7 ms·

Withholding is an awful idea designed to favor the government over the taxpayer and to psychologically soften the blow of the ridiculous tax rates we pay. It's

by mises 8y ago

Withholding is an awful idea designed to favor the government over the taxpayer and to psychologically soften the blow of the ridiculous tax rates we pay. It's especially bad with mandatory withholding by the employer. It shouldn't happen. Taxpayers ought to figure out how much they owe and write the check for it at once. This is especially true since consumers can't invest that income or get interest on it: I could get a 6-month CD and make some extra money otherwise.

jedberg 8y ago
I would like that system, but unfortunately most of our fellow citizens would end up broke come tax time. Most people simply say "I can spend until my bank account is empty". That's why most people choose impound accounts when they get a mortgage. Because they literally can not budget money for the bi-annual property tax bill, so they have the bank take the money every month. It's also why teachers are offered a 10 check plan or 12 check plan. They get the same money, but most of them choose the 12 check plan, just so they don't have to remember to save money to live in the summer. That's why the banks offer those "save your pennies" plans. Every time you make a debt card charge, they round up to the nearest dollar and then put the rest in a savings account for you. Because people are that bad at budgeting. Can you imagine most of the people you know having the ability to set aside 20% of their check each month and not spending it ever?
- mises 8y ago
  I get this, and also that it's to help prevent the sticker shock of taxes that can lead to serious backlash. With that said, America is not supposed to be a place where the Nanny State must step in to manage people's lives for them simply because they can't do it themselves. I and my fellow citizens should not have to lose money simply because others choose to waste money. I like the comment lotsofpulp made below: "The solution to people’s inability to save is not for the government to hold their money hostage."
  - war1025 8y ago
    The government doesn't hold anyone's money hostage. You are free to adjust your W-4 withholdings any time you want. They even have an online calculator to estimate your tax burden and set your withholding properly.
    - mises 8y ago
      Yes they do, because there is still employer withholding. Almost 75% of Americans had too much withheld: https://www.cnbc.com/2018/08/01/30-million-americans-are-not-withholding-enough-pay-for-taxes.html https://www.cnbc.com/2018/08/01/30-million-americans-are-not... And if you don't believe me on the reducing-sticker-shock part, here's a quote from the Treasury: "it... greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future." https://en.wikipedia.org/wiki/Tax_withholding_in_the_United_States https://en.wikipedia.org/wiki/Tax_withholding_in_the_United_... It is indeed a very underhanded way to con citizens into putting up with stupidly high taxes. Oh, and for what it's worth, it hits lower incomes harder because they are less likely to hire tax advisors, fancy accountants, etc. to make sense of it all for them. Maybe we would end up with lower taxes on our poorest, too, if they realized how much they were being robbed.
      - war1025 8y ago
        For the record, I make good income for the area, which isn't amazing, and also have three kids. I had no federal tax burden this year and was in fact reimbursed $1800 of surplus child tax credit. So I find it hard to believe the poor are paying too much in taxes if they are anywhere near the same boat as me.
- ben0x539 8y ago
  > Most people simply say "I can spend until my bank account is empty". I don't think this comes down to just individual discipline/budgeting either. If you rejiggled things to that people who live paycheck to paycheck suddenly have non-zero amounts of money in their accounts for most of the year, I bet you'd suddenly see cost-of-living prices/rent adjust upwards so that they're living paycheck to paycheck again, except then they're fucked when taxes are due. Landlords etc aren't gonna leave money on the table.
- everybodyknows 8y ago
