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What Qualifies As Taxable Privilege

It's pretty simple, really...

AS MIGHT BE IMAGINED, I am often asked by folks about whether their particular activities qualify for the "income" tax. I can't and won't answer such questions, since I can't possibly know every nuance of anyone else's activities.

However, there is nothing complicated about making such determinations. All that is needed is to ask yourself whether what you get paid for can only be done because of the existence of Uncle Sam.

MIND YOU, this question doesn't refer to any vague, "I can only get paid for what I do because Uncle Sam defends these shores..." or "...because Uncle Sam prints currency" or "builds roads" or "enforces copyrights", or anything whatever of that sort.

Nor does it refer to getting paid for doing things in which Uncle Sam is peripherally involved through some kind of licensure scheme. License fees are themselves taxes, and paying those taxes doesn't enable other taxes per se, as in, "I have a license from the government to do this thing, therefore I only do it with government permission and everything I make from doing it is "income"..." (That said, some things done in connection with having a federal license ARE income taxable on their own merits, but this is not true of all things for which one can get a license. You can have a government fishing license, but this doesn't mean that every time you put a hook in the water it is being done in a government lake...)

Nor does it refer to having Uncle Sam's permission to be in the country, or to be in the country working or making money, or anything like that. The issue is never one of the status of the doer. It is always one of what gets done, not of who does it (nor of "what does it" in the sense of being a citizen, or a government worker, or whatever).

The tax falls on citizen privilege-exercisers; alien privilege-exercisers; and even non-resident alien privilege-exercisers alike. At the same time, it does NOT fall on even the earnings of foreign corporations making money in the United States, unless the thing they are doing to make the money is itself the gainful exercise of a federal privilege which would be just as taxable if conducted by any and every other category of person.

INSTEAD, WHAT "ONLY BECAUSE OF THE EXISTENCE OF UNCLE SAM" MEANS is what literally can only be done because of the existence of Uncle Sam, in the same sense in which some things can only be done because of the existence of your Uncle Ernie. For instance, you can only work for Uncle Ernie because Uncle Ernie exists. You could do the same work for someone else, but working for Uncle Ernie relies on the existence of Uncle Ernie.

Likewise, you can only invest in Uncle Ernie's business ventures because Uncle Ernie is out there creating them. You can only mine ore or harvest timber from Uncle Ernie's land because Uncle Ernie exists to own it.

It is only a very specialized category of things that qualify for this taxable class. Whether the interstate highway system exists or not, any trucker can still deliver goods from point A to point B in his long-haul truck. It might be a longer or bumpier ride had the super-slab never been built, but making those deliveries (unless delivered from or to the federal government itself) doesn't require the existence of the federal government in order to be possible.

The trucker might need to pay a license fee (and/or register with the DOT, etc.) in order to travel on government roads, but traveling on government roads isn't any more the gainful activity by which a valid tax can arise on the productive act of delivering the goods than is anyone's use of government-built roads to commute to her factory or office.

Likewise, someone being paid by the feds for services provided to someone else, such as a doctor being paid by Medicaid for services provided to another citizen, isn't doing anything that can only be done due to the existence of the government (although the recipient of the services is).

Being paid isn't itself a taxable event. It is doing something federally-privileged that is taxable. Being paid for it simply provides a metric by which can be determined the amount of the taxable thing done.

HERE'S THE LONG AND THE SHORT OF IT: Anything you could do even if the federal government had never been created by the Articles of Confederation-- fix your neighbors pipes, sell your paintings, build and operate a hospital or a bank or a factory-- isn't a taxable exercise of privilege.

Anything that relies on the existence of the federal government-- like fixing federal pipes, selling paintings to HUD, or building and operating a hospital, bank or factory on a US Army base might be a taxable exercise of privilege. (I say "might be" because not everything that COULD be taxable is taxed-- Congress has complete latitude within the universe of federally-privileged things.)

And let's not forget things like getting welfare from the federal government, whether Social security benefits or unemployment compensation, or whatever. Administering a federal instrumentality, like being a paid officer of a Federal Reserve bank or of a national railroading operation qualifies, too.


