Saturday, April 12, 2014

How Milton Friedman Helped Invent Income Tax Withholding

Timothy Taylor writes at Conversable Economist:

In one of the great ironies, the great economist Milton Friedman--known for his pro-market, limited government views--helped to invent government withholding of income tax. It happened early in his career, when he was working for the U.S. government during World War II. Of course, the IRS opposed the idea at the time as impractical. Friedman summarized the story in a 1995 interview with Brian Doherty published in Reason magazine. Here it is: 
"I was an employee at the Treasury Department. We were in a wartime situation. How do you raise the enormous amount of taxes you need for wartime? We were all in favor of cutting inflation. I wasn't as sophisticated about how to do it then as I would be now, but there's no doubt that one of the ways to avoid inflation was to finance as large a fraction of current spending with tax money as possible.
In World War I, a very small fraction of the total war expenditure was financed by taxes, so we had a doubling of prices during the war and after the war. At the outbreak of World War II, the Treasury was determined not to make the same mistake again.
You could not do that during wartime or peacetime without withholding. And so people at the Treasury tax research department, where I was working, investigated various methods of withholding. I was one of the small technical group that worked on developing it.
One of the major opponents of the idea was the IRS. Because every organization knows that the only way you can do anything is the way they've always been doing it. This was something new, and they kept telling us how impossible it was. It was a very interesting and very challenging intellectual task. I played a significant role, no question about it, in introducing withholding. I think it's a great mistake for peacetime, but in 1941-43, all of us were concentrating on the war.
I have no apologies for it, but I really wish we hadn't found it necessary and I wish there were some way of abolishing withholding now."

Timothy Taylor is author of The Instant Economist: Everything You Need to Know About How the Economy Works and Macroeconomics: Economics and the Economy , 2nd

3 comments:

  1. Interesting comments by Milton. In fact, between 1913 and 1939, before withholding was implemented, on average, less than 10% of working Americans files income tax forms, according to BLS and IRS data. Withholding changed that as American business was co-opted into false reporting of earnings as "taxable", when prior to WWII, they were not. The tax laws did not change, only the process of collection, and the American people, engaged in a great war, lost their freedom to the central govt. And, as folks no longer know the law or the process to recover money withheld, the flow of ill-gotten gains continues to this day. See Losthorizons.com for all the details, documentation and evidence of this scam on the American people by their govt. and American business. Shameful!

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  2. "One of the major opponents of the idea was the IRS...This was something new, and they kept telling us how impossible it was. It was a very interesting and very challenging intellectual task. I played a significant role, no question about it, in introducing withholding."

    Yeah who would have thought that only somebody sufficiently interested and challenged like Milton could so easily humiliate an entire nation of slaves by scaring them into filing papers with the state detailing all of their monetary transactions?

    On the other side of the debate, Himmler said it was easy and no Chicago-trained econometricians are necessary:

    "...the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same way in any country."

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  3. All the free market rhetoric aside, Milty still found the absolute necessity of the State and was NO way an Austrian. Rothbard correctly tagged his economics as 'Keynesian Lite'. His withholding brainstorm was a horrendous and unforgivable sellout to State control.

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