5 Reasons the American Tax Payer Should Support the Fair Tax! Part 1 – Withholding System #oktcot #tcot #fb

Seal of the Internal Revenue Service
Image via Wikipedia

A change in the way the government collects taxes is a BIG change.  Anytime someone is asked to make a BIG change, they need a reason.  They need to know “why?”  Although other reasons exist, here are five reasons why the American tax payer should support this change in our tax system.

The Withholding System

Many Americans, including the author at one time, are clueless about the amount of taxes they pay to the federal government under the income tax scheme, due in large part to the system of withholding.

One of the first jobs I worked to pay for college was at Braum’s Ice Cream and Dairy Store.  I remember receiving my paycheck and seeing how much tax was being withheld on that first check.  From that point on when I received checks, I usually just looked at the bottom line and saw how much the check was worth and cashed it for rent, etc.  When tax day came and went, I received a check from the United States Treasury Department for around one hundred dollars.  I was instantly ecstatic because I had received “all” my money back.

As you and I both know, I was very much mistaken.  The fact is, the government took a chunk of my minimum-wage paycheck and gave me a pittance back.  Have you or anyone you have known ever made this same mistake?  Don’t be embarrassed because it is a very common thing to do.  For example, in 1965, a study showed that only 12.6 percent of those polled correctly estimated the amount of taxes they paid.[1] See, they were making the same mistake back then.

It wasn’t always like this.  In the beginning, the tax payers were sent a bill detailing how much income tax they owed once a year.  They would then write a check to cover the amount and mail it off to the government.  It is said that person will remember what they see better than what they hear and that they will have a better memory of what they do over what they see.  If this is true, then it is quite possible that person would have a very good memory of how much they paid in taxes if they had to sit down and write it out in a check, especially when the check is as large as twelve percent of your income.[2] Writing such a large check might cause some people to become a little more interested in how their government was spending their money.

When the income tax was first put into practice in 1913, withholding was the method by which the government intended to collect the revenue.  The people rejected the idea and in 1917 a law was passed discontinuing the withholding component of the income tax.  It is not hard to understand why politicians prefer withholding.  Under that system, they receive revenue as soon as the taxpayer earns it rather than having to wait to receive a check once a year.  Additionally, the government has the benefit of letting the money draw interest, although they generally spend it before it can incur any.

Let’s put it another way.  Without withholdings, the taxpayer could place the amount of their paycheck that will be taxed into a savings account where it can draw interest until they are ready, once a year, to write a check for the amount of money owed to the tax.  Even if the interest that can be made is a small amount, it is still interest that could go to the taxpayer to buy new shoes for their child or to save the money for a rainy day.

[1] Joseph Van Wagstaff, “Income Tax Consciousness under Withholding,” Southern Economic Journal, Vol. 32, No. 1, Part 1 (Jul., 1965), p. 75

[2] The average tax rate of all taxpayers is 12.68% while some Americans pay an average of 22% of their income according to the Internal Revenue Service.

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