Transparent Recognition of Unjustified Tax Hoarding in Government Act of 2016

At the onset of the Civil War, Congress passed the Revenue Act of 1861, which imposed a tax on personal incomes and to assure timely collection, taxes were “withheld at the source” by employers.

The need for Federal revenue declined sharply after the war and in 1872, the income tax was abolished and along with it, the Federal withholding mandate.

With passage of the 16th amendment to the Constitution, Congress swiftly passed legislation creating a Federal income tax, withheld before employee salaries were paid.

In response to growing taxpayer criticism of the withholding mandate, Treasury Secretary William G. McAdoo stated that “it would be very advantageous to … do away with the withholding of income tax at the source” because it would “eliminate a great deal of criticism which has been directed against the law”; a statement reflecting the sentiment which ultimately led to the repeal of Federal withholding authority in 1917.

In the 1920s and 1930s, income taxes were due on March 15 following the end of the tax year and could be paid either in one lump sum on that date or in quarterly installments.

With the onset of World War II, fearing that taxpayers might refuse to pay the higher tax rates and surcharges associated with funding the war effort, Federal officials, lawmakers, and political leaders such as President Franklin D. Roosevelt used the military crisis to draw on Americans’ sense of patriotism and resurrect the Federal withholding authority as a “temporary wartime measure”.

The campaign to reinstitute a permanent system of withholding overcame public hostility with the passage of the Withholding Tax Act of 1943 which incorporated suggestions proffered by Beardsley Ruml to eliminate individuals’ 1942 tax liabilities by counting amounts paid or withheld in 1943 as tax payments for that year.

Since that time, Congress has stubbornly refused to repeal the Federal withholding mandate contained in the Withholding Tax Act.

In fiscal year 2014, the Internal Revenue Service refunded overpayments amounting to over $330,561,145,000 more than actual individual income tax liabilities, effectively denying interest payments otherwise owed to taxpayers and amounting to a hidden tax.

These overpayments are returned annually in the form of tax refunds to taxpayers who often confuse the payments as a reward.

According to the Tax Foundation, in 2010, there were 58,416,118 tax returns with zero or negative income tax liability, or 41 percent of the 142,892,051 returns filed.

The absence of the Federal withholding mandate leaves employers and employees free to negotiate alternative, private means of collecting and paying Federal income taxes, thereby allowing individuals to voluntarily earn interest on their withhholdings.

The Federal withholding mandate allows the Federal Government to disguise tax increases and hampers Federal accountability and transparency by requiring the assistance of an intermediary tax collector.

Complying with the Federal withholding mandate imposes costly burdens and legal liabilities on employers forced to act as de facto IRS agents, without compensation for lost time and resources.

Referring to the Federal withholding mandate in his work Public Finance in Democratic Process: Fiscal Institutions and Individual Choice, 1986 Nobel Prize winning economist James Buchanan stated that “The individual who does not have possession of income before paying it out cannot” sense “the real cost of public services in a manner comparable to that experienced in a genuine act of outpayment”.

In a CATO Institute study, Charlotte Twight has noted that “[W]ithholding is the paramount administrative mechanism enabling the Federal Government to collect, without significant protest, sufficient private resources to fund a vastly expanded welfare state.”

The National Taxpayers Union notes that the incremental nature of withholding masks the true cost of Federal income taxes, which would be much more apparent if individuals had to write monthly, quarterly, or annual checks to the Federal Government.

to increase transparency and accountability in the Federal tax system by providing the public with a more accurate account of—

to decrease the overall tax burden and increase the personal wealth of taxpayers by allowing for the personal collection of interest during the fiscal year on overpayments that are otherwise used by the Federal Government to partly avoid interest payments;

to decrease the burden on employers by freeing them from the task of collecting income tax withholding from their employees; and

to end the deceptive practice of masking higher tax rates from taxpayers.

In general— The following provisions of the Internal Revenue Code of 1986 are hereby repealed:

Requirement of estimated tax payments for employee social security taxes— Subsection (f) of section 6654 of such Code is amended by redesignating paragraphs (3) and (4) as paragraphs (4) and (5), respectively, and by inserting after paragraph (2) the following new paragraph:

Effective date— The amendments made by this section shall apply to amounts paid on or after the first January 1 occurring after 1 year after the date of the enactment of this Act.

Authority of the IRS— Nothing in this Act may be construed to limit the authority of the Internal Revenue Service to accept voluntary tax payments from employers electing to continue collecting Federal income taxes from employees.

Voluntary employer participation— Nothing in this Act shall be construed to prevent voluntary employer sponsored withholding of Federal income taxes on behalf of employees.

Voluntary employee participation— Nothing in this Act shall be construed—