Controversy over the income tax
Jon Roland


The publication of the full-page ad in USA Today, which is also at has brought the expected flurry of comment, including criticisms from various parties who approach the problem of income taxes from a different theoretical standpoint. For example, see the comment at .

Most of the commentators have been publishing to their blind lists or reflectors, so it is difficult to respond in a way that reaches everyone reached by the messages of others, and it is therefore not useful to try to quote all these other messages. I will offer a few comments of my own, and leave it to others to pass them along as needed to reach everyone. To those on my lists who are not interested in this subject, my apologies.

My first comment is that everyone needs to put aside pride of authorship. It is clear that it plays a role in this controversy. People who have invested in what they hope are solutions tend to become attached to what they think they have found.

Second, we need to put aside the fantasy that court decisions in this field are being made legally. They are not. If they were made legally, the vested interests of most of the more powerful people in this society would be adversely affected to an extreme degree. There is no way such decisions will be made legally, if they are made at all. They are being made politically, which means that when a court is given no logical way to avoid making a legal decision, it will refuse to make it. The stakes are high enough that judges who did otherwise would be in actual danger of being murdered. This is gangster government, folks. A bullet gets further than a valid argument, and it is bullets that would be used if judges started making legal decisions.

For the same reason, the individual litigant might occasionally win a round, just to maintain the illusion that the judicial process has integrity, and this can encourage those who have used approaches that bring such minor wins to believe those approaches might have broader efficacy. That is a pathetic delusion. There is no chance that anyone is going to get a major win no matter what approach he might use. If there were any chance of that, the litigant would just be killed or otherwise neutralized. The opposition has many ways to do that. They like to practice new ways, perhaps just for amusement.

Third, for the above reasons, it is ridiculous to treat any court decision or opinion as constitutionally authoritative. They can be respected for what they are, which is what is (perhaps) being enforced (and perhaps not), but what is constitutional is what the Founders understood when they drafted and ratified the Constitution and its amendments, not what courts said about that later. Sometimes the judges get something right, and when they do, they can be respected for that, but when they get it wrong, and they often have, it is what it is, which is an exercise in partiality or incompetence, and citing such an exercise as authoritative doesn't make it so.

That particularly applies to the opinions of the Supreme Court concerning what is a direct and what is an indirect tax. I have reviewed all the usually cited opinions, and not one of them got it right. Not one. Whether that is due to corruption or incompetence I cannot say. I have generally reviewed the work of supreme court justices since John Jay, and I do not find a single one whose work I can respect intellectually. Now, granted, my standard is somewhat high. My peers are mathematicians, physicists, and computer scientists, and there is no evidence that any supreme court justice could reason on that level. From the standpoint of such scientifically trained professionals, the entire field of law would be a joke if its impact on people's lives were not so serious.

Okay, so what did the Founders understand by their distinction between "direct" and "indirect" taxes? They were using an economic model which allowed a distinction between a cost that could be passed on to a purchaser of a product as a higher effective price, upon which that purchaser could decide whether to purchase, and a cost that could not be passed on, but would be borne by the individual on whom it was imposed. This model, when applied to the kind of taxes, considered as costs, that were imposed during the Founding Era, which were excise taxes calculated on the quantities of tangible commodities, made some sense. If the tax is one cent on a pound or a gallon of lamp oil, then the vendor who was going to sell the oil for 25 cents can sell it for 26 cents, and the purchaser can decide whether he wants to pay the extra cent.

The model does not really work very well, however. The purchaser, that is, the demand, might not be willing to pay more than 25 cents. The question then turns on what is the cost to the seller. If it is 23 cents, so that he would make 2 cents profit without the tax, then a one cent tax is half his profit. If it is, will he offer the oil at 25 cents, including the tax, or decide that a one-cent profit on an investment of 24 cents, if the tax is included, is not high enough for him to make the investment, and that he can get a better return on his money and effort offering a different product?

In this example, whether the tax is direct or indirect, using the Founders' model, depends on whether the purchasers will pay 26 cents, or the vendor offers the product at 25 cents and absorbs the tax as a reduced profit. In actuality, what is likely to occur is that some vendors will leave the market at 25 cents, demand will respond to reduced supply by raising the price to, say, 25.5 cents, and the vendor and the purchaser will each absorb about 0.5 of the one-cent tax.

So what is that one-cent tax on lamp oil? Direct or indirect? By the understanding of the Founders, it would be indirect, but their understanding was inadequate. If the above analysis were presented to them, they would probably have either abandoned the distinction, or recognized that such a tax would be partially direct, and partially indirect, and therefore, if they were to insist on the distinction, they would have to analyze the distribution of the cost on the participants in every market, which might change from one day to the next.

Now, we can try to let them off the hook by allowing them to say that the tax is indirect if it can potentially, or at least partially, be passed on as a higher cost to the ultimate consumer, and reserve the term "direct" to taxes (or other costs) that cannot be passed on under any plausible scenario. What could such taxes be?

