Doubleplusgood, Donald!

Craig Goodrich
Rant Magazine
June 1998

Well, it's been a couple Donald got a refund! of months now since you filed your income tax return. How much did you pay? Oh, you got a refund -- how nice! But how much did you really pay?

You don't know? You forgot? My friend, that's the whole idea. They've suckered you again.

See, back in 1913, when the law instituting the income tax was first passed, Congress authorized "withholding at the source" -- that is, withholding pretty much as we know it. But there were two important differences in the system then:

First, the tax rates were low, ranging originally from 1% on the first $20,000 (about $250,000 in 1990s dollars) of income up to 7% on incomes above $500,000 ($6 million).

Second, very few people were subject to the tax in the first place -- only about 1% of the wealthiest Americans were originally required to file: those with incomes above $4000 (about $50,000 today) after deductions and exemptions. The tax was basically sold to the electorate with "soak-the-rich" rhetoric, the politician's ancient appeal to the idea that somebody else can be forced to pay for the things that you want.

But the withholding provision was wildly unpopular anyway, particularly since Congress doubled the top rate (to 15%) within only two years. Treasury Secretary McAdoo recommended in the Department's 1916 Annual Report that they "do away with the withholding of income tax at the source" to "eliminate a great deal of criticism which has been directed against the law." (1916 was, of course, an election year.) Sure enough, Congress withdrew withholding authorization, effective in 1917.

That same year, President Wilson injected the US into World War I -- only four years after the income tax was instituted -- and the tax rates rose steeply: to 67% in 1917 and 77% in 1918. ("War is the Wealth of the State." -- Anonymous)

After the war, tax rates were reduced -- but only down to 25%, still more than triple the original 7% rate. Moreover, during the war Congress had substantially lowered the income brackets to which the various rates applied. Nearly 4% of American households were now subject to the income tax.

This of course bothered many Americans. In those days, the Republican Party was the home of most "Progressives" -- advocates of government activism to solve supposed social problems -- while the Democrats tended to attract conservatives and populists.1

So in 1932, the candidate promising lower taxes and reduced Federal spending was elected: Franklin Roosevelt. Roosevelt has been hailed as "the first modern politician", probably because he managed to break all of his campaign promises within a week of his inauguration.

FDR was very consistent, though. His stump speech for the 1940 campaign contained the lines, "I have said this before, but I shall say it again and again and again: Your boys are not going to be sent into any foreign wars." So naturally by 1941 the government was badly in need of additional funds for World War II -- another vast expansion of the income tax, which the Congress would of course pass without question, since we were going to war and had to support Our Brave Boys. ("War is the Wealth of the State", remember?)

Treasury Secretary Henry Morgenthau saw the potential problem: enforcing compliance. As late as 1939, fewer than 6% of American households had ever had to file a Federal tax return. A Treasury official summarized the tax explosion to Congress in 1943:

Up until 1941 we never received as many as 8,000,000 individual income-tax returns in a year. In 1941 that number increased to 15,000,000; in 1942 it increased to 16,000,000. This year we expect 35,000,000 taxable individual income-tax returns.2

At that time, taxes were paid the year after they were accrued. You sent quarterly checks to the government in 1936, for example, to pay your 1935 taxes. Suddenly the millions of new taxpayers every year had to find money to pay their taxes, taxpayers who, unlike the well-to-do, probably didn't have savings and investments ready to cushion the financial shock. And tax rates were rising every year. Uncle Sam wants YOUR money!

So Treasury augmented the government's already-massive wartime "Work! Buy Bonds! Watch for Spies!" propaganda campaign: "Pay Your Taxes!" The crowning glory of this effort was a film they commissioned from Disney in 1942, The New Spirit, featuring Donald Duck being politically reeducated -- he is told that it is "your privilege, not just your duty, but your privilege to help your government by paying your tax and paying it promptly."

(I am not making this up, as Dave Barry says. Six years later, in the dystopic masterpiece 1984, British novelist George Orwell coined the word "duckspeak" to refer to mindless parroting of government slogans. Had Orwell been treated to a special screening of The New Spirit?)

