What Went Wrong? Identifying Root Causes
Their Lips Are Moving—Requiem For The Income Tax
Part 4 of 6
 

Of course the IRS does not win every case. Occasionally it confronts someone like Bill Conklin, former legal researcher with the National Commodities and Barter Association. IRS supervisors in the Denver office know Bill on a first-name basis. They learned to respect his expert knowledge of tax code the hard way. He regularly loses cases in local federal district court and later wins them in the Tenth Circuit Court of Appeals.

Conklin ties knots in the IRS’s tail with its own rules. First he sends in an unsigned return. Along with it he gives IRS officials his power of attorney to sign it for him if they can do so without waiving his Fifth Amendment protected rights. (The government may not compel a person to be a witness against himself.) The IRS retaliates, under 26 U.S.C. Section 6702, with a fine for filing a frivolous return. Conklin promptly pays the fine and sues for refund. A judge in federal district court denies the government’s motion to dismiss and the case goes to trial.

The government argues that an unsigned return is a return for purposes of 26 U.S.C. 6702. Conklin replies, “As the plaintiff, I don’t know whether it would be better to lose or win this suit!”

If he wins his ‘return’ was not a return and he gets a refund. If he loses, and the Tenth Circuit Court of Appeals upholds the ruling, then an unsigned return is a return. That result probably destroys the income tax system.

BILL CONKLIN’S ADVERTISEMENT

Conklin points out to the court that the Ninth Circuit recently placed itself in this predicament. In U.S. v. Ted H. Kimball the court had to rule that a Fifth Amendment Return is a return for purposes of Section 7203 because it had ruled that it was a return for purposes of Section 6702. Realizing the potential damage, the court later ruled that a return could be a return for purposes of one section of the code and not a return for purposes of another section of the same code. The judges overturned themselves!
 

In addition to considerations of direct versus indirect taxation and its Fifth Amendment problems, there are other constitutional questions about the legitimacy of the income tax system. An interesting one concerns the presumed 1913 ratification of the Sixteenth Amendment, the so-called income tax amendment. Coauthors of The Law That Never Was, Bill Benson and Red Beckman, assert that the federal government’s records of its ratification were falsified.[11]

They should know. Between them, they visited the state archives of all forty-eight states that had considered the proposed amendment and obtained certified copies of the records. Benson then went to Washington, D.C. and poked around in the basement of the National Archives, probably the first person to look at the original documents in all these years. His research shows that 36 state endorsements were defective. In Kentucky, the state senate, according to its official journal, voted 22 to 9 against the amendment. The Office of the Solicitor at the State Department in Washington knew about this vote but listed Kentucky as affirming. Benson quips, “They must not have had Sesame Street back then.”

U.S. Attorneys and the federal courts have not looked favorably upon Benson’s research. They insist “it’s too late to do anything about it” and “it’s a political question.” Neither argument finds any basis in law. Their latest tactic is to claim (correctly, it appears) that the personal income tax upon wages is an indirect excise tax and therefore not founded upon the Sixteenth Amendment.

This line of reasoning follows that of the 1916 Supreme Court decision in the case of Brushaber v. Union Pacific Railroad Company, the leading decision supporting the proposition that the federal income tax is an indirect tax on investment income. The Court held that Mr. Brushaber must pay income tax on the earnings of his Union Pacific stock. Officials at the IRS point to this case as proving the constitutionality of the income tax. Their position, now advocated by U.S. Attorneys, seems strange because for years ‘tax protesters’ quoted the same case, claiming their wages were not investment income, that an income tax on wages operated as an unconstitutional unapportioned direct tax upon them. Invariably, the federal courts ruled their logical arguments “frivolous and without merit.”

While the courts perceive the issue of fraud in the ratification process of the Sixteenth Amendment as a political question and contend that it lies beyond their jurisdiction, the lawyer-politicians hold a different opinion. They maintain that “It’s a judicial question.” “Congressman Ronald V. Dellums (D-California) said that ‘only the judiciary can decide the validity of a law.’”[12] The problem is simply too hot for either to handle. Both know that the income tax is dying.

The coroner will list the cause of death as overindulgence—too much of everything: too much tax; too many clerks, bookkeepers, accountants, agents, auditors and tax attorneys; too complicated; too big a drain on productive work; too intrusive on private lives; too many forms; too much power allocated to a single government agency; too open to abusive influence by bureaucrats; too likely that special interests will receive preferential treatment; too much daylight finally exposing the nature of the beast to the taxpayers.
 

The American taxpayers, more than those of any other nation, willingly pay their proportionate share for a job well done. Conversely, they absolutely despise fraud, waste and abuse. Had taxpayers realized the true nature of this system, the income tax would have died long ago.

