FT218: “The withholding tax is the greatest sin government ever perpetrated against the people.” —Old Pithy

Posted by PITHOCRATES - April 18th, 2014

Fundamental Truth

The tariff was the funding source for most of government for about a century.

Once upon a time there was no federal income tax.  No estate tax.  No gift tax.  No payroll tax.  No capital gains tax.  And no corporate tax.  Taxes we take for granted today didn’t exist a century or so ago.  The country was a lot leaner back then.  People kept most of their money.  And took care of their families.

The federal government used to fund everything thing they did with tariffs.  A tax on imports.  Paid in ports.  As ships unloaded their goods.  Far away from most people.  And few people complained.  Our first excise tax was a different story.  A 7 cent per gallon of whiskey incited the Whiskey Rebellion.  After fighting the Revolutionary War to escape the oppressive taxation policies of Great Britain the people were in no mood for a new tax.  The whiskey tax lasted for about a decade.  Then they repealed it.

This left tariffs as the funding source for most of government for about a century.  But even that grew controversial.  And began the divisions between North and South.  The North protected its industry with protective tariffs on iron products, textiles (wool and cotton) and agricultural goods.  Shipped from the more industrialized Britain.  Which Britain responded to with tariffs of their own.  On cotton and other agricultural products grown in the South.  So the more the North protected their industries the more difficult it made for the South to export their raw goods.

In 1913 the progressives reintroduced the income tax and taxed the rich at 1%.

This wasn’t the only difference of opinion the North and South had.  And their differences resulted in war.  The North was able to win the American Civil War with its expansive industry.  But the war devastated the country.  Especially the South.  Which lost about 8.6% of her population.  To get an idea of what an 8.6% population decline is consider this.  That percentage of the current U.S. population is approximately 27 million.  So the losses the South suffered were similar to what the Soviets lost on the Eastern Front during World War II.

The South may have lost more of its population.  But the North suffered nearly the same number of war dead.  She just had a larger population to begin with.  To run all of that industry that won the war.  America’s first modern war was a costly one.  And one that President Lincoln had to turn to a new source of revenue.  The federal income tax.  Which taxed the rich.  At 3%.  Then it taxed the super rich at 5%.  But after they paid down the war debt they repealed America’s first income tax.

Then came the progressives.  And their taxes.  In 1913 they reintroduced an income tax.  Taxing the rich at 1%.  And the super rich at 6%.  To fund an expanding federal government.  Then came World War I.  To fund the war they increased the tax rate on the rich to 15%.  And the super rich at 77%.  The top marginal rate fell during the Twenties.   But FDR raised it back up during the Great Depression.  Until it reached 94%.  Where for every dollar they earned in and above the top income bracket they got to keep only 6 cents.

Few would be able to write a check on tax day to pay their full tax bill.

Then came all the other taxes.  And they just kept coming. Our tax bill grew to staggering amounts.  Which posed a problem for the taxing authorities.  As people just didn’t keep that kind of money around.  They worked.  They raised their families.  And what little they had left they put into the bank for their retirement.  Making it very difficult for them to pay their tax bill when it came.  Especially when it was 30% or more of their entire income.  So what to do?

The Founding Fathers created a nation out of a tax rebellion.  And then when that nation levied its first excise tax they got a little rebellion of their own.  Being opposed to taxes is part of the American DNA.  So the taxing authorities had to somehow hide the large amount of taxes we were paying.  That is, they had to reduce the transparency of these taxes.  For if you don’t know what you’re paying in taxes you really can’t get mad at paying high taxes.

Enter the withholding tax.  The greatest sin government ever perpetrated against the people.  For it takes our money before we ever get it.  Conditioning us to accept ‘net’ pay as the norm.  And making ‘gross’ pay some meaningless payroll jargon.  Because you can’t spend ‘gross’ pay.  You can only spend ‘net’ pay.  Which is the only pay people care about.  Making it not only easier to hide the soaring amount of taxes people were paying.  But because it’s so easy to hide what we’re paying they could raise those taxes to confiscatory heights.  Because we never have that money in our hands.  We never see it.  It goes from our employer to the taxing authorities.  Which is the only way they could collect these soaring amounts.  For few would be able to write a check on tax day to pay their full tax bill.  As people just don’t keep that kind of money around.