  IRS actually has a documented policy on the "12-check plan": https://www.irs.gov/pub/irs-tege/409a_presentation.pdf https://www.irs.gov/pub/irs-tege/409a_presentation.pdf Wonder how many teachers understand that the net financial effect amounts to a zero-interest loan from themselves back to the school district?
  - mac01021 8y ago
    That example teacher is very well compensated.
jfk13 8y ago
And what proportion of taxpayers would be sufficiently disciplined to make sure they have funds on hand to write that check at the end of the year (or quarter, or month)? Maybe you'd have the foresight to get a 6-month CD, then pay your tax with the money at the end of that period (and pocket the interest), but the majority of your compatriots would have long since spent it -- whether on healthcare or a holiday in Vegas, either way it's gone.
chrisabrams 8y ago
This is what I do but I work for myself. Withholding is easier as most people would prefer to watch Tom Brady throw touchdowns vs manage their money.
Waterluvian 8y ago
I felt this way until I asked a tax accountant who said that the majority of taxpayers are just not capable of this discipline, planning, or in some cases math.
- phil21 8y ago
  That's the entire point though. Those people presumably vote on tax policy, and have zero clue what they pay. If the majority of the country were constantly being hounded by government tax collectors for being past-due, there would be very little political support for raising taxes in the future. Right now it's an imaginary percentage the vast majority have no clue of. Ask 10 people in various social circles in your life what their all-in tax rate is. Almost zero will know, and those that think they know are often wildly wrong.
  - mises 8y ago
    This isn't pleasant, but it's true. It wouldn't take many tax cycles of widespread IRS debt for average people to start pushing for lower taxes. It also might make people realize that 44% of Americans pay no income tax (source: https://www.marketwatch.com/story/81-million-americans-wont-pay-any-federal-income-taxes-this-year-heres-why-2018-04-16 https://www.marketwatch.com/story/81-million-americans-wont-...). Even accounting for children, that's a lot of people not contributing. It doesn't have to be a lot, but the average American will care a lot more about politics and about frivolous uses of their money when they've got some skin in the game. For reference, the average American taxpayer pays over $10k in taxes (https://www.usatoday.com/story/money/personalfinance/2017/10/07/a-foolish-take-how-much-does-the-average-american-pay-in-taxes/106237216/ https://www.usatoday.com/story/money/personalfinance/2017/10...), which is roughly a 14% rate by the same source. How crazy is that? Americans will be much more willing to push for massive tax cuts after they realize that $10k is being stolen from them every year.
ip26 8y ago
I feel similarly about incomes; employers ought to write a single check all at once. You get paid on Jan 1st and that's it. Perhaps as a stretch goal we can aim for decennial paychecks. In seriousness, a steady flow instead of a lump sum has benefits for both sides of the transaction. For example, I shudder to imagine what shopping sprees politicians might engage in, were they bequeathed with the nation's entire yearly budget in one day!
- wutbrodo 8y ago
  > For example, I shudder to imagine what shopping sprees politicians might engage in, were they bequeathed with the nation's entire yearly budget in one day! The USG has more flexibility with spending relative to liquid resources than pretty much any entity in the world. I can assure that having tax receipts directly in the bank has nothing to do with the way we spend and would have even less to do with the psychology of our representatives
  - ip26 8y ago
    No offense but I'm not prepared to inform my policy opinions on the basis of your assurance.
    - wutbrodo 8y ago
      We're rather far from discussing any substantive changes in policy, leaving aside the fact that you only have a single vote to cast. This is an incredibly bizarre response to someone making the case that you have a factually inaccurate model of the way policy works. On the other hand, I appreciate your comment in that the psychology on display here is another data point in helping me understand the psychology of how an ostensibly voter-driven government can be so consistently stupid and backwards: If people's response to "you're misunderstanding how this works" is effectively "my opinion is as important as any fact"
