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March 11, 2009

How Effective Would Reduced Withholding Be?

by Brad Warbiany

In my post two days ago, I suggested that as many Americans as possible reduce their withholding to the minimum allowable levels. It’s a new type of tax protest, one that might actually hit the feds in the pocketbook:

So here’s my suggestion. April 15th, go to your HR department and change your W-4 claimed exemptions. Go with the maximum exemptions that you calculate will keep you from over-withholding, but small enough to avoid penalties. Budget (save or invest) the difference, so that you can pay the necessary tax next April, and don’t dare postmark the check to them before April 14, 2010.

Two folks (including my old blogging friend Perry Eidelbus and regular commenter jpm100 at QandO) suggest that it wouldn’t be as effective as advertised.

After all, it just defers the time at which the government gets paid, it doesn’t actually stop them from getting the funds.

But that’s not how the government operates. They’re expecting to get the money up front, and when the inflow drops, it is noticed:

Lower tax revenue and massive government spending on the bank bailout pushed the federal deficit to $765 billion in the first five months of the budget year, well on its way to hitting the Obama administration’s projection of a record annual imbalance of $1.75 trillion.

The Treasury Department also said Wednesday that the February deficit reached $192.8 billion. That’s a record for the month and up 10 percent from a year ago, but below analysts’ expectations of $205.7 billion.

The slow economy sharply reduced the government’s tax revenue last month to $87.3 billion, 17 percent below the previous year. The government has collected $860.8 billion in revenue through February, 11 percent below the year-ago period.

When government has to borrow the money up front, instead of simply having it withheld from your paycheck, it functionally increases the cost of their activity. It doesn’t mean that they won’t continue spending, but it certainly doesn’t make it as easy to increase it.

Of course, the question is still there of what to do with the extra money. I suggested to save or invest it, and my old college buddy Jim laughed at the investment idea. Considering the market over the last 6 months, I don’t blame him.

So here’s an idea. Take the extra money in your paycheck. Invest it in short-term T-bills. Instead of the Feds paying interest in China for use of their money, or getting yours interest-free, or hitting the printing press, they’ll be paying you interest on the use of your money. Obviously, if you’re an investment whiz, you can find ways to make a better return than what you get from T-bills. But if not, at least you’re earning SOME return for lending your money to the feds before they seize it next April.

Keep your money as long as you can, folks. Put it to use for yourself!

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  • http://www.belowthebeltway.com Doug Mataconis

    Brad,

    The last sentence of the post is the reason I like your idea.

    Whether it works as a tool of political protest or not, decreasing your withholding to the minimum level legally allowed is a good idea for a very simple reason —- it’s a stupid idea to give an interest-free loan to the government

    I’ve always said that tax refunds are for suckers.

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