Strengthening Constitutional Self-Government

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Economy

Tax Reform, Human Nature, and Big Government

If I recall the thesis of Cass Sunstein's book Nudge correctly, it argues that people are irrational in predictable ways. It notes that if the default option is to buy into a pension system with one's employer most people will do so, but if they default goes the other way, most will not, and other such quirks of human behavior.

Would this apply to taxes?  When there is automatic witholding, people don't notice how much money our government is taking from our paychecks. That's probably too strong.  People certainly notice, but I suspect that it doesn't have the same impact as it would if the money were in hand first.  The current system, I suspect, makes it easier to allow taxes to rise and government to grow.  It thus lowers the threshold for deciding when a government progam is called for to solve a particular problem.  If, however, we changed the system, and ended witholding, would that change things?  Having to pay up every April 15th, rather than waiting for a refund every spring (as so many do, since they withold too much), might change the bias in our system?

Perhaps it would make no difference, but I suspect not. At the very least, it would make our system more transparent.

Categories > Economy

Discussions - 6 Comments

People like my husband, those who are self-employed, small business owners, are always more upset than the average employee about rates of taxation and taxes in general. They do have to write a check, or checks, as when they must pay quarterly Estimated Taxes. The estimation is of how much money you think you will make for the next quarter. You are paying money on money you have not even made yet.

"Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return."

Read this; you'll love it -- http://www.irs.gov/businesses/small/article/0,,id=110413,00.html

I wonder how many of the tea-partiers have to pay estimates taxes.

Funny, I just recently read something in the news about a fellow who was fairly upset about taxes. I think he was in Austin?

It would drive up the savings rate. There would also be more penalties for under and late payments assessed. I always try to owe, though a couple times I succeeded beyond expectation.

Have you ever asked someone what they paid in taxes and their response is "I got back X amount of dollars"?

Whenever I hear that I ask again what they actually paid in taxes and people have no clue. They only know they got money back like they found gold at the end of the rainbow.

They may have just paid 35% of their income to the government. But who cares, they got a check for $400 just in time to pick up a new HDTV!

So of course it would make a difference if people had to write out a check every year for several thousand dollars.

Certainly it would apply to taxes. Nudge by Cass Sustein is a terrific book. On the other hand it is true that under Obama thus far largely because of the depression and the stimulus taxes have been lowered for 95%. It is also true I think that deficit spending and inflation aren't really figured in. JD is right.

I also disagree with Ken Thomas, if you ended withholding at best the savings rate would remain even, at worst a large group of people would owe and not have funds to cover. Even if more of the money that would go to tax witholdings as a proportion was directed towards savings, this would be eaten up come tax time, and it seems likely that proportionally this extra money would mostly go to discretionary consumer spending. Watching certain tax attorney commericals I often wonder how so many people get stuck oweing so much money to the IRS. Of course the legal settlements eat way at what the IRS gets and the litigation increase the cost of collecting the tax. Without witholding I believe the IRS would have an impossible time collecting.

I actually think churches should start a policy that allows witholding. Tithing 10% or a bit less off a weekly pay check is more likely to occur than tithing 10% at the end of a year. This is why the first part of the harvest went to the synagogue. As Malthus said,"if you have it you spend it."

The same also occurs if you do automatic payments on a car loan, automatic payments to a savings or brokerage account. A lot of folks automate so many payments that what is left is discretionary, or treated as such.

One reason credit default swaps cost so much in a bad economy is that once you get downgraded...more collateral is demanded to cover...everyone wants the assurance that they will get paid.

Tax witholding is basically a way that the government says, we trust you will pay the IRS, but our creditors sleep better if they know you will.

Ending witholding doesn't sound like a great plan to me, but it could be tried it as a stimulus idea in the next recession. What might then occur is that Fredie and Fannie would enter the tax loan business, every year you take out a loan to pay your taxes, and then you are back to witholding(automatically payments on your tax loan) and a year behind.

Seriously? obvious troll is obvious.

All this would do is turn over at lot more homes to the IRS. I don't think the public has the discipline to prepare for tax season in this way. I bet the offshore banks would sign on for this.

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