Tax Withholding System
About Tax Withholding System
The US tax withholding system was introduced by the Current Tax Payment Act of 1943. Before withholding, taxpayers paid their full tax bill annually, which was politically painful. Beardsley Ruml, chairman of Macy, popularized the concept of pay as you go. Withholding made the income tax politically sustainable by making it invisible. Workers never see the money that is withheld, reducing resistance. The withholding system was essential to funding World War II, when the number of income tax payers increased from 4 million to 43 million. Milton Friedman, later a Nobel laureate and libertarian icon, helped design the withholding system while working at the Treasury. He later regretted it, arguing it made it too easy for government to raise taxes.
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