Section 1 of the Title 26 statutes imposes the "income tax" in five different categories (unmarried people, married people filing jointly, etc.). In each case, the wording reads "there is hereby imposed on the taxable income of…" The law defines "taxable income" in the following section of the statutes: "Sec. 63. Taxable income defined
(a) In general - …the term "taxable income" means gross income minus the deductions allowed by this chapter…" [26 USC § 63]
In other words, when someone determines his "gross income," and then subtracts all legal deductions, the remainder is "taxable income."
So far, so good--but that's what the guy who jumped off the roof of the Sears Tower said as he went past the 80th floor.
The law specifically defines "gross income" in the following section of the statutes:
"Sec. 61. Gross income defined
(a) General definition - … gross income means all income from whatever source derived, including (but not limited to) the following items:" [26 USC § 61]
This section then lists "items" of income such as interest, compensation for services, etc.
So far, so good...
This is the point at which many tax "experts" err, either by assuming that the "items" of income listed constitute "sources" of income, or by assuming that "from whatever source derived" means that all of the "items" of income listed, regardless of where they come from, are subject to the "income tax." Both of these assumptions are incorrect. (The difference and relationship between "items" and "sources" will be explained below.)
And here is the problem.
The "sources" or "items" of income are not taxed. The income ITSELF is taxed.
The "sources" or "items" of income are not taxed. The income ITSELF is taxed.
Careful Poohbah, that isn't exactly how it works, income is used to determine the amount of tax on a commercial activity such as selling one's labor for compensation. That is why it is classed as an indirect tax under the rule of uniformity.
House Congressional Record, March 27, 1943, pg. 2580:
- "The income tax is, therefore, not a tax on income as such. It is an excise tax with respect to certain activities and privileges (the type 3 and 4 taxes) which is measured by reference to the income which they produce. The income is not the subject of the tax; it is the basis for determining the amount of tax."
KNOWLTON v. MOORE, 178 U.S. 41 (1900)
- 'indirect taxes are levied upon the happening of an event or an exchange.'
BROMLEY v. MCCAUGHN, 280 U.S. 124 (1929)
- While taxes levied upon or collected from persons because of their general ownership of property may be taken to be direct, Pollock v. Farmers' Loan & Turst Co., 157 U.S. 429 , 15 S. Ct. 673; Id., 158 U.S. 601 , 15 S. Ct. 912, this court has consistently held, almost from the foundation of the government, that a tax imposed upon a particular use of property or the exercise of a single power over property incidental to ownership, is an excise which neet not be apportioned
Tyler v. U.S. 281 U.S. 497, 502 (1930)
- An indirect tax is a tax laid upon the happening of an event,as distinguished from its tangible fruits.
The "sources" or "items" of income are not taxed. The income ITSELF is taxed. "Source" and "items" are two different things. "Items" are specific types of income from money-getting behavior. "Sources" are the areas of money-getting mined for the "items". The income itself is composed of the specific items.
At the bottom line work behavior is what is taxed. The items of income are just a measure for that taxation.
This is the analogy given in the treatise:
The following analogy may help to clarify the matter of "items" of income and "sources" of income.
Suppose that there was a law imposing a tax on "Zonkos," and that the law defined "Zonkos" as "all toys from whatever toy store derived, including the following toys: plastic cars, dolls, yoyos," etc.
Then the law stated that another section "determines the toy stores for purposes of the Zonko tax," and that section listed "Bob’s Toys," "Toy City," and "ToyWorld" as "toy stores."
In this example, there would be two distinct aspects of the term "Zonko": whether an item is a taxable "toy," and whether it comes from a taxable "toy store."
Both criteria would have to be met for it to legally constitute a "Zonko." For example, a baby bottle bought at ToyWorld would not be a "Zonko" (even though it came from a toy store), if baby bottles are not within the legal definition of "toys."
Also, a doll bought from "Chuck’s Bargain Basement" also would not be a "Zonko" (even though it is a toy), as it did not come from something within the legal meaning of "toy store." A yoyo from Toyworld would be a "Zonko" as it is both a "toy" and comes from a "toy store."
