Posted On: Saturday - April 18th 2020 10:38AM MST
In Topics:   Liberty/Libertarianism  US Feral Government  Taxes
It's been a while since our last Morning Constitutional, which explains why posting has been somewhat irregular lately. In the last, summary post about the abomination known as Amendment XVI, in point #5 of the 5 Evils, Peak Stupidity mentioned and wrote a short footnote about income tax withholding. Nope, the idea is not specifically written about even the 1913-amended US Constitution, well, see, it was left open-ended, exactly how this new source of funds was to be collected. That's why you don't! let! them! ... ahhh.
Please read the great comments under that 3rd Amendment-16 post, which, with 21 comments, less than 50% having been written by your Moderator here, makes a new Peak Stupidity record! Commenter Ganderson* wrote in that he had just finished a lecture on the home front of WWII with discussion of this very subject, mandatory income tax withholding. Please, Mr. Ganderson, if you have anything in written form that will fit, I can attach it to this post or make it a subsequent post.
After a quick search, eschewing wiki, as I'd rather do more, I came across a site called the Foundation for Economic Education. They go by FEE, and I'm sure, being economic experts, they realized I'd not been reading if they'd had one. They have a nice, pretty unbiased, quick read about the War Time Origins of Modern Income Tax Withholding. Yep, mandatory withholding goes back 77 years! People know no other way. (You'd have to have been an paid-on-the-books working man - not nearly as prevalent then - in 1942, meaning 95 years old.. with a good memory!)
What was surprising to me out of this FEE article is that even 26 years after the Amendment XVI abomination was ratified, the common man normally paid very little income tax, if even filing forms at all. It really was on the richies at first. WWII changed all that. From the article:
Before World War II individuals who owed federal tax on their income earned in a particular year paid the tax during the following year in quarterly installments. In those days relatively few people paid income taxes. As late as 1939 fewer than four million individual returns were filed, and the filers’ total tax bill came to less than $1 billion, or less than 4 percent of their net taxable income. When so few people paid income tax and the amounts due in most cases were so small, the system of deferred payment imposed no great burden and gave rise to few taxpayer complaints.Yeah, well, to the great chagrin of government officials, "customer" complaints have skyrocketed.
Back to WWII, the big one, holy moley, Federal tax spending rocketed from $9 Billion in 1940 to $98 Billion, 10X as much, by 1945! Yes, it was the war, and governments involved needed as much money as they could round up. However, as one can see from the last graph in Peak Constitutional Amendment - XVI, Part 2, afterwards the tax collected went down maybe 25-30% from the 1945 peak, as a ratio to GDP, but basically stayed way up there from then on. (Yes, the MIC AND the Great Society (that we enjoy today - it's grrrrreaaat!)).
Even before 1943, since 1935 there were "payroll taxes", which is this point term that means the Social Security and (I think also Medicare) money taken off of each check. Actually, though it's very confusing at this point, as there are many different types of withdrawals of portions of our paychecks by governments now, I like the word "tax" being in that term. It ought to clue people in that this 6.5% of their gross income being collected forever is neither going into a literal nor virtual lock-box of any sort, or even a separate account**. Do the words "aaaand, it's gone." mean anything to people anymore?
The system that was set up to collect this SS money was a great tool to enable the tools (Milton Freedman being one discussed in the article***) to implement taxation directly off of the working man's paycheck The foot had been in the door since '35 and accountants didn't have to change much - nice work, F'ing Delano.
Another thing that I just learned from the article is that the big impetus to do withholding was the more-innocent purpose of just wanting to get tax money ahead of time for immediate war financing, rather than more nefarious reasons. (Or am I being naive about it, like Americans at the time, likely?) The big arguments over this new way of collecting income tax were not about the idea itself, but just about how to avoid double-taxing people during this changeover. Was that a big distraction from the big idea? Yeah, there are usually smart bastards behind the scenes, just as during the original creation of Amendment XVI.
The transition problem sparked a great deal of debate in the government and among the public. Perhaps the leading proposal in 1942 came from Beardsley Ruml, the treasurer of R. H. Macy & Co., who was also the chairman of the Federal Reserve Bank of New York. Ruml proposed to “forgive” the previous year’s tax liability completely when the switch to the pay-as-you-go system was made. The Treasury objected to allowing such a great amount of “forgiveness” and proposed an alternative, less-forgiving design.It sure sounds like it was all a big distraction from the real damage being wrought. With much more significant tax bills due, the working man was going to get truly pissed each April 15th. Since Americans weren't so cowed back then, and more were still against Big-Gov, there'd have been tax revolts here and there, and maybe everywhere.
After more than a year of wrangling in the bureaucracy and in Congress, the Current Tax Payment Act was signed into law on June 9, 1943. It provided for a complicated partial-forgiveness transition. As Friedman described it, the law basically “canceled . . . one year’s tax obligations of $50 or less and 75 percent of the required tax on the lower of 1942 or 1943 income, requiring the remaining 25 percent to be paid in two equal annual installments.” After the system became fully operational, employers withheld almost $8 billion for income taxes in 1944 and more than $10 billion in 1945.
That was the real purpose of income tax withholding, to hide the damage, or at least ease the pain. Peak Stupidity published a nice long article on Americans' attitudes about, and ways of dealing with the income tax, broken into 4 income classes, called Americans' attitudes on the income tax, that I recommend the reader take a look at it. (I spent a good bit of time on that one, so, you know ...)
Perhaps a better phrase to describe what the real point of tax withholding is "reducing awareness". The FEE again:
The Treasury itself publicly acknowledges, in a fact sheet on the history of the U.S. tax system posted at its website, that wartime withholding not only “greatly eased the collection of the tax,” but “also greatly reduced the taxpayer’s awareness of the amount of tax being collected, i.e.[,] it reduced the transparency of the tax, which made it easier to raise taxes in the future.” Some evidence: in 2005 more than 130 million individual income-tax forms were filed, yielding the federal government $1,108 billion in revenue, and of that amount, $787 billion, or 71 percent, came from withholding.Flatten the awareness curve!
I'm skipping back up some in that great summary article, but this will summarize our post here well:
The withholding system has remained in effect continuously ever since 1943, even though the war that prompted its creation ended 62 years ago, and the system’s perpetuation has contributed greatly to nourishing the postwar Leviathan state. As Twight says, “Withholding is the paramount administrative mechanism that since 1943 has enabled the federal government to collect, without significant protest, sufficient private resources to fund a vastly expanded welfare state.”Yes, the Foundation for Economic Education seem like some good folks. Bravo!
Let me tell you, were withholding not in place to this day, the anger and financial worry out of this Kung Flu Infotainment Panic-Fest would be enough to cause a major cessation of the flow of funds. I would be part of that. Income tax withholding has taken away all our leverage. Come to think of it, that's the most egregious thing and likely part of the whole idea.
* Hey, it's the Chinese way, better get used to it. As with Chairman Mao, "Chairman" not being his actual first name, I am Blogger #REDACTED, and you all are Commenter Ganderson, Detractor Lolberg, State Hospital
** See The Social Security Scam, errr, Scheme(?) - Part 1 and Part 2
*** though he subsequently rehabilitated himself as an economist. He was just young and foolish back in 1943... hard to imagine. The subtitle of the FEE article is "Milton Friedman Did Not Foresee the Long-Term Implications of the 1943 Tax-Withholding Law". Yeaaahhh!