The circulation of a currency is merely a means for people to exchange value more easily. However, in the United States, it is not mandatory that the exchange of goods and services be conducted in official legal tender. Sometimes economic circumstances are not always conducive to transactions in the U.S. Dollar; private exchanges of value may become more convenient outside the monetary realm. But this can only occur if the parties involved happen to have coincident wants. This private exchange is known as barter, and those who participate in it in the United States are just as liable to the Internal Revenue Service [IRS] for gains as they would be if they used official legal tender currency.
In a publication released on the IRS website, bartering is defined as “an exchange of one taxpayer’s property or services for another taxpayer’s property or services. The fair market value of property or services received through barter is taxable income.”¹ It may be difficult, if not impossible, to accurately determine what constitutes “fair market value” in a fractured economy, where adverse supply shocks and mass uncertainty about the future create vast differences in costs for similar goods and services depending on the region (ignoring the natural differences in individual firm’s pricing decisions). Just because a cabinet maker in one economic region charges X for his expertise doesn’t mean that a cabinet maker of similar expertise in another region won’t charge X+3. Without a reliable means of establishing the fair market value of a good or service, the determination of the tax liability of individuals who engage in barter cannot be adjudicated easily or fairly, if at all.
In the event of hyperinflation, where many private individuals will spontaneously engage in asymmetric economic improvisation, the question of practical and effective enforcement of the income tax with respect to barter arises. According to IRS Agent #02209-39, who identified himself as “Devlin” in a telephone interview on January 28th, 2010, “There simply aren’t enough boots on the ground to enforce voluntary compliance.” This indicates that the IRS knows it cannot rely on a forensic approach to determining tax liability in a comprehensive way. The term “voluntary compliance” is key. It is a euphemism for fear. During more tranquil economic and political times, it is far easier for the IRS to instill the amount of palpable fear in the public necessary to induce “voluntary compliance”, particularly through the practice of deliberate bureaucratic mystification. The high-profile enforcement operations of the agency, supported by lack of transparency merely induce capitulation.
In her testimony before Congress, former IRS employee turned whistle-blower Shelley Davis stated, “Mystery breeds distrust and contempt. It also breeds fear, which compels many taxpayers to comply with the tax laws because they are afraid of the consequences, but it does not breed voluntary compliance or trust.”² Even if one believes that the taxation of personal income is a necessary fiscal tool, the fact that the use of fear as a method of application is considered appropriate by the IRS sets an unfortunate and dangerous precedent. The practice highlights a breakdown of natural law.
If an agency of the U.S. government depends upon the fear it instills in the public in order to fulfill its established mandate, then its effectiveness becomes uncertain when the general fear level of the population arising from ongoing economic turmoil subsumes that which the agency utilizes for the purposes of enforcement. Put simply, if people are more worried about where their next meal is coming from, their tax liability with the IRS will cease to be as great a priority.
Private voluntary barter can be a solution to shaken confidence in an official currency. In the event of hyperinflation, anyone attempting to establish enclaves of organized economic activity could do so through a barter exchange. This represents the next order of magnitude above individual exchange: such an organization would serve as a nexus for parties with coincident needs without any other means of seeking each other out. Such impromptu arrangements would provide at least a reasonable chance of salvaging some economic liberty in an environment where the failure of the monetary system would invite comprehensive government control. Strangely, the IRS liability associated with barter extends beyond the individual participants. There also exists a non-monetary aspect of compliance associated with barter exchanges. Whether or not the IRS would be willing to attempt widespread enforcement of the code among diffuse, spontaneous barter organizations is unknown. However, in the absence of certainty, it would be diligent for anyone considering a barter exchange operation to examine the law as it currently exists:
Under Regulation 1.6045-1(f)(i), barter exchanges are required to make a return of information reporting the name, address, and taxpayer identification number of each member or client providing property or services in the exchange, the property or services provided, the amount received by the member or client for such property or services, the date on which the exchange occurred and other information required on Form 1099-B.3 [See also, exemptions.]
One problem here is defining what an “amount” is: Denominated in what? What if a system of valuation is based upon different numerics, like the American Open Currency Standard [AOCS]? Much of what is considered in a barter transaction is the marginal utility received in the item(s) traded for, apart from the dollar value. This is the incentive which makes barter desirable. But utility is subjective, and not denominated in dollars. If we’re not using a dollar system, then the only consideration of the value of an item is its usefulness: its utility. Since there is no law which states that we must only consider value to be expressed in terms of dollars, then how must we account for value exchanged through barter in a manner compatible with IRS expectations? This is a serious moral question which should be pondered.
