By Andrew Miller
During World War II, Treasury Secretary Henry Morgenthau asked his staff a serious question: “Suppose we have to go out and arrest five million people?”
For most of American history, the income tax was a rich person’s problem.
The exemption was high enough that the average worker never owed a dime. The wealthy few who did owe paid once a year, in a lump sum the following spring. They could afford to set the money aside.
However, the war cost far more than that small group could cover.
So Congress lowered the threshold. That put tens of millions of new taxpayers on the hook.
This created a dilemma for Morgenthau. These new taxpayers lived paycheck to paycheck. The government doubted they would save all year for a bill they never had to pay before.
The workaround was to stop asking workers to save in the first place.
Instead of one payment in the spring, the tax would come out of every paycheck as it was earned. The employer would do the deducting and send the money in.
That left one ugly transition.
If workers started paying the current year’s tax through their paychecks while they still owed last year’s, they would be paying two years at once.
The solution came from a businessman, not a politician. Beardsley Ruml, the treasurer of Macy’s, pitched a trade: forgive most of one year’s taxes so nobody paid double. In return, everyone switches to paying through their paychecks from then on.
Congress argued over how much to forgive. They landed on the Current Tax Payment Act, which Franklin Roosevelt signed on June 9, 1943. It erased 75% of a year’s tax, and all of it for anyone who owed $50 or less. Paycheck withholding started three weeks later.
Eventually, the war ended. Withholding did not.
The new law meant that collecting income taxes continued to be the responsibility of the employer, under penalty for getting it wrong.
It’s stayed that way ever since.
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