Florida Senator Rick Scott recently kicked over a beehive when he included an income tax increase for most Americans in his 11-point plan to ‘Rescue America.’ The fifth point of that plan, titled ‘Economy/Growth,’ included ‘All Americans should pay some income tax to have skin in the game, even if a small amount. Currently over half of Americans pay no income tax.’
How does this happen? Many low-to-moderate income households have standard deductions and child tax credits that effectively eliminate their federal income tax liability.
Why should they have ‘skin in the game?’ One could argue that many taxpayers – and voters – would be significantly less likely to vote for politicians supporting expensive government programs if they had to pay a price for them.
However, if a federal income tax has to exist (it doesn’t have to, of course), there is a better way to sensitize Americans to the cost of government.
In World War II, the federal government laid the modern framework for income tax collection in the “Current Tax Payment Act of 1943.” The federal government forced employers to set aside a portion of the paychecks for their employees and send it to the government, adding income tax collection services to employers’ legal responsibilities.
The practice didn’t expire with the end of World War II, given its attractiveness to government and special interest groups benefitting from government spending and other policies.
Income tax withholding dramatically improved the government’s ability to raise revenue, but it also desensitized taxpayers to the cost of taxes.
Consider an alternative – a law forbidding the federal government from skimming paychecks like this. Instead, individual income taxpayers would calculate their income tax liability like they do now, but they would have to pay any tax liability after it was calculated.
This isn’t just about ‘skin in the game.’ Ending income tax withholding would improve the transparency and integrity of the tax system, period.
But income tax withholding has been an attractive, powerful tool in the government’s toolbox. It remains firmly entrenched. Republicans and Democrats alike don’t want to touch it. It didn’t find its way into Gov. Scott’s 11-point plan, even as he expressed a desire for all Americans to have some ‘skin in the game.’
One possible downside to ending income tax withholding could be that government would borrow more money if extracting taxes proved more politically problematic. But that would be a challenge for another day.
Speaking of challenges for another day, consider whether Social Security and Medicare withholding should be part of this.
But ending income tax withholding, today, could be a great step forward. Who in Congress will step forward?
