Thoughts on taxes, Part 1: The problem with withholding income taxes

I said last week I had some things I’d like to say about taxes. Here is my first argument, which I’ve written in bits and pieces over the past few days when time allowed.  

I have a few problems with our system of withholding parts of people’s paychecks during the year for paying income taxes.

My main two reasons for disliking this system are:

  1. Most people have the government withhold more than they actually owe the government. This means the federal government gets millions of interest-free loans from us every year. This is money that could be in our bank accounts, earning interest for us, or being put to use buying things we want. Instead, Uncle Sam sits on it until we get our tax returns filed.
  2. This system of taking more money than is owed for taxes and then paying a refund creates the perception that our tax refunds aren’t the repayment of money that is rightfully ours but rather some sort of windfall that we should be grateful to receive. I’ve heard many, many people tell me over the years that they look forward to getting their tax refunds every spring and then splurging on something nice. It’s like it tricks us into seeing our government as a lottery instead of an entity that takes our money and spends it.

To be clear, everyone should pay their fair share of taxes. That includes me. Also, I’m well aware that we can’t just do away with our current system of collecting income taxes without incredible expense and inconvenience. My argument is not for for reforming the tax system, but for taxpayers to change the way they deal with it.

The way we pay our taxes can affect the way we view our government and how we let it behave. The withholding method is easy for taxpayers to put up with. In fact, it’s too easy because we don’t feel that much real pain when we pay them like we would if everyone had to write out actual checks to pay our tax bills the way that business owners do.

It’s a lot like the difference between making a $100 purchase with a credit card or paying $100 cash for the same purchase. Because you’re actually having to hand something over rather than having it added to a ledger somewhere, the cash stings more and makes you question the purchase with more diligence. Likewise, having to write out a check for at least some of your taxes makes you more aware of how much of your money the government is taking.

Taxes are not evil. As a quote attributed to Oliver Wendell Holmes Jr. goes, “Taxes are the price we pay for a civilized society.”

Just look at what’s happening in Libya right now (Read about the concepts of rentier states and the resource curse) and other oil-rich states in the Middle East to see the danger of what happens when a government does not need to tax its people to survive. By paying taxes, we take ownership of our government and give it good reason to keep us happy.

But that doesn’t mean we should absolutely love our taxes or be complacent about how much we pay or what that money is used for. I think there needs to be at least a little bit of a sting when we pay our taxes every year because that sharp bite will help keep us alert about what our republic is doing.

So here’s what I do: I have my pay set to withhold a bit less than I actually owe for taxes every year. This means that every April, my tax preparer tells me how much I owe the state of North Dakota and the U.S. Treasury.

I’d like to claim I did this on purpose, but it was really an accident. I don’t know how I got my withholding set up this way, but a few years ago I was rather surprised to find I owed about $600 in taxes. At first, I was unhappy to owe that much when I’d been expecting a refund, but it dawned on me that, in the big picture, it just meant I’d avoided making another interest-free loan to the government. I paid what I owed and was ready for it the next year, when I paid a similar bill in the spring.

But, I confess, I missed getting my annual refund check from the government. So last year, after paying my tax bill, I opened an extra savings account and made arrangements to have a sum taken out of every paycheck during the whole year. This meant that my money was still sitting in my own bank account all year round, where it was earning interest for me. It wasn’t much interest, only totalling up to a couple of bucks after a year, but it was money for me.

Last month, after my taxes were done, I transferred all the money from that savings account into my checking account — except for the minimum $200 deposit. The transfer not only covered my tax bill — it left me with an extra bit of money to use however I wished.

However, it still stung when I wrote those checks to the U.S. Treasury and N.D. tax commissioner. And that’s the point. It should sting.

Taxes shouldn’t just be money taken from out paychecks before we ever see them. We should pay them out of our own pockets and watch our money become the government’s money because that would make us more vigilant about our government’s spending habits. It would also help us think more clearly about what we want our government to do for us.

If you want to try handling your taxes my way, then I commend you. It hurts, but there are several benefits:

  • You keep more of your own money in the bank for longer, earning interest interest for you, before paying taxes.
  • You avoid making an interest-free loan to the government.
  • When you pay your tax bill every year, you pay more attention to what you’re handing over to your government and that helps you care more about what your government does with that money.
  • After you pay your taxes, every spring, you have your money instantly instead of having to wait for the refund check in the mail.

Full disclosure: I’m just a writer and a taxpayer. I don’t have any training in financial planning or tax advice. If you want to do something like this, you should talk it over with a financial planner or tax expert.

If you disagree with me: That’s fine. I’d love to have a reasonable, civl discussion about my arguments and ideas. But if you just want to insult me and talk trash, I really don’t have time for it.

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6 Responses to Thoughts on taxes, Part 1: The problem with withholding income taxes

  1. Thanks for writing the blog, Logan. It’s good to know you’re at least conscious of taxing by the state and federal government. That being said–I’d like to see your ideas further developed before I weigh in on how I feel. And I ask this respectfully — are taxes “your way” a view of the world through rose colored glasses? Are they practical? Why, why not?

    • Could you rephrase the question? I’m not sure of what you mean.

      • Taxes shouldn’t be taken out of our paychecks, we should pay them out of our own pockets instead, to better monitor the money the government is spending. What? If anything that’s going to make us more aware of the government’s TAXING habits (maybe not, look, we’re already talking about it under the current system). I don’t see a solid connection to making citizens more aware of our governments SPENDING habits. See what I mean? Undeveloped propositions.

        I can see no circumstances where you earn more than $35,000 per year as a Forum Communications employee. You’re probably sitting towards the lowest end of the tax bracket–those who pay the least, and complaining. Which is ok — I do my fair share of complaining, but see what I’m getting at? Let’s be practical.

        • I’m not calling for the abolition of withholding income taxes. I’m proposing a better way for individual taxpayers to use that system.

          Some are already noticing how much the government is taking on their own, but I believe a lot of people out there may not be fully aware of just how much of their money is taken by taxes. I’m not complaining about how much I’m taxed, but saying that the current method of paying them can make us not fully comprehend how much is being taken. If you disagree with that, that’s fine.

          I think my system is practical for me, and it’s working OK so far. I think other people might also benefit from it. Do I think it would make government leaders happy if everyone in the country suddenly adopted it? (Fat chance!) No.

  2. Marlyn says:

    I like your system. My husband and I had this same theory about big ticket items we purchased. If we felt we would need a new car in a couple of years, we made payments to our selves in a bank account and then purchased the car with cash. No loan, no interest. We bought all appliances with cash. The only loan we had was for the house. I am now retired and required to make withdrawals from some investment accounts. They take out the taxes and I have tried to get them to reduce the amount, because each year I have to get a refund for over payment of taxes. They say they are following the law and can’t change the percentage that they take out.

  3. I love getting that federal tax refund every year and if the government can put that money to good use for a while, I have no problem with that. I say each to his own.