U.S. Treasury: Tax Withholding Reduces Transparency

January 8, 2009

Ah, tax withholding. 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 tax 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.

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