January 15, 2004
Tax withholding proposed for independent contractors.
The NY Times
reports that the IRS' "taxpayers advocate", Nina E. Olson, has proposed tax withholding for American's independent, self-employed workers. Which makes a major change. She also proposes changing or even eliminating the Alternative Minimum Tax, which is supposed to make sure high earners pay at least some tax.
The taxpayer advocate, created by Congress to help the public deal with the tax system, proposed yesterday that taxes be withheld from payments to independent contractors, from truck drivers to freelance writers, and that the alternative minimum tax be repealed or at least revised so that it no longer applies to the middle class.
... For years, the number of workers who are classified as independent contractors, rather than employees, has been rising. Debate has raged in economic conferences, Congress and in courthouses over whether this means more freedom for workers, especially those in intellectual jobs, to move about as free agents or whether it is in significant part just a tax dodge. Federal law requires that income, Social Security and Medicare taxes be withheld from the paychecks of employees, but not from payments to independent contractors.
Ms. Olson proposed a basic withholding rate of 5 percent on payments to independent contractors, with lower rates for those in low-margin businesses. She said her proposal would "level the playing field" between companies that comply with the law and those that evade taxes by not properly classifying workers as employees, from whose paychecks taxes are withheld, or by not reporting payments made to contractors.
Ms. Olson also said it would be fair to individuals by reducing the number of people who do not report part or all of their income and may not even file tax returns because there is no record of their income. She said it would also reduce burdens on people who fail to set aside money for taxes and end up in debt to the government.
... The most pressing need, the report said, is repeal of the alternative minimum tax, which critics call the stealth tax because it reduces the deductions that individuals receive for themselves, their spouses and children, their state and local property taxes and some medical bills - and can even wipe out the standard deduction.
"The A.M.T. is bad policy and its repeal would simplify" the tax code, Ms. Olson wrote.
The tax, first enacted in 1969, was intended to make sure that very high-income taxpayers cannot escape all income taxes. In 1966, there were 155 taxpayers who made the equivalent of $1 million or more in today's dollars who paid no income taxes, the Treasury disclosed in 1969. The alternative minimum tax was set up for these people.
But by 2010, an estimated 33 million Americans will pay this tax, most of them middle- and upper-middle-class taxpayers who will lose their deductions.
I have to challenge the assumption that by 2010, 33 million Americans will be making more than a million a year. That's quite a bit. How do they know that? Let's focus on what people are earning today, and worry about 2010 in 2010. In any case, the AMT was set up to deal with the many loopholes in the tax code, most of which benefit the rich. If they do repeal it they should first eliminate the loopholes which made it necessary in the first place.
I find it strange that she suggests that the AMT hurts "middle-class" taxpayers, when it only applies to those who make one million dollars or more. It's the rich who will really benefit from this, not the middle-class, who will end up paying more taxes to make up for what the rich don't pay. But ever since the boom there's been a lot of pressure to repeal this, and I guess they're going to get their way. Same as the inheritance tax. All of which increases the growing gap between the rich and the poor.
Anyway, I feel it's "good policy", not "bad policy." If it needs to be adjusted for the growing incomes since 1969, that makes sense. Raise the threshold to two or five or ten million. But let's not pretend repealing it is aimed at "helping" the "middle-class." That's nonsense.
I've long felt that tax withholding ought to be voluntary. The argument is that taxpayers need help in managing their finances. At the very least, the government ought to pay interest on this money, which amounts to an interest-free loan to the government. In any case, it's another extension over the growing federal control of people's lives.
