Thursday, August 13, 2009
Pro-Democracy Tax Reform: Fold Payroll Tax Into Income Tax, End Tax Withholding
Op-ed in today's Wall Street Journal: Tax Withholding Is Bad for Democracy; So Is the Payroll Tax. End Them Both and Voters Will Have a Healthier Understanding of the Government Burden:
Fold payroll taxes into the personal tax code, adjusting the rules so that everyone still pays the same total, but the tax bill shows up on the 1040. Doing so will tell everyone the truth: Their payroll taxes are being used to pay whatever bills the federal government brings upon itself, among which are the costs of Social Security and Medicare.
The finishing touch is to make sure that people understand how much they are paying, which is presently obscured by withholding at the workplace. End withholding, and require everybody to do what millions of Americans already do: write checks for estimated taxes four times a year.
Both of those simple changes scare politicians. ... But the politicians' fear of being honest about taxes doesn't change the urgent need to be honest. The average taxpayer is wrong if he believes the affluent aren't paying their fair share—the top income earners carry an extraordinary proportion of the tax burden. High-income earners are wrong, too, about being exploited: Take account of payroll taxes, and low-income people also bear a heavy tax load.
End the payroll tax, end withholding, and these corrosive misapprehensions go away. We will once again be a democracy in which we're all in it together, we all know that we're all paying a share, and we are all aware how much that share is.
https://taxprof.typepad.com/taxprof_blog/2009/08/tax-withholding.html
Comments
I've proposed that for years for some Republican lawmaker wanting to make a mark.
All he has to propose is ending withholding. Make people write a big check to the Feds once per pay period.
There would be a revolution if that ever came to pass.
Posted by: Chester White | Aug 14, 2009 5:03:34 PM
Income tax rates should also be quoted as percent of net like sales tax instead of a percent of gross. 39.6% of gross is 65.6% of net.
Posted by: Sam Dinkin | Aug 14, 2009 2:14:26 PM
Move the day taxes are due from April 15 to the first Monday in November.
Withheld taxes are a convenience to most of us: otherwise, the huge bill is overwhelming. And unless we want SIGNIFICANTLY smaller government (not to mention massive inflation in lieu of default), we will continue to have large tax bills for years to come.
Make people acutely aware of how much they’re paying, though, and they’ll be a lot choosier about who spends their money.
Posted by: anon | Aug 14, 2009 1:29:47 PM
Self employed and income taxes are not that bad. About 10% after massaging my deductions. There is no fudge factor on payroll taxes. Comes right off the top. That is what is killing me. Every time I get ahead I am having to send 1 of every 4 checks to them. In my case, it is essentially the same as paying for a new car every year.
Instead of shoving 800 Billion into the wrong end of the mule had they used it to cover the federal budget and declared a tax amnesty for a year beginning at the bottom and working up until it reached the 800 Billion mark would have placed that money into the consumers hands, capitalized banks, reduced inventories and provided a little lubrication where it was needed to get the private sector economy moving again.
Posted by: IOpian | Aug 14, 2009 12:01:11 PM
In Texas we pay our property taxes with one single check.
Let me tell you that people do notice what they are paying. Somehow, they are also able to come up with that lump of money. People can budget when they are forced to.
As a result, we tend to have more mini tax revolts over property taxes.
Our taxes went down this year while almost every other state raised them.
You make the call.
Posted by: Paolo Thompson | Aug 14, 2009 10:15:25 AM
Without withholding, a lot of people would be unable to write those quarterly checks. They simply do not have the financial discipline to set aside that money and not spend it on something else.
And the federal government has financial discipline?
Posted by: anon | Aug 14, 2009 10:12:42 AM
The FairTax both eliminates the FICA taxes and withholding as well as the personal and corporate income taxes and others. It eases the collection problem while retaining the transparancy by collecting taxes on purchases of all new goods and services at the point of purchase every day. Each receipt shows the amount and percentage of the tax paid so everyone knows how much they are paying to support the Federal government. It relieves the working poor of the regressive payroll taxes and eases the consumption tax by a monthly payment equal to the taxes due for each household based on the number of legal residents in that household. Get all the facts at FairTax.org.
