Regardless of the amount of federal income tax that one ultimately pays, the fact that the U.S. government seizes the wealth of its citizens slowly over the course of the year via the withholding tax means that the typical taxpayer is comfortable in each of the above scenarios because he doesn’t actually have to write out a check to the government on April 15 of each year. The withholding tax makes it possible for the government to silently steal the wealth from its citizens with little or no outrage about the loss. [Full Article]
Source link: http://archive.mises.org/3504/the-curse-of-the-withholding-tax/
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It amazes me how people don’t have a problem paying ~10% in income taxes and another 7.65% in FICA taxes but moan when they have to pay 3-4% in local property taxes. Perhaps it because, much of the time, the latter tax comes out as a lump sum.
But while the government certainly enjoys the silent stealing, once again the people get the government they deserve, and if they choose to remain ignorant, they have no one to blame but themselves.
Thank you Mr. Vance for the excellent article regarding what certainly is an important topic. I would only like to comment on a related point. As important as changing the tax structure, including the withholding tax, is, little positive will be accomplished if government spending is not reduced; the needed revenue will just be borrowed, or created through inflation. And to significantly reduce spending will require a fundamental shift in the view that the vast majority of citizens have regarding the proper role of government. Hopefully this shift will someday occur, but given the preponderance of tax eaters and the typical individual’s disregard for the property rights of others, sometimes I wonder. Although used in a completely different context, sometimes I almost believe that the words of The Beatles and John Lennon, “nothing’s gonna change my world”, may describe this melancholy state of affairs. But fight on we must, since this is the only correct course of action.
And Milton Friedman has been paying penance ever since.
It’s interesting to see how one post can lead to another post on this website. Or is it purely coincidence that this one so quickly follows “A Personal Request From Milton Friedman”?
The Income Tax Act applies only to U.S. Citizens, not to Americans. An individual not having a Slave Surveillance Number (SSN) is not subject to the Income Tax. Make sure your children do not have a SSN and they won’t have to file, and therefore not have to pay the Income Tax. Of course, the solution is to reduce government spending; however not paying Income Tax is a step in the right direction. If you are a taxpayer, you should take a look at http://www.861.info/.
Lew Rockwell and others have pointed out that tax reform is useless unless taxes are reduced. However, I think this article shows how changing the tax structure can lead to a reduction in taxes. I think it’s undeniable that getting rid of withholding would make a huge difference.
The argument that people would not stand for their current tax burden if they had to pay it in one lump sum only works if we assume that people are incredibly stupid. But once we assume that, how can we expect any kind of rational behavior from them in reaction to how their taxes are collected?
If I had to pay my income tax in one lump sum once a year, I’d have to set aside a portion of my income all year long so that I would have the money to make my tax payment. That only difference is that instead of my employer taking on the task, I would have to manage it in some other way. In light of that, and assuming that the average tax payer is not incredibly stupid, “thanking” Milton Friedman for “the present monster of the Leviathan State in America” is not even a bad case of hyperbole. It’s just wrong.
As has been pointed out on this website, I believe, as well as other places, it is the level of government spending that is the problem, and tax reform isn’t going to solve it.
I don’t buy the argument that spending cuts have to come before tax cuts. I certainly favor any cut in either gov’t spending or taxation, but to make that argument is to morally sanction the funding of the state’s expenditures by forcible means.
If there is no corresponding spending cut, funding will have to come from lenders, who voluntarily buy the state’s paper promises. I won’t shed a tear for them when the state finds itself in default, as it inevitably will.
When the government borrows, true, the lenders voluntarily loan the money, but the interest and principal payments must come from taxation, which by its nature is not voluntary. The government can also monetize the debt, which is nothing but a tax due to the resulting decrease in the purchasing power of money. In short, government spending must either be financed through taxation, borrowing, or in a fiat money regime, inflation, or some combination of the three methods.
The state cannot turn stones into bread, thus it has to take from somebody-that much we all can agree on. The problem with the spending cuts must preceed tax cuts argument, though, is that it basically says that just because the state has spent money, you or I or someone is obligated to pay for it. Unless you concede that the state has a rightful claim to your wealth, that argument is no more valid than me saying, well, I have ten grand in credit card debt and it has to come from somewhere, so I’m going to pick your pocket as I see fit.
In my first posting, I do not think I said and definately did not mean to imply that spending cuts must preceed tax cuts. I was only trying to convey that for the federal government’s fiscal situation to improve and for the size of government to be reduced, both spending and tax cuts must take place. And I absolutely do not believe “that just because the state has spent money, you or I or someone is obligated to pay for it.” But given the nature of government, someone, one way or another does have to pay for state spending. Not only can the state not turn stones into bread, but more fundamentally, it can not “produce” anything that hasn’t first been taken from someone else. This is a basic problem of all government activity.
All I know is that when I tried to get the government to pay back the interest on my yearly loan to them in the form of my taxes, I got some strange stares.
You’d think that your witholded taxes throughout the year would comprise the same situation as a 1 year government bond, which certainly has an ROI.
Tax season is a REWARD for the average American who receives a refund.
I am in complete agreement that the over-witholding of tax serves the purposes of those who believe in big government.
