Tax Withholding and a Separate Payroll Tax Hide the True Burden of Government

[R.A. Hettinga]

...It's one thing, of course, to just pass a law. Laws only reflect
what's physically possible to do, and once done, they're rarely
undone.  It's another thing entirely for technology to make a whole
category of law obsolete.

Ever since Hollerith, governments have been able to forcibly withhold
an individual's earnings or purchase and sale proceeds for taxation
because -- like the proverbial dog -- they can.

Humanity won't be rid of taxation on book-entry transactions like
those for labor, assets, goods and services until we have the
technology to make it obsolete.

We're close, we've been "close" since the middle 1980's, but we won't
be there yet until the economics of digital bearer settlement, not
just the existence of the technology itself, make it possible.

Maybe, in light of the last year's events, we now have some more
incentive?

Cheers,
RAH
-------


<http://online.wsj.com/article/SB10001424052970204313604574328273572673730.ht
ml?mod=djemEditorialPage#printMode
 >

The Wall Street Journal
OPINION
AUGUST 13, 2009, 12:18 A.M. ET

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.

By CHARLES MURRAY

America is supposed to be a democracy in which we're all in it
together. Part of that ethos, which has been so essential to the
country in times of crisis, is a common understanding that we all pay
a share of the costs. Taxes are an essential ingredient in the civic
glue that binds us together.

Our democracy is corrupted when some voters think that they won't have
to pay for the benefits their representatives offer them. It is
corrupted when some voters see themselves as victims of exploitation
by their fellow citizens.

By both standards, American democracy is in trouble. We have the worst
of both worlds. The rhetoric of the president tells the public that
the rich are not paying their fair share, undermining the common
understanding from the bottom up. Meanwhile, the IRS recently released
new numbers on who pays how much taxes, and those numbers tell the
people at the top that they're being exploited.

Let's start with the rich, whom I define as families in the top 1% of
income among those who filed tax returns. In 2007, the year with the
most recent tax data, they had family incomes of $410,000 or more.
They paid 40% of all the personal income taxes collected.

Yes, you read it right: 1% of American families paid 40% of America's
personal taxes.

The families in the rest of the top 5% had family incomes of $160,000
to $410,000. They paid another 20% of total personal income taxes. Now
we're up to three out of every five dollars in personal taxes paid by
just five out of every 100 American families.

Turn to the bottom three-quarters of the families who filed income tax
returns in 2007not just low-income families, but everybody with
family incomes below $66,500. That 75% of families paid just 13% of
all personal income taxes. Scott Hodge of the Tax Foundation has
recast these numbers in terms of a single, stunning statistic: The top
1% of American households pay more in federal taxes than the bottom
95% combined.

My point is not that the rich are being bled dry. The taxes paid by
families in the top 1% amounted to 22% of their adjusted gross income,
not a confiscatory rate. The issue is that it is inherently
problematic to have a democracy in which a third of filers pay no
personal income tax at all (another datum from the IRS), and the
entire bottom half of filers, meaning those with adjusted gross
incomes below $33,000, have an average tax rate of just 3%.

This deforms the behavior of everyonethe voters who think they aren't
paying for Congress's latest bright idea, the politicians who know
that promising new programs will always be a winning political
strategy with the majority of taxpayers who don't think they have to
pay for them, and the wealthy who know that the only way to get
politicians to refrain from that strategy is to buy them off.

For once, we face a problem with a solution that costs nothing. Most
families who pay little or no personal income taxes are paying Social
Security and Medicare taxes. All we need to do is make an accounting
change, no longer pretending that payroll taxes are sequestered in
trust funds.

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. Payroll taxes are
politically useful because low-income and middle-income taxpayers
don't complain about what they believe are contributions to their
retirement and they think, wrongly, that they aren't paying much for
anything else. Tax withholding has a wonderfully anesthetizing effect
on people whose only income is a paycheck, leaving many of them
actually feeling grateful for their tax refund check every year, not
noticing how much the government has taken from them.

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 sharethe 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 way. 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.

Mr. Murray is a resident scholar at the American Enterprise Institute.
His most recent book, "Real Education: Four Simple Truths for Bringing
America's Schools Back to Reality," will be out in paperback later
this month (Three Rivers).