The Internal Revenue Service (IRS) realized that millions of people didn’t understand that they had to pay. They didn’t understand how much they had to pay, and that they’d need to save up all year long to make such a big payment all at once. The new tax law was creating a disaster. What would happen when the day came, and people weren’t able to pay?
The IRS is part of the Treasury Department and is responsible for collecting taxes.
The government didn’t want to file charges against millions of taxpayers. It wouldn’t have even been possible to do so, because there were so many people involved. The legal fees in many cases would have been greater than the anticipated tax revenue.
Hurriedly, the IRS hoped to make people aware of what they had to do, as historian Amity Shlaes writes:
The Treasury nervously launched a huge public relations campaign to remind Americans of their new duties. A Treasury Department poster exhorted citizens: “You are one of 50,000,000 Americans who must fill out an income tax form by March 15. DO IT NOW!” For wartime theatergoers, Disney had prepared an animated short film featuring citizen Donald Duck laboring over his tax return beside a bottle of aspirin. Donald claimed exemptions and dependent credits for Huey, Dewey, and Louie.
The eventual solution to the problem was the invention and implementation of the payroll withholding system. Invented by Beardsley Ruml, this system collected taxes all year long, taking a percentage of an employee’s pay before the employee received his pay. The beauty of this system is that people don’t have to worry about accidentally forgetting to save up to pay a massive, once-a-year tax bill. It’s automatically saved for them.
Ruml’s system was put into practice in mid 1943, and has been operating ever since.
This system was and is highly successful. Everyone who gets paid, with a few exceptions, has a bit of her or his pay confiscated every week or every month, and that confiscated money is saved up to pay that person’s annual tax bill. The government has reliable access to people’s money.
There is, however, a problem with this system. It has been in place nearly a century, so long that people often forget that it exists. Workers can forget that the government is taking their money on a regular basis. When employees feel that their pay is too small, they don’t realize that a significant percentage of their wages are being confiscated by the government.
If hourly workers were allowed to receive their full hourly wage, and if salaried workers were allowed to receive their full annual salary, they would suddenly experience a massive increase in disposable income.
The problem has been compounded by the fact that most of the fifty states, and a few cities, have also implemented payroll withholding programs. The government often takes 10%, 20%, or even 30% of a worker’s wages.
The payroll withholding system has not only allowed the government to take huge amounts of people’s money, but also to take it in a way that causes people to forget, or not to realize, that it’s being taken.