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The Federal Government taxes away about Half of Every Dollar the Middle Class Earns

Posted by PITHOCRATES - August 19th, 2012

Week in Review

Thanks to withholding tax people don’t fully appreciate how high their taxes are.  They know they’re high.  So high that gross pay means nothing to them.  Workers only speak of ‘net’ pay.  Or ‘take home’ pay.  The money they actually get.  Not that strange fictitious ‘gross’ pay on their paycheck stub.  Whatever that is.  And what is gross pay?  Their pay.  It’s their money.  And they would have had it when they cashed their paychecks if their employers didn’t withhold it so they could give it to the government.  And why does the government use the withholding tax to take our money?  Because if we had to write a check at the end of the year for our full tax amount there would probably be a nationwide tax revolt.  Which is why the taxing authorities take that money before it gets into our hands.  Because once it is in our hands people may be less willing to hand it over to the taxman.  Which is probably why the Founding Fathers didn’t include any withholding taxes in the Constitution.  They did not want to make it easy for the government to take our money.

So how high are the taxes on the middle class?  Pretty high (see Government Will Take Almost Half Your Paycheck in 2013 by Patrick Tyrrell posted 8/13/2012 on The Foundry).

A middle-class taxpayer’s income is subject to a 25 percent federal income tax. Then there is the federal Social Security and Medicare payroll tax of 13.3 percent in 2012—5.65 percent of that is removed from the employee’s paycheck, and the remaining 7.65 percent is paid by the employer. (In reality, the employee pays the entire 13.3 percent, because the employer’s portion of the tax does not affect the cost of labor: The employer would pay the employee 7.65 percent more if there were no employer’s portion of the payroll tax.)

So the 25 percent federal income tax plus 13.3 Social Security and Medicare payroll taxes equals 38.3 percent going to federal taxes in 2012.

And then there are state taxes. According to the Tax Foundation, the average state’s income tax rate for the middle-class taxpayer is 4.82 percent, which brings the total to 43.12 percent in federal and state taxes.

In Billy Joe’s Movin’ Out (Anthony’s Song) he says, “You can pay Uncle Sam with the overtime.  Is that all you get for your money?”  The point being is this.  Yes you can give up your Saturday and work some overtime.  But is it really worth it when you can only keep about $0.57 of each additional dollar you earn?  Not really.  Which is why a lot of people who work with their hands will do ‘side work’ for cash under the table.  So they can keep every penny of every dollar they earn.

Or some will work some hours serving tables in a restaurant.  For a little extra spending cash.  I worked with a lady who did.  A devout liberal Democrat.  And part of the middle class.  I asked her if she reported all her tips so she could pay her fair share of taxes on those earnings.  Even though she was a steadfast liberal Democrat voter who always voted ‘yes’ to increase tax rates on others she said the government had already taxed her enough.  So that those supplemental earnings should be hers free and clear.  Of course, that’s not how the tax law works.  You make more you pay more.  She wouldn’t give me a definitive answer on whether she reported all her tips as income.  But it was interesting to hear her say that high tax rates were fair.  As long as she didn’t have to pay them.  Well, her taxes will be going up.  Fair or not.

And it’s going higher, thanks to the nearly $500 billion in tax increases for 2013 that some have called Taxmageddon. In January of next year, the federal income tax rate for middle-class taxpayers is scheduled to rise from 25 percent to 28 percent, and the payroll tax is scheduled to rise from 13.3 percent to 15.3 percent. This drives the marginal tax rate based on the aforementioned three taxes to 48.12 percent. Add in state and local property, corporate, excise, and other state and local taxes, and the percentage of each additional dollar that is taxed hovers around 50 percent.

When half of each additional dollar earned is taxed away, taxpayers experience a disincentive to start businesses or expand existing ones. This leads to fewer jobs being created.

It’s like we divorced our government in the state of California.  And we lost half of everything we earn to a spiteful ex.  Half!  Yeah, that really encourages you to work hard and build your business and hire more people.  So you can deal with the labyrinth of government regulatory compliance.  Lawsuits.  Insurances.  Drug testing.  Sexual harassment training.  All the while hearing the government tell you, “You didn’t build that.”  That you somehow won life’s lottery to riches.  And that you’re greedy for not wanting to pay more taxes.  And for what?  To keep half of every dollar you earn?  It would be a lot easier just to lay off all your workers. Shut down your business.  And go to work for someone else.  And let them deal with these headaches.  Like they did in the Roman Empire as it was collapsing under the weight of her welfare state.  Until the Romans passed laws forbidding people from quitting the work they were doing.

