Virginia Libertarian

by Laurence Vance

[Posted on Thursday, April 21, 2005]

Did you have to write out a check to the IRS for $5,581 this past April 15? If you had to do such a thing next year, would you think of it as your civic duty or would you consider it a crime that only the government could get away with?

A Typical Taxpayer

This figure of $5,581 is not an arbitrary one. According to the U.S. Census Bureau, real median household income was $43,318 for 2002 and 2003. A taxpayer with an income of that amount who was single with no children would, after his standard deduction of $4,850 and his personal exemption of $3,100, owe $5,581 in federal income tax for tax year 2004. If this same taxpayer was married and his spouse did not work, he would be entitled to an extra personal exemption, thus lowering his tax liability to $3,399—still a huge sum for most Americans to come up with.

If this same couple were to have a child, they would gain not only another personal exemption, but also a $1,000 child tax credit. However, their tax liability would still be $1,934—an amount that the typical American does not have in his checking account. The addition of another child would lower this couple’s tax liability down to $469.

The Withholding Tax

But regardless of the amount of federal income tax that one ultimately pays, the fact that the U.S. government seizes the wealth of its citizens slowly over the course of the year via the withholding tax means that the typical taxpayer is comfortable in each of the above scenarios because he doesn’t actually have to write out a check to the government on April 15 of each year.

The withholding tax makes it possible for the government to silently steal the wealth from its citizens with little or no outrage about the loss. And even in the case where the citizen receives a refund of all the taxes he has paid in, the withholding tax still serves two evil purposes. First, getting a refund of all the taxes one pays in amounts to an interest-free loan to the government. The government gets money to continue its spending orgy, and the citizen loses the ability to receive a return on money that could be invested. And second, getting a tax refund fosters the notion that the government is benevolent. Never mind that the money is yours. If the government sends you a check in the mail then the government can’t be all that bad.

If the $5,581 were gradually taken out of one’s paycheck over the course of the year and no money was owed on April 15, the pain of the theft would be greatly diminished, but for two entirely different reasons. Obviously, it is less painful to have $107.33 taken out of one’s check every week for fifty-two weeks than writing a check to the government for that amount every week or a check for the whole amount once a year. The second reason the pain of the $5,581 loss would not readily be felt is that very few people pay any attention to the amount of taxes that are withheld from their pay. They are concerned only with their take-home pay. This is unfortunate because if the people who pay taxes actually realized how much the government was taking from them they would be outraged.

The Origin of Tax Withholding

So where did the withholding tax come from? It was not part of the original income tax that resulted from the sixteenth amendment in 1913. Very few people paid any taxes back then anyway. The income tax did not directly affect the average American until World War II.

On the eve of the war, few Americans paid income taxes. Those that owed taxes paid them in one lump sum on March 15 (later changed to April 15). To pay for the war, the Revenue Act of 1942 lowered exemptions and raised income tax rates. But it also did something even more insidious—it instituted a 5 percent “Victory Tax” on all wages above an exemption of $624. The tax was to be collected by the employer and deducted from the employee’s paycheck—just like the Social Security tax that began in 1935.

The Current Tax Payment Act of 1943 then revolutionized the income tax by making withholding taxes universal. The withholding tax was part of the new tax plan offered by Beardsley Ruml (1894–1960), the chairman of the New York Federal Reserve Bank and treasurer of R.H. Macy and Co. By 1945, about three-fourths of Americans were paying federal income taxes. And although the withholding tax was sold as a wartime emergency, like most expansions of government instituted during wartime, it has been a way of life for most Americans ever since.

The Curse of the Withholding Tax

The income tax allows the government to confiscate the wealth of its citizens. The curse of the withholding tax is that it allows the government to commit this crime systematically, effortlessly, painlessly, and benevolently.

Surprisingly, it was a free market economist who helped the federal government implement the withholding tax in the first place. As was pointed out by the Austrian economist, Murray Rothbard (1926–1995), in his 1971 article “Milton Friedman unraveled”:

One of Friedman’s most disastrous deeds was the important role he proudly played, during World War II in the Treasury Department, in foisting upon the suffering American public the system of the withholding tax. Before World War II, when income tax rates were far lower than now, there was no withholding system; everyone paid his annual bill in one lump sum, on March 15. It is obvious that under this system, the Internal Revenue Service could never hope to extract the entire annual sum, at current confiscatory rates, from the mass of the working population. The whole ghastly system would have happily broken down long before this. Only the Friedmanite withholding tax has permitted the government to use every employer as an unpaid tax collector, extracting the tax quietly and silently from each paycheck. In many ways, we have Milton Friedman to thank for the present monster Leviathan State in America.

