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Week of: January 21, 2001

Why Pay Taxes Before They're Due?

by F.R. Duplantier

Want to generate support for a federal tax cut? Repeal withholding and let Americans pay a lump sum every April.

Most taxpayers tend to keep mum
Because they don't pay a lump sum,
But get rid of withholding
And there'd be such a scolding
That tax reform quickly would come.

"World War II led to a vast expansion of the government's need for revenue," recalls Bruce Bartlett of the National Center for Policy Analysis. "Tax rates were increased sharply," he observes, "and millions of Americans previously exempt from taxation now found themselves ensnared in the government's tax net. As early as 1941, before the United States was even a formal belligerent, the Treasury was asking Congress for authority to require withholding of taxes at the source."

Writing in a recent issue of the national conserva- tive weekly, Human Events, Bartlett traces the history of withholding and chronicles the growing demand for its discontinuation. "Between 1917 and 1943, taxpayers simply paid their income taxes in a lump sum," he comments. "But government officials understood that the vast expansion of taxation during the war was going to severely strain the lump sum payment system. They also understood that taxes were unlikely to fall to prewar levels after the end of hostilities and that withholding would be necessary to maintain compliance," Bartlett adds. "Moreover, they understood that there would be strenuous resistance to withholding and that the government needed to take advantage of the window of opportunity presented by war to get it implemented. Even with broad patriotic support for sacrifices necessitated by the war," he notes, "opposition to withholding was intense."

Bartlett argues that withholding constituted a hidden tax increase by providing the government "the use of a taxpayer's money long before his tax liability is due. In 1998," he reports, "the IRS withheld almost $1 trillion from the paychecks of American workers, $120 billion more than their actual tax liability. While taxpayers received a refund on the amount overwithheld, they did not receive interest on it," Bartlett emphasizes. "With the Treasury Bill rate at about five percent in 1998, taxpayers therefore lost at least $6 billion in income just on the taxes that were overwithheld. The loss of income on all taxes," he remarks, "would be several times greater."

Bartlett points out that business owners in particular objected to withholding, because they recognized that "much of the burden of tax collection had been shifted to them. Henceforth, employers would have to expend their own resources to withhold taxes from their workers, account for them properly, and remit them to the Treasury in a timely fashion. Failure to do so invited severe penalties from the IRS."

Bartlett claims that "a growing number of legal scholars now believe that withholding has outlived its purpose." They've concluded that "businesses should no longer be forced to be de facto IRS agents, collecting the government's revenue for it without compensation. Elimination of withholding would constitute a significant tax cut for individuals," Bartlett concludes, "because they would once again have full use of their money until their taxes are due on April 15th."


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