The beginning of WW2 justified, perhaps, increased revenue to the federal government. In 1942, Congress decided to increase income taxes and expand them to those working-class families.
The choice of income tax, instead of sales tax or value-added tax, was fateful. The tax was intended to fund the war, which ended in 1945, but has continued for almost a century.
The damage caused by any tax is the impoverishment of citizens by means of government confiscation. But income tax, as structured in the United States, inflicts still other harms both to the individual and to the nation as a whole.
The reintroduction of income tax to the lower and middle classes was, as historian Amity Shlaes write, confused, chaotic, and traumatizing:
The new rates were law. But Americans were ill-prepared to face a new and giant tax bill. A Gallup poll from the period showed that only some 5 million of the 34 million people who were subject to the tax for the first time were saving to make their payment. In those days, March 15, not April 15, was the nation’s annual tax deadline.
To get citizens to hand their wages to the government, the withholding system was devised. Workers would, under this system, not receive their full wages.
Employers would pay part of the wages to the worker, and part to the government. In this way, the citizens would not ‘feel’ the loss of their wages, because they would never have received those dollars in the first place.
The ‘withholding’ system is a cruel deception, because it acclimates workers to lower wages. Rather than paying taxes, the wage earners never even receive their full pay.
The government become a trap which intercepts salaries on their way from the employer to the employee.
To be sure, the numbers remain the same whether a ‘withholding’ system is used, or whether the workers receive their pay and then send a fraction of it to the government as a tax payment.
But while the numbers remain the same, the psychology is quite different. In political science, perception is often more important than reality.
Over the decades, American workers have become so accustomed to confiscatory taxes that they are not at all surprised when they are hired for at a stated wage and then receive merely 70% or 80% of that stated amount.
This passive tolerance of theft is damaging to many aspects of the economy, including the relationship between employers, employees, and labor unions. It is also damaging to the political system as it fosters a submissive resignation to a greedy and thieving government.