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The Earned vs The Unearned: An IRS Fiction

Much confusion surrounds the subjects of earned and unearned income in the United States. 

Of course, this confusion was deliberately manufactured by the men behind the curtain to conceal the true intentions of all involved: to justify the fleecing of more people by still more means. 



For the purposes of income taxes in the United States, the federal government distinguishes between forms of income that are “earned” and others that are “unearned.” 

“Earned” income includes wages, salaries, tips, and other taxable employee compensation, which are subject to deductions and, in most cases, a lower tax rate. 

“Unearned” income, on the other hand, includes interest from savings accounts, bond interest, alimony, and dividends from stock, which are typically subject to one’s marginal tax rate. 

The primary distinction drawn between “earned” and “unearned” income is a manufactured one between forms just as easily classified as “active” and “passive”, respectively. 

In their attempt to discredit the latter, which is their primary intention, they expose their philosophical ignorance and, with it, a modus operandi anathema to truth. 

Let’s consider a worker named Frank who produces widgets out of a small factory. 

Frank leverages land, labor and capital for the production of widgets, which he sells to his customers at a nominal cost. 

At the end of the day, Frank normally nets around $150 for his efforts. 

So far, so good, at least according to the IRS, which classifies his compensation as “earned” income. 

Well, how could it possibly not be? 

After all, Frank poured his own blood, sweat and tears into each of those widgets, so he surely earned every bit of it. 

Now, that very next day, Frank decides that he wants to prepare for his future, so he takes that $150 of “earned” income and invests in another company that supplies parts to his factory and others across the globe. 

Frank accomplishes this through the medium of stock, which enables his $150 of “earned” income to become the “earned” income of still another worker, George, for the parts supplier. 

At this point, that same $150 has transitioned from the original customer to Frank, and then to George, as “earned” income. 

George then takes that $150 of “earned” income and, with the benefit of his own land, labor and capital, manages his own nominal return, a fraction of which returns to Frank in the form of a “dividend” to reward him for assuming the risk and, of course, earning the capital in the first place. 

This is precisely where the IRS intervenes to characterize the dividend as “unearned” income, but, as we’ll see in just a moment, they are woefully mistaken in the use of this adjective. 

First, Frank could have done any number of things with his $150: he could have spent it on a pair of designer sunglasses, a night of cocktails, or a new pair of headphones. 

Frank very well could have splurged on an impulse purchase, but he wisely considered his future and invested in a promising company with an appealing value proposition. 

This investment did not come without risk, and it would have been altogether impossible without having earned the income in the first place. 

Just as a bank teller or financial advisor “earns” income through the management of capital, so too does the private income-earner add value as a shrewd custodian of his funds. 

Beyond the enormous risks and opportunity costs associated with investing, there are virtually limitless alternatives to any investment. 

Intelligent investors must do their due diligence in weighing their options, and considering the inherent risks, before investing. 

Interestingly enough, under specific employment circumstances, this very task qualifies as work, the basis of “earned” income, but in the management of one’s own finances, it’s apparently nothing more than a favor to oneself and the tax collector. 

Despite the broadly-circulated claims by the IRS, there is no meaningful difference between “earned” and “unearned” income. 

These classifications were constructed to con the public into accepting one form of income as more legitimate than the other, which would subject the “less legitimate” form to greater penalty. 

Conveniently for the men behind the curtain, the abstract nature (and even “privileged” appearance) of investing has empowered their con while the obedient public hurriedly acquiesces to appear hip to the rules or to simply avoid sounding stupid in the company of others who’ve accepted or warmly embraced it all by now.

As it turns out, there are only two forms of "unearned" income: those by trickery and those by theft.

For these and other high crimes, the hypocritical IRS ought to be Public Enemy No. 1, but as long as they're writing the rules and the public so eagerly accepts them, their piracy will continue unfettered, albeit with the pronounced "authority" to do so. 

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