A Constitutional Replacement for the Income Tax on Wages
Jon Roland

A better system would be a purchase tax. Not a sales tax. In other words, an excise tax on purchases, including purchases of labor, payable by the purchaser, provided that it is indirect, that it, that it could be passed on to another purchaser of the product or service produced in the form of a higher price. So the employer of a worker who passes on the labor product to its customer would pay a tax on that purchase of labor, but the ultimate consumer, who can't pass it on, such as a householder purchasing the labor of someone to cut his lawn or clean his house, would not be liable for a tax on such purchases of labor.

The difference is that a sales tax is payable by the seller, and a purchase tax by the purchaser. Don't be confused by the fact that most sales taxes are collected by sellers from buyers and then transmitted to the state. It is actually the buyer who is liable.

The Framers introduced the distinction between "direct" and "indirect" taxes, first put forward by Adam Smith in his Wealth of Nations in 1776. They provided that direct taxes had to be apportioned. As Smith explained, the key is that people can avoid indirect taxes passed down to them by not making a purchase. The Framers thought that important, and it is, although the "pass-on-ability" of a tax is often not clear in practice. Labor and the fruits of are a natural right and compensation for labor is an equal exchange, not "income". So the purchase of labor can constitutionally be taxed but not the sale of it.

A purchase tax would be similar to a value-added tax (VAT) except that it would be on the purchase rather than the sale, and could be a fixed percent of the gross amount rather than on the net after deductions. This would make accounting less costly and susceptible to fraud, and allow for the complexities of production processes in which many inputs go into a product or service.

The present system of income taxes on wages is unfair not because of how much or how distributed, but because it is unlawful. Tax protesters are (mostly) correct. There is no unbroken logical chain of authority back from what IRS agents do to the Constitution. The income tax amendment was not ratified, based on the best available evidence of state legislative records, but rejected, and the report that is was is at least a mistake, and probably a fraud. Even if it had been, the statutes are not logically authorized by the Constitution, the regulations are not logically authorized by the statutes, and the instruction booklets and forms are not logically authorized by either statutes or regulations. What we have is IRS agents inventing claims out of thin air and corrupt courts "deferring" to their assessments, reversing the burden of proof from the government to the "taxpayer" (who is nowhere defined in a constitutional law).

The purchase tax described above would be constitutional, with a similar impact to the present income tax on wages, which is not constitutional.

While a purchase tax that included the purchase of labor for production would not adversely affect employment more than the present income tax on wages already does, as a matter of public policy we might want to reduce the rate on purchase of domestic labor to encourage job creation.