from privilege via a top down approach - closer to a capital gains tax than a labor tax.

The Laws

16th Amendment

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.

I take this to be an enabling clause, removing the restrictions imposed by Article 1, Section 9. This doesn't create an income tax, it just allows it.

26 U.S.C. § 1

There is hereby imposed on the taxable income of [various categories, such as married individuals, single individuals, etc., omitted for sake of this discussion] a tax determined in accordance with the following table: [table omitted for brevity].

Ok, so there is a tax on taxable income... aka an income tax. So what's taxable income?

Section 63. Taxable Income Defined

[T]he term "taxable income" means gross income minus the deductions allowed by this chapter (other than the standard deduction).

Ok, so taxable income is gross income minus deductions. What's gross income?

Section 61. Gross Income Defined

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

Compensation for services, including fees, commissions, fringe benefits, and similar items; Gross income derived from business; Gains derived from dealings in property; Interest; Rents; Royalties; Dividends; Alimony and separate maintenance payments; Annuities; Income from life insurance and endowment contracts; Pensions; Income from discharge of indebtedness; Distributive share of partnership gross income; Income in respect of a decedent; and Income from an interest in an estate or trust.

Ok, now we run into a problem. Gross income means income from any source. So what does income mean?

Crickets...

What's Income Then?

Barring a definition, the dictionary definition must be used...

a coming in : entrance, influx a gain or recurrent benefit usually measured in money that derives from capital or labor

So, income is a gain.

Thought experiment. You break a $20 for 4 $5's. How much income did you make? Not $20, or anywhere close to it. Would you let someone break your $20 for a 5 cent fee? Possibly. For a $1 fee? Less likely. For $10? No way. So, even though it could be argued that you're gaining from trade, you're not gaining $20 worth.

Let's look at wages. You work a year for $70k. Did you gain $70k? No, you traded part of your life for that money. While it can be argued that some of that money is a gain (otherwise why did you do the transaction), the entire sum is certainly not. Would you work a year for $1? No. Then that one dollar is not a gain ... it's not income, it's not gross income, it's not taxable income.

In the case of wages, gross income is "gain derived from wages." Some portion of wages may not be gain. If the entirety of wages were income, then they would be gifts or gratuities because the basis for earnings is implied to be $0.

Examples of Different Sources

People get hung up on the list of sources without asking whether something is income or not. An example of income and non-income from various sources by Thomas K. Cryer:

Example 1: Gains on Capital

Joe places $100,000 in a certificate of deposit earning 6% per annum. Joe gave up his $100,000 for a year and at the end of the year he received $106,000 of which only $6,000 would be income as defined by the act. Joe still has his original $100,000 and can 'rent' it out again for another year, but he pays taxes only on the $6,000 gain.

Example 2: Gains on Sales

Tom buys a widget for $1 and sells it for $2. Tom gave up $1 in order to receive $2, but only the additional $1 is considered income. Tom still has his dollar back and can purchase another widget to sell, but he pays taxes only on the $1 gain.

Example 3: Gains on Labor

Bob pays Bill $50 to unplug Mrs. Haversham's drain for which Bob charges Mrs. Haversham $75. Bob gave up $50 in order to receive $75, but only $25 is considered income, his realized gain of $25 on Bill's labor. Bob still has his original $50 that he can use to purchase more labor that he can sell for profit, but he pays taxes only on the $25 gain.

But what about Bill's $50? What has Bill given up? Nothing? Bill gave up a day out of his life, he expended his effort and skill, employed the use of his working tools. Bill no longer has his day or his labor, both are spent. He cannot, even with every penny of his $50, buy another day or recover the effort he expended, yet according to the government, his $50, every bit of it, is profit, gain, accession to wealth and was received in exchange for nothing. What Bill gave up to receive his $50 was not "nothing", it was "'The property which every man has in his own labor, [and] as it is the original foundation of all other property, so it is the most sacred and inviolable. . . .' Adam Smith's Wealth of Nations, Bk. I. Chap. 10." Butchers' Union, supra.

Joe recovered his $100,000, and paid no tax on it; Tom recovered his $1 and paid no tax on it; Bob recovered his $50 and paid no tax on it; but Bill can neverrecover his day, energy or labor, but pays tax on his gross revenue, including the value of his day, energy and labor and even if the value of that day, energy and labor exceeds the gross revenue!

We can all agree that a person's labor is not only his property, his capital, but that it is depleted in its employment and, eventually, is exhausted and totally spent. We have two major, landmark Supreme Court decisions, still controlling law, dealing specifically with that issue, and the decisions of the Supreme Court in those two cases makes a conclusion that an income tax on wages is not an income tax, but a tax on gross receipts, taxing both income and capital, and, therefore, unconstitutional.