THE EVOLUTION OF FEDERAL INCOME TAX WITHHOLDING

The Evolution of the Federal Deceit - by Paul Revere

Vol. 14 No. 3

THE EVOLUTION OF FEDERAL INCOME TAX WITHHOLDING: THE MACHINERY OF INSTITUTIONAL CHANGE

Taxes are the backbone of any politico-economic regime. Constraints on a government's power to tax are constraints on its power to act. Focusing on the legalization of mandatory federal income tax withholding through the Current Tax Payment Act of 1943, this article examines forces that have eroded constraints on the U.S. government's power to tax.

The central questions this article seeks to answer are how, why, and to what effect--despite preponderant public opposition to universal income tax withholding between 1914 and 1942-- mandatory withholding was established in 1943, and sustained thereafter. It is an important question, for withholding is the paramount administrative mechanism enabling the federal government to collect, without significant protest, sufficient private resources to fund a vastly expanded welfare state. U.S. government officials themselves now view withholding as "the cornerstone of the administration of our individual income tax" (U.S. House Ways & Means Comm. Hearings 1982: 162, 165).

This article explores (1) historical conditions that led people to accept withholding of federal taxes on wage and salary income; (2) the politico-economic function of income tax withholding; and (3) the consistency of the U.S. income tax withholding experience with a more general economic model of institutional and ideological change.

A systematic transaction-cost framework for understanding the evolution of withholding will be suggested as a way of integrating this critical episode with other U.S. policy experiences. Historical circumstances facilitating adoption and expansion of income tax withholding will be seen to reflect broader incentives of government officials to alter political transaction costs facing the public. Equally important, the willful alteration of political transaction costs will be viewed as supporting institutional and ideological changes that, over time, expand the publicly accepted scope of government authority.

Government manipulation of political transaction costs contributed significantly to the institutional changes and subsequent ideological transformation supporting income tax withholding. Though in 1943 the withholding mechanism was sold politically as a benefit to taxpayers, government officeholders even then widely regarded it as a means of extracting greater tax revenue. Senators and representatives spoke candidly in congressional hearings (U.S. Senate Hearings 1943: 43) of the revenues that needed "to be fried out of the taxpayers."

This article is organized as follows. I first develop a theoretical framework for analysis of federal income tax withholding. After discussing the early evolution of income tax withholding in the United States, I then consider how changing institutional contexts have influenced attempts to expand withholding. The final section of the article ponders the reversibility of current withholding mechanisms in light of the paper's theory and evidence.

Institutional and Ideological Change: A Theoretical Framework

Many scholars have identified politico-economic patterns associated with taxation. For instance, in his study of taxation in the New Deal, Mark Leff (1984) showed that the rhetoric surrounding tax policy often serves a symbolic function inconsistent with actual tax policy. John Witte (1985) emphasized that across a broad span of income tax history changes in tax law have tended to proceed incrementally and therefore to generate complexity. Dall Forsythe (1977), studying U.S. tax policy during 1781-1833, suggested that tax policy is shaped by recurrent political patterns, including "normal politics," "regime politics," "environmental crises" such as war or depression, and "authority crises" such as the Civil War in which the regime's ability to govern is challenged. He viewed these patterns as helping to explain why similar policy initiatives sometimes generate quite different political outcomes, arguing (1977: 122), for instance, that

if the elite can successfully establish its definition of a situation as a crisis, it can undertake without direct opposition activities which might otherwise be considered gross violations of regime boundaries.

How many "crisises" have we seem to have had in our own lifetimes? The feds seemingly come up with one after another in order to distract, divert, and otherwise sway the Peoples' attention away from what is REALLY going on. Listening to the news anchors on T.V. is the wrong way to get your information. Most of the major television, radio, and newspapers absolutely refuse to report on anything that might be more than the people could handle. ACCORDING TO WHO? DON'T THE PEOPLE NEED TO KNOW THE TRUTH SO THEY CAN MAKE INTELLIGENT DECISIONS REGARDING OUR ELECTED OFFICIALS et al.? DON'T EXPECT TO GET IT ON YOUR LOCAL "NIGHTLY NEWS" FROM DAN BLATHER AND THE LIKE.

All of the above-cited conceptualizations of the emergence of tax policy may be subsumed by a broader explanation grounded in the phenomenon of government manipulation of political transaction costs. As employed here, the phrase "political transaction costs" denotes transaction costs involved in making political decisions on issues that influence the scope of government authority.[f1] Those transaction costs include not only costs of obtaining information regarding an authority-influencing issue,, but also costs of taking collective action to support one's policy preferences. A transaction-cost-manipulation model identifies the endogeneity of a broad range of transaction costs affecting the accepted scope of government authority, and it endeavors to specify both the circumstances that give rise to government augmentation of political transaction costs and the consequences of that behavior.[f2] I have analyzed theoretical dimensions of this model in greater detail elsewhere (Twight 1983, 1988, 1994). In the present context, I want only to summarize salient features of the model as a backdrop for this article's historical analysis of the evolution of U.S. income tax withholding policy.

Transaction-cost-manipulation theory builds on the idea that government officials, as individuals, have strong incentives to try to alter political transaction costs facing citizens and others in government. If they can raise the transaction costs to voters of opposing a policy that the officeholders (or influential constituents) favor, the officeholders' policy preferences are more likely to prevail. Clearly, if government officials make it harder for most citizens either to perceive an unwanted policy (e.g., a tax or special-interest legislation) or to organize to resist it, public opposition is less likely to materialize. In the presence of transaction-cost augmentation, political resistance to policy initiatives is thus in part a function of government officeholders' volitional choices to raise transaction costs of particular types of collective action, not solely a function of citizens' or other officeholders' preferences.

We will see in the next section that income tax withholding is both an instrument and a result of transaction-cost augmentation. Withholding's transaction-cost-increasing features and implications for the growth of government were well captured by David Brinkley (as quoted in Jones 1989: 730), who stated that, with withholding Congress and the president learned, to their pleasure, what automobile salesmen had learned long before: that installment buyers could be induced to pay more because they looked not at the total debt but only at the monthly payments. And in this case there was, for government, the added psychological advantage that people were paying their taxes with not much resistance because they were paying with money they had never even seen.

As George Lent (1942) described it in the Journal of Political Economy, "the taxpayer does not have the same consciousness of parting with his income to the government, " making withholding" the most 'painless' method of meeting tax liabilities." The following section explores the extent to which government decisionmakers not only understood this result ex ante but also used other types of transaction-cost manipulation to achieve it when they instituted income tax withholding in 1943.

