Our Economic Past--Wartime Origins of Withholding Taxes

This is an article over a year old now, brought to my attention this morning by a "tweeter".  We've bandied about the question of Milton Friedman's role in withholding taxes here before:

Milton Friedman was an economist at the Treasury during the early part of the war. In his 1998 memoirs, Two Lucky People, written with his wife Rose, he observed: “It was clear to all of us at the Treasury, as we set out to multiply the amount of revenue to be collected from the personal income tax, that it would be impossible to do so unless we could develop a system to collect the taxes as the income was earned, not a year later.”

And then, the article goes on to sum up:

The Treasury itself publicly acknowledges, in a fact sheet on the history of the U.S. tax system posted at its website, that wartime withholding not only “greatly eased the collection of the tax,” but “also greatly reduced the taxpayer’s awareness of the amount of tax being collected, i.e.[,] it reduced the transparency of the tax, which made it easier to raise taxes in the future.” Some evidence: in 2005 more than 130 million individual income-tax forms were filed, yielding the federal government $1,108 billion in revenue, and of that amount, $787 billion, or 71 percent, came from withholding.

Friedman, who admitted being “one of the architects” of the Treasury’s proposal for a withholding system, correctly noted in his memoirs that the system “would have been introduced had I been involved or not.” Withholding was an essential element of the government’s wartime revenue grab. “At the time,” concluded Friedman, “we concentrated single-mindedly on promoting the war effort. We gave next to no consideration to any longer-run consequences. It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too intrusive, too destructive of freedom. Yet, that was precisely what I was doing.”

My opinion--one of the things that the Campaign for Liberty and other like-minded groups ought to do is to watch any proposed tax legislation in the future, and--if we don't have the power to fight the taxes themselves outright, at least fight the withholding element.  Perhaps push for legislation which would cap withholding at current levels.  The best way to fight government growth and taxation is to increase the transparency of it--and to make citizens aware of just how much they're paying.

LLE