Increase our awareness of taxes

As the annual tax season is upon us, we should take a moment to examine our level of awareness of the taxes we pay.

First, very many families don’t pay any federal income tax. According to a study by the Tax Foundation (link: http://www.taxfoundation.org/ff/zerotaxfilers.html) 58 million households, representing some 122 million people or 44 percent of the U.S. population, pay no federal income tax.

For those who do pay taxes, they often aren’t aware, on a continual basis, of just how much tax they pay. That’s because our taxes are conveniently withheld for us on our paychecks. Many people, I suspect, look at the bottom line — the amount they receive as a check or automatic bank deposit — and don’t really take notice of the taxes that were withheld. This makes paying taxes almost painless.

An alternative would be to eliminate the withholding of taxes from paychecks, and from monthly mortgage payments, too. Instead, each month or year the various taxing governments would send a bill to each taxpayer, and they would pay it just like the rest of their periodic bills. In this way, we would all be acutely aware of just how much tax we pay. I’m aware there is an obvious collection problem.

A further perversion is that many people are happy during tax season, because they get a refund. And they’re delighted to get that refund, so much so that many will pay high interest rates on a refund anticipation loan just to get the money a little earlier. The irony is that by adjusting their withholding, they could take possession of much of that money during the year as they earn it.

The other people happy during tax season are tax preparers. As a country we spend an enormous effort on tax recordkeeping and compliance. Another study by the Tax Foundation estimates that in 2002 we spent, as a nation, 5.8 billion hours and $194 billion complying with the federal tax code. (5.8 billion hours is equivalent to about 2,800,000 people working 40 hours per week, 52 weeks per year.) By simplifying our tax code, we could eliminate much of this effort, and return that effort to productive use.

Since tax withholding from paychecks and mortgages reduces our awareness of just how much tax we pay, it’s unlikely that governments will stop withholding and submit a bill to taxpayers. It’s left to ourselves to remain aware of how much we are paying.


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