Since the history of U.S. income tax withholding documented below involves extensive misrepresentation by government officeholders, and since withholding itself alters perceptions of private tax burdens, one may legitimately ask whether a transaction-cost manipulation model is concerned exclusively with use of political deception. As the preceding paragraphs imply, the answer is no. Whether or not deception is involved in passage and implementation of a law such as the Current Tax Payment Act of 1943, the institutions and constituencies thereby fostered can significantly alter the transaction costs of political resistance to present and future government policies. In short, political transaction costs involve costs of individual and collective political action broadly defined, not just information costs. Regardless of the strategies by means of which income tax withholding became law in the United States, the institutional practice of withholding affected in predictable ways the political viability of income taxation and the government policies such taxation supports.

If a candidate running for political office told the People that he wouldn't be "bringing home the bacon" because he believed in the "Constitutional Restrictions" imposed on his authority [if elected] to make use of the "legal-theft" mechanism, as in the taking from one for the benefit of another [social welfare] scam, do you suppose he'd have any REAL chance of getting elected?

Consider the following conceptual experiment to assess the policy neutrality of income tax withholding. Suppose that we eliminated mandatory withholding for a year and instead required taxpayers to send in checks on April 15 for the full amount of their annual federal income taxes. The likely consequences of this institutional change are consistent with government officials' beliefs (documented below) concerning the role of withholding in increasing private individuals' costs of tax resistance. Most relevant here, with government-mandated withholding, such increased costs of tax resistance would exist even under the counterfactual assumption of perfect public understanding of the impact of withholding on the real burden of taxation: that is, they need not depend on continuing Theft by deception.

Transaction-cost augmentation takes myriad forms. On the collective-action side, it includes changing the locus of decisionmaking authority so as to shift the transaction-cost burden entailed in effectuating changes in the role of government,[f3] changing the cost to private citizens of achieving political agreement to revise the scope of governmental authority, changing the interaction between governmental agencies to alter the cost to individuals of revising the scope of government authority, and concentrating the benefits and dispersing the harm born of government action (Twight 1988: 150, fn. 1 and 2; 1994). On the information-cost side, transaction-cost manipulation includes such strategies as semantic efforts to alter public perceptions of the costs or benefits of government activities, forms of taxation that change people's perception of the actual tax burden imposed upon them, and overt distortion of information about the nature and consequences of government activities.

Many superficially disparate forms of political or legislative behavior fit within this model, and the model helps us to predict the context-specific likelihood of politicians' use of such strategies. Leff's (1984) evidence of symbolic rhetoric as well as Witte's (1985) evidence of the roles of incrementalism and complexity thus may be viewed in this broader context. Moreover, governmental attempts to milk bogus crisis circumstances for expanded authority, as described by Forsythe (1977), involve analogous efforts to raise transaction costs to the voting public of resisting governmentally favored policy measures. In other policy contexts, diverse political strategies--such as inserting riders in omnibus bills, diffusing tax costs of public policies, expanding sovereign immunity doctrines, establishing ballot-access laws that differentially impact third parties, and using federal tax money (such as federal funding for universities and highways) as a lever to foster unrelated federal policies--all alter the transaction costs to private citizens of participating in political processes affecting the role and scope of government.[f4]

The question is, under what circumstances is it more likely that government officials will choose to employ transaction-cost augmentation? In previous research (Twight 1988) I have suggested that a government official's decision to favor a transaction-cost-increasing measure is likely to be a positive function of identifiable variables, including the issue's complexity,[f5] the availability of an appealing (though possibly incorrect) rationale for the measure, executive support and party support for the measure, third-party payoffs, the measure's perceived importance to constituents, and its promise of job security and perquisites for the officeholder. The official's decision is expected to be a negative function of publicity or media attention directed at the measure's transaction-cost-increasing features. The impact of time is an empirical issue because, while it counteracts complexity, it also facilitates entrenchment of beneficiary interest groups. The officeholder's ideology also is expected to play an important role, influencing him to favor measures that raise the transaction costs of opposing measures that the officeholder favors on ideological grounds.[f6]

As preliminary evidence of the relevance of a transaction-cost-augmentation model in explaining the development and extension of U.S. income taxation, consider two studies. Although the authors did not analyze their results in these terms, both Carolyn Jones (1989) and Ben Baack and Edward John Ray (1985a, 1985b) provide evidence of the importance of political transaction-cost manipulation in engineering acceptance of the income tax.

Jones documented the widespread and systematic use of propaganda by U.S. government officials during World War II to quell resistance to the transformation of the income tax from a "class tax" to a "mass tax" during those years. This propaganda ranged from pressuring radio broadcasters to air "plugs" promoting income tax payment to providing story lines to magazines. However, in Jones's view (1989: 716) the "crown jewel of tax propaganda" was a Disney film entitled The New Spirit commissioned and promoted by the U.S. Treasury Department, in which Donald Duck was informed "that it is `your privilege, not just your duty, but your privilege to help your government by paying your tax and paying it promptly'." More than 32 million people saw the film in the first few months of 1942, and a Gallup poll reported that "37 percent felt the film had affected their willingness to pay taxes" (Jones 1989: 717). Without doubt, such government propaganda manipulated political information in ways that raised the expected marginal cost of income tax resistance.

Lest Jones's observations appear anomalous, note that the U.S. government employed income tax propaganda well before World War II. During World War I, the secretary of the Treasury explicitly suggested use of "widespread propaganda" to convince the public to forgo their "needless pleasures" (U.S. Treasury Department 1918: 2).

COMMENT: IF THEY HAD TO USE PROPAGANDA TO "CONVINCE" PEOPLE, OBVIOUSLY IT WASN'T BACKED UP BY ANY LAW THAT MADE IT MANDATORY. WHAT REALLY BURNS ME IS THAT THE STUPID ASSININE PEOPLE ALLOWED THIS KIND OF CRAP TO HAPPEN! IS IT LOGICAL THAT THE REST OF US MUST SUFFER THE CONSEQUENCES OF THE IGNORANT OF YEARS PAST? OR IS IT UP TO US TO INFORM AND CORRECT THE SITUATION SO THAT OUR POSTERITY DOESN'T HAVE TO DEAL WITH THE SAME BULLSHIT RHETORIC SPEWED FROM THE MOUTHS OF POND SCUM LIKE THE IRS, THE "RUMP" CONGRESS, et al., etc...? IF YOU'RE NOT A PART OF THE SOLUTION, THEN YOU'RE A MAJOR PART OF THE PROBLEM. SO SHUT UP AND GET THE HELL OUT OF THE WAY!

The Treasury Department implemented what it called a "campaign of education" regarding the income tax. Its "essential features" included government-supplied news stories and editorials as well as encouragement of special cartoons and films. Perhaps its most intriguing feature, however, was its use of the clergy. The commissioner of Internal Revenue reported that "Thousands of clergymen, at the suggestion of the Bureau, made taxation the subject of at least one sermon." As a result of the "patriotic response" aroused, "dissatisfaction and complaint over the burden imposed by taxation were minimized." Government officials commented that "the groundwork was laid for securing in ensuing years prompt and regular response to revenue demands." To perpetuate its success, the Bureau of Internal Revenue advocated "the most intensive cultivation of intelligent public opinion" (U.S. Treasury Department 1919: 964-65, 974; see also Higgs 1987: 133-34).

