Thursday, March 17, 2016
Ajay Mehrotra (Executive Director & Research Professor, American Bar Foundation) presents A Brief History of U.S. Income Tax Withholding: From Contested Concept to Cornerstone of Administrative Practice at UCLA today as part of its Tax Policy and Public Finance Colloquium Series hosted by Jason Oh and Eric Zolt:
Among the many modern administrative innovations adopted to facilitate effective tax compliance, arguably none has been more significant than the use of third-party reporting and tax withholding. Since at least the early nineteenth century, when Great Britain first adopted a crude form of withholding as part of its national income tax, modern governments have increasingly relied on harnessing the knowledge and power of third parties to increase income tax compliance. As a result, employers, financial institutions, and business corporations have become instrumental remittance vehicles and reporting agents for nearly all modern taxing agencies.
Yet, like most administrative achievements, the effective implementation of information reporting and tax withholding did not occur quickly or easily. Although today some individuals and businesses may object occasionally to tax withholding and third-party reporting, these administrative methods have generally become a socially accepted and politically entrenched part of our tax system. Not only have lawmakers celebrated withholding as an administrative “cornerstone,” most everyday Americans appear to believe that employers, financial institutions, and business corporations should be able to collect and remit tax dollars, and convey important tax information to the government.
The evolution of withholding and third-party reporting raises a series of important historical questions: how did a contested administrative concept become an accepted and celebrated method of tax collection? What were the pivotal periods of administrative reform during this seemingly path-dependent process? Why were activists, commentators, and lawmakers opposed to the growth of this administrative practice? And how did reformers and government officials overcome this hostility during critical junctures in the development of this important administrative achievement? These sets of questions frame the historical analysis of this paper.