Repeal the Current Tax Payment Act of 1943
With a national debt of $16.7 trillion and growing, America's spending problem isn't likely to go away in the near future. (The sequester only slightly reduces the annual rate of increase in the federal government's spending.) Given the Obama Administration's plans for future federal spending, U.S. debt is estimated to be between $19.3 and $22.5 trillion by 2016.
In the wee hours of January 1, Congress voted to raise income taxes on individuals making $400,000 or more a year. Most of the Bush-era tax cuts were made permanent, so people making less than $400,000 a year assumed they weren't going to see any tax increases.
Imagine the shock that nearly 80% of workers experienced when they learned that their FICA taxes (owed to the U.S. government to pay for Social Security and Medicare) had gone up. Congress had allowed the "payroll tax holiday," which had lowered a worker's share of the Social Security tax in 2011 and 2012, to lapse.
I have a proposal that might impinge on the ease with which America's ruling class has been able to increase income taxes in recent decades. (An unanticipated consequence might be an eventual reduction in government spending.)
Let's rescind the "Current Tax Payment Act of 1943." Unlike repeal of the XVIth Amendment to the U.S. Constitution that legitimized the graduated income tax -- which is extremely unlikely given the cumbersome process by which the Constitution can be amended -- all this would take is a majority vote on identical bills in both houses of Congress and a president's approval.
(A future president will have to approve. Given his addiction to government spending, Obama isn't likely to approve of anything that might crimp "revenues.")
What is the "Current Tax Payment Act of 1943"? Basically, it was an act passed by Congress during World War II that created the federal income tax withholding procedure. (Ironically, it was free-market champion Milton Friedman, then working as an economist in the federal bureaucracy, who made the original suggestion.) Before that act, voters directly paid the Internal Revenue Service what they owed in federal income taxes. Under the act's provisions, employers withhold workers' federal income taxes, and individuals don't make direct payments.
Most state legislatures eventually passed statutes creating automatic withholding of their income taxes.
Add FICA, and a sizable proportion of many workers' income is never seen. Unless a worker closely reads his/her paycheck stub, he/she may not even be aware of how much of his/her salary is withheld each pay period.
That 1943 act of Congress had several advantages for governments. It vastly eased the process of collecting taxes, and greatly reduced the taxpayer's awareness of the amount of federal income, FICA, and state income taxes he/she pays every year. In effect, the federal and state income tax codes are much less transparent. That, in turn, has made it easier for governments to increase the income tax burden falling on individuals.
How would income taxes be collected once the 1943 act is gone? We should probably keep April 15th as the magic date, and have Jane or John Q. Public cough up her/his "fair share" then.
The important thing will be to shift the onus of figuring out, and sending in, each worker's "fair share" of the federal income tax, FICA, and state income tax burden from employers to employees. If Jane or John Q. Public has to keep track of how much she/he owes in income taxes, she/he might be much less inclined to approve of, and accept, increases in these "revenues." (Repeal would also end the "gift" effect, by which many workers view their tax refunds as something "awarded" them by the government, as opposed to a return of their own money.)
I can hear the objection now: "You want to increase the burden imposed by tax codes on individuals." Precisely. If we want workers to have "skin in the game," let them see how much of their pay goes to government.
Even better, if this saves businesses money they now have to spend on accountants, etc., and those savings are passed on to employees as higher wages, more the better. If businesses keep the money, and invest it to make the enterprise more productive, the economy grows. (It's a "win-win" proposition.)
Is there any precedent for this? Yes. When Congress passed the "Tariff Act of 1913," provisions for automatic withholding of income taxes were included. The "Income Tax Act of 1916," however, rescinded the provision for automatic withholding.
Can elimination of the 1943 act's provision calling for automatic withholding be passed now? It won't be easy. It will probably take years. Democrats, who are addicted to spending, will overwhelmingly oppose the notion. Those Republicans who want to join what Angelo Codevilla calls "the ruling class" will also refuse to support the idea.
Perhaps we'll need a reinvigoration of the Tea Party revolt.
Still, in an era when transparency is highly valued, repeal of an 80-year-old provision of the federal income tax code is at least worth considering. Transparency is always good, and what better facet of life can there be to restore it to than money? Moreover, when the public's trust in government is lower than at any time since scientific public opinion polling began in the mid-1930s, proposals to change a law that seems mysteriously to hit people in the pocketbook should be popular. At the least, it would put yet another facet of the American income tax system on the public agenda.
The more attention given to federal and state tax codes, especially if the consequence is to get more people sensitized to how much of their income is taxed, the better. At a time when Obama and his minions are calling for more "revenue," just months after the federal income tax rate for individuals and small businesses making $400,000 or more a year went up, getting people to focus on tax codes has to help.