The sad thing is that so many people will vote to perpetuate this binge of taxation.  While they themselves will do everything within their power to avoid paying their own ‘fair share’ of taxes.  While demanding the rich pay more.  Even though the top 10% are already paying 70% of all federal taxes.  The truth is that the rich can’t pay these taxes.  There just aren’t enough of them.  Even if you take everything they earn.  Which leaves the middle class to make up this tax shortfall.  So they take half of everything they earn.  And will continue to take more as their spending continues to grow.  And if people begin to quit the hard jobs because they can’t keep their earnings perhaps the government will step in like the Romans did.  And force people to be doctors.  To run pharmaceutical companies.  To build the next new technology.  It’s happened before to an empire that began as a limited republican government.  So it can probably happen again.  Besides who would have ever thought that the country borne out of a tax rebellion would one day take half of every dollar a middle class worker made?  No one would have seen this coming.  And yet here we are.  Paying half of every dollar we earn to Uncle Sam.

The Founding Fathers would be flabbergasted.  Upset.  And saddened.  To see what had become of their beloved republic.  And their experiment in limited self-government.

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FUNDAMENTAL TRUTH #81: “Gross pay is a myth.” – Old Pithy

Posted by PITHOCRATES - August 30th, 2011

The sooner Kids don’t Believe in Santa Clause the sooner they get Clothes as Gifts

When we were young the world had unicorns.  A jolly fat man in a red suit gave out toys once a year.  The Tooth Fairy paid us for our baby teeth.  Thankfully after they had fallen out.  And an Easter Bunny left hardboiled eggs for children on Easter morning.  Because kids love hardboiled eggs.  As well as the occasional piece of chocolate.

But that was once upon a time.  In a far distant land.  Our childhood.  And as we left our childhood we learned some hard truths.  They weren’t real.  Except unicorns, of course.  But Santa Clause?  The Tooth Fairy?  And the Easter Bunny?  Just childhood myths.  Existing only in our childhood.  Until the day our parents killed them.  Just to save a buck. 

Raising kids is expensive.  And these things just added to the cost.  Especially in large families.  The sooner your kids didn’t believe in Santa Clause the sooner you could wrap their clothes as gifts.  And skip the expensive toys.  Because Daddy worked hard enough.  And the money from that second job could buy Mommy some nice things for the house.  Or a new car.  Besides, there are only so many hardboiled eggs Daddy can eat.

Progressivism replaced Rugged Individualism with the Feminization of Men

Speaking of myths, there is another one many of us remember from our childhood.  Daddy’s paycheck.  He may not have earned a lot.  But he kept almost everything he earned.  And he could raise a large family.  Kids grew up with lots of brothers and sisters.  But then something happened.  And Daddy couldn’t do that anymore.

Government began to grow.  You can probably blame this on a war.  But probably not the one you’re thinking about.  Unless you’re thinking about the American Civil War.  For that war killed a generation of fathers.  Leaving a lot of children fatherless.  To be raised by widows.  During the 1870s and 1880s.  Some who would go on to enter politics.  And served in the federal government.  Joining the Progressive Party.  Which began the ending of rugged individualism.  And the feminization of men.

This was the founding of the nanny state in America.  Boys who lost their fathers in the Civil War had no male role models in their lives.  They were surrounded by women.  And went from rugged individuals to refined dandies.  In the Northeast, at least.  Overly sensitive to other people’s feelings.  Overflowing with empathy.  And filled with a mothering instinct.  Learned from their own doting mothers. 

(These Civil War widows went through unspeakable hardships.  Losing husbands, fathers, brothers and sons.  The Civil War killed approximately 2% of the population.  Some 620,000 people.  That same percentage of today’s population would equal some 6,000,000 people.  They lost so much that they doted on their remaining children.  As any parent would.  This is not a condemnation of their parenting.  These widows should be held up in the highest regard.  It’s just a story of numbers.  Such a large generation of fatherless children was destined to change the body politic.)

The Term ‘Gross Pay’ has gone the way of the Unicorn

The fatherless children of the Civil War began the growth of the federal government.  Where the best and brightest would make everything fair.  And better.  Woodward Wilson greatly expanded the federal government.  Then it was FDR‘s turn.  And then LBJ.  Every time government grew so did the cost of government. 

