Saturday, January 12, 2008

Mandatory Withholding – A Historical Primer

Each year millions of Americans race for the nearest tax office to claim their refund immediately after receiving their W-2. This zero percent interest savings plan is created by two things: many people’s ignorance and the mandate that employers withhold the taxes from paychecks.

It hasn’t always been this way. The mandatory withholding provision in the tax code has been around for 65 years. In 1943, in the midst of World War II, the federal government needed a way to raise more money and to raise it quickly. It was suggested by a department store executive to break up people’s tax burden into smaller incremental payments. The executive came up with the suggestion after noticing that his customers liked paying for merchandise in installments even when the total payments were much larger than the item was worth.

When Congress enacted the mandatory withholding law most people believed it was only intended to last as long as war funds were needed. A funny thing happened on the way to pork barrel spending. Like any other organization, Congress recognizes the need for self preservation when it sees it. It recognized that taxes could be increased easier because taxpayers didn’t feel the pinch as much as if there were a large balance due in a lump sum payment.

Even today there is evidence that the federal government uses the public’s ignorance to its advantage when enacting tax law. I have posted earlier that many of the deductions available to most taxpayers really aren’t that advantageous. In regards to the total tax bill, most Americans have no idea how much they are paying in income taxes.

For most two income homes the total income tax liability is around $30,000. That’s a number that would be sure to cause anger among workers. However, if it’s withheld on a weekly basis from two spouses’ checks the $250 or so each payday isn’t noticed as much. And that is were the frustration lies. Are taxpayers gladly paying taxes because they feel the money is being used wisely in Congress and the feel comfortable with the level of taxation? Or are taxpayers so unaware of what they are actually paying in taxes that they feel no need to protest?

Obviously there is a need for taxes in order for our government to function. But Congress should not be able to hide behind its smoke and mirrors method of assessing taxes in order to raise revenues in stealth manner.

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