What? Income tax is slavery? What kind of nonsense is this? That’s fanatical! Right?

Read on, let me explain.

Let’s say you’re a store owner. You set up your business – the store, and you invest a lot of money in buying stock (it’s a bookstore, so you stock up on books). Your business spends $30,000 on books to sell. You’ve rented a nice retail store downtown, and that costs your business $10,000 for the year (what a steal!) and then your business spends $5000 for the year on bills in the store (power, phone, internet and insurance). Then over the course of the year, your business sell $75,000 worth of books (retail price). I’m leaving out a bunch of things (like paying employees and store fittings), but you get the idea.

And then it’s time to pay taxes for the business. So you sit down to do your taxes – let’s say tax is 15% of your income (if only!). In the “income” side of the balance sheet, you write down your sales: $75,000. Then on the “expenses” side of the balance sheet, you enter $30,000 for stock, $10,000 for rent, and $5,000 for bills. So what’s your taxable income? Your taxable income is the difference between the two sides of the balance sheet: $30,000. You made $30,000 this year. That’s called profit. You pay the government 15% of that profit, 15% x $30,000 or $4,500. if the government said that your investment in the business counted for nothing and tried to tax your sales of $75,000 you’d be outraged. How dare they make your business’s investment count for nothing! They wouldn’t dare do that. They tax your profit.

Profit is the amount of income you received, minus the value of the investment you made to get that income.

OK, simple so far?

Now, let’s say your business didn’t do so well. But things could be worse. You managed to sell just $45,000 worth of books. Well, that’s not so bad, you still managed to break even, so you’re going to keep the business open again next year. How much taxable income do you have? $45,000 of income and $45,000 worth of expenses. Your income exactly matches the value of the investment you made to make that income, so your profit is zero. No tax to pay.

OK, the stage is now set. Consider somebody who is not in business. She works for a company, 40 hours per week. Before starting work, she sat down with her prospective employer to discuss wages. “So what are my skills worth to this company?” She asks. She and her employer come to an agreement: $25 per hour. That’s what her skilled labour is worth. So for every hour of labour that she invests, her employer will give her $25 as income. If she starts working fewer hours, she is giving less so she gets less. If she works overtime, she is giving more hours, so she gets more money. But the amount of money always exactly matches the value of her labour: $25 per hour.

In other words, this employee is breaking even. The amount of her investment in her career exactly matches the amount of her return in wages. The end of the year rolls around, and this worker has earned $52,000. I say earned because each $25 of that income is matched with an hour of work that is worth $25.

Now, let’s calculate her tax, shall we? let’s use 15% again. What do we have on the income side of the balance sheet? We have income of $52,000. What do we have on the expense side? What investments have been made to get that income? We have $52,000 worth of skilled labour. Remember, this woman spoke with her employer about what her work is worth, and they both agreed that it’s worth $25 per hour. So when we take the income and subtract the investment, what do we have left? Zero. This woman did not get given more than the value of what she gave, she was given exactly the value of what she gave. Remember: Profit is the amount of income you received, minus the value of the investment you made to get that income.

There’s no profit here.

But what does the government have to say about this? Let’s think of some horrible things they could say. they could say:

The value of your work is nowhere near that high. We think that your work is only worth $40,000 for the year, and that means you made some money on this deal. You profited $12,000. We’re going to tax that profit that you made. 15% of $12,000 is $1800, so you owe us $1800.

Wow, that’s a bit of a slap in the face, right? Telling this woman that her work is worth less than what she got paid is pretty offensive. Let’s imagine that the government was even nastier than this. What if they said:

The value of your work is nowhere near that high. Your work is so unimportant that it’s only worth half of what you got paid. You got paid twice as much value as you invested. You made a 100% profit of $26,000! Half of your income is profit, and we’re going to tax that profit that you made. 15% of $26,000 is $3900, so you owe us $3900.

Holy moly, way to de-value people’s work! You can probably see where this is going, so let’s get to the conclusion: This is what the government actually says:

You have provided labour, and your employer has provided income. However, your labour is not worth the income your received. In fact, your labour is worth zero. Absolutely nothing. It is worthless. Therefore, every single cent you received is profit. We are going to tax what you made, and since you invested nothing of value in getting this income, that means taxing your whole income. 15% of $52,000 is $7800, so that’s what you owe us.

What do we call it when we treat people’s labour as having no value? (Hint: It’s in the title of this blog entry.)

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