Morgenthau and his Treasury Department began in 1941 to lobby Congress for withholding; publicly, the emphasis was always on "patriotic sacrifice" and "convenience to the taxpayer," but in legislative hearings the underlying objective of the proposal was frankly admitted. One Treasury witness pointed out that they needed withholding to "collect some money from people who would not otherwise make any report on income," because "we cannot get those fellows unless we have the collection-at-the-source method."

The problem of selling the idea of tax withholding to the American people worried the Congress. It's interesting that, although the 1913-1917 experience with taxpayer resistance and criticism of withholding was hardly ever mentioned in policy discussions, fear of the public reaction underlay nearly all of the debate. People are very sensitive about their paychecks, after all.3

Besides, there was a transition problem: citizens would find themselves paying double for one year, trying to pay off the previous year's taxes with paychecks from which the current year's taxes had already been withheld.

Enter the improbably-named Beardsley Ruml, Treasurer of Macy's Department Stores and Chairman of the Federal Reserve Bank of New York. Ruml was worried about the fact that retirees from Macy's always seemed to have financial problems the first year of retirement, because they had to pay last year's taxes from this year's reduced income. So he advocated "moving the tax clock back", paying taxes in quarterly installments the year they were accrued instead of the following year.

To solve the transition problem, Ruml suggested "forgiving" one year's taxes; simply not collecting it. It would make no difference to Treasury's tax receipts "until Judgment Day", Ruml said, since this was after all just an accounting device -- receipts would continue to flow into the Treasury at the same rate regardless of the nominal tax year.

We forgive you, Alice! That did it: the politicians could both sell the "convenience" of withholding and take credit for "tax forgiveness," so the Current Tax Payment Act of 1943 was passed by Congress -- after its advocates promised that it would raise three billion dollars extra for the Treasury the first year alone: the "forgiveness" was completely phony, of course.

So, my friend, this is how the Washington establishment managed to set up a program that takes away your money before you even see it. Wake up, dammit, Donald! Notice that those new-car ads always say, in huge print, "ONLY $250 a MONTH" and never mention the total price or for how long? They probably learned that trick from the politicians -- like, for example, Representative McLean of New Jersey, who praised the withholding plan because it would "protect the Government revenues not only now, but for all times to come."

But at least the car will be paid off someday...

1 It was a bipartisan coalition of Progressive activists, religious populists, and newly-enfranchised women that passed Prohibition, for example. ("Liberal soccer moms" were around long before 1992. And some of them carried hatchets...)

2 For 1914, the first year of the income-tax law, 358,000 returns were filed. In less than thirty years, the number of Americans subject to Federal income tax had increased a hundredfold. In 1894, another Treasury official, one Worthington C. Ford, had told Congress:

Wherever an income tax has been in practice for any time the small incomes as well as the large are taxed; and it is the small incomes which yield the largest revenue to the state.
So much for soaking the rich.

3 A fascinating glimpse into the bureaucratic mind is provided by this exchange between Representative McLean (R, NJ) and Elisha Friedman of the Treasury Department:

Mr. McLean: Do you think there is anything inherently wrong in going too far in compulsory deductions from wages?

Mr. Friedman: I can only come back to this, we have got to do it gradually.

Mr. McLean: Whether you do it gradually or rapidly, I am asking you whether there is anything inherently wrong in taking money out of a fellow's pay envelope without giving him the right to say you are privileged to do it.

Mr. Friedman: Is it wrong 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?

Friedman made this comment during the 1943 hearings. At that time we had for two years been waging total war against one of the most vicious regimes in history, which had come to power by legal democratic elections a decade before, and which had maintained its façade of "democratic form" throughout the entire period. Never ask an elitist bureaucrat whether anything is "inherently wrong." Like Friedman, he will simply not understand the question.

Acknowledgments:
The posters are from The Tax History Project. Donald, Alice, the Mad Hatter, and the March Hare ©Disney. Information gleaned from the writings of David Brinkley, Charlotte Twight, and many others.

Computer guru Craig Goodrich lives in a house in the woods in Elkmont, with his wife, two children, and four cats. He is a representative-at-large of the Libertarian Party of Alabama, a smoker, a gun owner, and a taxpayer.