April 16, 2024

In Brief: It’s Time to End Automatic Tax Withholding

The practice distances citizens from the financial workings of their government, diluting their sense of participation and oversight.

For most Americans, yesterday was the filing deadline for tax returns. Millions of Americans “get money back” — i.e., the loan they gave to the government by overpaying. Others were forced to pay more. Either way, the aggravating game is trying to make withholding match what you’ll actually owe. The Cato Institute’s Adam Michel says we need to ditch withholding altogether because it distorts the whole process of paying taxes.

Introduced during World War II to ensure a steady revenue stream for federal projects, income-tax withholding greased the wheels for an expansion of the income tax and decades of government growth.

By automatically deducting taxes from employees’ earnings each pay period, withholding seemingly alleviates the burden of saving for a lump-sum payment when the tax man comes calling. This “out of sight, out of mind” approach to tax collection obscures the true cost of the income tax. And because most people over-withhold throughout the year, two-thirds of Americans get a check from the government when they file their taxes — an Orwellian spectacle of fiscal misdirection.

Before 1943, Americans paid the previous year’s taxes as a lump sum on April 15 or through installments over the following year. The transition to a pay-as-you-go withholding model posed a dilemma: It necessitated paying taxes for two years out of one year’s earnings. Congress’s solution was to forgive 1942 tax bills and start pay-as-you-go collection the following year. Automatic withholding was called a tax cut. Public resistance dissipated.

This shift aided the transformation of the income tax from a “class tax” paid only by the rich to a “mass tax” paid by most working Americans. Originally a limited tax on a few high earners, the income tax expanded over time, first as top tax rates were raised and then as the tax base was broadened to include more middle-class incomes. Collecting taxes as a routine part of wage payments made this expansion easier.

Ultimately, he argues, “Democracy thrives on engagement and accountability, qualities undermined by automating such a significant civic duty as tax payment.” He concludes:

It’s time for Congress to stop conscripting employers as tax collectors. Americans should pay their own taxes, even when it’s costly. Many Americans might conclude that they pay too much, or the tax system is too complex.

Read the whole thing here.

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