In the second aforementioned study, Baack and Ray examined an earlier period of tax history to discover why it was that, although the 1894 income-tax statute was declared unconstitutional by the Supreme Court in 1895, a constitutional amendment was not introduced in Congress until 1909. Their results suggested the "pivotal role of federal transfer payments in securing passage of the Sixteenth Amendment in 1913" (Baack and Ray 1985a: 607). Between 1895 and 1909, government officials--acting through the secretary of War, the secretary of the Navy, and the commissioner of pensions--channeled disproportionate government military-related outlays to the states whose congressional delegations up to that time had consistently opposed the income tax. For instance, 74.7 percent of the increases in annual War Department expenditures on army arsenals, posts, and public works between 1897 and 1908 went to the 17 states that previously had opposed income tax legislation. To Baack and Ray (1985b: 128-31), this and related evidence appeared "consistent with the possibility that naval expenditures and veterans benefits were used to buy state votes to support the income tax amendment." These targeted outlays and the implicit possibility of their withdrawal clearly raised the opportunity costs to affected legislators and their constituents of continuing to resist the income tax. Deliberate choices by government officials again reshaped political transaction costs influencing the role and scope of government.

Even if one grants the prevalence of political transaction-cost augmentation, still one may ask what difference it makes. Can we not expect the public, in a representative democracy, to reverse political arrangements incompatible with their preferences? Unfortunately, we cannot. Transaction-cost-increasing measures by definition raise the costs to individuals of particular forms of political action. For any given distribution of political opinion, such measures therefore drive a wedge between people's preferences and the political expression of those preferences. Policies unwanted by the bulk of the citizenry may survive.

Moreover, transaction-cost-increasing measures often alter the institutions of government, changing society's institutional bedrock. In the long run, such institutional changes tend to reshape predominant societal ideologies so as to validate existing government authority-- in effect molding people's beliefs to conform to the new institutional status quo. In his study of crisis-induced changes in government authority, Higgs (1985, 1987) has shown how institutional change generates self-validating ideological change as people become accustomed to and "learn to like" the new institutional arrangements. Such ideological changes also occur as a result of people's reticence to express unpopular views in public. As Timur Kuran (1987, 1991, 1993) has shown, given the institutional status quo, people often have strong incentives to misrepresent or "falsify" their preferences in public discourse. As a result, succeeding generations receive less exposure to public discourse questioning the status quo, and more exposure to public discourse affirming it. Accordingly, subsequent generations may perceive many societal decisions embodied in the institutional status quo as settled, despite widespread (though unexpressed) private preferences to the contrary. Over successive generations, institution-validating ideological change is the likely result.

Political transaction-cost manipulation thus matters in a larger sense because it artificially redirects political action, facilitating institutional changes that ultimately distort public discourse and channel ideological change in ways potentially inconsistent with people's initial preferences -- and, sometimes, preexisting constitutional law. For theoretical reasons explored in greater detail elsewhere, this politico-economic sequence typically eventuates in greater dependence on government (Twight 1993).[f7] The balance of this paper analyzes the extent to which the model is consistent with the establishment and expansion of income tax withholding in the United States.

Early History of Withholding: A Reinterpretation

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.

--Treasury official Worthington C. Ford (U.S. Senate 1894)

U.S. Income Tax and Withholding Experience Before 1940

An income tax was first employed in the United States during the Civil War. Although many, including the secretary of the Treasury, desired longer retention of the Civil War income taxes, the taxes were widely viewed as emergency measures and were repealed in 1872. This was a time when even the commissioner of Internal Revenue recommended repeal of the income tax, writing to the chairman of the House Ways and Means Committee that he regarded the income tax as "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" (U.S. House 1871: 1). Such opinions provide a baseline against which to assess later changes in public sentiment.

COMMENT: CAN YOU SEE ROSSOTTI SAYING ANYTHING LIKE THAT? I DIDN'T THINK SO. HE CAN'T EVEN ANSWER A SIMPLE "YES" OR "NO" QUESTION. IT IS MY OPINION THAT THESE PEOPLE [ACTUALLY] IN REALITY HAVEN'T GOT A CLUE WHAT THEY'RE SUPPOSE TO DO IN THEIR OWN POSITIONS. IT'S SYSTEMIC TO THE POINT OF ad nauseum. ARE THESE THE KINDS OF PEOPLE WE WANT TO PAY FOR DOING SUCH A TERRIBLE JOB? ARE THEY WORTHY OF THE POSITION? DO THEY EVEN "LAWFULLY" HOLD THEIR POSITIONS? WHY SHOULD ANY AMERICAN WILLFULLY CONCEDE TO GIVING UP A GOOD 50% OF WHAT HE/SHE ALONE EARNS TO AN UNFORGIVING, LYING, CHEATING BUNCH OF HOOLIGANS THAT CALL THEMSELVES - government???? Hmmmm.... WE WILL FIND OUT. THIS IS TRULY INSANITY AT ITS HIGHEST LEVEL. WAKE THE HELL UP AMERICA!

Though proposed many times, income tax legislation was not enacted again until 1894. Consistent with a transaction-cost-manipulation model, Congress labeled the 1894 law "An act to reduce taxation, to provide revenue for the government, and for other purposes." When challenged in the case of Pollock v. Farmers' Loan and Trust Company, the income tax law was held unconstitutional by the U.S. Supreme Court because it established a "direct" tax on real property and invested personal property deemed unconstitutional without apportionment among the states according to population as mandated by the Constitution (157 U.S. 429, 158 U.S. 601, 1895).[f8]

COMMENT: THIS OF COURSE MEANS THAT THE UNITED STATES SUPREME COURT IS A PART OF THE PROBLEM AS WELL. AND WHAT DO THE PEOPLE DO ABOUT THIS PARASITE? ROLL OVER AND PLAY DEAD. blaaaaaaahhhhhh.....! IT'S ENOUGH TO MAKE ME WANT TO PUKE ON ALL OF YOU SORRY EXCUSES FOR HUMAN BEINGS.

Income taxes temporarily were stymied. There was strong sentiment in the Senate to pass similar legislation and again confront the Supreme Court on this issue. Wanting to avoid such a confrontation, President Taft in 1909 recommended both a corporate income tax, labeled as an "excise" tax to avoid constitutional censure, and a constitutional amendment authorizing taxation of income from all sources without apportionment among the states (U.S. Senate 1909). Many staunch opponents of income taxation nonetheless supported Taft's proposal, hoping that the corporation income tax and the cumbersome amendment process would erode support for more broadly based income taxation. Congress submitted the proposed Sixteenth Amendment to the states for ratification in 1909.

