Tax collectors don't change much through the ages.
In the 17th Century, Louis XIV's finance minister, Jean-Baptiste Colbert, famously said that the art of taxation involved plucking the goose so as to get the most feathers with the least hissing. More recently, Internal Revenue Service Commissioner Mark Everson suggested in a speech that, in any attempt at tax reform (such as that currently being investigated by President Bush's advisory panel), "policy options should be carefully assessed for their potential impact on attitudes towards compliance."
Everson went on to talk about fairness and perceptions of fairness, but both his and Colbert's comments both boil down to minimizing the hissing.
And while Everson made a special point of highlighting the president's requirement that any proposed reform be "appropriately progressive," he might more profitably have reminded the panel that the United States currently possesses one of the most powerful weapons ever given a tax collector in the history of humanity.
The weapon in question? Withholding.
Withholding may well be the U.S. government's cleverest, most effective policy -- and it's certainly the greatest hiss-muffler ever invented. If Colbert had been able to withhold, things might not have gotten so messy around the guillotine; if the British had been able to do it, we here in the U.S. might all be drinking a lot more tea.
Withholding is fantastically effective because it takes advantage of a particular human quirk: People discount the value of money they don't have. The Founding Fathers started a revolution over tax rates that were far smaller than the ones we're taxed at now; if the average American had to write a check every April 15 for the amount that they actually pay annually in taxes, there would be blood in the streets of Washington, and Grover Norquist would be elected president-for-life. But because the money is siphoned off before it ever reaches the taxpayers' hot little hands -- and in bits and pieces, twice a month -- the enormity of the sums involved is masked and muted. People still hiss, of course, but less than they might otherwise.
And then there's the added tweak of refunds, where a small amount of money actually manages to make some people happy that the government has been lightening their pay packets by a much larger one. What other tax collection tool can claim that?
The reason for this fulsome praise of withholding is that there has been a lot of talk floating around the president's reform panel about consumption taxes. Now, there may well be sound economic reasons for a tax on consumption, as opposed to one on income, but the panel would do well to remember that the most common form of consumption tax involves people digging into their wallets at a sales counter. And if Americans suddenly start finding themselves having to pay taxes on their purchases with actual money -- bills they themselves have folded, coins they've personally jingled -- they're going to do three things: Purchase less, develop a thriving black market, and start hissing like crazy.
So when it comes to tax reform, Everson (and everyone else concerned with maintaining a decent flow of government revenue) should remind the president's panel of the simple, hypnotic beauty of withholding, and its enormous power to reconcile taxpayers to taxpaying.
Compliant geese, after all, hand over the most feathers.
Daniel Hood is managing editor of Accounting Today.
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