FT218: “The withholding tax is the greatest sin government ever perpetrated against the people.” —Old Pithy
The tariff was the funding source for most of government for about a century.
Once upon a time there was no federal income tax. No estate tax. No gift tax. No payroll tax. No capital gains tax. And no corporate tax. Taxes we take for granted today didn’t exist a century or so ago. The country was a lot leaner back then. People kept most of their money. And took care of their families.
The federal government used to fund everything thing they did with tariffs. A tax on imports. Paid in ports. As ships unloaded their goods. Far away from most people. And few people complained. Our first excise tax was a different story. A 7 cent per gallon of whiskey incited the Whiskey Rebellion. After fighting the Revolutionary War to escape the oppressive taxation policies of Great Britain the people were in no mood for a new tax. The whiskey tax lasted for about a decade. Then they repealed it.
This left tariffs as the funding source for most of government for about a century. But even that grew controversial. And began the divisions between North and South. The North protected its industry with protective tariffs on iron products, textiles (wool and cotton) and agricultural goods. Shipped from the more industrialized Britain. Which Britain responded to with tariffs of their own. On cotton and other agricultural products grown in the South. So the more the North protected their industries the more difficult it made for the South to export their raw goods.
In 1913 the progressives reintroduced the income tax and taxed the rich at 1%.
This wasn’t the only difference of opinion the North and South had. And their differences resulted in war. The North was able to win the American Civil War with its expansive industry. But the war devastated the country. Especially the South. Which lost about 8.6% of her population. To get an idea of what an 8.6% population decline is consider this. That percentage of the current U.S. population is approximately 27 million. So the losses the South suffered were similar to what the Soviets lost on the Eastern Front during World War II.
The South may have lost more of its population. But the North suffered nearly the same number of war dead. She just had a larger population to begin with. To run all of that industry that won the war. America’s first modern war was a costly one. And one that President Lincoln had to turn to a new source of revenue. The federal income tax. Which taxed the rich. At 3%. Then it taxed the super rich at 5%. But after they paid down the war debt they repealed America’s first income tax.
Then came the progressives. And their taxes. In 1913 they reintroduced an income tax. Taxing the rich at 1%. And the super rich at 6%. To fund an expanding federal government. Then came World War I. To fund the war they increased the tax rate on the rich to 15%. And the super rich at 77%. The top marginal rate fell during the Twenties. But FDR raised it back up during the Great Depression. Until it reached 94%. Where for every dollar they earned in and above the top income bracket they got to keep only 6 cents.
Few would be able to write a check on tax day to pay their full tax bill.
Then came all the other taxes. And they just kept coming. Our tax bill grew to staggering amounts. Which posed a problem for the taxing authorities. As people just didn’t keep that kind of money around. They worked. They raised their families. And what little they had left they put into the bank for their retirement. Making it very difficult for them to pay their tax bill when it came. Especially when it was 30% or more of their entire income. So what to do?
The Founding Fathers created a nation out of a tax rebellion. And then when that nation levied its first excise tax they got a little rebellion of their own. Being opposed to taxes is part of the American DNA. So the taxing authorities had to somehow hide the large amount of taxes we were paying. That is, they had to reduce the transparency of these taxes. For if you don’t know what you’re paying in taxes you really can’t get mad at paying high taxes.
Enter the withholding tax. The greatest sin government ever perpetrated against the people. For it takes our money before we ever get it. Conditioning us to accept ‘net’ pay as the norm. And making ‘gross’ pay some meaningless payroll jargon. Because you can’t spend ‘gross’ pay. You can only spend ‘net’ pay. Which is the only pay people care about. Making it not only easier to hide the soaring amount of taxes people were paying. But because it’s so easy to hide what we’re paying they could raise those taxes to confiscatory heights. Because we never have that money in our hands. We never see it. It goes from our employer to the taxing authorities. Which is the only way they could collect these soaring amounts. For few would be able to write a check on tax day to pay their full tax bill. As people just don’t keep that kind of money around.