Consider the plight of a worker in an automobile manufacturing plant. Assume that $6,000 of income tax is withheld from her pay annually. She did not get the money, nor did her employer. The government took it. From the manufacturer’s point of view that tax was a labor expense included in the price of the car. From her point of view, as she buys that car from a local dealer, she pays the tax again plus its collection cost, hidden in the price. On the second occasion she probably borrows the money and pays interest on the loan. This will be one unhappy citizen when she finally realizes that she is paying interest on money borrowed to pay for the collection of a tax that she already paid!

Income taxes on business profits are also hidden in product cost or must be paid by the shareholders. Businesses never pay taxes, people pay them. Corporations, acting in their own best interest, pass taxes through to the consumer whenever possible. The consumer, having no way to pass the tax on, pays both the tax and the indirect costs associated with its collection. Businesses spend about 4 billion hours per year working on their taxes, either trying to avoid them or collecting data and preparing the returns. At $25 per hour that amounts to $100 billion. Add that $100 billion to the $120 billion in taxes that they pay to the government. The total, over $200 billion, gets dumped on unsuspecting consumers, hidden in the prices of products or services.

What is wrong with these pictures? Two features stand out—the hidden nature of the tax, which now plays into the hands of the lawyer-politicians, and the inefficiencies of the system. In the design of the income tax system, neither was accidental.

Remember that the pattern for today’s income tax system was the Victory Tax of World War II. Confidential hearings concerning the 1942 Revenue Act before a Senate Finance subcommittee on August 21 and 22, 1942, give some insight into its design.[13] In this classified testimony, released 35 years later, Meyer Jacobstein of the Brookings Institution tells Senators “that it is necessary to mop up the excess purchasing power of the community …” He was correct.

The government financed a large part of the war by monetizing its debt through the Federal Reserve System. The lawyer-politicians knew then that excessive purchasing power creates inflation. A well-paid Rosie the Riveter might spend her money on consumer goods rather than government war bonds. At the hearings another member of the Brookings Institution, Charles O. Hardy, testified “…that we have to bring about a readjustment of consumption in the country to the amount of consumers’ goods and services that we can spare…”[14]

Instigation of a pervasive Victory Tax and routine withholding solved the “readjustment of consumption” problem. Raising revenue efficiently was unimportant. In fact, an inefficient system worked better “to mop up the excess purchasing power.”

Randolph Paul testified for the Treasury Department. “We are just afraid, without collection at the source, with our present rate and our present incidence of taxation, that the system will break down.” The tax rate then was only 5 percent, but he realized that many taxpayers would default if required to pay an annual levy directly to the government. He worried about an “unpopular procedure,” such as a lien, used to take money from a reluctant taxpayer’s paycheck and about the resultant loss of “prestige” for the Treasury Department.  Withholding made the plan workable.[15]

It should not escape notice that, for a ruling elite, the plan offered one other interesting feature. During the hearings Hardy remarked that “…It would give an opportunity for complete registration of the population, which could be used for a great many purposes …” That statement may be interpreted as sinister or benevolent depending on one’s political philosophy. It was accurate.

Camouflaged by the war effort, the lawyer-politicians shifted power to Washington, D.C., through a successful “readjustment of consumption” policy. The wars continued: the Korean War, the Cold War, the Vietnam War, the War on Poverty, the War on Cancer, the War on Illiteracy, the War on Drugs, the War on Crime, etc., etc. What about AIDS, Homelessness, Somalia, Haiti and Bosnia? The American taxpayer was drafted into the War-of-the-Month Club. The winner is always the same—the homeland of the lawyer-politicians, Washington, D.C.

America lost. The attempt of a powerful central government to “provide for the …general Welfare” killed individual self-reliance. An ever larger public sector “mopped up” much of the productivity of a relatively decreasing private sector. More than 50 years of wars against every perceived injustice and the misguided policies of the income tax, deficit financing and government-guaranteed promises eventually bankrupted the country. Most of the lawyer-politicians, unwilling to surrender their elite status, insist that America continue the fight. To preserve their legacy, they are more than willing to sacrifice additional citizens. A few seem ready to declare peace.
 

11 Bill Benson and M. J. Red Beckman, The Law That Never Was, Vol I and II (1985, Constitutional Research Assoc., Box 550, South Holland, IL 60473) 
12 Ibid., II, p. 47 
13 Alan Stang, Tax Scam, (1988, Mount Sinai Press, P.O. Box 1220, Alta Loma, CA 91701), p. 216 
14 Ibid., p. 217 
15 Ibid., p. 218