A Picture Is Worth A Thousand Words

WRITTEN ANALYSES ARE INDISPENSABLE to an accurate communication of the critical nuances and details of any subject. Still, sometimes the written presentation of the distinctions drawn in the law between the all-inclusive general class of something and the tax-related subclass of the thing can be confusing. This is especially so when the subclass distinguished in the law continues to be called by the same name as the general class, and the reader is obliged to resort to context in order to recognize the distinction.

Let's look at a couple of class/subclass distinctions in tax-law areas of widest interest-- those between "wages" relevant to the tax and the general class 'wages' as the word is commonly-defined. In order to help cement the distinctions in mind, I'm going to deploy some graphic aids. These images should assist greatly in communicating the true nature of the subclasses, and as a serendipity, serve to illustrate the effect of the "includes" rule of construction, as well.

WE'LL START WITH the basic division between ALL wages (pay for labor, generically) and the two "wage" subclasses relevant to the "federal income" (fed-come) tax. First, see the "wages" distinguished for purposes of Chapter 24, which are themselves dependent in that distinction on the statutory distinction between commonly-defined employees and "chapter 24 employees":

26 USC § 3401(c) Employee

For purposes of this chapter, the term ''employee'' includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term ''employee'' also includes an officer of a corporation.*

(*This only means an officer who is paid for services rendered, and not someone with merely an unpaid directorial position-- see IRS pub. 15A. Also, the corporations covered are only "United States corporations"-- see this for some particulars regarding this distinction.)

The graphic representation of this statutory definition is seen in the following diagram:

It is clear that the workers who qualify as "employees" for purposes of the chapter and its provisions are a subclass from among the larger generic class of ALL employees. This is just as the statute says, of course, and is also self-evident from the simple fact that a special definition is given at all. If the "employees" relevant to the tax were not a subclass of the overall class: 'employee', a special definition would be neither needed nor rational.

Looking at the definition of "wages" as used in chapter 24, we find another distinction drawn:

26 USC § 3401(a) Wages

For purposes of this chapter, the term ''wages'' means all remuneration (other than fees paid to a public official) for services performed by an employee [defined, for purposes of this chapter, as shown above]...

Here is the graphic representation of this distinction and relationship:

All told, then, we see that "wages" as meant in chapter 24 (the remuneration subject to that chapter's withholding provisions, and also serving as measure of taxable activity subject to the normal "subtitle A" fed-come tax) is only what is paid to statutorily-distinguished "employees" (a subclass of the greater class of ALL employees, and thus, plainly NOT "all employees").

Now, turning to chapter 21 "wages", we have to again first look at a primary distinction drawn in the law-- this time between commonly-defined 'employment' and statutorily-defined "employment":

26 USC § 3121(b) Employment

For purposes of this chapter, the term ''employment'' means any service, of whatever nature, performed by [a long, involved series of distinguished individuals, deploying dependencies resting on other dependencies]...

The graphic representation of this subclass distinguished from the class of ALL employment looks like this:

Turning to the "wages" definition for chapter 21, we find the statutorily-distinguished "employment" subclass invoked:

26 USC § 3121(a) Wages

For purposes of this chapter, the term ''wages'' means all remuneration for employment...

Again, looking at the graphic representation, we clearly see that "wages" to which the FICA sur-taxes apply are merely a subclass of all wages:

It's all pretty easy to take in and keep straight with the help of these diagrams, isn't it? A picture really IS worth a thousand words!

(And don't miss this very important point relevant to the subject of these illustrations: When certain "pay for labor" in what is commonly thought of as "employment" is distinguished as reflecting activities subject to the tax ("income"), then all other pay for labor in what is commonly thought of as employment is thus identified as NOT reflecting activities subject to the tax ("income"). That is, 'wages' that don't qualify as tax-relevant "wages" are not tax relevant at all, under any label. See pp. 12-15 in CtC for a bit more on this.)


I HOPE THIS HELPS ANSWER SOME QUESTIONS out there. Those interested can find a much more comprehensive treatment of this subject interwoven throughout CtC, of course, and to a lesser but more immediately-accessible extent in the primer here or in the less comprehensive but very concise presentation here.

AND BY THE WAY... When you have won them, SHARE YOUR VICTORIES!! That's a good chunk of YOUR part of the bargain in exchange for my efforts teaching you how to be free (and how to keep or regain control of a huge portion of your wealth). Find formatting guidance here.