A confluence of circumstances facilitated adoption of the income tax amendment. Chief among them was widespread belief that the existing federal tax system, with its reliance on tariffs and excise taxes, unfairly burdened the less affluent. Noting "a growing conviction among people from all walks of life that the existing tax system failed to reach the great fortunes that had been amassed as a result of industrialization," John Buenker (1981: 185) identified such beliefs as the "single most important reason for the eventual enactment of the federal income tax." Then as now, people's tax preferences often were driven by beliefs about tax incidence. Detailed studies of the history and politics of the period indicate intense desire on the part of various regional and economic groups to rearrange taxes to make others pay a disproportionately high share of governmental costs (Buenker 1981, Ekirch Jr. 1981). Thus most low-income Southern and Western states endorsed federal taxation based on "ability to pay" and favored a graduated federal income tax differentially burdensome to wealthier states in the North and East. As noted in the preceding section, the apparent manipulation of federal transfer payments also may have contributed to some states' approval of the amendment (Baack and Ray 1985a, 1985b). Widespread concern about cost-of-living increases partially attributed to import tariffs, along with increases in U.S. exports and military expenditures, created additional pressures to find alternative sources of federal revenue. Strengthened by elections in 1910 that reduced Republican representation in many state legislatures, these mutually reinforcing conditions led many states previously opposed to the income tax to favor the amendment.

COMMENT: BELIEF IS THE OPERATIVE WORD HERE. THE INTERNAL REVENUE MANUAL PROVES THIS.

Part 5, Collection Activity

105.4.1.2 (07/27/98)

Introduction

(1) Our system of taxation is dependent on taxpayers' belief that the tax laws they follow apply to everyone and that the Internal Revenue Service will respect and protect their rights (is this a joke?) under the law. These are fundamental principles of voluntary compliance.

Are you a believer in voluntary compliance? IF YOU ARE THEN YOU ARE TRULY A PART OF THE "COLLECTIVE". WELCOME TO THE B.O.R.G. (Bionic Omnivorous Revenue Gestapo)

As the Sixteenth Amendment moved toward ratification, some state governors waxed eloquent in their support of the income tax amendment. Governor John Franklin Fort assured the people of New Jersey that the citizenry can be relied upon "to see that their representatives make no unjust exactions in the way of taxation or in the curtailing of the rights of the States or otherwise," that the amendment "is vital to the safety and security of the Republic," and that it "is without danger in the power conferred" (U.S. Senate Doc. No. 365, 1910: 5). Some believed that income taxes authorized by the amendment would be implemented only during emergencies. Presaging later transaction-cost augmentation, Senator Norris Brown (R., Nebraska) asserted that the income tax amendment "lays no tax, promises to lay none, but simply and solely restores to the people a power many times sustained but finally denied by the courts" (U.S. Senate Doc. No. 705, 1910: 6).

The 16th amendment became constitutional law in February 1913. Contrary to Senator Brown's implication, income tax legislation was adopted in October of that year.

COMMENT: YEAH, RIGHT! THERE TEN THOUSAND+ "CERTIFIED" DOCUMENTS TO PROVE THAT WRONG AS WELL. BUT NOBODY HAS THE BALLS TO GO NEAR THAT ONE. WHAT WE'VE ENDED UP WITH IS A BUNCH OF THIEVES [A.K.A. PIMPS, WHORES AND WELFARE BRATS] LIVING IN CONGRESS GETTING RICH OFF OF US! DO THEY DESERVE OUR RESPECT? NOT A CHANCE! THEY HAVE ALL VIOLATED THEIR "OATH". CAUSE ENOUGH FOR REMOVAL. WE HAVE A BUNCH OF SPINELESS HYPOCRITES IN D.C. THAT, SIMPLY PUT, DO NOT DESERVE THE TIME OF DAY FROM THE AMERICAN PEOPLE. RESPECT HAS TO BE EARNED. THEY HAVE A LONG WAY TO GO.

The 1913 statute authorized withholding of income taxes "at the source"--that is, extraction of income taxes from taxpayers' pay envelopes before salaries were paid. Precedent existed in the income tax withholding for government employees during the Civil War (Bopeley 1943). However, the 1913 law's withholding provision proved to be a great irritation to taxpayers, a fact downplayed in later discussions of withholding. Based on public criticism, Treasury Secretary William G. McAdoo reported that "it would be very advantageous to ... do away with the withholding of income tax at the source" because it would "eliminate a great deal of criticism which has been directed against the law" (U.S. Treasury Department 1916: 19). The following year the commissioner of Internal Revenue, in a report also signed by McAdoo, formally recommended that "the provisions of law requiring the withholding of the normal income tax at the source of the income be repealed" (U.S. Treasury Department 1917: 674). The authority for withholding was withdrawn in 1917, not to be resurrected until the 1940s.

COMMENT: The 1913 [statute?} authorized withholding of incomes "at the source" -- ...", Are we talking about an "amendment" or a "statute"? Amendment; A statement that is added to or revises or improves a proposal or document (a bill or constitution etc.), Statute; An act passed by a legislative body, Enacted by a legislative body. Obviously a Constitutional Amendment cannot be passed by a legislative body. It must be "ratified" by the states, and then only IF the "People" think it is necessary. This provision is found in Chapter 24 if Tile 26. It does not impose a tax, it authorizes withholding "at the source". Via a W-4 "Voluntary Withholding Agreement" the employer/employee enter into an agreement to have money withheld from his/her paycheck. This only applies to employees of government, which makes sense since they're getting paid with "tax payer" dollars, there has to be some [accounting] program to pay for all the "perks" and fringe "benefits" Uncle Sam has set up for them.

The Current Tax Payment Act of 1943

Despite the 1913-16 experience, Congress in 1943 passed the Current Tax Payment Act, establishing the broad-based income tax withholding that has continued to this day. The important politico-economic question is how and why. This section discusses transaction-cost-increasing strategies used to structure political support for a policy previously so unpopular with the public. We will contrast the ostensible and actual purposes of the withholding law, analyzing the political mechanisms that made its passage possible.

Conventional wisdom suggests that withholding became advantageous to the public with the vast expansion of income taxation that occurred during World War II. In fact, the military crisis facilitated establishment of institutional mechanisms that served long-run interests of government and its functionaries rather than the public, with crisis providing an essential ingredient and cover for all manner of misrepresentations used to secure passage of the withholding act. As Higgs (1987), Forsythe (1977), and others have noted, real or purported crisis often provides a carte blanche for expansion of government authority. In the more general framework employed here, crisis facilitates transaction-cost augmentation by influencing its determinants -- providing an appealing rationale for transaction-cost-increasing measures, stimulating executive and party support for such measures, prompting favorable media coverage, and shortening the public's time horizon so as to focus attention on the emergency at hand and deflect attention from transaction-cost-increasing features of proposed legislation.

