Freeman

ARTICLE

Tax Withholding: An Immodest Proposal

APRIL 17, 2003 by DALE M. HAYWOOD

Filed Under : Private Property

At the beginning of each class I teach I explain why I dislike boxing. I make the point to help my students understand what I believe is the purpose of education. Boxers have a clear-cut goal: to knock their opponents unconscious. That’s exactly opposite our goal as students. We strive to become more conscious.

For example, as students of economics we want to become more conscious of why some people on this planet are rich and others are poor. As students of accounting we want to learn the vital role that accurate income statements, balance sheets, and statements of cash flow play in the wise allocation of real capital among alternative investments. As students of ethics we want to learn what responsibility people have for themselves and what responsibility they have for others. Yes, I consider education a consciousness-raising activity.

Those of us who hold this view of education are likely to be especially sensitive to consciousness-lowering experiences. There are numerous examples of these in our lives. But as someone conscious of the vital roles that private property and limited government play in promoting human liberty and prosperity, I suggest that the withholding of federal personal income taxes just might be the premier example of an anesthetizing experience. Because withholding is automatic and regular, I believe most workers quickly resign themselves to it. Thus it is consciousness-lowering.

And the result? Here’s an example from Britain: “Lack of knowledge seems to be the best explanation of why the entire NHS National Health Service] has continued in its present form. Public opinion polls show that most British voters greatly underestimate the taxes they actually pay to support the NHS. About 60 percent of voters, for example, believe they pay only 5 percent of the amount they actually pay to finance this health service. Given this perception, small wonder that the NHS is one of the most politically popular programs in Britain.” (Quoted in Edwin G. Dolan and John C. Goodman, Economics of Public Policy [New York: West Publishing Company, 1989], p. 51.)

So what’s to be done to bring taxpayers’ perceptions in line with reality — and thus equip them to act more rationally? What will it take to raise the consciousness of taxpayers? The following two illustrations may help answer these questions.

For some months my 90-year-old mother-in-law has been in a nursing home. For part of that time she has had a roommate named Alice. While visiting my mother-in-law, my wife and I visit Alice also. Several weeks ago Alice was telling us about one of her granddaughters, a college student who worked in Chicago last summer. She was making good money, but when she got her first paycheck she was stunned by the big difference between the pay she was quoted at her job interview and the amount of her paycheck. A big part of that difference was due, of course, to the withholding of income tax. This was the first time in her young life that she was personally and directly hit with a significant amount of income tax. It was definitely a consciousness-raising experience. At least for educational purposes, this was a good situation.

But, unlike Alice’s granddaughter, most of us are long past the transition from not being subject to the income tax to being subject to it. The jolt we felt at that time of transition has faded from our memories. For educational purposes, this is not a good situation. It’s not good because we cannot possibly make rational cost-benefit analyses of government programs if we’re not conscious — or not fully conscious — of the costs of the programs. That’s what we learn from the misperception those British taxpayers had of the cost of their National Health Service.

Of course, it’s not just proponents of big government who use the withholding device to desensitize people to costs. Once a year at the university where I work, one of my colleagues tries to persuade me to sign up for withholding for the United Way. A big donation, spread over 24 pay periods doesn’t seem so costly, right? This is an annual ritual at businesses throughout the United States. The company with which I have auto insurance, AAA, encourages me to pay for my insurance by authorizing automatic monthly charges (of about one-twelfth of the annual premium) to my credit-union savings account. Yes, this is a convenient way to pay for insurance, but I’m guessing it also blunts criticism of the size of insurance premiums.

Some Tax Not Withheld

Not everyone has his or her income tax withheld. My mother-in-law lives off stock dividends and certificate-of-deposit interest from investments she made during her long teaching career. The tax on this income is not withheld, so each year she’s required to estimate her tax liability and to write a check each quarter to the IRS. Thus even in her present situation she continues to be very conscious of these regular drains on her checking account. We need to find a way to make people other than new workers and retirees more sensitive to the cost of government. To be sure, politicians, in their quest for votes, will tout the alleged benefits of the programs they favor. They always have, and they always will. They have little to say about the costs. That’s why we need remedial action.

Let’s grow up. Many of the things we want in life are costly. Let’s stop kidding ourselves with devices that suggest otherwise. For the sake of a more rational society, I propose that we start stripping these devices out of our lives. The withholding of taxes, being the premier consciousness-lowering scheme in the eyes of at least this libertarian, should be the first to go.

My consciousness-raising alternative to withholding is this: Allow employers to pay their workers their gross earnings. Ask employers simply to tell their employees how much tax would have been withheld had the law not changed. Ask employees to pay that amount in cash, not by automatic deductions from their checking accounts. Ask employees to do this every time they get paid. Then let’s stand back and see what happens.

There is a wealth of evidence that two of the most vital prerequisites for liberty and prosperity are private property and limited government. Can you think of a single change that has the potential for doing more to reduce the size of government? What an education that would be.

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April 2003

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Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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