Don't Try to Outsmart the Government

My cousin, ever the schemer, found a website called Paynoincometax.com. Since I wasted three years of my life in law school, he asked me if it was legit. "If you argue it right," he said, "you don't have to pay taxes." Is it really true, as Irwin Schiff (the website's operator) claims, that the IRS has no legal authority to collect taxes?

I don't know, but does it really matter?

Governments (local and national) can be seen as mafias, as Randal Holcombe a libertarian economics professor argues. The taxes we pay are protection money. Some governments are better than others. Here in the US we get back some of what we give (more than many countries, less than others), in the form of public schools, libraries, public transportation, fire departments, clean water, roads, hospitals, and so on.

But a lot of it is wasted on bailing out stupid rich people (or maybe not so stupid since they know how to get bailed out), unpopular wars, building bridges and tunnels to nowhere, breaking up small companies, etc. Coupled with some methods of collecting taxes (like double taxation of corporate earnings, double taxation of social security--you are taxed on a portion of your social security payments twice, first when you get your paycheck and then when you collect benefits), it's enough to make some people not want to pay taxes at all.

So along come individuals like Irwin Schiff.

Without looking at any laws, I told my cousin of course you have to pay taxes. Suppose taxation is illegal under the US Constitution. Will a court ever say so? No! Most laws can be interpreted in a number of ways. A lawyer I know once convinced a court that "daily" meant "annually." Most judges interpret laws based on their policy preferences. (If you disagree, why is there often a dispute over judicial appointments? Why do senators reject nominees? Why do presidents and governors nominate certain individuals instead of others? Why do we vote for certain judges rather than others?)

Who pays the judge's salary? Why would any judge, ever, say that the money with which his salary is paid is collected illegally? Sure, there are individual cases where a court may say the IRS erred. To strike down the whole system, however, is entirely different. It'll never happen.

Besides his paycheck, the judge also has to look out for his employer. The US is broke. Remember that Lending Tree commercial, the one where a goofy guy says, "I'm in debt up to my eyeballs"? He's not just a subprime borrower. He's America. A government in need of money will not let its citizens skirt taxes.

But let's say, for argument's sake, that you argue persuasively and the court says taxes are illegal. The IRS will appeal. Let's say you win the appeal. The IRS will petition the Supreme Court, and they will take the case. Let's say you even win this one. How many years will you have spent on this (in jail, likely)? How much will you have spent on attorney fees? Even if you defended yourself it would be expensive. Wouldn't it be cheaper, less stressful, and less time consuming just to pay your taxes?

Think taxation is unfair? Run for congress, or vote and campaign for someone who shares your views. While this will probably get you nowhere, it's better than spending years in court (and jail). There's also the option, untenable for most people, to move to a country where you'll pay less taxes.

The guy from Paynoincometax.com is in jail, by the way. If he's released, it probably won't be until 2016.

Maximize your deductions, but don't try any fancy arguments. They won't work.