Wilson gave us the first income tax since the Civil War.  And gave us the Federal Reserve System.  FDR gave us the New Deal (including Social Security).  LBJ gave us the Great Society (including Medicare and Medicaid).  All expensive programs.  All requiring heavy taxation.  And where did those taxes come from?  Daddy’s paycheck.

During this period of expanding government a new term entered the American lexicon.  ‘Net’.  As in ‘net pay’.  If you got a pay raise or a bonus, your wife didn’t ask how much your raise or bonus was.  She asked how much will you ‘net’.  After taxes.  That part of the check you actually got.  Because by this time the term ‘gross pay’ went the way of the unicorn.  (Yes, I know unicorns don’t exist.)  Gross pay is a myth.  It may have existed at one time.  But now the term is meaningless.  Because of all the taxes taken out of your paycheck.

High Taxation and Inflation make it difficult for Daddy to Raise a Large Family Today

The gap between ‘gross pay’ and ‘net pay’ is now very large.  It is a very big part of the reason that Daddy can’t raise a large family anymore.  Even with working nights for a little extra money.  Now it takes two full time wage earners to raise a large family.  And a booming child care industry.

But this growth of government took spending to such heights that taxing alone could not pay for it.  So they borrowed a lot of money.  And printed a lot.  In fact, they were printing so much that President Nixon took us off the ‘gold standard’.  Which was the only real restraint on printing money.  And once he did, they printed away.  Giving us permanent inflation.  And a faster growing CPI.  Which shrank our shrinking paychecks even further.

It’s the one-two punch of high taxation and inflation that makes it difficult for Daddy to raise a large family today.  On a single paycheck.  Thanks to an ever rising CPI.  And an ever shrinking net pay.  It’s gotten so bad that kids often get socks and underwear for Christmas.  From Santa Clause.  Even when kids still very much believe in him.

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FUNDAMENTAL TRUTH #53: “The essence of politics is taking from the many and giving to the few.” -Old Pithy

Posted by PITHOCRATES - February 15th, 2011

That Great Sucking Sound of our Money Leaving our Pockets

All right, here’s the dirty little secret about politics.  Most people enter politics for the money.  They can say whatever they want but when it comes to voting tax increases, guess what?  There are tax increases.  Always.  The amount of money transferring from the private to the public sector is always increasing.  Always.  Congress set up close to half of the federal budget to increase automatically.  That great sucking sound isn’t jobs going to Mexico.  It’s our money leaving our pockets.

Take a look at your check stub.  Compare gross pay to net pay.  Are these numbers almost the same?  Or is the difference closer to a car payment?  A house payment?  Depending on where you are in your career this difference on your weekly paycheck could pay for a nice car.  Add them up in a month and they could get you into that nice house in the good school district.  This is a lot of money.  Ask your grandparents what was the difference between gross pay and net pay on their paychecks.  You’ll probably be surprised.  Because, back then, net pay was very nearly gross pay.

Today, nobody gives gross pay a second thought.  We talk about what we ‘net’.  Because we’re just used to it.  You see, the government (federal, state and local) didn’t just start taking hundreds of dollars out of our paychecks.  It was incremental.  Over a long period of time.  Sometimes coming to pennies a day.  Hard to see.  And just not enough to bitch about.  We may see tens of dollars of our gross pay taxed away over a decade or two.  But we typically make more over that same time.  Again, in the great scheme of things, these are small incremental changes.  Just not big enough for a great number of people to bitch about.

Incrementalism, Progressive Tax Rates and the Withholding Tax

That’s the power of incrementalism.  Baby steps.  Little by little.  Big growth over time.  Like watching grass grow.  You don’t see it grow.  Then one day you have to cut it.  And so it is with taxes.  One day you look at your check stub and realize how much you’re paying in taxes.  You may have never realized you were paying so much.  A progressive tax system keeps the tax burden on the young who don’t make a lot money yet low.  So they don’t see it at first.  And keep voting Democrat.  Not because they want to pay higher taxes.  But because the higher taxes haven’t impacted their lives yet.  When they do start paying more in taxes, that’s when some of them start voting Republican.

So taxes creep up on us.  We don’t see them all that clearly at first because of progressive tax rates.  And the fact we pay them before we see them.  Via the withholding tax.  Which provided the greatest advancement in the collection of confiscatory taxes.  For without it there would be tax revolts when April 15th rolled around and people didn’t have tens of thousands of dollars sitting in their checking accounts to pay their taxes.  I mean, what’s easier?  Getting us to pay our taxes with money we never saw?  Or paying our taxes after having that money in our hands first?  Funny thing about earnings.  Once we have the cash in hand we don’t give it up lightly.

