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Sunday, April 10, 2016

Withheld Taxation is Theft, Even If It Doesn’t Feel Like It

When you have to pay taxes directly, it changes your outlook

A friend of mine, who has filed income taxes for the past 15 years, faced an unusual situation this year. Instead of getting a refund like 4 out of 5 taxpayers, she suddenly found herself among the 20% who have to pay more.

She had to write a check. Money that might otherwise have gone toward fixing her car, repairing her home, or getting a new smartphone, she is forced to send to the federal government. To be sure, her check only made up a fraction of what she paid in taxes last year. That she was forced to do it at all was the issue.

The key word here is forced. Of course all taxation is about forcing resources away from the way we want to use them and coercing us against our will to fund government instead. But in today’s world, this brutal reality is shrouded within an accounting smokescreen that uses the employer as subterfuge.

When you have to pay taxes directly, it changes your outlook. Suddenly the slogan “taxation is theft” starts to make some sense. You start to ask yourself questions, like:

  • How do they get away with this?
  • What is government doing with my money anyway?
  • How could this be good for the economy to support a bunch of bureaucracies that serve special interests rather than real businesses that provide goods and services?
  • Who says that the government knows how best to use my money better than I do?

These are reasonable questions. They are questions absolutely every taxpayer ought to be asking every year. The problem is that most people never have the questions occur to them.

And there is one reason for this: the withholding tax. Instead of being collected directly from the payer, the government  collects them “at the source,” which is to say that they are collected from the institution that pays wages and salaries — on behalf of the taxpayer.

As comedian Chris Rock said on stage, “You don’t even pay taxes. They take taxes. You get your check, money gone. That ain’t a payment, that’s a jack.”

Yet somehow it makes people even less likely to think of a tax as a “jack.” Once tax time comes around, and all possible deductions are considered, most people end up getting money back. This provides incentive for people to file. Why leave money sitting on the table? The result is one of the most amazingly brilliant innovations of the modern state. This tinkering with the system — the creation of the institution called withholding — has created an illusion that paying taxes is really about getting free money!

When the check arrives from the government a month or so later, the taxpayer is actually tempted to think: wow, this is really great!

A pillaging has been spun to look like a gift.

How did all this come about? It was wartime in 1943 and the government didn’t want to wait a year to obtain the revenue stream. The revenues were needed to fund the war effort now. (Nowadays, the Fed would just print it all.)

A young and smart Milton Friedman was the driver of an idea that he later came to regret. Taxes would be collected from the employer, that is, withheld from the paycheck.

“At the time,” wrote Friedman late in life, “we concentrated single-mindedly on promoting the war effort. We gave next to no consideration to any longer-run consequences. It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too intrusive, too destructive of freedom. Yet, that was precisely what I was doing.”

Robert Higgs has all the grim historical details.

This emergency measure did not go away after the war. It was too convenient, too brilliant from the government’s point of view. Why not continue to disguise from the worker that he or she was being robbed at an ever increasing rate? The politicians could increase taxes in a way that the average person didn’t even feel! And not just income taxes: the payroll tax (which takes a bigger bit from the average person) could be withheld too.

Mind Games

Withholding dramatically changed the psychology of paying taxes. It almost feels like you aren’t paying any at all. The worker gets used to how much after-tax income she makes and adapts to it quickly. Then when tax time arrives, there is no more to pay. Instead you file and find yourself on the receiving end of what seems like an unexpected gift of a check from government. Yet in reality your refund is nothing more than the belated return of a zero-interest loan you were forced to provide the government.

If we really wanted to make a wonderful change in favor of transparency and decency, one that would mark a shift in people’s perceptions of the costs of government, the withholding tax could just be repealed completely. In principle this should change little about the revenue expectations of the federal government. The difference is that every taxpayer would pay the full amount owed to the government every April 15 and otherwise receive full compensation the rest of the year.

Such a seemingly small change would have a dramatic effect on public perceptions of taxation and government. Even from the age of 16, every citizen would have a more pungent reminder of the costs of government. We would no longer live the illusion that we can all get something for nothing and that government isn’t really expensive after all.

Such a change would mean that we would pay for government in the same way we pay for rent, clothing, food, and groceries. We pay the full cost of what we consume. It would also feel more like a “jack” if it was us, and not our employer, who had to cough up the money on pain of imprisonment.

That alone might inspire a different attitude. Even a revolution.