Refunds Mask the Pain of Income Taxes

For most Americans, getting a refund after filing their taxes feels like a payday rather than the blatant robbery that it is. Few people question automatic tax withholding. After all, it’s hard to miss what you never had. And who doesn’t like a what appears to be a financial windfall every spring?

What they fail to see is that it was their money to begin with. It’s money they could have used for gas, groceries, and utilities throughout the year. It’s money “lent” to the government instead of money that you could have earned interest on. It also shows many taxpayer’s financial ineptitude.

Automatic withholding began during World War II as a way to fund the war effort, making federal (as well as state and local) income tax collection a virtually invisible process. For those who do pay attention, it’s much easier to accept a modest mugging each week when you know some of it will be returned. But why get mugged in the first place?

Prior to 1943, Americans paid their previous year’s income taxes in a lump sum every April 15, or through installments over the following year. That made any tax increase conspicuous and painful. No one likes writing a check for something they never purchased.

Income taxes have been a con job from the start. Numerous times prior to 1913, income taxes were ruled unconstitutional, but like many Supreme Courts, it simply took the magical “right group” to overrule all the previous court decisions. When first implemented, it was a very small tax that was paid overwhelmingly by wealthy Americans – a mere 1% on incomes up to $20k (about $67k adjusted for inflation). The top rate was 7% on incomes over $500k, ($16.8 million today).

Automatic withholding also makes cutting taxes less visible. After President Trump’s 2017 tax cut, roughly 140 million American households (myself included) paid less in taxes throughout the year. As a result, due to less money being withheld every week, many received smaller refunds than in the past. They noticed and were quite vocal. Despite 80% of taxpayers sending less money to Washington, only 17% thought they’d gotten a tax cut. In other words, most people judged their taxes by the size of their refund (what they could see) vs what they paid in (what is hidden by automatic withdrawals).

Now the IRS is doubling down with their “Direct File Program”, which allows the IRS to calculate your taxes for you. If you’ve ever dealt with the IRS directly, you should know this is not a good idea. You should calculate your own taxes; you have a direct interest in the outcome. If too complicated, you should hire a tax professional; they have an interest in your outcome assuming they want to keep you as a customer. The IRS, on the other hand, has no interest in what you pay - other than how much they can take from you. If they miss a deduction, it’s to their benefit.

Automatic withholding will never end, but should. Tax preparation software/preparers may end, but never should.

Source used: Cato