Cracking the Code defended

I said I would publish a response to my recent posts on Crackigng the Code and here it is:

From Scott M. Olmsted:

Here is my take on Cracking the Code by Pete Hendrickson: this book deserves careful study by all libertarians. Its insights into the income tax mesh perfectly with those from LRC, especially about the limitations of federal power and what the government will do to break the chains put on it by the Constitution. See the excerpt from the Foreward that I have appended below.

First, a bit of background: A couple years ago I sent copies of this book to Lew, to David Gordon, and to others, attempting to interest them in it. No takers. Lew Rockwell and James Ostrowski especially take the point of view that all efforts of this sort are “tax protests” and doomed to failure. Given the dismal history of attempts to fight the income tax in court, who can blame them?

In thirty years of being a libertarian, I have done a great deal of reading on the subject. There are a million theories and claims out there, but with very few exceptions, they are based on inadequate research or none at all (See for Hendrickson’s discussion of some). Also, most seem to go looking for justifications for a desired conclusion (wages are not income, the 16th Amendment wasn’t passed properly, and so on). This one is different. Hendrickson did the unthinkable and actually read all the income tax laws from 1862 onward (it is not enough to simply read the tax code; the truth is in the law, which the code does a magnificent job of concealing). And he approached it without a preordained conclusion.

Here is what he found: there is a class of earnings that is legally taxable (technically, taxable activities that produce earnings; the subject of the tax is not the earnings themselves but the activities). Some Americans owe a tax computed from their income, a word whose meaning must be found in the law, not in ordinary usage (even the Supreme Court has said the “income” is not “all that comes in”). The rest of us have our earnings declared taxable by our employers or others who are exhorted by the IRS to do so. Given that virtually every “protestor” who has gone to court has failed to rebut such declarations, it is no wonder that they always lose. If unrebutted, the employer’s testimony makes the earnings into legally taxable income. But the power to give testimony to return our earnings to their proper status is within each one of us, a fact the IRS labors mightily to conceal.

To understand how this can be requires taking a journey with Hendrickson through the Constitution, the tax laws, and the tax code. Along the way the pieces fall into place. It starts right away with the very first income tax law (still in force, though greatly amended): it contains two sections, one for those who are required to pay, and one for anyone else, who is allowed to declare how much taxable income he has or that he has none at all, “and the same so declared shall be received as the sum upon which duties are to be assessed and collected” (Section 93 Of The Revenue Act Of 1862). This smoking gun has been ignored far too long (and ought to be added to the crimes of Lincoln). The journey continues with various Supreme Court decisions. The Court understood in particular that the 16th Amendment did not actually grant any new taxing power to the government (it removed a technical roadblock placed by an earlier court decision to taxing particular items). And how could it be otherwise? The income tax survived several challenges in the 19th century, and no amendment to the constitution was needed then.

The details, as with any legal subject with over a century of history, require some effort to sort out. Hendrickson’s work shines in this regard. Relying on Court decisions and other primary sources, he produces an analysis in complete harmony with the limited government point of view advocated by LRC. And there is delicious irony for libertarians in discovering exactly the class of persons who are liable for the tax. I will not spoil that surprise here, and I hope others do not either. More importantly, what will the average American think when he discovers that he has been misled all these decades in order to have his pocket picked? He will be outraged of course. Therefore, every reader of LRC who desires to see the end of the tax should read this book and spread its message. A short version of the first few chapters of the book is at

Mr. Ostrowski asked for post-1970 court cases, presumably one favorable to the book. I don’t know why post-1970 legal decisions are of any more value than earlier ones (unless the earlier ones have been overturned), but in any case all the great issues surrounding the tax were decided by the courts before 1970. A requirement for submitting this brief was to provide responses to two recent court cases, here they are:

In the case of the Hills, the reason why the court found against them is to be found right there in the excerpt that Mr. Ostrowski provided: “Defendants continue to hold the erroneous belief that wages are not taxable income”. If this is what they asserted, then the Hills are wrong: “wages”, as defined in the code are indeed “taxable income”. “Wages” is a legal term that presumes its taxable nature, so the Hills lost the battle before they even began, as have so many others . If the Hills cited Cracking the Code as their authority, they certainly didn’t understand it.

Same thing applies to the case of Mr. Gray. He apparently asserted (or the court mischaracterized his assertions to mean) that ” ‘income’ is not defined in the I.R.C. [Internal Revenue Code] and wages earned by non-federal employees are not subject to the federal income tax”. While Mr. Gray was correct that income is nowhere defined in the code (as a term from the 16th Amendment to the Consititution, it cannot be redefined in mere legislation, see Eisner v. Macomber, 252 U.S. 189), he was found guilty of making the “wages are not income” error. This illustrates something that applies to many, if not most “tax protestor” cases: if you make one mistake, the court will declare your entire argument “frivolous” (another legal term), and will not tell you where you went wrong.

However, it is also true that the courts often pigeonhole arguments into one of the set of errors that they are on firm ground in rejecting. Mr. Ostrowski’s attitude is one of obeisance before the judiciary, political appointees beholden to the status quo often more inclined to get along than to get it right. This is particularly ironic when on display on the website championing a school thought whose history is one of disregarding– indeed defying– the “authorities” (that is, the overwhelmingly dominant community of thought on a subject).

One last thing: consider that, as a U.S. subject born in the 20th century, you have been subjected your entire life to government propaganda on innumerable subjects including the inevitability of income taxes. But, as a reader of LRC, there’s a good chance that you have thrown off this cloud of misinformation and you see quite clearly what is going on. That is what Hendrickson’s book can do for you: pierce the cloud of confusion around the income tax by leading you through the law itself. What you find there will actually be no surprise at all.


Here’s my reaction to Scott’s comments.

I asked for new cases and got none. To the best of my knowledge, tax protesters have not won a legal ruling on the merits from a court since the movement was started around 1975 (That’s why I asked for modern cases.)

As far as the Gray case I cited, it rejected the argument that “wages earned by non-federal employees are not subject to the federal income tax.” Scott does not deny that this, more or less, is part of the argument of the book, nor does he respond to this point.

Scott is reluctant to disclose the core argument of the book as have many private emailers been. What’s the big mystery? Is this all about selling books?

Scott writes: “Mr. Ostrowski’s attitude is one of obeisance before the judiciary, political appointees beholden to the status quo often more inclined to get along than to get it right.”

First, the statement is not true. I have battled federal judges long and hard in many ways.

Second, this is a characteristic of the tax protesters. Instead of answering my arguments, they usually resort to personal attacks. Some of them even want me silenced.

Third, my “attitude” is irrelevant, unimportant. In our system, judges hold the keys to your prison cell. They can even overturn jury verdicts for lack of sufficient evidence. Tax protesters need to persuade federal judges, not me.

I’ve stated my overall views on this subject here.


11:26 am on March 2, 2008