We know that World War II prompted transformation of a tax long endorsed by the public as a tax on the rich into a tax on the masses--a "people's tax" in the familiar words of Treasury Secretary Henry Morgenthau Jr. (U.S. Senate Hearings July-August 1942: 3). The numbers have been widely reported elsewhere. A Treasury Department official testified in early 1943 (U.S. House Hearings 1943: 2):

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.

It was one thing to pass the laws that authorized such taxation. The troubling question for government officials was how to assure that the taxes would be paid. Early on, they recognized that income tax withholding could get the job done; the problem was how to sell it to a public previously hostile to such measures.

Ostensible versus Actual Purposes of Withholding. In 1941 Albert G. Hart, professor of economics at Iowa State College, proposed a general plan for collection of income taxes at the source (U.S. House Hearings 1941: 330-48). The next year Treasury Secretary Morgenthau (U.S. House Hearings 1942, vol. 1: 5) recommended income tax withholding, presenting it as a "more convenient method for the payment of income taxes." Government concern for the well-being of the taxpayer was the dominant theme. Throughout this period the Treasury Department consistently portrayed the withholding proposal as providing taxpayers "a way of meeting their tax obligations with a maximum of convenience and a minimum of hardship" (U.S. House Hearings 1943: 9). As Treasury official Randolph Paul (U.S. House Hearings 1943: 10) put it:

The tax has been broadened to reach many millions of additional taxpayers with small incomes and little experience in planning their finances to meet large bills at infrequent intervals. ... A suitable pay-as-you-go method will be of great assistance to millions of persons.

COMMENT: "of great assistance..." TO WHOM? Certainly not the American People! Now that this extortionist racketeering enterprise steals over 50% of the average working "private" American Citizens pay before he/she ever sees it, and will be lucky to see any of it, if they decide to file a "tax return" to do it, thus perjuring themselves every year, giving up their fundamental rights in order to "maybe" get some of the stolen illbegotten booty back where it should never have left in the first place! All thanks to the dimwitted, uninformed, naiive and just plain ignorant "employers" in America today. It's is truly a sad state of affairs when one has to be coerced into signing his/her life away to a bunch of "thugs" who have no respect for the Law, no respect for their fellow Americans, whose sole purpose for existing is to make some poor hard working stiffs life miserable to the point that he can't afford to fight back, and in some cases loses everything he has worked his entire life for.

The fact that withholding had been tried before, and that the public had strongly opposed the earlier withholding system, seldom was mentioned.[f9]

As the president and Congress imposed ever higher income taxes, tax payment was wrapped in patriotism. In congressional hearings as in government propaganda efforts documented by Jones (1989), sacrifice was a dominant theme. Treasury officials (U.S. House Hearings 1941: 49; Higgs 1987: 202-03) labeled proposed tax increases "light indeed as compared to the sacrifices which large numbers are undergoing in entering military services." [f10] Secretary Morgenthau (U.S. Senate Hearings July-August 1942: 8) urged Congress to adopt a "courageous tax bill," avowing that "acceptance of sacrifice on the home front is a yardstick of our determination to win the war."

Although taxpayer convenience and patriotic sacrifice were the avowed purposes of income tax withholding, the actual objectives -- though not trumpeted to the public -- were candidly acknowledged in congressional hearings. These harsher objectives included increasing government revenue, enforcing payment of taxes, and muting taxpayer resistance.

Treasury officials viewed pay-as-you-go withholding as a way to "collect some money from people who would not otherwise make any report on income," testifying that "We cannot get those fellows unless we have the collection-at-the-source method" (U.S. Senate Hearings July-August 1942: 137). They advocated "us[ing] the tax system as we would a delicate surgical tool" (Paul 1943: 327). A recurrent theme was "the far greater collectibility of the tax if it is collected currently" (U.S. House Hearings 1943: 76).

Fear of taxpayer resistance was prevalent. One witness (U.S. House Hearings 1943: 391) warned that, without withholding, "taxpayers will simply throw up their hands and in a defiant tone say, `Try and collect'." That fear surfaced again in an exchange (U.S. Senate Subcomm. Hearings, August 19, 1942: 61) regarding withholding between Senator Bennett Champ Clark (D., Missouri) and Treasury's Randolph Paul:

Senator Clark: Psychology almost certainly ought to be considered in the tax year. Some British Chancellor of the Exchequer once said: `Taxation consists of getting the greatest amount of money with the least amount of squawks.' Mr. Paul: Do you think if we cut down the squawking under this method we could raise the individual tax rates? Senator Clark: That is what I am trying to find out: How we can raise the greatest amount of money with the least amount of hardship on the taxpayer.

As transaction-cost-augmentation theory suggests, "squawking" -- vocal resistance to taxation -- was viewed as manipulable, controllable by officeholders' deliberate decisions to change institutional mechanisms of government.

Long-term advantages of withholding to the government were apparent to Congress. As Representative Donald H. McLean (R., N.J.) put it (U.S. House Hearings 1943: 85), the advantages involved "protecting the Government revenues not only now, but for all times to come." McLean believed that everyone felt "the need for the change in the collection method, due to the increase of the number and type of taxpayers that we have brought into the system." Witnesses testified (U.S. House Hearings 1943: 187) that it would be "good business" for the government: government "will have more revenue; ... its people will pay better and be happier about it."

COMMENT: SO FAR SO GOOD, HUH? THEIR GRAVY TRAIN HAS BEEN LOOTING THE AMERICAN PEOPLE FOR OVER 80 YEARS! BUT TAXES FOR REVENUE ARE OBSOLETE. IT IS MORE IN-LINE WITH SOCIO-ECONOMIC "CONTROL". ARE YOU ALL "HAPPIER" ABOUT GETTING RIPPED OFF BY "YOUR SERVANT GOVERNMENT"???

Nonetheless, an effort was made to maintain a facade of solicitous concern for the taxpayer. Whenever a crack appeared in the facade it was quickly smoothed over -- as when a Treasury official discussing withholding (U.S. House Hearings 1943: 32-33) referred to the "person against whom the method was applied" and quickly corrected himself to say "or I might say in whose favor it was applied."

Political Strategies for Effectuating Withholding. The key strategies used to obtain support for income tax withholding in 1943 all entailed political transaction-cost augmentation. Government officials artfully employed national defense language, tax-cost information, and promises of "tax forgiveness" to engineer support for a withholding system at root designed to enhance and protect government revenue for all times to come. The above-noted conflict between the government's actual objectives and its publicly promoted objectives formed only one part of a systematic pattern of transaction-cost manipulation documented below.

Disingenuous use of the defense theme to secure tax increases was acknowledged in congressional hearings. Representative Frank Carlson (R., Kans.), admonishing witnesses to use such language, reminded them that the House Ways and Means Committee "passed a 10-percent increase in our income and corporate taxes a year ago by calling it a defense tax." He opined (U.S. House Hearings 1942, vol. 1: 508) that "the suggestion that we call this tax a war tax is a good one." The power of the war image to overcome political resistance also was evident in polling data to be discussed below. Similarly, in discussing the issue of "forced savings," Representative A. Willis Robertson (D., Va.) noted that the "word `forced' is not a euphonious name" and that it "would be much better if we should call it `Victory savings,' or something of that kind" (U.S. House Hearings 1942, vol. 1: 108). Treasury official Randolph Paul agreed. The language enwrapping revenue legislation was not lightly chosen.