For anyone who is willing to accept the validity of the income tax, then income derived from membership fees, such as that gained by a barter exchange for access to their facility by its participants would be legitimately taxable, (ignoring the problem of value incompatibility if the fees are not denominated in dollars.) But again, in the midst of exigent circumstances, the opportunity cost of failing to keep records for the IRS’s benefit will never be as great as that of not having adequate material for basic subsistence. Since a barter exchange is merely a private intermediary forum in which transactions are made between private parties, the IRS requirement that barter exchanges themselves keep such records seems to be a means of merely enforcing a monopoly on government issued currency. The burden of this reporting requirement can grow so complex as to engender accounting errors, which the IRS could use to exact penalties and other monetary assessments. Given that the IRS itself admits that there “aren’t enough boots on the ground,” the agency’s enforcement limitations would suggest that they may employ high-profile “selective enforcement,” another tool of fear, for the political purposes of inducing mass compliance, if not merely for revenue collection.
If barter exchanges circulate their own private monetary units, like those which are endorsed and promoted by the AOCS, the IRS still considers such activity to be generating income: “Trade dollars or barter dollars are valued in U.S. currency for the purposes of information returns.”(4) So, according to the IRS, no matter what medium of exchange is used, regardless of the philosophical definition of “value,” individuals are forced to convert gains from their trade to the current value of the U.S. dollar, regardless of the dollar’s purchasing power. During a hyperinflationary episode, the whole idea of using a barter currency is to purge decaying Federal Reserve Notes out of the economy in order to maintain price stability.
Private voluntary barter may transform into the preferred medium of exchange for a region suffering from the effects of hyperinflation – particularly if a measure of macroeconomic stability can be established using commodities with intrinsic value, such as gold and silver. Whether it’s with a privately circulated currency made of gold or silver, or whether it’s with pre-’64 U.S. silver coins recirculated for their commodity value, the requirement to affix the subjective value derived from barter to a legal tender currency suffering the ravages of inflation establishes an inescapable dependency on failed economic policy. Such a policy would be far less productive than allowing free market principles to operate in the hands of the rugged individuals who are willing to take the risks on a new economic frontier. Tying tax liability to an exponentially depreciating currency further exposes the failure of the monetary system, since the U.S. government requires its currency to retain enough of its purchasing power to utilize tax revenues to meet its requisite expenditures. Eventually, the function of the Internal Revenue Code will be nullified.
In the event of severe hyperinflation, the income tax, tied to the value of the Federal Reserve Note, will inevitably have to end. The severity and longevity of such an episode in the United States depends on how quickly the U.S. government can create a new economic overlay. It will only function if the American people believe the new system is viable, and that depends on the philosophy upon which the new system is based. The likelihood that the American people will uniformly accept a new fiat currency in the aftermath of the failure of the old will be dim, so long as the right monetary experts step forward and articulate the circumstances that lead to the monetary breakdown, and can provide an optimistic appraisal of sound money. But the successful reestablishment of an official commodity-backed currency is contingent upon the same belief that it represents value. When deciding upon a new monetary system, it is incumbent upon Americans to be informed and to act fearlessly in their own best interests- such is the foundation of sound economic reasoning.
1. Record Keeping for Business Barter Transactions. Headliner Volume 281 November 30, 2009. IRS website. Accessed February 22nd, 2010. http://www.irs.gov/businesses/small/article/0,,id=215975,00.html
2. Internal Revenue Service Whistleblowers: Prepared Statement of Shelley L.Davis Before the Senate Finance Committee Oversight Hearing on the Internal Revenue Service. Tuesday, September 23, 1997. http://whatistaxed.com/IRSwhilstleblowers.htm#davis
3. Tax Requirements for Barter Exchanges. Updated December 16, 2009, IRS website. Accessed February 22nd, 2010. http://www.irs.gov/businesses/small/article/0,,id=188094,00.html
4. Barter Exchanges. Updated December 16, 2009. IRS website. Accessed February 22nd, 2010. http://www.irs.gov/businesses/small/article/0,,id=113437,00.html