That’s why the government introduced withholding taxes.  It makes getting our money from us easier.  And allows them to raise our taxes ever higher.  Because we pay those taxes with gross pay.  Pay we never get.  In our real world, gross pay is a myth.  It doesn’t exist.  Our earnings only become real at net pay.  Sad.  But true.  So they can increase our taxes a lot more than if we were paying them in full in April.  And do.

Pandering and Patronage

Yeah, but America is a center-right country.  And liberal Democrats on the left are the ones who want to keep increasing our taxes to pay for their Big Government programs.  So how can they?  When America is a center-right country.  I mean, if it’s a minority of Americans that want to raise our taxes to grow government, how do they get the votes to increase our taxes in the first place?

By pandering.  Buying votes.  And patronage.  The power to tax provides near-limitless money for politicians to spend.  The trick is in the getting and giving amounts of money.  You tax the many.  And give to the few.  You tax a hundred dollars or so from each paycheck.  And give hundreds of thousands of dollars to those who can help you win election.  That’s how the tax and spend people win elections.  They give money to small groups in exchange for their vote.  Or legislate favorable legislation for them.  Or put someone from that group in the government itself in an oversight position of the industry there’re in.

A small group by itself can’t make a big difference at the polls.  But you get enough of them, they can.  Luckily for the tax and spenders, a lot of these small groups can be found in the political center.  Which helps pull some of that ‘center-right’ to the left.  And this is how the difference between gross pay and net pay continues to grow larger.  These ‘swing votes’ may pay more in taxes, too, but the special privileges they receive from the government more than makes up for it.

The Little Programs Add Up

We pay a lot in taxes.  And yet you don’t hear too many people complain about it.  Why?  The progressive tax rate plays a role in this.  There are more poor people than rich.  So fewer people pay taxes.  And the withholding tax helps, too.  Because most of us don’t even pay attention to what we’re paying.  But what really helps government is the number of taxpayers.  The total amount of taxes each taxpayer pays can ‘appear’ small.  And the amount each taxpayer pays for a specific program can appear smaller still.  This can get a lot of people to ‘support’ these little programs.  Simply by their passive lack of opposition.

For example, heating assistance for the poor is not a very big part of the budget.  And it doesn’t take much out of your paycheck.  You feel for the poor who can’t pay for heat.  You want to help.  So there isn’t a lot of political action against this program.  It’s like those commercials where you can save a child in Africa for the price of a cup of coffee.  I mean, who wouldn’t feel guilty for refusing to buy one less cup of coffee to save a life?  It’s an effective tactic.  Making people feel guilty for being so greedy that they are unwilling to drink one less cup of coffee.  And no one wants to be seen as this greedy.

But the little programs add up.  You start out by sacrificing a cup of coffee.  But when each of these little programs costs you a cup of coffee, they can add up to a dinner.  A movie.  A night on the town.  A new car.  And they do.  That’s why a lot of people can’t live in the school districts they want to.  Because of the aggregate of all of these little programs.  But we never look at the aggregate.  It’s always one program at a time.  To make the taxpayer feel guilty for their greed.  To break down their will to oppose cuts.  To go along with further tax increases.  And a lot of us do.  Which makes that gap between gross pay and net pay grow ever larger.

Taxpayers and Tax Consumers

But things are changing.  And it’s causing a problem.  The baby boomers are beginning to retire.  They’ll soon be using Medicare.  And collecting Social Security.  So the number of taxpayers will go down.  While the number of tax consumers will go up.  And that changes everything.  The fewer taxpayers will have to pay a larger amount of taxes to support these entitlements as well as all of those little programs.  And this will make it a lot harder to hide these taxes.  To make them appear small.  More people will have to go with less to pay these taxes.  Even those who once did all right during periods of high taxation will have to go with less.  Because more people will be consuming Medicare and Social Security benefits.  And it’ll be political suicide to cut these programs.  Leaving little choice but to cut some of the little programs.  Which will give the patrons of Big Government little incentive to support tax and spend any longer.  Because they’ll see more taxing.  And less spending.  On themselves.

Politics as usual will not work as well as it once did.  Because they will not be able to hide the cost of Big Government any longer.  They won’t be taking from the many to give to the few anymore.  They’ll be taking from the few to give to the many.  Which can’t be anything but a recipe for disaster.

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