Other forms of political transaction-cost manipulation also proved instrumental in securing passage of income tax withholding legislation. Those strategies were evident in government officials' handling of (1) the present-value issue, (2) the Ruml plan, and (3) the final debates.

1.Present - value issues were pivotal to important misrepresentations surrounding income tax withholding proposals in the early 1940s. In the 1920s and 1930s, income taxes had been due and payable on March 15 following the end of the tax year--for example, 1938 taxes were due on March 15, 1939, and could be paid either in one lump sum on that date or in quarterly installments during 1939. The proposed system would require employers to extract tax payments out of each paycheck during the tax year, so that a given year's taxes would be paid largely during that same year.

Treasury officials repeatedly testified to Congress that such withholding of income taxes--current collection at the source--represented "no additional tax." On dozens of occasions, Treasury official Randolph Paul and other government spokesmen testified:

This collection at the source mechanism is nothing but a mechanism for collection. It is not an additional tax. ... It merely speeds up the collection (U.S. House Hearings 1942, vol. 1: 100). It should be kept in mind that collection at the source does not in itself increase or decrease the tax liability of the taxpayer (U.S. House Hearings 1943: 11).

Given the expert witnesses' knowledge of present value, statements so seriously misleading to Congress and the public could not have been inadvertent.

Treasury officials and members of Congress who repeated these statements implicitly treated dollars today as identical in value to future dollars. This indefensible foundation of the Treasury's analysis was not made clear to Congress or the public. Indeed, in his congressional testimony, Randolph Paul simply added up an individual's tax liabilities over various years, without making a present-value computation, to compare that person's total tax burden under various proposals (U.S. House Hearings 1943: 23 ff.). When members of Congress probed too closely, Paul and other officials usually sidestepped their questions.

COMMENT: HAS ANYTHING CHANGED? YES! NOW THEY ALL "SIDESTEP" THE QUESTIONS.

Nonetheless, some astonishing statements were elicited. Consider the 1942-43 House hearings on this issue. When Representative Thomas A. Jenkins (R., Ohio) protested, "I have seen taxes collected after they have accrued, but I never saw them collected 6 months ahead of time," Treasury Secretary Morgenthau replied, "You are putting it very bluntly, but that is what we are proposing to do." The Treasury Department repeatedly acknowledged that this represented "payment in advance" (U.S. House Hearings 1942, vol. 1: 22, 57, 78). Yet Treasury officials insisted (U.S. House Hearings 1943: 36):

There is nothing in collection at the source that imposes any additional tax burden. Collection at the source relates entirely to the method and time of payment. It advances payment which otherwise would not be made until the following year, under our present system, to the current year--indeed, to the very time when the payment to the salary recipient is made.

Whether or not members of Congress understood the concept of present value, it is clear that Treasury officials did. Milton Friedman, then working for the Treasury Department, certainly was cognizant of present values when he stated (U.S. Senate Subcomm. Hearings, 19 August 1942: 58) to a congressional subcommittee evaluating alternative tax plans,

"You must also take into account the timing of the receipts." Randolph Paul alluded to the government's "power to make up the loss [associated with eliminating certain tax liabilities] by compelling quicker collections" (U.S. House Hearings 1943: 17). Treasury officials further demonstrated their understanding of the time-value of money by recommending that the Bureau of Internal Revenue be required to pay interest on amounts refunded under the new tax law (U.S. Senate Hearings 1943: 35).

Moreover, before withholding was reestablished in 1943, the government sold interest-bearing "tax anticipation notes" which private citizens could buy during the year to generate interest to help pay their taxes when they were due the following year (see U.S. Cong. Rec.-Senate 14 May 1943: 4419). Like other investment vehicles, such tax anticipation notes enabled taxpayers to set aside a smaller amount in the present to satisfy any given future tax liability. In contrast, under the proposed withholding system--with identical tax rates--the taxpayer would have to forgo a larger sum in present-value terms to satisfy the tax collector. The government, not the taxpayer, would receive the benefits obtainable from earlier command over that income.

Nonetheless, the Treasury Department's claim that withholding was not an additional tax was repeated by members of Congress on the House and Senate floor and elsewhere. On this fundamental issue, government officials systematically raised the transaction costs to the public of assessing the proposals at hand. Accordingly, while other features of the bill prompted bitter dispute, by the time the Current Tax Payment Act reached the floor of Congress there was no dispute about current withholding of income taxes at the source. Ironically, transaction-cost augmentation was employed to curry support for a proposal that, once adopted, in turn would serve as a key mechanism for increasing other political transaction costs facing the public.

2.Transaction-cost augmentation also took other forms, including a "paper forgiveness" of income taxes that came to be known as the Ruml plan. As Congress considered various withholding proposals, a key transitional problem became apparent. Immediate conversion to a pay-as-you-go system seemed to entail double taxation in the transition year. That is, if a pay-as-you-go system were adopted in 1943, during 1943 people would be required to pay both their 1942 taxes (under the old law) and their 1943 taxes (via the new withholding arrangement). Although Treasury officials thought that was a fine idea, most others disagreed.

Accordingly, various proposals aimed to soften this effect. The Treasury was willing to spread out the extra year's tax over an extended period to accomplish the transition. However, the idea that captured the public's attention was Beardsley Ruml's proposal (first made in the summer of 1942) to cancel or "forgive" one year's tax, treating amounts paid or withheld in 1943 as payments toward a person's 1943 tax and eliminating 1942 tax liability.[f11] Using the metaphor of daylight savings time, Ruml proposed to set the "tax clock" ahead one year.

Two things stand out from the convoluted history of Ruml's proposal. The first is that it was absolutely critical to--and perhaps the proximate cause of--public acceptance of income tax withholding in 1943. The second is that the tax "cancellation" involved was a sham and was understood to be a sham by a significant number of government officials involved in its passage. Both of these conclusions point to the transaction-cost-increasing role of the Ruml plan in securing passage of the Current Tax Payment Act of 1943. Sham or not, taxpayers liked the sound of the words, and government officials were attentive to the nuances. The psychology of taxation was a recurrent theme. As Ruml testified, "there is a power in words to evoke emotion, and double taxation evokes emotion." He explained (U.S. Senate Subcomm. Hearings 19 August 1942: 5) that "People don't believe in double taxation, even though the single taxation may be the sum of the two." The Current Tax Payment Act played on this psychology.

