To this end, many subtle plots and devices have been invented. One of them has been successful and goes by the name “payroll withholding.”
If a worker obtains his wages, and then has to pay his taxes, he is likely to be keenly aware that the government is appropriating the earned fruit of his labor. But what if a worker never received his full pay? What if part of it were siphoned off and sent to the government before it was transferred to him?
This is the genius of the withholding plan. People don’t miss what they never had. Rather than pay a worker $100 and ask for $25 in taxes, simply pay him $75. He may know, in some vague and abstract sense, that his property has been stolen from him, but he will not sense or perceive it in a concrete and direct way.
Payroll withholding arose when the government saw a sudden need to raise revenues because of war. While the citizens were willing to contribute to war effort, the mechanism of withholding was introduced because it would lower the degree to which voters were intuitively aware of amount being taken from them, and because it would allow the government to confiscate funds for other, less popular, purposes.
Until the advent of withholding, only Americans in the highest earning levels paid income tax. After withholding, almost everyone would pay it, as historian Amity Shlaes describes:
The father of the modern American state was a pipe-puffing executive at R.H. Macy & Co. named Beardsley Ruml. Ruml, the department store’s treasurer, also served as chairman of the the board of directors of the Federal Reserve Bank of New York and advisor to President Franklin Roosevelt during World War II. In those years Washington was busy marshaling the forces of the American economy to halt Japan and Germany. In 1942, not long after Pearl Harbor, lawmakers raised income taxes radically, with rates that aimed to capture twice as much revenue as in the previous year. They also imposed the income tax on tens of millions of Americans who had never been acquainted with the levy before. The change was so drastic that the chroniclers of the period have coined a phrase to describe it. They say that the “class tax” became a “mass tax.”
By means of withholding, the government was able to steal money from citizens without their noticing it so much. Ruml would devise the paycheck system by which a worker’s money was taken from him before he ever saw it.
It wasn’t so much that they’d pay more taxes; rather, they’d bring home smaller earnings. It was a simple but clever maneuver.
The rhetorical question has often been posed by those who study taxation: what would happen in twenty-first century America if workers had to pay their taxes outright instead of having them withheld? If, on April 15 each year, they had to write checks of $5000 or $10000 and mail them to the government?
This question reveals the evil genius of the withholding system. The government has been able to steal shocking amount of earnings from the workers, without the workers being fully aware of the crime.
Beardsley Ruml may be the mastermind, or at least an accomplice, behind the greatest theft in history.