Charles Murray On The Evils of Tax Withholding

Charles Murray wrote a wonderful editorial in last Thursday's Wall Street Journal, entitled "Tax Withholding Is Bad for Democracy."

Murray provides a lot of interesting and compelling statistics. Among them,

"Turn to the bottom three-quarters of the families who filed income tax returns in 2007—not just low-income families, but everybody with family incomes below $66,500. That 75% of families paid just 13% of all personal income taxes. Scott Hodge of the Tax Foundation has recast these numbers in terms of a single, stunning statistic: The top 1% of American households pay more in federal taxes than the bottom 95% combined.

My point is not that the rich are being bled dry. The taxes paid by families in the top 1% amounted to 22% of their adjusted gross income, not a confiscatory rate. The issue is that it is inherently problematic to have a democracy in which a third of filers pay no personal income tax at all (another datum from the IRS), and the entire bottom half of filers, meaning those with adjusted gross incomes below $33,000, have an average tax rate of just 3%.

This deforms the behavior of everyone—the voters who think they aren't paying for Congress's latest bright idea, the politicians who know that promising new programs will always be a winning political strategy with the majority of taxpayers who don't think they have to pay for them, and the wealthy who know that the only way to get politicians to refrain from that strategy is to buy them off."

Murray is correct, of course. It's not so much the tax rate on higher-earnings, as it is the existence of a large number (i.e., those that cause the so-called "tipping point" to be reached) of voters who don't think more government costs them anything.

Murray offers two simple ideas by way of solving this mess,

"For once, we face a problem with a solution that costs nothing. Most families who pay little or no personal income taxes are paying Social Security and Medicare taxes. All we need to do is make an accounting change, no longer pretending that payroll taxes are sequestered in trust funds.

Fold payroll taxes into the personal tax code, adjusting the rules so that everyone still pays the same total, but the tax bill shows up on the 1040. Doing so will tell everyone the truth: Their payroll taxes are being used to pay whatever bills the federal government brings upon itself, among which are the costs of Social Security and Medicare.

The finishing touch is to make sure that people understand how much they are paying, which is presently obscured by withholding at the workplace. End withholding, and require everybody to do what millions of Americans already do: write checks for estimated taxes four times a year."

Murray does something that I've seen nobody else do. He observes, and states, the truth- that Social Security is a shell game, in which taxes buy government IOUs, so that the net result is that the "program" doesn't really have any sequestered assets of its own. It's really just another tax program, the payments from which go into the general Treasury fund, though indirectly, through the purchase of that department's instruments.

Second, Murray touches on a point that only my late father, to my personal knowledge, understood. As a youth, I listened to him lecture my brother and I on how FDR had stripped from every citizen their right to not pay taxes. Further, he turned reality upside down by slowly, over decades, teaching people to want a big refund, rather than owe the government money. Since it's your money, overpaying all year is wrong and foolish. But Roosevelt conned Americans into thinking they are fortunate to get their own money back after April 15th.

Murray is spot on when he insists that only by making every taxpayer write four quarterly checks for their taxes, including FICA, will we ever bring home the true, large scale of governmental cost to each voter and taxpayer.

Clearly, this Congress and administration won't even consider these ideas. Maybe a new Republican President and Congress will.

Let's hope so, because I believe time is running out for America to recover its fiscal rectitude.