A couple of days ago I joined in the discussion about to what extent the agorist approach of trying to build a free society within the shell of the state was worthwhile.

Joey has responded to my remarks and clarified his position a bit (which I clearly didn’t really understand at all before, and still don’t feel like I really get). The gist of it seems to be that the problem for liberty lovers is that people, because of their family upbringings, have internalized certain habits of thinking that bias them toward authoritarianism, and so a more libertarian outlook on the big scale can’t really get a foothold until we have a culture in which children are raised in a less-abusive manner.

So to that end, the best thing a freedom-loving person can do is to encourage our own intimate circle of peers to appreciate freedom in their personal lives, in the hopes that this will eventually lead to the withering away of the state as fewer people are convinced of its importance. Trying to confront the state more directly, by creating underground economic structures that evade it, or by refusing its demands head-on, is (in Joey’s view) making yourself vulnerable to a lot of trouble without much hope of anything good to show for it.

If you are self-employed, you may be classified as a sole proprietor, or as a corporation of some sort. If you are a sole proprietor, the profit your business earns is considered your personal income, and you’re taxed on it as such — both income tax and self-employment tax. But if you’re organized as a corporation, the income accrues to the corporation, which pays taxes on it at corporate rates and doesn’t pay self-employment tax or FICA on its own profits. It can then pass the profits on to you via dividends which are also free from self-employment tax.

Richard Winchester has put a paper on this subject up at SSRN: The Gap in the Tax Gap: What Congress Should Do About It. As you can tell from the title, Winchester sees this as a problem, and not an opportunity, but he gives a good summary of how this loophole works, which could turn out to be a useful thing.

I’m currently organized as a sole proprietor, and so I’m vulnerable to self-employment tax. It’s possible that if I were to reorganize, I could eliminate that tax, and possibly the corporate tax I would then be vulnerable to would be less (I haven’t done the math). I know precious little about C-corps and S-corps and such things, and I have this premonition that by the time I learned enough to successfully do a reorganization, Congress would get around to figuring out how to close the loophole, but I’m curious…

Jeffrey Tucker has a good article up at LewRockwell.com about the underground economy. According to Winchester’s article that I referenced above, self-employed folks report fewer than half of the transactions that aren’t otherwise automatically reported to the government. In other words, if someone pays them in cash, there’s less than a 50% chance the government will find out about it.

Tucker’s article is about these cash transactions, and how you can frequently get a better deal on goods and services by paying in cash because those you pay know that cash transactions (on which they can evade taxes) are more valuable than transactions that leave a paper trail (and which then get whittled down by the government).