Wednesday, May 7, 2003

To appreciate taxes, we need more pain, not less

By Raymond J. Keating

On April 15, I went to the dentist excuse me, the oral surgeon to have two teeth removed. As if this were not painful enough, these extractions occurred on Tax Day.

Getting teeth pulled and on the same day that taxes are due? More than one person asked if I was a masochist. I'm not. But after the medication wore off, I started to think about pain and taxes.

The much smaller number in my bank account after forking over money to the government hurt a lot more than my mouth, and will continue to do so into the future. After all, visiting the oral surgeon had a positive purpose: to stop further decay and trouble with my teeth.

However, it's hard to see much positive coming from being shaken down to such a great extent by government. Don't get me wrong, I'm no anarchist. We need government to protect life, limb and property. Unfortunately, government has grown far beyond these core duties, reaching massive levels at the federal, state and local levels. As a result, the bulk of my money taken by the government is simply wasted.

Of course, government waste is nothing new. Over the years, countless organizations and individuals have offered a wide range of ideas to get the size and cost of government under control.

Nonetheless, government continues its relentless expansion. It gets bigger when Democrats are in charge. It gets bigger when Republicans are in control. It gets bigger with divided government. Sometimes government grows at a rapid pace, at other times at a slower rate. On rare occasions, spending levels for a year or two might decline slightly or remain flat. But this always is a temporary phenomenon, and spending quickly resumes its ascent.

I think part of the reason for government's relentless expansion is due to the lack of pain when paying taxes. During World War II, the federal government began withholding income taxes from the paychecks of wage and salary earners. As a result, many people stopped looking at their total earnings, and instead focused on take-home pay. If you never get your full income in the first place, taxes paid simply don't hurt as much.

Getting rid of withholding would cause real pain, and the good kind of pain that has a productive purpose.

If you have your own business, for example, you have to write checks to the United States Treasury and most states four times a year in the form of estimated income tax payments. I have a full-time job where taxes are withheld. I also have a business where I write out checks quarterly to the government to cover taxes. So, I can say firsthand that having my money in hand and then having to write a check to the government carries far greater weight. Actually writing out checks to the government generates a lot more thinking and questions about the size and scope of government.

From 1913 to 1942, income taxes were paid in quarterly installments during the year after the income was earned. Returning to such a system would mean that all income earners would have to sit down four times a year and write out a check to the government.

It would be a wonderfully painful experience. For people who rarely give a thought to taxes and government, they'd start wondering where their money was going. What exactly are these politicians in Washington and the state capital doing with the money I worked so hard to earn? Couldn't I put those dollars to better use by investing, paying for my kids' education, giving it to my church, fixing up the house, or even taking a much-needed vacation? Many individuals would start to question the income tax itself.

For those of us concerned that big government and high taxes cause real economic harm, then having more people asking such questions would be quite productive.

If we are serious about reducing the size of government, then it's time to get rid of withholding. It's time to spread the pain.

[Raymond J. Keating is chief economist for the Small Business Survival Committee, and co-author of "U.S. by the Numbers: Figuring What's Left, Right, and Wrong with America State by State" (Capital Books, 2000).]