Monday, April 18, 2011

A Politimical Aside - Taxes

Since today is tax day and all, I figured I would throw out my crazy two-step solution to many of the problems in our tax/political system. Overspending, budget woes, abuse of the tax code for social engineering/punishment? Two simple steps can make a major dent in these issues and more. The first idea I hear fairly often, the second I don't recall hearing many rants about. Here goes.

1) Move tax day back six months, to October 15. Keep elections the first week of November. Anyone need the logic of this one spelled out? I've heard numerous people recommend this or something similar (move elections to late April) over the years, but by itself it wouldn't be nearly as effective as you would think. I suggest adding the second step to really keep them in line...

2) End backup withholding. Depending on how you look at it, backup withholding is either truly brilliant or devious. I believe that this, more than any other single factor, has allowed tax rates to rise to the current ridiculous levels without the wrath of the electorate being unleashed. Consider the following two cases:

Person A makes $5000 a month, or $60,000 a year. Every three months, he writes the government a check for $3000 (by April 15, he must have paid the government a total of $12,000).
Person B also makes $5000 a month, or $60,000 a year. He has taxes withheld at a 25% rate ($1250), taking home $3750 a month. Every year around April 15, he gets a check from the government for $3000.

Both of these people earn the same income, and pay the same net taxes. However, their feelings about their tax bills will be completely different. When it's time for A to do his taxes, he will be rather upset at having to write such a large check. When B does his taxes, however, he'll most likely be thrilled to be 'getting' so much money from the government. He has grown used to living on the smaller take-home amount (smaller than A, who takes it all home but has to set aside the 20% for taxes), and while he may see how much is withheld from his paycheck, it lacks the emotional sting of having the money, then having to write the check and send it away. Plus he has come to see the tax refund as a gift of the benevolent government (don't ya know how much the generous IRS is stimulating the economy by giving your money back?), and sadly many view the tax refund as a sort of savings account!

People in category A include those who have to file quarterlies (small business owners, self-employed, etc); they get their money without withholding, but have to set it aside to cover the tax bill. Shockingly, these people tend to be the most upset at tax increases - and since they are generally society's producers, they also are the target of the taxes. Category B people are generally less upset at tax increases, having been conditioned to the lower take-home pay and the 'gift' of a refund, the repayment of an interest-free, mandatory loan to Uncle Sam.

End backup withholding and put tax day and election day close together, and not only will tax rates drop, but absurd spending (such as the government-funded Ponzi schemes) will be dramatically and immediately reduced, as elected officials will finally be held to account for every dollar they waste.

1 comment:

Ralph M. Petersen-Always Right; Sometimes Wrong! said...

Both excellent ideas.

I just found your blog and I am happy to find someone else who appreciates sarcasm.

You should include a "follow this blog" gadget so we can know when you post new stuff.