      - ip26 8y ago
        someone making the case that you have a factually inaccurate model of the way policy works Your case was basically "trust me, I'm right".
PopeDotNinja 8y ago
> Withholding is an awful idea designed to favor the government over the taxpayer I like taxes being withheld from my paycheck. Dealing with taxes can be incredibly confusing, and it's super easy to screw up. If I could choose between taxes being withheld and making payments on my own, I'd seriously consider having the money withheld.
- mises 8y ago
  > I like taxes being withheld from my paycheck. I'm glad you prefer it. With that said, it ought to be a choice for those who prefer it, not a mandatory procedure. This is especially true in that it makes the taxpayer less likely to realize just how much he is paying. Quote from the Treasury: "it... greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future." Source: https://en.wikipedia.org/wiki/Tax_withholding_in_the_United_States https://en.wikipedia.org/wiki/Tax_withholding_in_the_United_... People pay way too much, and breaking it up into little payments makes them less likely to realize this. It's the same reason salesmen offer it for expensive purchases (cars, iPhones): low payments of $100-$400/mo are much more appealing than a big check all at once.
wutbrodo 8y ago
> Withholding is an awful idea designed to favor the government over the taxpayer I don't understand this claim. Why wouldn't be the baseline be to pay tax on taxable events as they happen (ie per paycheck)? This seems completely reasonable to me. I don't even see how it softens the psychological blow: again, the baseline of "every time I get paid, I lose X amount of taxes" seems like a pretty reasonable visceral signal of how much you're paying.
- mises 8y ago
  Quote from the Treasury: "it... greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future." (https://en.wikipedia.org/wiki/Tax_withholding_in_the_United_States https://en.wikipedia.org/wiki/Tax_withholding_in_the_United_...) Same reason payment plans are offered for cars and iphones. Technically, many people are payed by the hour; should they have to immediately pay tax? Yearly taxes were the norm for a long time, and helped keep resentment of taxes high. It also led to a drastically reduced paperwork burden, which was cheaper for the government, businesses, and consumers.
  - wutbrodo 8y ago
    > Quote from the Treasury: "it... greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future." Sorry, that may have been unclear. I don't doubt the psychological effect is greater when it happens in a lump sum. I'm saying that it's just as easy to say that people overestimate their taxes when they pay in a lump sum and accurately estimate them (at a per-paycheck level): there's nothing about once a year that's special and justifies privileging it. > Technically, many people are payed by the hour; should they have to immediately pay tax? No, they're not. Their pay is measured by the hour, but they are _paid_ on different schedules (eg once every two weeks), at which point they're debited for the tax (in that they receive net pay). I don't see how anything else wouldn't be the reverse of having a large refund: ie, an interest-free loan from the government to the taxpayer. > It also led to a drastically reduced paperwork burden, which was cheaper for the government, businesses, and consumers. This is belied in the part you elided from the quote you pulled. from the same sentence: > "This greatly eased the collection of the tax for both the taxpayer and the Bureau of Internal Revenue. However, it also greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future" Also, I'm not making the claim that there's no pragmatic argument for annual payments (though I personally disagree). My complaint was that part of your argument rested on treating annual payments as arbitrarily natural and measuring the downsides of withholding from that flawed perspective.

