- The Washington Times - Thursday, April 13, 2000


Believe it or not: Once upon a time even the Internal Revenue Service (IRS) opposed a federal income tax. Complained an IRS commissioner to the chairman of the House Ways and Means Committee, the tax is "the one of all others most obnoxious to the genius of our people, being inquisitorial in its nature, and dragging into public view an exposition of the most private pecuniary affairs of the citizen." The year was 1871. Considered an emergency revenue measure during the Civil War, the income tax was actually repealed in 1872.
More than a century later, it's obvious that government officials have managed to get over any concerns they may have had about taking part in this kind of financial inquisition. Come Monday night, millions of Americans will make their annual pilgrimage to the Post Office to pay the tax on their genius, exposing their pecuniary affairs along the way. To do otherwise is to risk a visit from federal law-enforcement officials or worse. This is what the feds mean by "voluntary compliance."
The truth is, however, that by the time hapless taxpayers reach the Post Office, most have already paid the bulk of their taxes and may even be due "refunds." One uses the phrase "refunds" advisedly because the government is just giving them back their own money. They paid it prematurely thanks to a withholding tax that cuts the feds in for a share of their earnings even before they have a chance to miss it. But withholding does more than collect taxes efficiently. It blunts efforts to reform the tax code and turns every debate about government into one of shape rather than size. Taxpayers can't demand smaller government because it already has the money to keep it large and getting larger.
History suggests this outcome was a conscious government strategy. In 1942, lawmakers passed a so-called victory tax to help fund the U.S. war effort. It consisted, among other things, of a 5 percent income surtax and effectively turned what had been a "class tax" to a "mass tax," adding millions of people to the tax rolls that hadn't been there before. The government rolled out no less than Donald Duck (in a Disney film titled "The New Spirit") to inform Americans that it was their "privilege" to help their government by paying their taxes promptly. Still, government officials were concerned about compliance. Amity Shlaes, author of "The Greedy Hand: How taxes drive Americans crazy and what to do about it," reports that Treasury Secretary Henry Morganthau worried aloud about mass tax evasion. "Suppose we have to go out and try to arrest five million people," he said.
Enter advocates of federal withholding, including R.H. Macy & Co. executive Beardsley Ruml. Ruml had noticed that store customers didn't like big bills, but preferred to pay them in installments, a little bit at a time. By turning private employers into an arm of the IRS who would withhold a portion of employee wages and hand it over to the feds, government officials didn't have to worry about having to arrest 5 million people. Under the circumstances, the size of the revenuers' take was limited only by the size of the paycheck itself.
In Senate subcommittee hearings in 1942, Sen. Bennett Champ, Democrat of Missouri, and Treasury official Randolph Paul couldn't resist imagining the size of the treasure that withholding would uncover. Asked Paul, "Do you think if we cut down the [taxpayer] squawking under this method we could raise the individual tax rates?" Replied Clark, "That is what I'm trying to find out: How can we raise the greatest amount of money with the least amount of hardship on the taxpayer." Of course, it was up to lawmakers to define "hardship."
At least some lawmakers expressed concerns about the justice of withholding. Rep. Donald McLean, Republican of New Jersey, wondered whether there was anything "inherently wrong" about stripping an employee's wages from him without his consent. The answer of economic consultant and former Treasury official Elisha Friedman is blunt. "Is it wrong," he said, "for a democratic form of government to do anything? You are the people's elected representatives. When you decide to do something, it means the people have decided it. What do you mean, wrong?" In short, power is its own judge. In 1943, lawmakers approved the Current Tax Payment Act, extending the reach of "the greedy hand" to collect not just Social Security taxes but income taxes through federal withholding.
More than half a century later, McLean's moral question has been reduced to a political one: To what extent can American citizens manage the size of their government when the feds see nothing wrong in taking an employee's wages before he assents to it. The answer is they really can't. The result is a lopsided debate in which lawmakers debate the way the money is to be spent, not whether it should be taken in the first place.
As taxpayers head to the Post Office Monday, they should try imagining what the government might look like if employees collected their entire paychecks, then had to write checks back to the government on a monthly or quarterly basis. Imagine the modern counterparts of the Boston Tea Party that would follow. Then they should try to imagine that the government would willingly walk away from easy money. The genius of the American people may have to endure obnoxious taxes a good while longer.
E-mail: smithk@twtmail.com

LOAD COMMENTS ()

 

Click to Read More

Click to Hide