We can get a clue by what kind of taxes they cited as examples of "direct" taxes: land taxes and head taxes. That is, a property tax on the acreage or market value of the land and improvements on it, or a fixed amount on each individual subject to the tax. Are such taxes borne by individuals who can't pass them on to customers, or do they affect prices of something?

A head tax, that is, a fixed amount on every individual, would seem to qualify as a direct tax by the above considerations, but does the real property tax?

Now things can get complicated, because land and improvements on it can play many different roles in commerce. First, it can be used to produce minerals, which can be sold, and the price of the minerals could be increased to pass on to the customer the cost of a tax on the land, which would make it indirect. There could also be an excise tax on the minerals sold, which, by the above analysis, would be indirect. But now suppose the taxpayer is allowed to deduct the costs of production, so that he is taxed on the profit. That makes it a kind of income tax.

But what about sales of the land itself, in whole or in part? If there are valuable minerals discovered on the land, that increases its market value, and if it is sold, there is a capital gain. If the taxpayer is taxed on the capital gain, is that a direct or an indirect tax? After all, the gain is essentially a sale of the minerals, discounted by the cost of extracting them.

Now consider that minerals have been extracted for a while, and they are being depleted. That will cause a drop in the market value of the land. If it is sold at that point, the sale price will represent a gain of only the minerals expected to remain extractable, minus projected extraction costs. If there is a tax on the gain, should there be a deduction for the drop in value for depletion? What part of a tax on which is direct, and what part is indirect?

Similar considerations apply to land used for agricultural production. After all, farming and ranching is a kind of extraction of a scarce resource, with an extraction cost, and potentially depletion. There can be both an "earned income" from its production, and an "unearned income" from its increase in market value, but the market value is based in part on its potential for income production, and that can decline.

Now consider capital improvements, such as a factory, or a house offered for sale, or a house, office, or apartment offered for rent, or a theater, restaurant, or bank. There are a lot of ways taxes can be imposed on such operations. On sales, on rents, on services, on products, on gains. Direct or indirect?

But there is one more consideration that has been neglected. The kind of entity the taxpayer is. Does it make a difference to whether a tax is direct or indirect whether the taxpayer is an individual or a corporate entity? After all, as long as there is an individual involved, he might bear the cost of a tax and not be able to pass it on to a customer. However, if it is a corporation, the cost is only imposed, if at all, on the dividends and share prices of investors, who are free to decide whether to purchase or sell the stock based on its price. So can the tax be considered direct? I would say the answer is no in the case of for-profit corporations, even if there is only a single stockholder. The Founders had individuals in mind when they thought about taxes that could not be passed on as higher prices, not for-profit corporations, which are not ultimate consumers in themselves, but only vehicles for the production of something.

What about non-profit corporations, such as churches, foundations, universities, hospitals, or research institutes? If they don't charge any fees for their services, then any tax is borne by them or those they serve, and cannot be passed on. Therefore, a tax on them could be direct.

Now, we can further explore intermediate entities, such as an individual who functions as a business. A celebrity entertainer or athlete might sell shares in his revenues to agents, promoters, studios, or teams, without being incorporated. We might consider such individual as having both the attributes of an individual and a one-man for-profit corporation, just as a church leader might be both an individual and a one-man non-profit corporation. But without getting into grey areas, we can conclude for the time being that only a tax on an individual or non-profit corporate entity can be direct, and then only if it cannot be passed on as higher prices to customers or clients.

Finally, what about an income tax on individual salaries, wages, or fees for personal services? Direct or indirect? The answer depends on whether they can be passed on to customers. Who are the customers? The employer or client. Will they pay more to cover any taxes on the individual? Probably not. The situation is closer to that of the head tax. The tax is direct.

The alleged "income tax amendment" was apparently proposed to overturn the Supreme Court decision in Pollock, which held that the income tax in Pollock was direct, not apportioned by population, and therefore unconstitutional. But was it? The answer is no, because the taxpayer in Pollock was a for-profit corporation. The Court decided wrongly, either because it didn't understand what a direct tax is, or because it was argued incompetently. The taxpayer could pass on all of its income tax, either as higher prices for its products or services, or as lower dividends or share prices. It would have been rightly decided, however, if the taxpayer had been an individual or non-profit corporate entity.

In any case, from the language of the alleged "income tax amendment" we can conclude that its framers intended by it to remove the requirement for apportionment by population of direct taxes, whatever they might be, and, just to make sure, identified taxes on income as potentially direct. Therefore, if the amendment was never properly ratified, and if my analysis above of what is and is not a direct tax is valid, then at the least, a tax on salaries, wages, or fees of individuals, and on the operations or assets of non-profit corporate entities, must be apportioned by population. The tax that was enacted following the certification of the ratification of the amendment provides an indication of what the sponsors in Congress of both the amendment and the act considered to be a direct tax that might otherwise have to be apportioned by population if the amendment had not been adopted. It was not the income tax we know today, but it had many of its elements.