by mises 8y ago

jedberg 8y ago

I would like that system, but unfortunately most of our fellow citizens would end up broke come tax time. Most people simply say "I can spend until my bank account is empty". That's why most people choose impound accounts when they get a mortgage. Because they literally can not budget money for the bi-annual property tax bill, so they have the bank take the money every month. It's also why teachers are offered a 10 check plan or 12 check plan. They get the same money, but most of them choose the 12 check plan, just so they don't have to remember to save money to live in the summer. That's why the banks offer those "save your pennies" plans. Every time you make a debt card charge, they round up to the nearest dollar and then put the rest in a savings account for you. Because people are that bad at budgeting. Can you imagine most of the people you know having the ability to set aside 20% of their check each month and not spending it ever?

mises 8y ago
I get this, and also that it's to help prevent the sticker shock of taxes that can lead to serious backlash. With that said, America is not supposed to be a place where the Nanny State must step in to manage people's lives for them simply because they can't do it themselves. I and my fellow citizens should not have to lose money simply because others choose to waste money. I like the comment lotsofpulp made below: "The solution to people’s inability to save is not for the government to hold their money hostage."
- war1025 8y ago
  The government doesn't hold anyone's money hostage. You are free to adjust your W-4 withholdings any time you want. They even have an online calculator to estimate your tax burden and set your withholding properly.
  - mises 8y ago
    Yes they do, because there is still employer withholding. Almost 75% of Americans had too much withheld: https://www.cnbc.com/2018/08/01/30-million-americans-are-not-withholding-enough-pay-for-taxes.html https://www.cnbc.com/2018/08/01/30-million-americans-are-not... And if you don't believe me on the reducing-sticker-shock part, here's a quote from the Treasury: "it... greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future." https://en.wikipedia.org/wiki/Tax_withholding_in_the_United_States https://en.wikipedia.org/wiki/Tax_withholding_in_the_United_... It is indeed a very underhanded way to con citizens into putting up with stupidly high taxes. Oh, and for what it's worth, it hits lower incomes harder because they are less likely to hire tax advisors, fancy accountants, etc. to make sense of it all for them. Maybe we would end up with lower taxes on our poorest, too, if they realized how much they were being robbed.
    - war1025 8y ago
      For the record, I make good income for the area, which isn't amazing, and also have three kids. I had no federal tax burden this year and was in fact reimbursed $1800 of surplus child tax credit. So I find it hard to believe the poor are paying too much in taxes if they are anywhere near the same boat as me.
ben0x539 8y ago
> Most people simply say "I can spend until my bank account is empty". I don't think this comes down to just individual discipline/budgeting either. If you rejiggled things to that people who live paycheck to paycheck suddenly have non-zero amounts of money in their accounts for most of the year, I bet you'd suddenly see cost-of-living prices/rent adjust upwards so that they're living paycheck to paycheck again, except then they're fucked when taxes are due. Landlords etc aren't gonna leave money on the table.
everybodyknows 8y ago
IRS actually has a documented policy on the "12-check plan": https://www.irs.gov/pub/irs-tege/409a_presentation.pdf https://www.irs.gov/pub/irs-tege/409a_presentation.pdf Wonder how many teachers understand that the net financial effect amounts to a zero-interest loan from themselves back to the school district?
- mac01021 8y ago
  That example teacher is very well compensated.

jfk13 8y ago

And what proportion of taxpayers would be sufficiently disciplined to make sure they have funds on hand to write that check at the end of the year (or quarter, or month)? Maybe you'd have the foresight to get a 6-month CD, then pay your tax with the money at the end of that period (and pocket the interest), but the majority of your compatriots would have long since spent it -- whether on healthcare or a holiday in Vegas, either way it's gone.

chrisabrams 8y ago

This is what I do but I work for myself. Withholding is easier as most people would prefer to watch Tom Brady throw touchdowns vs manage their money.

Waterluvian 8y ago

I felt this way until I asked a tax accountant who said that the majority of taxpayers are just not capable of this discipline, planning, or in some cases math.

phil21 8y ago
That's the entire point though. Those people presumably vote on tax policy, and have zero clue what they pay. If the majority of the country were constantly being hounded by government tax collectors for being past-due, there would be very little political support for raising taxes in the future. Right now it's an imaginary percentage the vast majority have no clue of. Ask 10 people in various social circles in your life what their all-in tax rate is. Almost zero will know, and those that think they know are often wildly wrong.
- mises 8y ago
  This isn't pleasant, but it's true. It wouldn't take many tax cycles of widespread IRS debt for average people to start pushing for lower taxes. It also might make people realize that 44% of Americans pay no income tax (source: https://www.marketwatch.com/story/81-million-americans-wont-pay-any-federal-income-taxes-this-year-heres-why-2018-04-16 https://www.marketwatch.com/story/81-million-americans-wont-...). Even accounting for children, that's a lot of people not contributing. It doesn't have to be a lot, but the average American will care a lot more about politics and about frivolous uses of their money when they've got some skin in the game. For reference, the average American taxpayer pays over $10k in taxes (https://www.usatoday.com/story/money/personalfinance/2017/10/07/a-foolish-take-how-much-does-the-average-american-pay-in-taxes/106237216/ https://www.usatoday.com/story/money/personalfinance/2017/10...), which is roughly a 14% rate by the same source. How crazy is that? Americans will be much more willing to push for massive tax cuts after they realize that $10k is being stolen from them every year.

ip26 8y ago

I feel similarly about incomes; employers ought to write a single check all at once. You get paid on Jan 1st and that's it. Perhaps as a stretch goal we can aim for decennial paychecks. In seriousness, a steady flow instead of a lump sum has benefits for both sides of the transaction. For example, I shudder to imagine what shopping sprees politicians might engage in, were they bequeathed with the nation's entire yearly budget in one day!

