Skip to content

U.S. Treasury: Tax Withholding Reduces Transparency

1 min readBy: Joseph Bishop-Henchman

Ah, taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. . That law which requires employers to collect a part of each paycheck and forward it to the government. It was devised as a wartime measure in 1943 by none other than Milton Friedman, who later urged its peacetime abolition.

Why? The U.S. Treasury says it best. From their Fact Sheet on the History of the U.S. Tax System:

This greatly eased the collection of the tax for both the taxpayer and the Bureau of Internal Revenue. However, it also greatly reduced the taxpayer’s awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future.

In 2005, the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. raised $1.1 trillion for the federal government. Thanks to withholding, $787 billion was in the hands of the U.S. Treasury long before April 15.