What Color Is Your Bicycle?

Understanding the Income Tax

Think of the Federal Government like a guy named Bob, who lives down the street from you in a town that is really big on bicycles. Bikes are used for commuting, deliveries, shopping, excursions, sports ... you name it. In fact, bikes are practically the trademark of your town! So your neighbor Bob has a bike-rental business called Bobs Bicycles. Bobs Bicycles is far and away the biggest business in town. Part of the reason is because Bob does a lot of contract business. But he doesnt just get paid by riders whove signed a rental agreement with him, or even those just using Bobs bikes. Bob gets something every time ANYBODY in town does any riding at all, through an odd combination of circumstances that took many years to come together. Heres how it happened ... Bobs Bicycles was launched a long time ago by the great-grandfather of the present Bob (Bob IV). Great-Grandpa Bob started out not only with a main location for his contract business he also had the bright idea of setting up spots around town where he parked some of his bikes for use by the more occasional rider on an honor system. Anyone could use one of these bikes, but they were expected to keep track of their mileage and periodically send Bob a 1040 Mileage/Rent Due Form and the appropriate money owed. The initial design of the form was this:

I, [William Gates], rode one or more of Bobs Bicycles for a total of ______ miles this year. At Bobs rental rate of 15 cents per mile, I owe Bobs Bicycles $ _____.

Great-Grandpa Bob planned to deal with occasional riders on the honor system, but he liked his money, too, and didnt want to miss what was due him. So after setting up the self-serve locations, Great-Grandpa Bob went around handing out W-2, 1099" and K-1" Rider Reporting Forms to every other business in town. The forms (along with notices that warned of a lawsuit from Bob if

he did not get his rent from those riding bicycles in connection with any business) said:

I, [Linda Gates], saw [William Gates] riding a bicycle on [month/date/year]. I swear this to be true to the best of my knowledge and belief under penalties of perjury.

For starters, everyone understood that where the form said bicycle, it was referring to one of Bobs bicycles. After all, what legitimate interest would Bob have in getting a report about someone riding a bike that wasnt his? And, what business would Bob have even ASKING for a report about someone riding a non-Bobs bicycle? Everyone understood and besides, when you looked on the back of the form, you would see that it said: When used on one of Bobs forms or notices, bicycle means one of Bobs Bicycles. So these forms worked well enough. Everyone knew what they were for, and Bobs honor system bicycles were all painted bright red, so mistakes were few. Some mistakes did happen, though. Therefore, Great-Grandpa Bob added to his system a way for people to correct erroneous reports made by others on their bicycling activities. All that a victim of an improper W-2, 1099 or K-1 Rider Reporting Form needed to do was to fill out one of the 1040 Mileage/Rent Due forms, which could conveniently be found at the Bobs Bicycles locations all over town, declaring the truth of the matter. This might mean reporting that they had ridden 0 zero miles on Bobs bikes that year, or it might mean acknowledging that they DID ride Bobs bikes for a certain number of miles, but not the number reported on the erroneous W-2, 1009 or K-1 Rider Reporting form. This use of the 1040 Mileage/Rent Due Form led to a slight change in its design. Now it looked like this:

I, [William Gates], rode one or more of Bobs Bicycles for a total of ______ miles this year. At Bobs rental rate of 15 cents per mile, I owe Bobs Bicycles $ _____. Under penalties of perjury, I declare the foregoing to be true, complete and correct to the best of my knowledge and belief.

