Income tax on wages unlawful?

Logo of the Internal Revenue Service, the federal income tax authority
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A chiropractor in Colorado has fought the Internal Revenue Service for years. He argues that American income tax law has a fundamental flaw. He says wages, salaries, tips, and other money you get for your labor is not income. Others have argued this before. But no one has yet set a precedent for this. At least one activist doubts that he ever will.

The income tax and the Constitution

The US Constitution (Amendment XVI) says:

The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the States, and without regard to any census or enumeration.

This is the Constitutional basis for the income tax. And the most common form of income on the personal income tax form (1040, 1040-A, 1040-EZ, etc.) is:

Wages, salaries, tips and other employee compensation

But Jeffrey Thomas Maehr, chiropractor and resident of Colorado, argues that wages, salaries, and so on are not income. And on September 6, the Supreme Court added his case to the docket for its Friday morning meetings. They also asked the IRS to respond by October 11.

How can wages not be income?

Maehr explained to Bob Unruh at WND why wages are not income. Income is the value that an asset gains. Maehr cited one example: interest on money in a bank account. That’s a very narrow example, of course. Black’s Law Dictionary defines the income tax as

a tax on the yearly profits arising from property, professions, trades and offices.

So: is a wage (or a salary) a profit? Maehr says no. Wages and salary, he says, are a value that someone else gives in exchange for another value, i.e. labor.

By that standard, what could constitute income? Other than interest on money in the bank, Maehr did not say. But perhaps “income,” as he narrowly defines it, would include:

  • Rents.
  • Interest on any kind of loan. (Interest is a special rent on money.)
  • Dividends.
  • Capital gains.
  • Gambling winnings.

He further argues that businesses pay taxes on profits but not on total revenue. Hence businesses do not pay taxes on their expenses. Wage and salary earners do.

Is Maehr correct?

Logo of the Internal Revenue Service, the federal income tax authority

Logo of the Internal Revenue Service

Nick Purpura has fought the government many times. A man who asserts that Obamacare breaks the Constitution and existing law fifteen separate ways is no friend of government for government’s sake. But he says that Maehr will lose on the income tax issue.

He is making the barter argument. He’s trying to say that when you work for a wage, you are bartering for the money someone pays you. Others have argued that before, and lost. So will he.

Purpura cited an example from his own experience as trustee for a 501(c)(3) tax-exempt charity. This charity, he says, often sent men to work in VA hospitals. His charity, not the VA, paid those men. The government credited the value of their labor as a gift to the VA. If labor were mere barter, that would not apply. Income tax law might be complex, but it is usually consistent.

Purpura said that the Supreme Court’s putting his latest certiorari petition on the docket meant nothing. The Supreme Court might, at best, remand the latest decision by the 10th Circuit Court of Appeals back to that court. More likely they will deny certiorari without comment. To accept his argument, says Purpura, would risk the collapse of the income tax system and even of the government itself. No court in the land would risk that.

One way the IRS could respond is to point out that the IRS already does let a person deduct his “expenses of living.” It does so first by exempting an amount of income for each person in a household, with extra shares if the person is:

  • 65 years old or older, and/or:
  • Legally blind.

Then it lets the taxpayer deduct a fixed amount from his income, or else tot up a long list of expenses and losses he might have. These are the “Itemized Deductions” on Schedule A.

So any wage or salary earner already has some claim for the expenses of daily living, taxes paid to other authorities, and unusual personal expenses. Maehr seems to have lost sight of that.

In short, he argues in one sentence that a person is a “business” paying an unfair tax on total revenue, and then in another that a person gets no new value when someone pays him a wage or salary. First, he can’t have it both ways. Second, his business analogy fails because the deduction and exemption systems already cover a person’s expenses.

Unruh cited a lawyer, Tom Cryer, who beat a tax evasion charge in Texas in 2007. A jury acquitted him after he offered a defense similar to Maehr’s argument.

Purpura discounted this result.

Juries can nullify any law they do not like. They might have acted from bitterness against the government, or bitterness against the income tax. But that does not change the law.

Meaning that one does not base judicial precedent on jury nullification.

A better way to argue against the income tax

No one will win against the income tax by arguing that the law improperly subjects him to it. But enough people might win by arguing that the income tax is bad public policy. It discourages saving and good money management. One might as well spend it all. (And depending on what they spend it on, they could lower their taxes.)

Others have proposed to flatten the income tax scale, so that a successful person suffers no penalty for succeeding at the margin. Still others propose to tax the things you buy, especially if they are new goods.

But these are cases to make in politics, not before the courts.