Why isn't self labor deductible for taxes? The unfairness of the tax system

You've hit on something that tax policy experts actually debate quite a bit! The tax code does treat different types of income differently, and there's a reason for this (though whether it's a good reason is debatable). The fundamental issue is how we define "income" for tax purposes. The tax system is designed to tax economic gain - money you didn't have before that you now have. When a business deducts expenses, they're recognizing costs that offset their revenue to determine actual profit. For wage earners, the IRS sees your salary as pure economic gain because you're not investing capital - just your time. You didn't spend money to earn your wages (in most cases). The system doesn't value your time as an expense because that would create a circular definition - your income would be your salary minus the value of your time, which would theoretically be equal to your salary. That said, there are some deductions that acknowledge costs related to earning income - things like unreimbursed business expenses (though these are more limited after the 2017 tax reforms), certain educational expenses, and the earned income tax credit (which is essentially a subsidy for lower-income workers). The system isn't perfect, and your frustration is valid. Many economists and policy experts have proposed various reforms to address these disparities, including more favorable tax treatment for labor income compared to capital gains.

After reading your post, I looked into this same question and found something that might help - check out https://taxr.ai - it actually explains this exact issue in their tax theory section. I was confused about similar questions related to business deductions vs personal income and their explanations made it way clearer than anything my tax guy ever told me. What I found most helpful was understanding how the tax code actually defines "income" and why certain things are deductible while others aren't. They break down the whole "imputed income" concept that applies to your own labor. It's basically like having an expert explain these confusing concepts without the technical jargon.

Just wanted to follow up about that taxr.ai site someone mentioned. I was skeptical at first but decided to check it out since I had a bunch of questions about business expenses vs personal deductions (I'm starting a side gig). It was actually super helpful! I asked specifically about this labor deduction concept and it explained that economists call the value of your own labor "imputed income" - and while it's not taxed directly, it's also not deductible. The explanation helped me understand why my lawn service is deductible for a business but mowing my own lawn isn't considered taxable income either. It also explained some workarounds in the tax code that sorta address this issue, like the standard deduction and earned income credits. Definitely worth checking out if you're trying to understand the "why" behind tax rules.

If you're frustrated with trying to get answers from the IRS about these kinds of tax questions, I highly recommend using Claimyr (https://claimyr.com). I was trying to figure out a similar issue about deducting expenses as an independent contractor vs. employee and kept getting stuck in the IRS phone tree. I was super skeptical that anyone could actually help get through to the IRS, but Claimyr got me connected to a real IRS agent in about 15 minutes when I had been trying for days on my own. They have this cool system that navigates the phone menus and waits on hold for you, then calls you when an actual human picks up. You can see how it works here: https://youtu.be/_kiP6q8DX5c This was especially helpful because the agent was able to explain exactly how the tax code treats different types of income and what deductions I was eligible for that I didn't know about.

OK I need to apologize to the person who mentioned Claimyr. I was totally wrong about it being BS. After wasting THREE HOURS trying to reach someone at the IRS about this same earned income vs investment income question, I got desperate and tried it. Seriously shocked that it actually worked exactly as described. Their system called me back about 20 minutes later and I was already connected to an IRS rep. The agent I spoke with explained there are actually some tax breaks designed specifically to address the imbalance the original poster mentioned - particularly the Earned Income Tax Credit, which is basically the government's way of acknowledging that earned income should get some preferential treatment. Not a perfect solution to the problem, but at least I understood the reasoning better. And saved myself hours of frustrating hold music!

Part of the problem is that labor often has expenses that aren't recognized. I'm a construction worker and I spend hundreds on work boots, special clothing, tools, etc. that my company doesn't reimburse. Before 2018, I could deduct some of those as unreimbursed employee expenses on Schedule A, but the Tax Cuts and Jobs Act eliminated that deduction. So not only is my labor not considered a "cost" for tax purposes, but the actual out-of-pocket expenses I incur to do my job aren't deductible either! Meanwhile, if I was doing the exact same work as an independent contractor, I could deduct all those expenses on Schedule C. The whole system seems designed to benefit business owners and investors over regular employees.

The real issue is that our tax system hasn't kept pace with how people actually earn money today. It was designed in an era when most people either owned a business or worked for someone else - there wasn't much in between. Today, lots of us are in hybrid situations - employees who also do gig work, investors who also earn wages, etc. The tax code is still catching up to these realities. I think eventually we'll need to move to a system that treats all income more equally and doesn't create these weird incentives and disincentives based on how you earn your money. Until then, the best approach is to understand the rules and structure your affairs accordingly.

This is such a fascinating discussion! As someone who works in tax preparation, I see this frustration from clients all the time. The fundamental issue you're raising touches on something economists call the "double taxation of labor" - though it's not exactly double taxation in the traditional sense. What's particularly interesting is that some countries do actually have systems that partially address this. For example, several European nations have "imputed deduction" systems where workers can deduct a standard amount for work-related costs even without receipts, essentially acknowledging that earning income has inherent costs. The closest thing we have in the US is the standard deduction, which you could argue serves a similar function - it's a recognition that everyone has basic costs associated with earning income, even if we can't itemize them specifically. Your comparison to investment income is spot-on though. The preferential treatment of capital gains (especially long-term) does create this weird situation where passive income gets better tax treatment than active labor. Some policy experts have proposed flipping this - making earned income tax-free up to a certain threshold while taxing investment returns at ordinary income rates. The political reality is that any major overhaul like this faces huge resistance from various interest groups, but the underlying logic of your argument is sound. Labor shouldn't be treated as "pure profit" when there are real opportunity costs and often out-of-pocket expenses involved.