Over the years, things got a bit more complicated, just by the unfortunate coincidence of a lot of misunderstandings. For one thing, Bob, Jr. took over his fathers business and stopped personally distributing the W-2, 1099 and K-1 Rider Reporting Forms, hiring a company to take care of this for him. Now, folks who had never even met Bob and didnt know anything about him or his business began to get W-2, 1099 and K-1 Rider Reporting Forms in the mail. Along with the forms came prominent instructions advising the recipient to use this form to report the use of a bicycle by any person. The note When used on one of Bobs forms or notices, bicycle means one of Bobs Bicycles got re-worded into more complicated legalese and was buried in a lot of new fine print on the back of the form. Later, that clarifying note disappeared from the form entirely, first being replaced by a cryptic reference to where the definition might be found in the Bicycle Forms, Publications and Policies Guide (conveniently available at each Bobs Bicycles location around town), and then ultimately being dropped altogether on the principle that knowing what the form was for was the responsibility

of the person filling one out. Not surprisingly, a lot of folks misunderstood all these things and began filling out and sending forms to the address provided every time they saw anyone riding ANY bicycle. Another thing contributing to complications with Great-Grandpa Bobs system was Bob, Jr.s decision to stop painting his honor system bikes bright red. Pretty soon, even folks who remembered that W-2, 1099 and K-1 Rider Reporting forms only related to Bobs bicycles were filling them out anytime they saw anyone riding a bike. This was only partly due to confusion. Bobs Bicycles had become a very successful business over the years. People were eager to please Bob and remain in good favor with him. Moreover, although the fine print on the W-2, 1099 and K-1 Rider Reporting Forms had changed, the notices about Bob suing for his money had not. Bob maintained an active PR department, along with a powerful in-house legal team and an aggressive accounting and collections operation. In light of these and other considerations, most people felt the simplest thing to do was to fill out a report whenever anyone was seen on any bike. It made sense that the next generation of townspeople grew up with the impression that Bob had a legal interest in bicycle usage in general. After all, once they got jobs, the company they worked for would automatically fill out a W-2, 1099 or K-1 Rider Reporting Form and send it to Bob, even when the townspeople rode their own bikes. If the rider didnt then send in the rent, Bobs collection agency would be all over him, with no grace extended and no questions asked. By the time grandchildren of the first Bobs Bicycles customers were born, everyone had heard stories of riders who, not having paid Bob, were hauled into court and accused of bicycle rent evasion. All that was ever alleged in these cases was that the accused rode a bicycle and hadnt paid Bob. It appeared that if just these things alone were proven, dire consequences followed. Bob, it seemed, could charge you rent for using your own bike, and the legal system would back him up! By then, almost no one alive had ever read through Bobs Bicycle Forms, Publications and Policies Guide, which had grown over the years to thousands of pages in length. Further, Bobs Bicycles had become so big, so rich and so diversified that Bob III had a hand in everything that went on in town, and he knew just how to spread all that rental money around. He had no trouble securing the support of all the important and influential townsfolk, and those movers and shakers just as ignorant of the truth as everyone else were only too happy to help Bobs PR department urge everyone to just pay their rent without question. Sending rent to Bob became something to be done not only unselfishly, but with pride. Sending rent to Bob was good for the community! Over the years, each successive Bob has carefully kept the overall rent burden tolerable. The nominal rate is considered high, but a big list of discounts and credits has grown in pace with the misunderstanding about who really owes rent to Bob. In the old days, when all business done with Bob was knowingly voluntary, one rental rate was enough and no elaborate discounting was needed. But as more and more people found themselves seemingly beholden to Bobs Bicycles, the company realized that somebody smart might just start reading the Bicycle Forms, Publications and Policies Guide, however difficult it had been made, and disclose the facts to all. Thus the rental rates became progressive, deductions and extensions were offered, and Bobs descendants were content to sacrifice on margin and make it up in volume. In its best move ever, Bobs Bicycles instituted a payroll deduction program, in which the townsfolk are instructed to anticipate how much riding they will do over a year and have part of their pay sent to Bob each week against the annual rental charges they estimate will accrue. By virtue of this program, most folks never even really notice how much theyre sending to Bob! (The Bobs are still chortling over this one, decades after thinking it up ...)

