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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