Required prerequisite reading – The Federal Government and Taxes – posted on June 11, 2008 on this blog.
This just may be the greatest stroke of evil genius the Federal Government has ever enacted. In the early years of the federal income tax, taxpayers received a bill at the end of the year and wrote a check. As a result, they quickly came to hate taxes far more than the average American does today. Why, you ask? Ahhhh….a wise person once said, “ignorance is bliss.” Here is a quiz. Quick, how much money did you pay in federal income tax last year? On the outside chance that you knew the answer, you are probably self employed, retired, or just some tax hating nut job like myself. In other words, if you know exactly how much you paid in federal income tax last year, chances are you are not one of the tax paying American’s forced into the system of withholding. Most American’s are not aware that the practice of federal withholding was illegal from 1917-1942. That’s right, four years after the first permanent federal income tax was passed, American’s protested the notion of withholding. Apparently, in those days, representatives in Washington actually listened to the voices of our citizens and passed a law prohibiting withholding taxes from paychecks. When World War II came along and the government desperately needed funding for the effort, they saw a perfect opportunity to rally the country behind withholding and begin to get their hands on our money before we even saw it. The Government even launched a public relations campaign and courted Disney to use Donald Duck as a pitch man.
One of the significant contributors to the technical aspect of the withholding structure was Economist Milton Friedman (1912-2006). Considered by most to be the single most important contributor to Monetary Theory in the post-Keynesian era, Milton later expressed regret over his involvement in developing a system of federal income tax withholding. In a 1995 interview, Mr. Friedman said, “I played a significant role, no question about it, in introducing withholding. I think it’s a great mistake for peacetime, but in 1941-43, all of us were concentrating on the war. I have no apologies for it, but I really wish we hadn’t found it necessary and I wish there were some way of abolishing withholding now.” In the same interview, Milton also described how one of the major opponents to the idea of withholding was none other than the IRS!
Withholding has become so ingrained in generations of Americans that most of us prefer withholding the exact tax amount of our tax liability over the course of a year. Of course, it is guesswork to hit the sweet spot, but many strive for it. Why? For some, it just makes it easier to stomach. For others, they just lack the basic discipline to set money aside and pay the balance at the end of the year. Leave it to the government to come up with a way to help us discipline ourselves. The same basic principle applies for contributing to a 401k. For those of you who contribute to a 401(k), how much money did you contribute last year? Now, don’t sit there and do the math on the percent that you know you contributed multiplied by your gross earnings! Chances are you simply do not remember the dollar amount you contributed. Out of sight…out of mind. That is just the way the government likes it for your income tax too. By the way, the federal government knows that if the tax code were easy, you could effortlessly determine the dollars you paid last year by running the same percentage calculation method you probably used to determine how much you contributed to your 401(k). Again, the government likes it complicated so the average American does not know what they pay. If you own a home with a mortgage, how much did you pay in property taxes and home owners insurance last year? If you do not escrow, then you know the answer! If you escrow, then I am willing to bet that you need to really sit and think to come up with the answer. Something about writing that fat check at the end of the year really sticks in the ole noggin.
Unless you are one of those evil rich people the liberals despise so much, you received a stimulus check recently. How did it feel to get your own money returned to you? Were you one of the many Americans who went out and purchased something (which is the point to a “stimulus” check)? I overheard a couple of average income earning guys talking about the mid sized flat screen T.V. they were going to purchase with their stimulus check. I couldn’t help but wonder if they would have purchased a flat screen had the government not originally garnished their wages and simply let them keep the money in the first place. Probably not (of course, this does not apply if you are one of the “working poor” in the country who paid virtually no income taxes to begin with after receiving a “refund”). It is amazing how the human mind works when it comes to finding your own money in the pocket of an old pair of pants. The federal government likes it this way.
It is no wonder the federal government is out of control spending our money. Sixty five years ago, we allowed them to create a way which makes it pathetically easy to take our wages before we even get our hands on it.
My grandfather had a saying about money; …”[if it] comes easy…..[it] spends easy.”