Needless to say, Bobs 1040 Mileage/Rent Due forms have gotten rather complicated. But an entire industry has sprung up in town just to help people fill them out (for a fee, of course). The average person doesnt directly deal with paying Bob at all anymore. In fact, most get a refund from Bob each year for what has been over-deducted under the payroll deduction program, and they view it like a birthday present. All in all, the Bobs have succeeded in creating a perfect storm of misunderstanding. Today, everyone in town plans all their affairs with Bobs piece of the action factored in. Indeed, big chunks of the population do nothing but handle Bobs-Bicycles-related activities. Most of the rest cant imagine a time without the business Bob does with their own businesses, or the charitable giving back to the community grants Bob bestows from the rental money he collects. Great-Grandpa Bob rests with a smile on his face cause the kids are doing all right. And deep within the Bicycle Forms, Publications and Policies Guide, the long-forgotten truth rests too waiting for anyone willing to go to the trouble to take it out for a spin. So, how about you? Who gave you your wheels, and what color is your bicycle?

The income tax ... is an excise tax with respect to certain activities and privileges which is measured by reference to the income [earnings] which they produce.
House Congressional Record, March 27, 1943 (p. 2580)

... in Springer v. U.S., 102 U.S. 586 (1880), it was held that [the] tax upon gains, profits, and income was an excise or duty, and not a direct tax ...
United States Supreme Court, Pollock v. Farmers Loan & Trust, 158 U.S. 601, 1895

The provisions of the Sixteenth Amendment conferred no new power of taxation ...
Stanton v. Baltic Mining Co., 240 U.S. 103 (1916)

The income tax is commonly interpreted to be a general tax on income. However, upon scrupulous study of the Internal Revenue Code and United States case law, it amounts to a tax only on a specialized subset of income, consisting exclusively of revenues attributable to the voluntary, profitable use of federal privilege, property or powers that is, revenues in which the Federal Government has a direct ownership interest, and to which it can therefore exercise a direct claim as a matter of right.

At no time prior to 1942 (80 years after the Federal Income Tax was first introduced) did more than 8% of American households ever file federal income tax returns in any given year. In most of those years, the percentage was far lower than even that small figure. As recently as 1936, only 3.9% of the entire American population filed returns, according to the Treasury Departments Division of Tax Research. Nonetheless, by 1943, thanks to the distractions of a world war and the adoption of a vague and confusingly worded temporary measure called the Victory Tax, the percentage of households sending in payments declared of be of income taxes rose to 38. That same year, the Treasury Department introduced its master work The Current Tax Payment Act of 1943, by which the practice of withholding tax deposits from wages, which had been a feature of the very first federal income tax acts but had been abandoned in the early 1900s, was re-introduced. The new version was a rare work of lawyerly art, and contributed enormously to the ongoing erosion of general understanding of the nature of the tax already well advanced at that point. Since then, the understanding of the limits of the federal income tax have further slipped away from American consciousness.
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This article is adapted from a primer to the book Cracking the Code: The Fascinating Truth About Taxation In America written by Pete Hendrickson. Below are two excerpts from the book:

The simple, tawdry fact is that Congress wants to spend lots of your money and even though it cant seize that money from you legally, it is perfectly willing to set up a system by which you are led to believe that it can, and about which you will have great difficulty discovering the truth. Dwell on this awhile and the nuances of the phrase voluntary compliance will suddenly become clear. What it refers to is you voluntarily allowing yourself to be characterized as a recipient of publicsector privilege, and then complying with requirements that attach to that status. The [income] taxs ubiquity is carefully generated and maintained, for, being illegal and a fraud, its success relies upon a thicket of lies so necessarily comprehensive as to have become background noise in most peoples lives. It has been famously observed that a tangled weave is necessary to implement a deceit. A racket by which 250 million people are conned every day for nearly the whole of their lives out of an enormous portion of their wealth production requires and inspires a web of such magnitude and pervasiveness as to strongly endanger, if not choke off completely, the very objective cognition needed to perceive its existence.