Conclusion

Ideally, the elimination of the withholding tax would force the American people to see exactly how much of their income is being confiscated by the government to fund its trillion-dollar budgets. This would, of course, have to be followed by sufficient outrage on behalf of the American people to reduce those budgets. The elimination of the withholding tax is also sometimes seen as freeing businesses from being tax collectors. But this would only be true if businesses also ceased to collect Social Security tax for the government.

But on a more practical note, there are two reasons why even if the withholding tax were eliminated it might not result in sufficient enough outrage at the level of government wealth confiscation and spending. First, the majority of the population presently pays little or no income tax. It is of no consequence to them if the “rich” have money withheld from their paychecks or not. And second, many out of this majority are not only not taxpayers, they are taxeaters who benefit from the redistribution of the wealth of those who actually pay taxes. The continued expansion by the Republicans in Congress of refundable tax credits like the Earned Income Tax Credit and the Additional Child Tax Credit will ensure that the number of taxeaters will increase.

There is also one significant practical consideration that cannot be ignored. The chance that Congress would ever eliminate that which provides the government with a continual flow of revenue is zero. There is, therefore, nothing short of dramatically rolling back income tax rates (good) or eliminating the income tax altogether (better) that will even begin to tame the federal leviathan.

About the time our original 13 states adopted their new constitution, Alexander Tyler, a Scottish history professor at the University of Edinburgh, had this to say about the fall of the Athenian Republic some 2,000 years prior:
A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse (generous gifts) from the public treasury.
From that moment on the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, (which is) always followed by a dictatorship.
The average age of the world’s greatest civilizations has been two hundred years. These nations have progressed through this sequence.
1. From bondage to spiritual faith;
2. From spiritual faith to great courage;
3. From courage to liberty;
4. From liberty to abundance;
5. From abundance to complacency;
6. From complacency to apathy;
7. From apathy to dependence;
8. From dependence back into bondage

This has been possibly incorrectly attributed to Lord Alexander Tyler, but whoever came up with it, it’s no less important.  Where would you place us in this cycle.  I find us disturbingly close to number 8.

With so much zero-sum thinking on the trade issue this Charles Wheelan piece
offers some good points to keep in mind.

For example, point number 3: A richer India will make for a
richer America.

How can a place that “competes” with American companies and replaces
American workers make us better off by growing wealthier?

First, a growing Indian middle class will buy our products.
The guy in Bangalore who answers questions about your Dell computer
probably drinks Coke, uses Microsoft Word, and reads my column on
Yahoo! Finance. (Okay, I can’t prove that last one, but you get the
point.) It doesn’t matter what business you’re in, having 300 million
new middle class consumers in India is good for you.

Second, Indian firms will design and sell products that make
our lives better.
That’s what happens when you unleash new human potential. Imagine the
following scenario: Your child has just been diagnosed with a rare form
of leukemia. The doctor sits you down and says, “I have good news and
bad news. The good news is that the disease can now be treated
successfully. The bad news is that the treatment was discovered by an
Indian scientist, and the drugs are produced by a leading Indian
pharmaceutical company.” Actually, that’s not really bad news, is it?

Third, at a minimum, Indian competition and outsourcing by
American companies will lower the cost and improve the quality of all
kinds of goods and services…Cheaper imports from places like
India or China are just like a tax cut;
there is more money left in your wallet at the end of the month. And
they create American jobs, too, which is less intuitive and therefore
often overlooked. If you save money on cheaper cotton towels, much of
that extra cash is likely to be spent on American goods and services. A
Canadian trade minister made this point to me once when he asked
rhetorically, “Look, a DVD player used to cost $500. Now it
costs $40. What are you doing with the other $460?”

Original post here.

