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State Treachery
... a strong distrust of government is indigenous to the American character.

 

                                 

 

 

By George F. Smith

MSN.com recently challenged visitors to see where their tax dollars go and posted a link to a site "explaining" the income tax and taxes in general.  It says that if you, the taxpayer, knew what government was doing with your taxes, "the less painful it [would] be to open your wallet each April." [1]

One thing government does is take a cut of your income from each paycheck, keeping you from ever using it. 

This has been the practice since 1943 when Federal Income Tax Withholding became reality.  Formally called The Current Tax Payment Act, this legislation converted a "class tax" into a "mass tax" with the enthusiastic approval of its victims.

Between 1914 and 1942, the public overwhelmingly opposed withholding of income taxes.  Then in 1943 it became law.  How did this happen?

Charlotte Twight, economics professor at Boise State and author of Dependent on D.C., provides a detailed explanation [2]  Essentially, it was sold as a benefit to taxpayers, even as government officials regarded it as a means of extorting more taxes.  "Senators and representatives spoke candidly in congressional hearings (U.S. Senate Hearings 1943: 43) of the revenues that needed 'to be fried out of the taxpayers.'"

Even with the propaganda machine running at capacity, federal officials viewed the pay-as-you-go method withholding as the key to imposing tax increases without resistance.

It had taken decades and a combination of political maneuvering and deception to get the public to accept just a basic income tax.

The Income Tax amendment passed in February 1913, and in October the same year Congress enacted the first income tax law, which carried with it a provision for withholding taxes "at the source."   Taxpayers hated withholding, and they let their sentiments be known.  In 1917, Congress repealed the installment clause.

Withholding got a boost from government-created crises in the 1930s and early 1940s.  Social Security arrived in 1935 as a payroll tax  withheld at the source.  The lie in this case was the claim that each "contributor" would have an "account" in D.C. as a nest egg for old age.  Very importantly, it represented a system of collection, payment, and administration needed for withholding.  Then in 1942 Congress passed the Victory Tax, a flat five percent tax above a $624 deduction that required employers to withhold it at the source.

The tax machine was ready for withholding, but the people were still tentative.  The sham known as the Ruml proposal relaxed their fears.  By this scheme, taxpayers would be "forgiven" one year's taxes.  Under the pre-withholding system, taxpayers would pay their 1942 taxes in 1943.  Under withholding, they would also pay their current (1943) taxes each paycheck.  Ruml removed this double taxation by eliminating the 1942 tax liability.  As soon as the press started pushing the plan in late 1942, public sentiment shifted strongly in favor of withholding, especially when people were reminded it would "help the war effort."

It was state legerdemain at its finest.  With incomes on the rise and taxes collected immediately at the source, government's tax haul would increase.  But Roosevelt didn't like it and promised to veto legislation that "forgave" the entire 1942 tax bill.  He finally agreed to a cancellation of 75 percent of one year's tax liability.   

The 1943 hearings on the withholding also reflected a new ideology in American life, as exemplified in an exchange between Representative McLean and ex-Treasury official Elisha Friedman:

Mr. McLean: Do you think there is anything inherently wrong in going too far in compulsory deductions from wages?

Mr. Friedman: I can only come back to this, we have got to do it gradually.

Mr. McLean: Whether you do it gradually or rapidly, I am asking you whether there is anything inherently wrong in taking money out of a fellow's pay envelope without giving him the right to say you are privileged to do it.

Mr. Friedman: Is it wrong for a democratic form of government to do anything?  You are the people's elected representatives.  When you decide to do something, it means the people have decided it.  What do you mean, wrong?

Reflecting on the implications of Friedman's statements, McLean said, "You are trying to take their independence from them."

With the passage of federal withholding, not only was opposition to taxation minimized, but as government officials commented, "the groundwork was laid for securing in ensuing years prompt and regular response to revenue demands." 

Indeed, by 1980 Treasury Secretary G. William Miller was proclaiming, "It is now a minimal problem to maintain a withholding system on salaries and wages, which is absolutely at the heart of our self-assessment technique of paying taxes." 

 Withholding is the key to suppressing tax rebellion.  Without it, people wouldn't be so willing to "open their wallets in April" -- or any other month.

 

References

1.  Where your tax dollars go: Income tax, the EZ guide, http://encarta.msn.com/guide/IncomeTaxGuide.asp (Broken link)

2.  Evolution of federal income tax withholding: The machinery of institutional change, Charlotte Twight, http://www.cato.org/pubs/journal/cj14n3-1.html

Next in State Treachery
Suing Corporate America to Save the World

Other Interesting Sites

Wikileaks Mirrors

Ron Paul's
Campaign for Liberty

Strike the Root

Classics of Libertarian Thought

BK's FED Economics Portal

Greenspan's 1966 "Gold and Economic Freedom"

Ludwig von Mises Institute

"V" for Vendetta

                                       

 

 

 

2001-2011
 George F. Smith