Wednesday, December 29, 2004
Tax Payment Act of 1943
Many Americans are wage earners, meaning they get a paycheck on a regular and consistent basis. The gross pay is one thing, and net pay is another. What's most important to us is that our net pay gets deposited into our checking accounts. (Business owners and independent contractors are required to file and remit taxes quarterly.)
A little known fact about our tax system is that the concept of 'withholding' income taxes was not always a fact of life. Between 1913 and World War II, an income tax existed; however, taxes were not withheld from paychecks. Instead, when April 15th came around, most Americans wrote a check to the US Government for the full amount taxes, not the net difference (as we do today).
The reason for this change in the tax regime was to fund our efforts in World War II and to a lesser extent, pay for the New Deal programs enacted during the 1930's. Here is a link to the US Treasury website explaining the history of taxation. Below is an excerpt from the website:
(Editor's note: I have a sneaking suspicion that every administration gets to put out their message on the facets of government. I wouldn't be surprised if this historical overview is part of that larger message, especially in light of the ambititious plans Presiden Bush has for the tax code and Social Security in his next term .)
Imagine having to save $5,000, $10,000, $20,000...to pay the tax man at one time! That seems daunting. But have no fear: our employers are effectively agents of the IRS in that they compute and remit each our payroll taxes each pay period. (A slip up on the employer's part will most certainly invite an IRS audit!)
Because of this, the income tax return has become simply a reconcilitation between what was withheld (and remitted) and what is actually owed, with the difference being owing more or receiving a tax refund. Most people get excited about their refunds. So excited in fact they take out a loan to get the money "now" and use the refund to pay the loan "later" at usurious interest rates. (The best situation is to owe a few extra dollars, essentially an interest free loan from the government. A huge refund, on the other hand, is an interest free loan to the government.)
If you are consistently receiving huge refunds or owing significant amounts of money, contact your payroll department and have them walk you through IRS Form W-4.
For those so inclined, here is an in-depth paper on the Tax Payment Act of 1943. Warning: it is a bit heady and hard to follow.
A little known fact about our tax system is that the concept of 'withholding' income taxes was not always a fact of life. Between 1913 and World War II, an income tax existed; however, taxes were not withheld from paychecks. Instead, when April 15th came around, most Americans wrote a check to the US Government for the full amount taxes, not the net difference (as we do today).
The reason for this change in the tax regime was to fund our efforts in World War II and to a lesser extent, pay for the New Deal programs enacted during the 1930's. Here is a link to the US Treasury website explaining the history of taxation. Below is an excerpt from the website:
Another important feature of the income tax that changed was the return to income tax withholding as had been done during the Civil War. 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.What an understatement! By withholding the tax at the time of pay, Americans slowly forgot just how much they paid in taxes. Any tax increase (or decrease) while amounting to a sizeable amount over a year, is hard to miss when your net pay changes by only 10's of dollars.
(Editor's note: I have a sneaking suspicion that every administration gets to put out their message on the facets of government. I wouldn't be surprised if this historical overview is part of that larger message, especially in light of the ambititious plans Presiden Bush has for the tax code and Social Security in his next term .)
Imagine having to save $5,000, $10,000, $20,000...to pay the tax man at one time! That seems daunting. But have no fear: our employers are effectively agents of the IRS in that they compute and remit each our payroll taxes each pay period. (A slip up on the employer's part will most certainly invite an IRS audit!)
Because of this, the income tax return has become simply a reconcilitation between what was withheld (and remitted) and what is actually owed, with the difference being owing more or receiving a tax refund. Most people get excited about their refunds. So excited in fact they take out a loan to get the money "now" and use the refund to pay the loan "later" at usurious interest rates. (The best situation is to owe a few extra dollars, essentially an interest free loan from the government. A huge refund, on the other hand, is an interest free loan to the government.)
If you are consistently receiving huge refunds or owing significant amounts of money, contact your payroll department and have them walk you through IRS Form W-4.
For those so inclined, here is an in-depth paper on the Tax Payment Act of 1943. Warning: it is a bit heady and hard to follow.
