17 January 2012

Tax Day

This morning, I dropped a couple of checks in the mail: one to the U.S. Treasury and one to the State of Michigan. Like most people who are self-employed, I make quarterly payments for the year's estimated taxes; the deadline for 4Q 2011 is today.

If you're an employee, your federal and state taxes are automatically deducted from each paycheck. You never see the money. Oh, sure, you'll see the line item on the pay stub for the deducted taxes...if you look for it. But if you're like I was when I was an employee, you probably have your check directly deposited into a bank account and never bother looking at the paper pay stub. You confirm that $X shows up in your account, and you think of $X as the amount you "get paid." Seldom, if ever, do you think about the amount you never saw.

Then, after you file your taxes in March or April, chances are good that you'll receive a sizable refund check for the amount of tax that you overpaid during the course of the year. Ever stop to think about that? You're giving the government an interest-free loan from every paycheck. Then you get this big check, which you then probably think of as "bonus" that you can use for something special.

The bigger the "bonus," the happier you probably are. It should be the opposite: the bigger the refund check, the more troubled you should be at the size of the interest-free loan you provided. But, human psychology being what it is, the government knows that's not how you'll react. You never saw the tax deductions all year. You never thought about what you never saw. Now you get a chunk of it, all at once, in a lump sum, courtesy of the U.S. Treasury. Isn't that great?

Contrast that with the experience of the self-employed. You deliver a project for a client, and get a check at some indeterminate time in the future. You deposit this money in a bank account, where you see it and control it all quarter. You spend some of it. You think about what else you'd like to spend it on. And then, at the end of the quarter, you must sit down and write a check relinquishing a portion of those funds to the United States Treasury. It was yours. You held it in your hands. You thought about what you could do with it. And then you turned it over to the government.

When you're making these quarterly payments, you try to make each one as small as legally possible --- and are happy when you sit down in April to do your taxes and discover you owe additional money to the government. That means you didn't overpay, and didn't provide an interest-free loan. But even if you have an unexpectedly large number of deductions in a particular year, and overpaid Uncle Sam, you don't even think about requesting a refund check. Instead, you apply the overpayment to the next year's tax bill. It becomes part of your first quarter estimated tax payment.

Why do I raise this topic? I love being self-employed, and the independence that goes with it. But it's remarkable how much the experience has changed my perspective on taxes and government spending. The more of these quarterly payments I've made, the more personally I've come to view government spending. The dollars government spends seem much more like my dollars now, in a way they did not when my paychecks were getting directly deposited with deductions automatically taken.

The local freeway resurfacing? The aircraft carrier? Ethanol subsidies? Payouts to failed solar panel manufacturers? Subsidies to buyers of electric cars? The person in line ahead of me at the grocery store, who pays for a cartload of junk food with an EBT card before whipping out a wad of cash to pay for their beer? Whether I approve of any of these particular expenditures or not, they represent dollars that used to be in our family's bank account. And I remember writing the check which turned them over for the government to use in these ways. That is much more real to me now than it was before, and much more real than I think it is to those who never see the deducted dollars at all.

For the record, I don't think our family is overtaxed. I happen to agree with Oliver Wendell Holmes that taxes are the price we pay for civilization. I'm happy to see the government provide a strong national defense, build and maintain roads, and fulfil the rest of its core functions. But the experience of writing quarterly checks has made me much more attentive to "everything else" the government spends money on --- and has led me to question those priorities to a much greater degree.

Try a thought experiment: imagine that, starting this year, every working American received every penny of his or her paychecks. And then had to sit down once a month and write a check to "United States Treasury" for the same amount that is currently being deducted. And a second check to their state or local tax authority.

I'm guessing we'd see much more vocal pushback against government spending at all levels. And maybe even a political revolution that restores truly limited government.

Which is why automatic tax withholding will never be eliminated. But we can still dream, right?

No comments: