Princess,
What about alimony, child support, or life insurance? By your definition, an employer could then pay the person's mortgage for them - bypassing the employee. The employee wouldn't have to pay taxes on the mortgage payment made on their behalf. These fringe benefits could go on and on
(health insurance, vacations, products, etc.)
Cercis,
Advocates of the flat tax are saying you wouldn't pay any taxes on this unearned income? I'd never heard that before.