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Saturday, June 23, 2007

The True Purpose of the Income Tax

The fact that the income tax and the Federal Reserve were created at the same time is no coincidence. Each needs the other to survive.

The income tax serves three purposes.

First, the Federal Reserve Act stripped the US government of its seignorage privilege. The government could not directly print money itself. If the government was allowed to directly print money itself, that would cause interest rates to rise, which was contrary to the Federal Reserve's cartel goal of keeping interest rates artificially low. The government needed an alternative means to fund its activities.

Second, the income tax prevents people living in the US from boycotting dollars. Suppose you realized the dollar was inherently worthless and returned to a barter system. In the eyes of the IRS, you owe income tax on the dollar equivalent of your barter transactions. Even if you wanted to live without using dollars, you would need to acquire dollars to pay income taxes. The income tax creates a certain demand for dollars.

Third, the income tax effectively converts all US citizens into government slaves. Income taxes force me to turn over 40% of everything I produce to the government. I'm including the 15% Social Security plus Medicare taxes, in addition to a 25% regular income tax rate. With a 40% taxation rate, I'm effectively working for the government 5 months per year. If people were forced to directly work for the government 5 months per year, there would be massive rioting. When it happens indirectly via payroll deductions, people don't notice as much. Could you imagine what would happen if everyone had to directly write a check for $10k to the government each year? That would make taxes a lot more noticeable. I have limited freedom to choose my own job, but that just means that the government figured out the free market can allocate my labor more efficiently than a slave system can. I can structure my investments to minimize taxes, but why should taxes affect my investment decisions?

Also, the income tax has allowed the Federal government to overrule states' sovereignty. The money the Federal government steals via the income tax is returned to the states, but only if they pass laws that the Federal government likes. Years ago, the Federal government said that states had to pass a 55 mph speed limit law, or they would not receive any Federal highway money. Because of high Federal income taxes, the states wouldn't have enough money to pay for roads without this money. The Federal government denies states education money unless their schools comply with Federal guidelines. The Federal government denies states welfare money unless their welfare program follows Federal guidelines. The high income taxes means that there isn't enough money leftover to pay for state services if they don't follow the Federal government's guidelines. For example, the Federal government could say that states receive no Federal money at all unless they comply with the REAL ID act. The practice of excessive taxation and withholding money is abusive. This effectively eliminates state sovereignty.

That's why the only tax the Constitution originally allowed was a fixed tax per person. That's much fairer than the current system. Income taxes ensure a diminished reward for increased work and increased productivity. Even though the income tax is progressive, income taxes hurt the average productive person more than they hurt wealthy people. First, most wealthy people can shield a lot of their income via trusts. Second, wealthy people can lobby for government perks; these perks are worth more than the income taxes they pay. Third, when a corporation has to pay income taxes, it just passes those taxes along as higher prices. Progressive income taxes give the illusion of taxes being paid primarily by the wealthy, but a lot of those taxes just get passed back to the average person.

People and corporations go to huge efforts to avoid paying income taxes. Frequently, the costs paid for tax avoidance and tax compliance are greater than the actual tax collected. The income tax is great for accountants and tax lawyers, but it's a huge drain on the economy.

Even though the dollar is intrinsically worthless, it's given value by the income tax. The dollar is backed by the US government's willingness to use violence against its own citizens to collect the income tax. The dollar is backed by the US government's willingness to invade people's privacy to make sure all economic activity is reported and taxed.

Even though the dollar is intrinsically worthless, the income tax makes the dollar effectively backed by all economic activity in the US.

Think of a dollar as a receipt that says "The bearer may conduct $3 of economic activity." (assuming a 33% tax rate). The IRS is the collection mechanism for these receipts. These receipts have value because they are needed in order to conduct any business at all.

That is why some of the IRS' most egregious violations were crackdowns on private communities that have returned to a barter system.

All other countries have a similar monetary system. It is easier to conduct economic activity in the US than most other countries. That's why a receipt that says "bearer may conduct economic activity in the US" is more valuable than a receipt that says "bearer may conduct economic activity in China". That's the only reason why dollars are considered more desirable than other currency.

You can't avoid the income tax by moving, because every country has a tax system with a similar basis. At one time, the US had a huge advantage over other countries, because it had a fair tax system and monetary system; the only legal tax was a fixed amount per person. That advantage has been largely eroded.

The income tax effectively turns everyone into government slaves, because you have to spend 40% or more of your time directly working for the government. If the government demanded that you work directly for them for 40% of the time, there would be riots everywhere. The income tax makes the effective outcome the same.

That's why some politicians who say "reinstate the draft" are being impractical. Right now, my annual income taxes are almost enough to pay one soldier's salary. I give up 40% of my income because I have no practical alternative. When the government tries to force people to directly work in the military, that theft is too obvious and there'd be protests. Besides, economic conscription (the current system) is much more effective than a draft. Economic conscription means that a certain number of people are so poor that their best career alternative is joining the military.

There are some tax protesters who argue "The income tax is immoral" or "The income tax is illegal" or "The income tax is unconstitutional". However, the IRS has more resources than you and can hassle you. If the IRS takes you to court, there is no guarantee you would get a jury that understood the complicated issues. In fact, most people who serve on jury duty are government employees, people who directly benefit from the income tax. You would even be denied the opportunity to explain the issues to the jury. The bottom line is that it isn't practical to try and avoid the IRS (unless you're really clever). The only solution is to try and get the laws changed.

On the other hand, the odds of the income tax law changing are zero. Maybe the correct approach is for a bunch of people to get together and be really clever about doing productive work while avoiding taxes and regulations.

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