January 2012

Ending a tax that never was | As I was saying …

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Ending a tax that never was

by Bill Good
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I can't think of a better example of our problems in Washington, D.C., than the imposition—and subsequent repeal—of the 3 percent withholding tax on government contracts.

The tax arose out of Congress' "pay as you go" mandate, which requires new spending to be offset by either expense reductions or additional revenues. Although well-intended, the requirement becomes, at least in part, a game: Tax increases, for example, can be placed in outlying years and overturned by a new Congress.

And so it was with the 3 percent withholding tax. Congress needed to find some new revenues, and in 2006 the Senate Finance Committee, then controlled by Republicans, came up with the idea of imposing the withholding tax in 2011.

In theory, the tax would be returned to the contractor after a contract was completed and after the contractor had filed a federal income tax return. The model for the tax assumed the government would make its money on some additional tax returns being filed, but most of it would come from the float—interest earned on the taxes as ...

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