Freedom Lawyers of America

If you're looking for a name to attach to the huge tax bite that was
taken out of your last paycheck, try this one on for size: Beardsley Ruml.
Ruml was treasurer at R.H. Macy & Company during World War II. He was also
an academic and chairman of the New York Federal Reserve Bank's board of
directors, a polymath so glittering that he stood out even in that era of
big talkers. Ruml was so well known for his dinner party expositions that
Moss Hart and George S. Kaufman made him a model for a character in The Man
Who Came to Dinner. But it is Ruml's role as New Deal spinmeister that keeps
him in our thoughts today. He devised the legislation that gave us
withholding as we know it. Today Americans give up more money in federal
taxes than at any time except when the country was at war: 20.7 percent of
the economy. Without withholding, it would be difficult to envision this
scale of taxation persisting in a land born of a tax revolt. Indeed, without
withholding the outsized government we have today would be hard to imagine.
Washington was busy marshaling the forces of the American economy to halt
Japan and Germany. In 1942 lawmakers raised income taxes radically, with
rates that aimed to capture twice as much revenue as the previous year. They
also imposed the income tax on tens of millions of Americans who had never
been acquainted with the levy before. Chroniclers of the period say that the
"class tax" became a "mass tax." But even in this most patriotic of moments,
it was not evident that Americans were willing to pay the new tax. In those
days, taxpayers sent one big check to the government. And as spring arrived
in 1943, it appeared that many citizens might not ante up and file returns.
Henry Morgenthau, the Treasury secretary, confronted colleagues about the
nightmarish prospect of mass tax evasion: "Suppose we have to go out and
arrest five million people?" Enter Ruml, man of ideas. Like other retailers,
he had observed that customers didn't like big bills. They preferred
installment payments, even if they had to pay interest to relieve their
pain. So Ruml devised a plan, which he unfolded to his colleagues at the Fed
and to anyone who would listen in Washington. The government would get
business to do its work, collecting taxes for it. Employers would retain a
percentage of taxes from workers every week and forward the money directly
to Washington's war chest. No longer would the worker ever have to look his
tax bill square in the eye. He need never even see the money he was
forgoing. Thus withholding as we know it today was born. To tame resistance
to the new notion, Ruml offered a powerful sweetener: The federal government
would offer a tax amnesty for the previous year. It was the most ambitious
bait-and-switch plan in America's history. Ruml advertised his project as a
humane effort to smooth life in the disruption of the war. He noted that it
was a way to help taxpayers out of the habit of carrying income tax debt,
debt he characterized as "a pernicious fungus permeating the structure of
things." Ruml's genius did not lie in inventing withholding, already a
known, if largely untried, tax concept. His genius lay in packaging so
clever it provoked envy from his peers. Randolph Paul, a tax authority at
Treasury, wrote distastefully that Ruml seemed to have convinced taxpayers
he had found "a very white rabbit"-a magic trick-"which would somehow
lighten their tax load." Ruml called his program not "collection at source"
or "withholding," two technical terms that might put voters off, but "pay as
you go," a zippier name. Most important of all was the lure of the tax
amnesty. The policy thinkers of the day embraced pay as you go. This was an
era in which John Maynard Keynes dominated economics, and Keynesians placed
enormous faith in government, which they thought could end depressions,
bring world peace, and build economies. The Ruml plan would give them the
wherewithal to have their projects. The Keynesians also held that high taxes
were crucial to controlling inflation. CREATING THE MONSTER Conservatives
played their part in this drama. From a junior post at Treasury, a young
economist named Milton Friedman helped plan the details of withholding.
Later, Mr. Friedman called for the abolition of the withholding system. In
their memoirs, Two Lucky People, Mr. Friedman and his wife, Rose, write that
in the 1940s "we concentrated single-mindedly on the promotion of the war
effort. We gave next to no consideration to any longer-run consequences. It
never occurred to me at the time that I was helping to develop machinery
that would make possible a government that I would come to criticize
severely as too large, too intrusive, too destructive of freedom. Yet, that
was precisely what I was doing." One can almost hear Mr. Friedman sigh as he
writes: "There is an important lesson here. It is far easier to introduce a
government program than to get rid of it."
We may have turned away from big government and the welfare state, but
our enormous Washington bureaucracy and our bewildering tax code remain with
us, unwieldy artifacts of an earlier era.Although withholding was supposed
to be a war measure, by 1945 there was a certain inexorability to the
project. Even as the nation girded for VJ day, the big thinkers were laying
out justification for expansive taxation in the postwar period. In 1945 Ruml
himself published a book, Tomorrow's Business, that described future
national tax policy. Taxes, he said, were important "as an instrument of
fiscal policy to help stabilize the purchasing power of the dollar" and "to
express public policy in the distribution of wealth and of income, as in the
case of progressive income and estate taxes." Early on, while the nation was
still recovering from the shock of the war, there were several famous
resisters. In the late 1940s, a Connecticut cable-grip maker named Vivien
Kellems actually tried to create a movement to protest withholding. She
refused to withhold for the hundred-odd employees of her company and
challenged the Internal Revenue Service collectors in federal court. She
even wrote a breathless volume of protest, titled Toil, Taxes and Trouble:
"Under the hypnosis of war hysteria, with a pusillanimous Congress
rubber-stamping every whim of the White House, we passed the withholding
tax. We appointed ourselves so many policemen and with this club in our
hands, we set out to collect a tax from every hapless individual who
received wages from us." Her protest earned her a modicum of respect in
serious quarters. The journalist Harry Reasoner compared her battle to that
of Gandhi and Martin Luther King. Most people, though, depicted her as a
kook, and she spent her waning years until her death in 1975 holding forth
at the soirees of the far-right fringe. The feisty Adolph Coors family also
tried to protest. The papers reported that Coors wanted to show workers the
scope of the government take. The company gave them their full pay-without
withholding-for two months. In the third month it took out three months'
worth of withholding. Yet Coors too soon abandoned its withholding
experiment. In recent decades it has become clear that Keynesianism is only
window dressing for big government, and most policy leaders have ceased to
see taxation as the principal monetary tool. From time to time, lawmakers,
always Republicans, have questioned withholding. Ronald Reagan talked about
challenging state withholding in his campaign for California governor-but
did not follow through while in office. In this decade, House majority
leader Dick Armey has pushed a plan to end withholding with his flat-tax
proposal. Instead of the annual 1040 reconciliation, Americans would send
the government a check every month, "rather like a monthly car payment."
Still, withholding prevails, a testament to the force of Mr. Friedman's
wistful insight. We may have turned away from big government, the welfare
state, and spending as a way of managing inflation, but our voluminous
Washington bureaucracy and our bewildering tax code remain as unwieldy
artifacts of an earlier era. It is a breathtaking contradiction and one that
might not exist but for the powerful marketing skills of a wartime package
man.