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What is "Income?"

There a difference between income and earning a wage.

by James Leroy Wilson
January 18, 2011

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What is "Income?"

The tax season is upon us. Accountants will be working overtime until April 15.

Ideally, I'm opposed to all compulsory taxes. Life within The Federal State, however, forces one to consider relative goods and bads.

In the real-world context, then, I'm not too opposed to income taxes.

As long as they'reincome taxes. Not wage taxes.

Most taxes are punishments, or discouragement, of certain behaviors.

  • If you spend tens of thousands of dollars remodeling your house, your property tax bill will increase; this discourages remodeling
  • When employers are compelled to pay Social Security and Medicare taxes for their employees; this discourages hiring
  • When you pay a "consumption" tax such as a retail sales tax, you are prevented from spending as much as you wanted; e.g., if you have only $108 to spend in a place with an 8% sales tax, you can only purchase $100 of goods and services, and the business community loses your additional $8.
  • Taxes on wages and salaries are de facto pay cuts mandated by the government

There may be something to be said for some of these taxes. A consumption tax, for example, encourages thrift and efficiency, which is good for the environment.  But it would still have to be high enough to collect sufficient revenue, and small enough so that people won't revert to black-market trading instead.

A real income tax, however, doesn't discourage behavior. Instead, it taps into passive or "unearned" revenue streams created by the market.

  • Appreciation of land values allowing owners to increase their rents or to sell at windfall profits
  • Re-selling of art, antiques, and memorabilia at a profit
  • Income from State-granted monopoly, such as royalties from copyrights and patents
  • Interest, capital gains, and dividends
  • Business profits, understood as revenue minus expenses

Many people who initially supported the 16th Amendment imagined taxing the very wealthy, who were the most likely to have these income streams.

A lot of what we call "income" today, however, isn't really income at all.

Think of a superstar baseball player earning $20 million per year in salary. People say, "he makes a good income."

But it isn't income.

It's a salary. The player received the $20 million in exchange for playing baseball.

It was an even trade between the team owner and the player. By an even trade, I mean that both parties benefited, but there was no net gain or "profit" on either side. Yes, the baseball player believes he benefits: he'd rather earn $20 million by playing baseball than earn nothing by sitting on the couch. And the team owner believes he is getting more than $20 million in value from the player.

The same applies to your job, or mine. Whether the salary is relatively high or low, the fact is that it's not income in any meaningful sense. It is mere payment for your work. You're not profiting from it, you are working for it.

If you trade your old used car for your friend's new computer, there's no "profit." You may benefit because you need the computer more than you need the car; your friend may benefit because he needs the car more than the computer. Wages for work operate on the same principle: the employer values the work more than he values the money used to pay wages; the employee values the wage more than he values the time he could be spending doing something else.

There is no net gain or profit for either side.

To tax the wage, then, is to deprive the worker of a portion of what he's entitled to.

Here's another way to look at it.

Let's say your husband is that baseball player. He brought in $20 million in salary, but he had also expended $20 million, by producing that amount in value (or more) to his employer. If the salary is taxed, it is more accurate to call it an excise tax on wages. It is certainly not an "income tax."

You may still think he should be taxed, because he's making a lot of money. Some may make this claim out of envy, others out of a pragmatic concern of making sure the government collects enough revenue. And yet the baseball player could do two things with his money:

  • Spend it, whereby he will be adding to the taxable incomes of the businesses he purchases from;
  • Save and invest it, and the interest income, capital gains, and dividends he collects would be taxable income. His investments are also causing business expansion, which broadens the base of income tax payers

A real income tax – as opposed to a household revenue tax or earning tax - may be the most "fair" kind of tax. The problem is the inherent complexity of some kinds of businesses and business expenses. How does one factor interest expense, or the depreciation of the physical plant, in determining a business's income?

Even if our taxes laws abolished taxes on wages, the income tax code will still be very complex. The best solution is to reduce the size of government to a level that paying for it won't be much of a burden on anyone. If tax rates are low, the form of the tax won't matter.

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