Friday, March 22, 2002

Who was Beardsley Ruml?

If you have followed Doonesbury for long, you'll have seen a character called Duke. Among this character's adventures was a stint as the 53rd hostage in Iran, and actually the first one taken. After his release he was being debriefed and he told about how he tried to talk his captors into letting him go. He told them that if they really wanted an international incident, why didn't they just go and take over the US Embassy?

Yep, somebody has to come up with these ideas, and often we don't know who they are so we can cuss them at great length as they so richly deserve. One such person was Beardsley Ruml.

You see, it wasn't so easy raising the money to fight World War II. Among other things, income tax rates were raised and applied to more people than ever before. But since the numbers were higher, many Americans found that they didn't have the money to pay the taxes at tax time. So what to do?

Tax withholding was one option, and in fact had arrived with the initial income tax in 1913. But it was very unpopular and was withdrawn in 1917.

It was recognized that withholding would be a great help in financing the war. And despite denials, Congress recognized that earlier collection of taxes amounted to increased taxation due to the time value of money. But how could the govt get withholding back in the door?

And there was another problem - making a transition from the previous system to the withholding. In a given year the taxpayer would ordinarily make quarterly payments toward the previous year's liability. Add in withholding, and for the first year the taxpayer would be paying last year's taxes along with the current year's. Congress recognized that this would be a very tough sell.

Enter Beardsley Ruml. He came up with a scheme in which taxes for 1942 would be forgiven, at the price of reintroducing income tax withholding. He recognized that what was needed was cash flow, and if bookkeeping entries for 1942 tax liability got in the way then they would have to go. Although the final bill varied from this, this idea proved critical in getting income tax withholding implemented - polls showed that much of the public thought they were getting a huge break.

This is the source for much of the above, and also these revealing quotes:
Wherever an income tax has been in practice for any time the small incomes as well as the large are taxed; and it is the small incomes which yield the largest revenue to the state. --Treasury official Worthington C. Ford (U.S. Senate 1894)

Taxes which are easy to collect tend to be extended and expanded with similar ease by legislative bodies. The withholding provisions make it easy for the Treasury to collect taxes from wage earners and low-income groups. We must be ever vigilant to prevent this ease of collection from being used as a lever further to lower personal income tax exemptions or otherwise to impose new burdens on low-income groups.

--National Lawyers Guild
(U.S. House Hearings 1942, vol. 2: 2302)
Thank you, Democrats, you friends of the poor.

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