Posted by: Jack Jackson | Aug 14, 2009 10:07:21 AM
Brilliant idea. And about time. Tax knowledge cuts at the roots of the monster state.
Posted by: K | Aug 14, 2009 9:45:28 AM
Without withholding, a lot of people would be unable to write those quarterly checks. They simply do not have the financial discipline to set aside that money and not spend it on something else.
Besides, FICA is integral to the belief that SS/Medicare recipients have "paid for" their benefits. That the "contributions" have at best a tenuous relationship to the benefits is irrelevant. "I paid for this; you can't take it from me" is pretty much the AARP motto.
Posted by: The Monster | Aug 14, 2009 8:08:00 AM
"It's just another method to advance the "starve the beast" philosophy."
Why, yes. Yes it is. What's your point?
Posted by: John Skookum | Aug 14, 2009 7:23:25 AM
This proposal is idiocy. Since ancient times, governments have always imposed taxes on the people who can pay them, at times or under circumstances when they have the ability to do so. Cessation of withholding for taxes will leave the vast numbers of poeple who live paycheck to paycheck totally unable to pay anything in taxes at the time they must file their tax returns. It's just another method to advance the "starve the beast" philosophy.
Posted by: Greg Jones | Aug 14, 2009 7:09:31 AM
The grim reality is that the people who benefit from the current tax regime would never vote to change it.
Proof? When Republicans had power, they didn't make these changes. And they never, ever will. Isn't it a bit strange that the Wall Street Journal is only now - six months AFTER a Democrat got elected - suddenly discovering that the federal tax system is a fraud?
I'll vote Republican again when every single Republican vows to enact tax reform. But Republicans aren't promising this. And they won't.
Posted by: grimreality | Aug 14, 2009 6:40:47 AM
But...politicians have been catering to the people at the low or middle end of the tax spectrum, to the point where nearly 50% don't pay income taxes.
What would stop them from continuing that trend with this new system?
Within 10 years or so, we could see 30-50% of people paying no taxes at all (whereas today, they at least are paying payroll), as politicians continue to make tax breaks for the majority of voters.
Posted by: Ann | Aug 14, 2009 6:21:15 AM
... except that we aren't in a democracy. This... is... a... Republic!
The change I would make is to have the taxes due on the birthday of the primary filer.
It would lighten the burden of the IRS processing.
Posted by: _Jon | Aug 14, 2009 6:11:52 AM
The payroll tax is our best tax, a flat tax.
If anything, remove the income limit, raise the rate, and eliminate the income tax.
Posted by: rhhardin | Aug 14, 2009 6:09:39 AM
The idea behind withholding seems to be that the IRS considers the employer to be a more responsible party than the employee. That's a pretty discriminatory message to send employees, isn't it?
Posted by: Jim | Aug 14, 2009 5:49:21 AM
I agree with the sentiment expressed by the authors. My concern is that frankly, we Americans budget poorly. It is very helpful (to me at least) to have the taxes taken out first. Based on my pro bono tax work, I believe what would actually happen is that people will simply spend the money and will not be able to pay the quarterly estimates. I think this behavior can be seen in the automatic-enrollment 401(k) plan the Feds are encouraging.
Posted by: hah | Aug 14, 2009 5:45:24 AM
If this got done it would also be accompanied by increases tax bracket limits, so those 50% of Americans who currently pay no income taxes would still pay no income taxes. All that would happen is the "rich" (i.e. productive) will simply have to pay more to cover up for the loss.
Posted by: Sean | Aug 14, 2009 5:42:14 AM
Yes! I like the idea of ending withholding, and making everybody write a check to the Feds at the end of every pay period. Better yet, make them write two checks, the second one being to pay the interest on the national debt.
Posted by: Lewin Wickes | Aug 15, 2009 3:31:28 PM