(WARNING: This mini-series for Tax Week will not be very joyful, sorry Challies)
This Wednesday, April 15, marks the day federal tax returns, payments, settlements, and extensions are due. Only six days later and it will be Tax Freedom Day, the day when the nation as a whole has earned enough money to pay its total tax bill for the year. You will spend 47 days working to pay off various federal taxes (including income), 27 days for social insurances (social security, medicare, medicaid, etc.), and 40 days for various state, local, property, and sales taxes. Many today do not know that there was not always income tax in America. Some libertarians may know that the income tax of today began in 1913 but they may not know that the withholding system we are familiar with did not come until nearly 40 years later. But it should come as no surprise to anyone that both institutions were to be “temporary” war-time measures.
“War is the health of the State,” – Randolph Bourne
Lincoln actually introduced the income tax during the Civil War in 1861 and it lasted until it was repealed by congress in 1871. It was then permanently reintroduced with a constitutional ammendment in 1913 (same year as the Federal Reserve) before WWI (how convenient), during which the top income bracket had “progressive surtax ranging from 1 percent to 6 percent, depending on income” (see here).
It was, like many taxes today, pitched as merely for the very top income earners in the country. Yet as World War I raged on the income taxed surged to well over 77 percent in 1918. In 1916, income taxes had been providing 16 percent of federal revenue. From 1917 to 1920, that percentage ranged as high as 58 percent. The tax was now a pillar of federal finance.
The Income Tax never returned to pre-war levels but did go down after The Depression You’ve Never Heard Of to 25%. They eventually hit their peak record in 1944, when the top rate peaked at 94% on taxable income over $200,000. Even fewer however know that it was at this time that the tax withholding system was introduced. (technically the first experiment for tax withholding was on federal employee wages during the civil war, swiftly and conveniently an amendment was passed within two years to make federal employees exempt from these taxes)
Even during many of these times only a relative percentage of the population (compared to today) paid any income tax, and before World War II that money was paid in quarterly installments the following year. The withholding system accomplished two things for the State since. For one, it made tax collection much more efficient and continuous. Second it has taken on a sort of sleight of hand trick. Imagine the fuss people would make if they had to physically write a check for the full amount April 15 every year? By drawing it out continually the State squelches most peoples objections. Who can object to $100 a week, isnt that much better than $5,200? As Charlotte Twight says, “withholding is the paramount administrative mechanism that since 1943 has enabled the federal government to collect, without significant protest, sufficient private resources to fund a vastly expanded welfare [and warfare] state.” Robert Higgs also notes how the Treasuries own facts sheet publicly acknowledges this fact. “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.” Out of sight out of mind. It as if Adam’s Smith own invisible hand drew it out himself. What’s a few dollars more each week and then maybe a little more next year?
The income tax and the withholding does something even more sinister. It comes with the implicit denial that your wages are your own. As Frank Chodorov, an Old-Right economist much beloved by Murray Rothbard said in his book The Income Tax: the Root of all evil
“The State says to the citizen: your earnings are not exclusively your own, we have a claim on them and our claim precedes yours, we will allow you to keep some of it, not because we recognize your right but because we recognize your need but whatever we grant you for yourself is up to us to decide.”
It is truly the nationalization of your income, an implicit denial of property rights. It is first Babylon’s, and they take your first-fruits (if only it were a tenth) before deciding what you may use.