Jay A. Soled (Rutgers; Google Scholar) & James Alm (Tulane; Google Scholar), Passive Income Withholding: $200 Billion in Revenue Without Raising Taxes, 187 Tax Notes Fed. 1163 (May 19, 2025):

In this article, Soled and Alm propose a reform under which estimated taxes on investment income would, by default, be automatically withheld by the institution making the payment, which they argue would improve compliance and raise substantial tax revenue.

Conclusion
Tax reform is coming, but no one knows the exact shape it will take. At least three possible agendas are on tap: tax cuts, relief of administrative and compliance burdens, and deficit reduction. Of course, equity considerations are also on the agenda of many policymakers.

In most instances, proposed tax reform measures address only one of the agenda items. For example, eliminating taxes on tip income constitutes a tax cut, and increasing the tax rate on income earned by millionaires targets deficit reduction. Few tax reform proposals currently on the table can multitask.

However, the voluntary tax withholding proposal uniquely checks off two of the tax reform agenda’s boxes. Were it instituted, it could eliminate millions of filing submissions. This translates into much less administrative burden on taxpayers and the IRS. At the same time, this reform measure could result in as much as $20 billion more revenue flowing to the fisc annually — and $200 billion over 10 years — without increasing tax rates.

In all of this, keep in mind the voluntary nature of the proposed tax withholding system — an aspect that must be emphasized. Because of its voluntary nature, no one would be forced to use this tax withholding system. Even so, because it would be the default for taxpayers earning interest, dividends, and other investment income, most taxpayers would likely default to it because on balance it would save them from a quarterly drudgery that they would rather avoid.

Would the proposed reform measure solve all of the nation’s tax woes and revenue needs? The answer is definitely no. However, a voluntary tax withholding reform is undoubtedly the first step toward instituting meaningful tax reform. As such, it should generate bipartisan support, and the public should also welcome it.

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