Tax Withholding Makes Taxpayers More Agreeable To Higher Taxes

First, I hope you have a wonderful weekend!

Just dropping a quick line this afternoon as I saw an article in the Wall Street Journal today titled, “Number of Americans Caught Underpaying Some Taxes Surges 40%” that made me think of a point I’ve often made in private.

To summarize very briefly, the article states that the number of people underpaying their quarterly tax estimates is surging. In other words, the article is not about 80% of the population that have taxes withheld from wages throughout the year but about those, primarily retirees and business owners, who have no withholding and so pay quarterly tax estimates instead.

At one point the author says, “Estimated tax payments are Congress’s way of keeping non-wage earners from having an advantage over wage earners.” I have to disagree. That may be PART of the reason for tax estimates, but why not just eliminate mandatory withholding altogether so no taxpayer is at a disadvantage?

I think the reason for enforcing mandatory withholding and tax estimates is less benign. I believe that politicians have long understood that people will be far less resistant to paying relatively higher taxes when taxes are withheld gradually throughout the year and those wages never hit the wage earner’s bank account in the first place. Contrast the current approach with an alternate approach where you didn’t have taxes withheld throughout the year. Instead, imagine you were allowed to let that cash build up throughout the year but then had to write a big fat check on April 15th. Paying taxes would be far more painful, and the amount of taxes you pay would be more obvious. Instead of cheering getting a portion of your money back, you’d be writing a check.

I believe there would be far more resistance to taxation even from those who tend to be more “sympathetic” to higher taxes. Of course, you’d still have a few folks who would support higher tax rates, but I don’t think you’d have enough support for even half the rates we have in place today…all else being equal.

Have fun discussing this topic over your favorite beverage with friends and family this weekend!