The polling data support the supposition of Representative Robert L. Doughton (D., N.Car.) that "one of the principal reasons for the popularity of this plan [bis] the fact that it relieves the taxpayers of the year's taxes."[f12] Although pay-as-you-go income tax withholding had been under discussion in Congress since 1941, by June 1942 public sentiment remained quite equally divided on the idea. For example, asked in May and June 1942 if they would "like to have a regular amount deducted from each pay check" to pay their federal income tax, 43 percent of the respondents said no, 50 percent said yes, and 7 percent were undecided. In a similar poll conducted on February 3, 1942, 45 percent said no, 45 percent said yes, and 10 percent were undecided (Gallup 1972: 338; Cantril 1951: 324). It was not a groundswell. The only polls during this pre-Ruml-plan period that found substantial support for withholding were those that inserted the phrase "to help the war effort" in their question.[f13]

However, after the Ruml plan was introduced in July-August 1942 and the idea of tax cancellation or forgiveness was touted in the popular press, there was a dramatic change in public sentiment. Polls conducted November 1942 to April 1943 found that a steadily rising percentage of respondents favored pay-as-you-go withholding, with support for the proposal ranging from 65 percent to 79 percent without mentioning war in the question. A similarly large percentage of respondents reported familiarity with the Ruml plan. Of the 81 percent of respondents who had heard of the Ruml plan in January 1943, 90 percent of those who expressed an opinion about it favored the plan. In February 1943, 42 percent of respondents expressed their belief that the Ruml plan would mean that they would not have to pay tax on their 1942 incomes (Cantril 1951: 324-25; Gallup 1972: 366, 371).

Thus it appears that the public jumped at the bait of tax forgiveness. The issue is whether the hoped-for cancellation was real. On the most obvious level, collecting two years' taxes in one year in the process of moving to a current collection basis would seem to imply greater tax revenues for the government, suggesting that cancellation of 1942's tax would reduce tax revenues. Therefore, one question is whether the government's revenue actually was expected to fall if a comparison was made between double taxation and tax forgiveness in the transition year (i.e., a comparison of current collection at the source with and without tax forgiveness). But that is not the only comparison to be made. Taxpayers naturally are concerned with how they will fare under the existing system versus a proposed new system. Thus another critical comparison is the government's revenue "take" without withholding (the old law), and the government's take with tax forgiveness coupled with current collection at the source (a Ruml-like new law).

Despite their opposition to tax cancellation, Treasury officials did not expect tax revenues to fall viewed from either of these perspectives. Faced with rising popular support of a Ruml-type plan, they repeatedly acknowledged that the post-cancellation situation could be expected to entail a greater tax-take for the government--whether compared with the old law or with a hypothetical situation involving two years' taxes in one. For instance, Randolph Paul testified regarding tax cancellation:

The Government by forgiving a year's tax liabilities would be discarding assets. ... The Government differs from the business in that it has the power to make up the loss by compelling quicker collections and by imposing additional taxes on the same or other people ... the cash receipts of the Treasury could be maintained even though the tax liability was forgiven (U.S. House Hearings 1943: 17).

Moreover, Paul acknowledged that, in the expected environment of rising incomes, the government's tax-take would increase under a Ruml-type plan compared with its revenues under the old law, even if tax rates were not raised. With present-value issues just beneath the surface, Paul testified (U.S. House Hearings 1943: 18):

Each individual subject to taxation in 1942 has 1 year's liability canceled, but he is at the same time required to pay another year's liability sooner than he otherwise would. Individuals who were not taxpayers in 1942, but who become taxpayers subsequently, will be obliged to pay their liabilities 1 year sooner than under existing law. Individuals who die, or who cease receiving an income, pay the Government 1 year's less taxes, but by and large the money loss on their account is offset by the gain from new taxpayers who begin paying their taxes a year earlier. ... The payments dropped out will be spread over a period of years. If any given year is a year of higher national income ... the actual receipts of the Government for that span of years would be increased by the change.

Former Treasury Department official Elisha Friedman openly called it a "paper forgiveness." Referring to lower-income taxpayers as "little people," he stated (U.S. House Hearings 1943: 503) that he "would agree to 100 percent forgiveness for little people, because, frankly, it is a paper forgiveness." Noting that withholding at the source "makes possible higher tax rates than under the present method," he testified (U.S. House Hearings 1943: 491, 492, 503):

The `forgiveness' of the small brackets is merely temporary. ... They will pay more later. ... You will forgive the 1942 tax for the little people but in 1944 and 1945 they will be paying at a higher rate. ... Ours is a paper forgiveness for the low brackets.

Some in Congress resisted the language of tax cancellation. Condemning "legislative legerdemain in the cancellation of 1942 income tax liabilities," Senator Robert M. LaFollette Jr. (R./Progressive, Wisc.) expressed his belief that, in the context of rising war expenditures, the "average taxpayer would rather learn the bad news now ... than be misled by the false sound of cancellation" (U.S. Senate Report No. 221, 1943, part 2: 1). As Senator Henry Cabot Lodge Jr. (R., Mass.) put it to a Treasury witness (U.S. Senate Hearings 1943: 94), "if you go at it from the standpoint that you live by, that you feed your children on, those things, there is no cancellation at all, is there?"

3.In examining the final congressional debates on this bill, it is not my intention to chronicle either the procedural maneuvers or the detailed differences between contending bills as income tax withholding legislation moved toward passage. Excellent summaries already exist (U.S. Senate 1946). My focus is on central politico-economic strategies that facilitated passage of such legislation.

The conference bill ultimately passed by the House and Senate involved compromise on everything except the fundamental idea of withholding at the source. As Randolph Paul had stated (U.S. Senate Hearings 1943: 2), the three leading bills "reflect[ed] essential agreement on the major issue of current payment." On the Senate floor, Senator Arthur H. Vandenberg (R., Mich.) reiterated (U.S. Cong. Rec.-Senate 2 June 1943: 5209) that "No one questioned at any turn of the road the desirability and necessity of having collection at the source and making the Nation current with its taxes."

The only disagreement concerned the degree of tax cancellation for 1942. President Roosevelt, having called for a $16 billion tax increase, stated in writing to the chairman of the House Ways and Means Committee and the Senate Finance Committee that he would veto legislation authorizing 100 percent cancellation of 1942 tax liability. Another constraint was concern that the rich would benefit more than the poor from tax cancellation. In particular, many wanted to avoid abating taxes on the "windfall profits" of war contractors.

With certain qualifications and exceptions, the bill finally passed authorized 75 percent cancellation of one year's tax liability. Two windfall profit provisions were included in the conference committee bill. In general, the final bill required payment of the higher of one's 1942 and 1943 tax liability. If someone died in 1943, or had much lower income in 1943 than in 1942, that person would not thereby avoid his 1942 tax liability. Moreover, to prevent recipients of "war profits" from receiving a boon, the bill set an additional cap on tax forgiveness for those whose lowest income in 1942-43 exceeded their income in a selected base year (1937, 1938, 1939, or 1940) by more than $20,000 (U.S. Senate 1946).

