What The Withholding System Can Teach Us
Money that doesn’t touch your hands is money you don’t have to think about very much.
This is a concept the government has become very familiar with.
Take income tax for example, for much of the country’s history it was technically functional, but it asked more of the taxpayer than it does now. Back then, there was no withholding like today’s W-2 method, and payments were separate and quarterly, covering the year before.
Things changed during World War II. Fueling it required more than what the government was bringing in, which led to the Revenue Act of 1942. It was the first of several steps to expand the pool of taxpayers, taking it from 13% in World War I to roughly 60% by end of World War II.
In 1943, things started looking familiar. The system dropped separate quarterly payments and opted for withholding in paychecks like today. While this change was largely for the government and war effort, It simplified things for Americans too. Many workers were relieved of having to consciously set money aside all year.
More than eighty years on, the system has held without much protest. Understanding why can teach us what the government figured out back then.
Our energy and brainpower are limited. Having to consciously put aside money, unable to use it how you want, takes up attention you could be putting anywhere else. With the newer withholding system, the money is gone before it even registers as being available.
We believe that idea can reach way farther than just taxes. Habits built with this in mind tend to be more durable and less draining on a daily basis; and the idea is present in forms you might already use, like automated retirement contributions or putting bills on autopay so you don’t stress every time they’re due. The tax system that stood the test of time understood this idea, and the habits that stick around in our daily lives often work the same way too.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Laurel Financial Group is a separate entity from WFAFN.
This material is intended for informational and educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
This is a concept the government has become very familiar with.
Take income tax for example, for much of the country’s history it was technically functional, but it asked more of the taxpayer than it does now. Back then, there was no withholding like today’s W-2 method, and payments were separate and quarterly, covering the year before.
Things changed during World War II. Fueling it required more than what the government was bringing in, which led to the Revenue Act of 1942. It was the first of several steps to expand the pool of taxpayers, taking it from 13% in World War I to roughly 60% by end of World War II.
In 1943, things started looking familiar. The system dropped separate quarterly payments and opted for withholding in paychecks like today. While this change was largely for the government and war effort, It simplified things for Americans too. Many workers were relieved of having to consciously set money aside all year.
More than eighty years on, the system has held without much protest. Understanding why can teach us what the government figured out back then.
Our energy and brainpower are limited. Having to consciously put aside money, unable to use it how you want, takes up attention you could be putting anywhere else. With the newer withholding system, the money is gone before it even registers as being available.
We believe that idea can reach way farther than just taxes. Habits built with this in mind tend to be more durable and less draining on a daily basis; and the idea is present in forms you might already use, like automated retirement contributions or putting bills on autopay so you don’t stress every time they’re due. The tax system that stood the test of time understood this idea, and the habits that stick around in our daily lives often work the same way too.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Laurel Financial Group is a separate entity from WFAFN.
This material is intended for informational and educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.