wutbrodo 8y ago
> For example, I shudder to imagine what shopping sprees politicians might engage in, were they bequeathed with the nation's entire yearly budget in one day! The USG has more flexibility with spending relative to liquid resources than pretty much any entity in the world. I can assure that having tax receipts directly in the bank has nothing to do with the way we spend and would have even less to do with the psychology of our representatives
- ip26 8y ago
  No offense but I'm not prepared to inform my policy opinions on the basis of your assurance.
  - wutbrodo 8y ago
    We're rather far from discussing any substantive changes in policy, leaving aside the fact that you only have a single vote to cast. This is an incredibly bizarre response to someone making the case that you have a factually inaccurate model of the way policy works. On the other hand, I appreciate your comment in that the psychology on display here is another data point in helping me understand the psychology of how an ostensibly voter-driven government can be so consistently stupid and backwards: If people's response to "you're misunderstanding how this works" is effectively "my opinion is as important as any fact"
    - ip26 8y ago
      someone making the case that you have a factually inaccurate model of the way policy works Your case was basically "trust me, I'm right".

PopeDotNinja 8y ago

> Withholding is an awful idea designed to favor the government over the taxpayer I like taxes being withheld from my paycheck. Dealing with taxes can be incredibly confusing, and it's super easy to screw up. If I could choose between taxes being withheld and making payments on my own, I'd seriously consider having the money withheld.

mises 8y ago
> I like taxes being withheld from my paycheck. I'm glad you prefer it. With that said, it ought to be a choice for those who prefer it, not a mandatory procedure. This is especially true in that it makes the taxpayer less likely to realize just how much he is paying. Quote from the Treasury: "it... greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future." Source: https://en.wikipedia.org/wiki/Tax_withholding_in_the_United_States https://en.wikipedia.org/wiki/Tax_withholding_in_the_United_... People pay way too much, and breaking it up into little payments makes them less likely to realize this. It's the same reason salesmen offer it for expensive purchases (cars, iPhones): low payments of $100-$400/mo are much more appealing than a big check all at once.

wutbrodo 8y ago

> Withholding is an awful idea designed to favor the government over the taxpayer I don't understand this claim. Why wouldn't be the baseline be to pay tax on taxable events as they happen (ie per paycheck)? This seems completely reasonable to me. I don't even see how it softens the psychological blow: again, the baseline of "every time I get paid, I lose X amount of taxes" seems like a pretty reasonable visceral signal of how much you're paying.

mises 8y ago
Quote from the Treasury: "it... greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future." (https://en.wikipedia.org/wiki/Tax_withholding_in_the_United_States https://en.wikipedia.org/wiki/Tax_withholding_in_the_United_...) Same reason payment plans are offered for cars and iphones. Technically, many people are payed by the hour; should they have to immediately pay tax? Yearly taxes were the norm for a long time, and helped keep resentment of taxes high. It also led to a drastically reduced paperwork burden, which was cheaper for the government, businesses, and consumers.
- wutbrodo 8y ago
  > Quote from the Treasury: "it... greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future." Sorry, that may have been unclear. I don't doubt the psychological effect is greater when it happens in a lump sum. I'm saying that it's just as easy to say that people overestimate their taxes when they pay in a lump sum and accurately estimate them (at a per-paycheck level): there's nothing about once a year that's special and justifies privileging it. > Technically, many people are payed by the hour; should they have to immediately pay tax? No, they're not. Their pay is measured by the hour, but they are _paid_ on different schedules (eg once every two weeks), at which point they're debited for the tax (in that they receive net pay). I don't see how anything else wouldn't be the reverse of having a large refund: ie, an interest-free loan from the government to the taxpayer. > It also led to a drastically reduced paperwork burden, which was cheaper for the government, businesses, and consumers. This is belied in the part you elided from the quote you pulled. from the same sentence: > "This greatly eased the collection of the tax for both the taxpayer and the Bureau of Internal Revenue. However, it also greatly reduced the taxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future" Also, I'm not making the claim that there's no pragmatic argument for annual payments (though I personally disagree). My complaint was that part of your argument rested on treating annual payments as arbitrarily natural and measuring the downsides of withholding from that flawed perspective.