Widespread awareness of the transaction-cost-increasing features of the Current Tax Payment Act was evident in the final debates. Despite allusions to alleged mutuality of interest, it was widely understood that income tax withholding was chiefly in the interest of the government, not the taxpayer. Calling current collection "the crux of the whole matter," Senator William W. Barbour (R., N.J.) told the Senate (U.S. Cong. Rec.-Senate 12 May 1943: 4271) that "the best interests of the Government will be served if the new tax law requires that taxes be paid while the taxpayer has the money to pay them." Senator Harry Flood Byrd (D., Va.) said (U.S. Cong. Rec.-Senate 13 May 1943: 4336) that it was ``of great interest and importance to the Treasury, as well as the Government as a whole, that taxes be placed on a pay-as-you-earn basis." Senator David I. Walsh (D., Mass.) added that withholding "is of more benefit to the Treasurer than to anyone else" and "means that the Treasury will be able to collect future taxes" (U.S. Cong. Rec.-Senate 2 June 1943: 5210).

Similarly, there was no doubt in the minds of many representatives that the result of withholding, even with tax forgiveness, would be an increase in the tax burden on the public. Although Senator Walter F. George (D., Ga.) as chairman of the Finance Committee repeated the official line that the withholding bill "does not deal with rates directly, nor does it affect the burden imposed under varying rates upon the taxpayers," others were more candid. Senator Barbour noted that "the change in the method of tax collection will unquestionably increase the flow of revenue to the Treasury."

Reinforcing this point, Senator John A. Danaher (R., Conn.) observed (U.S. Cong. Rec.-Senate 12 May 1943: 4268, 4272, 4282) that "The fact of the matter is the Treasury collections will go up annually rather than down." Senator Byrd predicted that "before the ink is dry on the signatures" establishing a Ruml-type bill as law, the Treasury "will call upon the Congress to increase the existing tax rates in proportion to the cancelation [sic] and forgiveness we extend to the taxpayers." He believed that "so-called benefits to the taxpayer" would then "quickly sink into complete oblivion" so that "most taxpayers would be injured rather than benefited" (U.S. Cong. Rec.-Senate 13 May 1943: 4337). Advocates of a Ruml-type plan openly boasted (U.S. Cong. Rec.-House 3 May 1943: 3841) that it "would actually bring in $3,000,000,000 more revenue to the Treasury this year than would the present law."
The fact that tax forgiveness was both a sham and an essential ingredient of public support for the income tax withholding bill was widely discussed in the final debates. Senator Tom Connally (D., Texas), an opponent of the Ruml plan who believed it portended a loss to the Treasury, asserted that the bill "font color="red">is really intended to fool people." He believed that the Ruml plan would be "blown out of the water" by those "whooping up the Ruml plan" if they became convinced that they were "not going to get any money back" (U.S. Cong. Rec.-Senate 14 May 1943: 4408). Senator Clark of Missouri stated (U.S. Cong. Rec.-Senate 12 May 1943: 4275) that he "never believed that there was any forgiveness or any personal advantage to anybody in the [proposed] system," perceiving "great governmental advantage in having everyone current with his taxes" and enabling government to "collect the taxes as the taxpayer earns them."

Nonetheless, while some congressmen understood the issue, others succumbed to its apparent complexity. Complexity here facilitated the adoption of transaction-cost-increasing measures, allowing the "experts" to steer the outcome to suit their own interests. Senator Connally of Texas stated that he did "not think there is anyone on the [Senate Finance] committee who completely understands all the angles," noting that taxation had become so complex that the Finance Committee "could never make any progress or headway if it did not have available the experts of the Treasury." He described (U.S. Cong. Rec.-Senate 14 May 1943: 4409) the relation between the committee and the Treasury experts as follows:

When a question arises we call on them for information as to what the effect of certain proposals would be, what the repercussions would be, what the reactions would be, and we are obliged to act on the basis of the information thus furnished.

Consistent with transaction-cost-augmentation theory, complexity not only encouraged reliance on experts but also provided political cover for those who took their advice.

COMMENT: SOUNDS FAMILIAR, DOESN'T IT? THEY COULDN'T FIGURE THINGS OUT FOR THEMSELVES EVEN THEN. HAS IT GOTTEN WORSE? I'D SAY IT HAS GOTTEN ALOT WORSE!

Crisis also facilitated passage of income tax withholding legislation. In the dispute over forgiveness or cancellation of 1942 taxes, outraged opponents of any cancellation impugned the patriotism of their adversaries and asked how one could in good conscience cancel taxes when U.S. soldiers were dying in battle. Countless allusions to "our men and boys ... dying to win victory and save our country" peppered the debates. Compounding the difficulty of understanding the actual import of the Ruml plan, those convinced that it signified reduction in government revenues invoked the "price in life and limb" being paid on the battlefield, stating that "no sacrifice however great of the citizen taxpayer at home can compare with the privations of the soldier in the field" (U.S. Cong. Rec.-House 4 May 1943: 3923, 3928). War and the oft-expressed desire to limit inflation by absorbing citizens' spending power provided appealing rationales conducive to approval of the income tax withholding measure.

COMMENT: IS THAT STILL TRUE TODAY? "NO SACRIFICE HOWEVER GREAT OF THE CITIZEN TAXPAYER AT HOME CAN COMPARE WITH PRIVATIONS OF THE SOLDIER IN THE FIELD". 1942 WAS THE LAST TIME THERE WAS A FORMAL DECLERATION OF "WAR". THIS JUST CANNOT HOLD UP AS A RATIONAL BASIS ON WHICH TO INVOKE ANY EMOTIONALLY PERCEIVED OBLIGATIONS TO PAY FOR AN "UNDECLARED WAR". HOWEVER, THE AMERICAN PEOPLE ARE MORE PRONE TO ACT OUT OF WHATEVER "EMOTION" DRIVEN EVENTS THE GOVERNMENT AND MEDIA TYPES WISH TO IMPOSE ON THEM AT ANY GIVEN TIME. THIS IS WHAT I CALL THE "AMERICAN MATRIX". WAKE UP AMERICA! ANY "MAN" SHOULD BE ABLE TO DIFFERENTIATE WHEN IT COMES TO ACTING ON EMOTIONS AND ACTING ON A LEGITIMATE "NEED" IN A REAL EMERGENCY.

Thus the Current Tax Payment Act of 1943 became law, both product and instrument of transaction-cost augmentation. Though the Act was widely supported by the citizenry, we have seen that wartime public support rested on misunderstandings actively encouraged by government officials. However, the Current Tax Payment Act of 1943 did not arise in an institutional vacuum, nor did its support erode as the public learned more about its effects. That deception was only one part of the fabric of transaction-cost augmentation surrounding this issue is shown below as we consider the interplay between transaction-cost manipulation, institutions, and ideology in shaping the evolution of U.S. income tax withholding.