tax withholding
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How Tax Withholding Came And Stayed

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Aug 31st 2015
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Nowadays, workers who receive wages or salaries know that income taxes and Social Security taxes will be withheld from their paychecks. But the withholding system experienced a difficult birth when it debuted in the middle of World War II.

The wide-ranging 1943 tax act included a provision that authorized withholding. But President Franklin Delano Roosevelt thought the legislation was too complicated, and he vetoed it, saying, “The American taxpayer had been promised of late that tax laws and returns will be drastically simplified. This bill does not make good that promise ... These taxpayers, now engaged in an effort to win the greatest war this nation has ever faced, are not in a mood to study higher mathematics.”

The president's veto was overridden by large margins in both houses of Congress, and withholding went on the books.

Broadway songwriter Irving Berlin supported the war effort with a song that tried to get Americans upbeat about tax withholding. Unlike another of his morale-building numbers, “White Christmas,” a composition that remains a standard, his withholding ditty had no legs; the turgid lyrics suggest a reason:

You see those bombers in the sky?
Rockefeller helped to build them
So did I
I paid my income tax today.

Was withholding the right way to help pay for a war? Among those who have weighed in are journalist David Brinkley (no) and historian Doris Kearns Goodwin (yes).

In an article on America in the 1940s for the Jan. 3, 1994 issue of Newsweek, Mr. Brinkley recalled withholding's introduction: “Under pressure of war, the withholding tax was born. It is doubtful that without war Congress would ever have voted for a tax so intrusive and troublesome. Because of the withholding tax, the term ‘take-home pay' entered the language. Had people been forced to count out their taxes in hard cash for some government collector, taxes in such stratospheric amounts almost certainly could not have been collected.

“The cost of the war was so high that the top rate eventually went to about 92 percent. It was explained to Roosevelt that his rich enemies would be soaked, even fleeced, beyond their deepest fears. They paid the 92 percent, hated it, but could not escape. It made Roosevelt so happy, Press Secretary Steve Early told me, that once or twice he saw the president spend hours poring over records sent to him from the IRS showing who paid how much.

“As for Roosevelt's own finances, all that was ever known was that his mother, Sara Delano Roosevelt, until she died in 1941, handed him cash in a sealed envelope every month or so.

“Members of Congress were so happy to find they now had a Niagara of money flooding into Washington, all ready for them to spend. Even when the war was long over, there was never any thought of ending the withholding tax. (They held the top rate at about 70 percent for another 16 years.) Did the enormous tax rates pay the cost of the war? No. Did the government run the war on credit and leave billions in debt? Yes.”

On a personal note, Mr. Brinkley fails to persuade me that the right way to pay for a global conflict's cost was pay-as-you-fight financing, instead of an increase in the national debt.

I prefer Ms. Goodwin's more positive take on withholding's birth and financing the war. Here's what she says in No Ordinary Time, a chronicle of the home front during the war years: “The Treasury was able to finance about 44 percent of the total war expenditures of $304 billion through taxation. The rest was secured through war bonds and borrowing. The debt rose from 43 percent of the GNP in 1940 to 127 percent in 1946.

“A transformation had been effected in the method of collecting taxes. Before the war, individuals were always a year behind in their tax payments, since they were called upon to pay taxes in quarterly installments on the income they had earned the previous year. The system had functioned well enough when rates were low and few people paid taxes, but when millions of people, unfamiliar with preparing tax forms, became taxpayers for the first time, change was inevitable. It took the form of ‘Pay as You Go,' a system that withheld taxes from paychecks before the employee even saw the money, allowing everyone to start the new year free from debt. This was ‘a revolution in American public finance,' journalist David Brinkley has written. Since people were paying taxes with money they had never seen, their resistance to the idea of taxation lessened.”

About the author:
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. More on this topic is available from “Julian Block's Year Round Tax Strategies,” available at julianblocktaxexpert.com.

Related article:

Fail to Remit Withheld Taxes and Find Yourself in a World of Hurt

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