So, despite confusing or nonexistent court decisions, the question of whether or not the "income tax amendment" was ratified does indeed make a difference, because on that question depends the legality of an income tax on certain kinds of revenue of individuals, especially salaries, wages, and fees for services, which comprises the bulk of the taxes raised by the present income tax system.

There is also a question of whether compensation for labor is "income" for the meaning of the "income tax amendment". From the evidence we have it apparently meant only what economists have later come to call "unearned income", that is, things like rents, profits, dividends, and gains. It did not include equal exchanges, and compensation for labor is an equal exchange for that labor. If an employer held back payment of wages and then added interest to them when he pays, the interest would be "income", but not the principal amount of the wages. This distinction seems to have been accepted as valid until the Victory Tax of 1942.

What the "income tax amendment" did not do, even if ratified, was delegate to Congress any additional powers to collect taxes that it did not already have to collect other kinds of excise taxes, such as were discussed above. Did that include the power to require taxpayers to file returns, signed under penalty of perjury, declaring the volume of commodity sales on which a tax was due? No, it did not. Excise taxes on commodities were assessed by inspectors at inspection points who weighed, counted, or otherwise measured the shipments. Taxpayers might be required to keep and present business records, which were subject to inspection, and taxes might be based on those records, but they were not required to self-report, or sign anything.

There also were no criminal penalties for failure to pay a tax, at least not on the federal level. The power to tax, like the power to regulate, authorized only civil penalties.

There also was no power delegated, outside of federal enclaves, to prosecute anyone for perjury, except pursuant to criminal cases involving the subjects on which Congress had penal powers, namely treason, counterfeiting, piracy or felonies on the high seas, offences against the laws of nations, offenses by military or militia personnel while in federal service, or violations of civil or voting rights under the previous amendments.

Further, there was no power delegated to require civilians to collect other people's taxes by withholding them from wages or other income.

Therefore, the key elements of enforcement of the present income tax system are all unconstitutional, even if the "income tax amendment" had been ratified.

There is also a problem with the lack of statutes. Congress has no power to delegate legislative powers to executive departments, and that is what it has done for most of the Internal Revenue Code, which are regulations, not statutes. Constitutionally speaking, regulations, like executive orders, can only govern government agents and contractors, not civilians. They can direct the details of enforcement of statutes, but they may not add anything to their contents. To do so would be legislating.

The comment has been made that the courts are not acting improperly by not allowing issues of law to be argued before the jury. That is not correct. First, it goes to the question of criminal intent. It is a well-established rule of due process that a person cannot be held guilty of a crime if, at the time he committed the act, he honestly thought what he was doing was lawful, and a reasonable person, knowing what he knew, would also think the act was lawful. That requires a presentation of what he knew and thought about the law, and what a reasonable person would think, and that cannot be done without presenting the legal arguments.

Second, the current prevailing practice of not allowing legal argument in the presence of the jury is a violation of constitutional due process. At the time the Constitution was adopted, when a general verdict, that is, a verdict of "guilt proved" or "guilt not proved", was required, it was part of due process to argue the issues of law before the jury, or at least it was in the American colonies. English practice had begun to diverge from American practice by that time, and it was the intrusion of such judicial practices that were among the irritants that contributed to the determination of the colonies to declare independence.

Now, juries were sometimes called upon to render "special" verdicts, that is, a finding on some narrow issue of fact, and the issues of law not argued in their presence, but that was mainly in civil cases. What has since occurred is the attempt of the legal establishment to use the rules for special verdicts in cases where general verdicts are required.

The movement to restrict the role of juries, and not argue issues of law in their presence, was led in England by Lord Mansfield, during the period just before and after the American Revolution. It was opposed by Lord Camden, who upheld the traditional role of the jury, and supported the principles of due process that prevailed in the colonies.

It is true, by the way, that the federal government does not need income taxes to fund the operations of government. It can do that by creating more money. What federal taxes do is remove money from circulation to prevent inflation, which would reduce the value of investments, which are predicated on not exceeding a certain level of inflation. Were inflation to destroy the value of investments, the economy would collapse.

It is not quite true that signing a tax return, or other government instrument, is a waiver of Fifth Amendment rights, at least not if the Constitution were being followed. Federal agents and courts treat it that way, but their actions are unconstitutional. The Fifth Amendment does not allow both prosecution for failure to sign something, and prosecution for self-incrimination resulting therefrom.

In closing, the Establishment is not going to allow any significant cracks in their revenue stream unless or until an alternative to the present income tax system is instituted to replace it. Most such alternatives are some kind of excise tax, perhaps in the form of a sales or purchase tax.

The ultimate questions remain, if the courts are rigged, elections are rigged, and the mainstream media are rigged, then what alternatives remain to defend our constitutional rights, and will an effective defense of them bring down the economy with the Establishment? Can the Establishment be reformed, or must it be replaced, and if so, by whom, and by what transition plan?

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