Abstract
The process of establishing a stable and effective system of taxation is a hallmark of nearly all modern states. Indeed, securing the ability to tax is a sine qua non of the historical process of state-building. From ancient Athens to the modern United States, nearly all societies have been concerned with the process of successfully collecting tax revenues. One critical concern that all taxing authorities face is limiting the “tax gap”— the difference between what should be paid voluntarily and on time and the amount that is actually paid.
Among the many modern administrative innovations adopted to facilitate effective tax compliance, arguably none has been more significant than the use of thirdparty reporting and tax withholding. Since at least the early nineteenth century, when Great Britain first adopted a crude form of withholding as part of its national income tax, governments have increasingly relied on harnessing the knowledge and power of third parties to increase income tax compliance. As a result, employers, financial institutions, and business corporations have become instrumental remittance vehicles and reporting agents for nearly all modern taxing agencies.