From Mises Blog, July 12, 2006
Maybe some tax expert can set me straight on the following assumptions, but from what I can tell, federal income tax law technically should make it virtually impossible to have a space program and to have anyone but a billionaire as president. Bear with me.
Federal income tax law requires (please don’t bug me, tax cranks and conspiracy nuts) tax to be paid on income. Now there is an exception for “imputed income,” which is where a person uses his own household durable (personal residence, car or television) or services to provide an economic benefit to himself or his family. The idea is that it’s too difficult to value such benefits, or they are not clearly realized, the costs and difficulties of reporting and enforcement, etc.So, for example, if you grow your own vegetables, you get a benefit from growing them and harvesting or consuming them instead of buying them (or being a paid a salary to use to buy them), but it’s imputed income so not counted as gross income. If you wash your dishes, you don’t have to pay tax on what you save from paying a maid to do it. Etc. With me? On the other hand, if the veggies were sold, tax is owed on the money made—it’s income. Now also, if there is barter, both sides of the exchange owe tax: if you give a dentist veggies in exchange for his fixing your teeth, you are both supposed to pay income tax on the value of what you received. (Incidentally, some jerks favor “taxing ‘imputed rental income,’ i.e., the money purportedly saved because a homeowner owns and occupies a home rather than renting it out. But I don’t know why that idea makes sense, let alone so much sense that the absence of such taxation is an “egregious” “loophole.”” There are also those who argue that the imputed income rule means that “acquisition of virtual assets from a massively multiplayer game could be taxed by the IRS.” For a critique of the concept of imputed income, see p. 456 of George Reisman’s Capitalism treatise.)
Now, one more point. It’s my understanding that a salary paid has to be reasonable—for example suppose you own your own company, and you decide to pay yourself $10 a year. The reason is you pay almost no income tax on this, and also no employment taxes. Instead, if your company is profitable, the money accumulates in the company and maybe you take it out as a dividend later. And if the company is, say, offshore, the IRS would really be upset about that. So the IRS would, I believe, in some cases re-characterize your salary as what it “really” is. It’s similar to the idea of taxing the value of barter: the idea is that the “real” value to someone of an exchange or “payment” is what is taxed, not the dollar numbers the participants attach to it.
None of this makes sense or is ethically or economically justifiable, of course, but there you have it.
Now, it has always seemed to me that many people would pay money to be President—probably every single person who runs for President would be happy to serve with no pay, and even pay say $50million a year for it. After all, look how much is spent on campaigns; look how much people give in campaign donations just to sleep in the Lincoln bedroom. The President gets to ride on Air Force One and live in a priceless building. Yet this is not considered part of his remuneration. Why not? Shouldn’t the IRS say the President is “really” being paid millions of dollars in value? In exchange for his services, he is given free room and board, fame, unique experience, etc., that no doubt has a market value of millions. Shouldn’t he have to pay tax on this? Which would mean he would have to be a millionaire just to be able to afford being President.
And think of jobs like astronauts. These guys get paid to take trips to outer space, which is a perq if I ever heard of one—after all many people are willing to pay millions to take a ride on a spaceship. Seems to me that means all normal career-employee astronauts owe income taxes of millions to the feds, which means that the space program would have to be dismantled—or only use millionaires as astronauts, in which case NASA could perhaps make a profit.