It was the year of the steel penny (copper was to valuable to put in pennies – it was needed for the war industries), rent control, and rationing – which now included canned goods, meat, fat, cheese, and shoes. Bread had to be sliced at home, meat was rationed at 28 ounces per person per week, and the government ordered minimum forty-eight hour work weeks at key defense industry plants.
And it was the year that the pay-as-you-go income tax was incorporated into the American scene.
While it had been tried before – during the Civil War and after – