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.

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.

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.

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.

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.”