BOSTON — Lawmakers overwhelmingly approved a bill Tuesday that would make

Massachusetts the first state to require that all its citizens have some form of health insurance.
The plan — approved just 24 hours after the final details were released — would use a combination of financial incentives and penalties to dramatically expand access to health care over the next three years and extend coverage to the state’s estimated 500,000 uninsured.
If all goes as planned, poor people will be offered free or heavily subsidized coverage; those who can afford insurance but refuse to get it will face increasing tax penalties until they obtain coverage; and those already insured will see a modest drop in their premiums.
The measure does not call for new taxes but would require businesses that do not offer insurance to pay a $295 annual fee per employee.
The cost was put at $316 million in the first year, and more than a $1 billion by the third year, with much of that money coming from federal reimbursements and existing state spending, officials said.
The House approved the bill on a 154-2 vote. The Senate endorsed it 37-0.
A final procedural vote is needed in both chambers of the Democratic-controlled legislature before the bill can head to the desk of Gov. Mitt Romney, a potential Republican candidate for president in 2008. Romney spokesman Eric Fehrnstrom said the governor would sign the bill but would make some changes that wouldn’t “affect the main purpose of the bill.”
Legislators praised the effort.
“It’s only fitting that Massachusetts would set forward and produce the most comprehensive, all-encompassing health care reform bill in the country,” said House Speaker Salvatore DiMasi, a Democrat. “Do we know whether this is perfect or not? No, because it’s never been done before.”
The only other state to come close to the Massachusetts plan is Maine, which passed a law in 2003 to dramatically expand health care. That plan relies largely on voluntary compliance.
“What Massachusetts is doing, who they are covering, how they’re crafting it, especially the individual requirement, that’s all unique,” said Laura Tobler, a health policy analyst for the National Conference of State Legislatures.
The plan hinges in part on two key sections: the $295-per-employee business assessment and a so-called “individual mandate,” requiring every citizen who can afford it to obtain health insurance or face increasing tax penalties.
Liberals typically support employer mandates, while conservatives generally back individual responsibility.
“The novelty of what’s happened in this building is that instead of saying, `Let’s do neither,’ leaders are saying, `Let’s do both,’” said John McDonough of Health Care for All. “This will have a ripple effect across the country.”
The state’s poorest — single adults making $9,500 or less a year — will have access to health coverage with no premiums or deductibles.
Those living at up to 300 percent of the federal poverty level, or about $48,000 for a family of three, will be able to get health coverage on a sliding scale, also with no deductibles.
The vast majority of Massachusetts residents who are already insured could see a modest easing of their premiums.
Individuals deemed able but unwilling to purchase health care could face fines of more than $1,000 a year by the state if they don’t get insurance.
Romney pushed vigorously for the individual mandate and called the legislation “something historic, truly landmark, a once-in-a-generation opportunity.”
One goal of the bill is to protect $385 million pledged by the federal government over each of the next two years if the state can show it is on a path to reducing its number of uninsured.
The U.S. Department of Health and Human Services has threatened to withhold the money if the state does not have a plan up and running by July 1.
God help us, this is coming…
There are so many problems with this, but lets start at the top:
One goal of the bill is to protect $385 million pledged by the federal government over each of the next two years if the state can show it is on a path to reducing its number of uninsured.
Why is the ferderal government giving out money to reduce the number of uninsured? I’ll answer my own question, since this article doesn’t, it’s because they are now paying for those people who are uninsured by giving out money when Jon Doe doesn’t have health insurance and can’t pay his bill. That needs to stop. If the hospitals want to take people that can’t pay their way, that should be up to them, they should not be reimbursed by the fed to take them. Yes, that sounds callous on the surface, but there are much better and efficient ways to help people that need it other than government (actually almost any way is better than government). Private charity organizations (March of Dimes, American Red Cross, the myriad Cancer ones, most hostpitals have some foundation or other, see here for more) do a far better job of it than government bureacracy ever can.
Individuals deemed able but unwilling to purchase health care could face fines of more than $1,000 a year by the state if they don’t get insurance.
Why are people that don’t want to buy health insurance forced to do so? If they don’t have insurance, do they not have to pay their medical bills? The underlying problem is that people aren’t paying their bills, and government is for some reason footing the bill.
“The novelty of what’s happened in this building is that instead of saying, `Let’s do neither,’ leaders are saying, `Let’s do both,’” said John McDonough of Health Care for All. “This will have a ripple effect across the country.”

God help us, yes it will.
The plan hinges in part on two key sections: the $295-per-employee business assessment and a so-called “individual mandate,” requiring every citizen who can afford it to obtain health insurance or face increasing tax penalties.
Now, MA is free to do as it chooses, but wait, we will be seeing this kind of thing all over the country, with the fed cramming it down the states throats (by “witholding” money they shouldn’t be giving away in the first place).
I don’t see why, if I don’t want to, that I should be forced to purchase health insurance. I also don’t see why my employer should be forced to offer that as a benefit (mine doesn’t), that is part of negotiating for your job (as is your wage, which the gov’t has stepped into as well). If I’m perfectly healthy, and I’m willing to run the risk that I’m not going to get deathly ill or get into an accident, then I should be able to not buy into this. Insurance is a gamble that something bad is going to happen to you (for life insurance, you’re betting you’re going to die, for health insurance, you’re betting you’re going to get seriously hurt). If I choose to bet that I’m going to stay healthy and live a long time, and I loose, then why should I not just have to pay the consequences for that (i.e., I’m now, say, $500,000 in debt to the hospital for that bypass surgery it turns out I needed). The problem is, we give people an easy way out of that (bankruptcy), thus there are no consequences for gambling wrong. What they’re doing now is making everybody pay (don’t hold your breath for this: “The vast majority of Massachusetts residents who are already insured could see a modest easing of their premiums.”, and if you think that service won’t get worse, you’re kidding yourself, look at Canada, England, and any other country with socialized medicine.) for those who gamble and loose instead of just making the looser pay.