Furthermore, I’m surprised no one mentioned the half of FICA taxes that your employer pays for you and you never even see on your paystub.
Many thanks to Laurence Vance for a simple reminder that taxes weren’t always omnipresent or painless.
It is often argued that abolishing the withholding tax will change the average American’s outlook on income taxation. Unlike the view expressed in most of the posts I’ve seen relating to this article, I believe that the average American taxpayer IS incredibly stupid. Among the justifications I’ve heard from fellow tax slaves for maintaining the present system include: funding the Military-Industrial-Corporate Complex (“I’d be out of a job as a contractor if it weren’t for the taxpayer!”), maintaining the social security system because private investments are “too risky” (pointing out that the even the worst-managed private investment plans pay at least two percentage points more in interest than social security doesn’t seem to register), and fueling their favorite government-subsidized charity (e.g., AIDS research, foreign aid, etc.).
The common thread running through all of these excuses has been 1) that the average American no longer has any concept of government’s proper role, 2) it doesn’t cost THEM anything, since their marginal tax rates are mostly less than 11 percent of their gross annual income, and 3) that economics should be added to the range of subjects (including math, science, and geography) in which Americans are hopelessly ignorant.
Perhaps this perspective will change once inflation returns with a vengeance and the federal budget spins so far out of control that everyone starts paying federal taxes at rates of 50 percent or more.
I focus on what I can control…therefore I’ll have my 2nd child tax credit entering the game in October…combine that with my mortgage interest deduction and this should be the second year in a row that my tax/income ratio is much lower than the naive class(i.e. single, no kids, renters).
To be fair to Milton Friedman, in his memoirs he says:
“Rose has repeatedly chided me over the years about the role that I played in making possible the current overgrown government we both criticize so strongly. That is in jest, since withholding would have been introduced had I been involved or not. The most I accept blame for is helping to make it more efficient than it otherwise might have been.”
As someone who first thought about freedom in a libertarian way by watching his series “Free to Choose” some 25 years ago, I have come to think of Milton as a Parent saying “Do as I say, not as I do”.
Only later did I chance to come across the works of Murray Rothbard from a footnote in a book by Harry Browne. I don’t think quite as highly of Milton as I once did, but he was still the first person that explained on T.V. why prices were going up in the late 1970′s.
Only Milton got to dramatically “illustrate the crucial role of money in inflation” by shutting down the Bureau of Engraving and Printing’s presses with the push of a button. He might not be perfect, but until that moment, I believed that inflation was caused by what our leaders said: greedy businessmen and greedy workers.
Maybe he got it wrong somewhat, but he has probably been responsible for many non-economists who have come to believe in the Austrian school who might otherwise have never read anything as boring as the connection between “capitalism and freedom”. I know that is true in my case.
This was a great article. I would build on it by adding that if you under-withold or pay quarterly estimated taxes, you are subsequently penalized if the total witholding was insufficient. i.e. even if you pay in full what is due by April 15, if you haven’t scheduled the payments appropiately you get punished. This in turn influences people to over withold (and then get a refund).
The bottom line is not only do pay the income tax but you also supply an interest free loan, or pay a penalty, unless you can ‘aim’ really well. Even this endeavour is frustrated by the ever increasing convolution of the tax code.
I agree with Eric. Although, Friedman’s wrong on some things, without Milton Friedman I probably wouldn’t be a libertarian, much less have ever heard of Murray Rothbard.
The US system has analogues in other countries, such as the British PAYE (pay as you earn). The US system is implemented much more visibly from the taxpayer’s direct involvement with compliance through tax returns. Other countries’ systems were formerly much less visible since they adminsitered most of it; it is only recently that they have passed the compliance burden to the taxpayer (and bipartisanly refused to recognise this as a cost being shifted rather than reduced).
The point is, these systems are not accepted because they are silent. They aren’t. Rather, they become accepted as they cannot be objected to effectively. Someone who does not comply ends up shooting himself in the foot, as his punishment is effectively a garnishee – he simply doesn’t get his refund. It’s just a few recalcitrants who don’t comply, so the system isn’t hurt by the fact that if everybody refused compliance the economy would collapse. A full scale tax strike would build up slowly, so governments have plenty of rope to strangle the first few recalcitrants. Result: opposition numbers don’t build to the critical level.
“I’d be out of a job as a contractor if it weren’t for the taxpayer!”
For me this is actually true, but I’d be willing to move to a different indusry. Working in government contracting suck.
Also, I agree with commentor Scott Evans who wrote “I believe that the average American taxpayer IS incredibly stupid.”
The average American is easily manipulated by government propaganda.
An excellent article on withholding! In regard to American’s intelligence, when it comes to taxes, we are not stupid, merely complacent. As withholding is quietly taken out all year long, we don’t notice it. The end of the year, when we go to the altar and hope that we are reconciled with the IRS, is the only time when we feel the pain of “Amount You Owe” or the exhilaration of “Amount You Overpaid”. Since this happens only one time during the year, we get over it quickly and shove taxes to the back of our minds.
In the example in the article, with income of $43318 and single, total taxes taken amount to about $8267, about 19% (withholding + SS + Med taxes). And for most Americans, it is taken quietly during the year because we are complacent.
We need to do both, tax reform and put the skids on gov’t spending.
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