Dominic Pino and Charlie Cooke are happy to say, ‘Where’s my plastic?’

One of those bitter ironies of history is that Milton Friedman played a key role designing our modern system of income-tax withholding. 

Before the Second World War, most people who owed income tax paid the bill to the Treasury in one lump sum on Tax Day. Friedman, who would later become famous for advocating free markets and low taxes, worked at the wartime Treasury Department. In an effort to streamline the collection of tax revenue to fund the war effort and limit inflation, he helped develop the system we know today, in which Americans have a part of their paychecks automatically withheld by the IRS. On Tax Day, instead of writing a check to pay their annual taxes, approximately two-thirds of Americans get a tax refund.

Now, of course, Americans are still paying taxes under this regime, but Friedman came to bitterly regret this system because the effect of automatic tax withholding during peacetime is to partly shield Americans from the very real pain point of paying taxes. “I wish there were some way of abolishing withholding now,” he later said. Indeed, many people now see Tax Day (incorrectly, of course) as some sort of financial windfall given to them by a beneficent government.

What I am suggesting to my friends Dominic Pino and Charlie Cooke is that, in addition to raising needed revenue for the federal coffers, a reintroduction of the pain point of higher taxes would be politically salutary for the overall effort of getting back to small government under our current political conditions.

Pino rejects my argument that “Spending Till Kingdom and Cutting Taxes Will End Badly” by suggesting that “Spending Till Kingdom Come and Raising Taxes Will Also End Badly.” I (cheekily, I admit) accused him of dining out, in “Dominic Pino’s Free Lunch.” He responded by insisting that he has paid for his lunch. Charlie interjects that the lunch isn’t guaranteed.

I don’t want to straw-man their disagreement with me. Cooke, Pino, and I would all vastly prefer an America with a limited government that stays in its lane and operates with sane finances and a low tax burden. We think that such a regime would be good not only for the country economically and for our personal pocketbooks but also for us as a people, as Charlie writes, in the ways that limited government and low taxes affect “behavior, investment, growth, employment, innovation, [and] productivity.” Small government and low taxes create, in effect, a more virtuous and independent people. And, to get back to that ideal state of affairs, all three of us would prefer that we cut spending dramatically rather than raise taxes.

What we disagree on — and, to my mind, the only thing we disagree on — is what conservatives ought to advocate if the American people refuse to cut spending, as they are doing now.

Dominic writes, “Conservative ideology aside, . . . fiscal reforms have to start with spending in order to work.”

Plenty of people out there believe in a free lunch, but I’m not one of them. I’m just saying that when you’re having a hard time paying for your lunch, and your lunch is five steaks, a pound of fries, and a bottle of expensive wine, the solution is to stop buying so much food.

My contention, contra Pino, is that what the American people are doing by voting (consistently, over multiple generations) for debt-financed Big Government and debt-financed low taxes is to put Dominic’s big lunch on the national credit card — a credit card that will likely be paid off by our kids via inflating away the debt or through brutal tax hikes.

My contention, contra Cooke, is that a Big Government society that operates on debt-financed low tax rates is developing “models” that perhaps aren’t as favorable as they might seem today. I agree with Charlie that life isn’t a board game, but has he considered that the overall effect of bending the rules of finance and fiscal responsibility so dramatically, and over so long a time, is the warping of the citizenry’s understanding of the cause-and-effect mechanisms of life? Has he considered that we are perhaps creating an essentially dishonest economic “model” that will have “important effects of its own”? I happen to think so, but I’d love to know what he thinks on this point.

The American people are not feeling (at the moment, that is) the effects — the very real pain — of Big Government because they’re not paying Big Taxes.

Oh, I’m sure we will one day. We’ll see inflation and high taxes and haircuts to Social Security and Medicare. That will come, and there will be wailing and gnashing of teeth. But today, most Americans are content to put Big Government on the national credit card.

Charlie and Dominic are, too. That’s not their preference, of course. They’d obviously prefer to cut spending to balance the budget, and, again, so would I. But if the American people won’t cut spending, then Dom and Charlie are happy to say, “Where’s my plastic?”

Dominic asks what kinds of taxes I’d be willing to see raised to pay for our gigantic entitlement state. Well, if the American people refuse to cut spending, I think, in general, you get less of what you tax, so I’d prefer to see taxes on investments (capital gains taxes) and work (income taxes) lowered and a big tax on consumption levied, through something like a national sales tax. Ideally there would be a line item on each receipt saying “$17.42 — Federal Sales Tax” so that Americans would begin to feel the pain that Milton Friedman took away and demand that their money is spent wisely and efficiently. (Of course, under the Pino/Cooke plan of doing nothing on the tax side until the crisis comes, we’re likely to get consumption taxes and higher income taxes, capital gains taxes, and payroll taxes down the road.)

I’ll lay my cards on the table. I don’t think the American people are going to demand that we fix our debt problem until we are simply forced to by dint of a national fiscal crisis. But perhaps by advocating the responsible thing now, by advocating that Americans pay for a little more of what we’re happy to spend, Americans will begin to demand that we spend our money a little more wisely — and, ideally, that we spend less overall.

I think even Milton Friedman would agree that the American people wouldn’t order such a big lunch if they had to pay for it in cash.