A convenient form of servitude

Americans have come to mark April 15 as a day of financial catharsis. They hate the pain of the reckoning, but they also console themselves with the promise that that grand relief, the refund, is not far behind.

This is pathetic. Actually those small cheques from Washington are not a bonus but a sign of servitude - servitude to the federal withholding system, through which citizens pay taxes all year long. While most taxpayers support some level of taxation, most also recognise that they might not be willing to continue to pay at their current rates if they had to deliver the cash in the form of a single cheque once a year.

Being rule-of-law types, though, Americans assume they have little choice about the amount of taxes they pay or how they pay them. They are probably right. So they focus on the prize of the refund and sublimate the rest of the tax story, along with the rest of life's inevitabilities.

But that does not mean the government should inevitably collect over a third or half of a person's earned income. Or that it is right that Washington should use its withholding device to steadily increase the share of the economy that it collects in taxes, as it has done in the last half century.

From time to time, a handful of feisty employers will seek to call attention to the fiscal fetters. They refuse to collect withholding from their employees.

This winter a new set of withholding resisters - they call themselves the "tax honesty movement" - made their way into the papers. As soon as they got national attention, the IRS screamed bloody murder. (If you were searching for it, this is as clear evidence as any that the tax authority knows it could not survive without the collection device.) The Justice Department, too, moved against them, virtually guaranteeing the protest's extinction. Still, this small act of civil resistance is a useful reminder that it is at least possible to call the arrangement into question.

Hard as it is to fathom, the twins of high taxes and withholding as we know them are relatively new in American life. Neither is particularly in keeping with the nation's traditions. America, after all, is a nation born of a tax revolt, and had no income tax for most of its history. The modern income tax system was introduced only in 1913 - and even then applied only to a narrow band of taxpayers. The top rate back then was 7 per cent. No one in those days contemplated the 50 per cent or more levy that this paper's readers routinely shoulder today.

Then, however, came the second world war. The Roosevelt administration needed revenue to fight Hitler and Hirohito, and converted the old "class tax" to a "mass tax". FDR and his Treasury Secretary, Henry Morgenthau, recognised within a year that most workers could not, or would not, be able to write an annual check. So they implemented withholding.

Today's resigned tax targets will find it interesting to know that, even in wartime, Washington did not think withholding would be an easy sell. To get the new mechanism through the legislative process, lawmakers offered a powerful sweetener: they would grant a partial tax amnesty for old tax obligations. The war ended, but withholding stayed.

And in the beginning there was resistance. A Connecticut cable-grip maker named Vivien Kellems refused to withhold for her workers, and documented her war against revenue authorities in a book, Toil, Taxes and Trouble.

Kellems' breathy manifesto provides a bracing contrast with the current tax cynicism. "Under the hypnosis of war hysteria," she wrote half a century ago, "with a pusillanimous Congress rubber-stamping every whim of the White House, we are passing 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." The tax courts and federal government stamped out Kellems's protest, just as they are stamping out "tax honesty" today. Still, she became something of a national celebrity.

Later came other stabs against the regime. The Adolph Coors family tried the no-withholding experiment for a few months, but the predictable clampdown followed shortly.

The new protestors probably will not win even the renown of a Kellems. Their cause will serve as fodder for talk radio and that is about it.

This is a shame. Most voters today, after all, say they feel trapped by the current system and support some form of tax reduction.

Most lawmakers say they want some tax cuts, too. Yet no one important in Washington is actively pushing withholding's abolition. It is too handy. As fine evidence as any that process can shape principle, as much as the other way around.

© Copyright 2001 Financial Times

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