Yesterday Americans filed their tax forms.
As Ben Domenech observes at The Federalist, this is a good time to consider reforming the 1943 law making withholding from our paychecks mandatory. (As noted on this blog, James Grant advocated the same thing yesterday in a column in Time magazine.)
The overwhelming majority of Americans pay their taxes by having them extracted from their paychecks before they ever see the money. Operating under the fiction that the government is giving you money as opposed to returning what it has already taken is damaging to the psyche of the nation’s taxpayers. The primary argument against such a move – that millions of irresponsible Americans in the income tax-paying classes won’t save up enough to write a giant check to the government come April 15th – encourages a viewpoint of the role of government as an entity that must constantly protect us from ourselves.
Withholding was originally mandated as a wartime step, but its continuation since then disguises the property rights involved, essentially offers the government an interest free loan, and shields taxpayers from the ramifications of federal spending. The country would be better off if everyone experienced what entrepreneurs and business owners do: writing the most sizable checks every year to the government, and watching that hard-earned money walk out the door.
Taxes are terrible, and income taxes particularly terrible (from 1789 to 1913, the American system of taxation primarily relied on a system of import duties Alexander Hamilton designed in the space of a few months). Withholding is designed to make them seem less so. Ending the withholding mandate should be a bigger priority for those who want to reform the tax code. It increases the pain, but also the awareness of what causes this pain: the people in Washington who say you work and toil and earn bread, and I’ll eat it.
It is quite true, as advocates of withholding no doubt argue, that many Americans would get in trouble by not preparing throughout the year for our onerous tax bills. But Americans would be forced to confront just how big out tax bills are. As I observed yesterday in my post on Grant's call for ending withholding, politicians' calls to provide more "free" stuff might makes us angrier if we fully realized how much we are already paying for free things.
Domenech mentions that withholding was originally a wartime measure. It was a way to hide from taxpayers the amount of money they were sending to Washington by incremental withholding instead of requiring them to send one big check (as described by Amity Schlaes in her book The Greedy Hand). Withholding was such an easy way to raise money that it continued after the war. Ending it is a first step towards tax reform.