NCPA - National Center for Policy Analysis


April 14, 2005

After more than 60 years of federal income-tax withholding, most Americans consider it natural for income taxes to be automatically deducted from their paychecks -- with the possible exception of those who, after receiving their first paycheck, are rudely introduced to the meaning of "take-home pay," says Investor's Business Daily (IBD).

It wasn't always thus:

  • In 1939, as World War II erupted in Europe, the average American blue-collar worker paid no income tax at all, the typical doctor or lawyer paid $25 a year and someone earning $16,000 owed less than $1,000 in taxes.
  • Only 6.5 million Americans out of a total population of 125 million paid federal income taxes.
  • Before 1943, there was no federal withholding of income taxes; those who owed any federal income taxes simply saved up and paid up on March 15.

But to finance our war effort, the government had to raise more revenues.

  • So it passed the Revenue Act of 1942, which greatly increased marginal tax rates and imposed a 5 percent "victory tax" on all income over $624.
  • This effectively resulted in an increase in the income tax rolls from 13 million in 1941 to 50 million in one year.

Raising taxes was the easy part. Collecting them was another matter entirely, and thus the idea of federal income-tax withholding was born. Or rather, reborn, says IBD. Withholding had been used for income taxes from 1913-17 and since 1936 for Social Security.

The President's Advisory Panel on Federal Tax Reform is mulling ideas to reform the tax code to make it simpler, fairer and more pro-growth. Perhaps the ultimate tax reform would be to eliminate income-tax withholding, return to the pay-once-a-year system and settle up on April 15, says IBD, and then hold federal elections the next day.

Source: Editorial, "Tax Fraud," Investor's Business Daily, April 14, 2005.


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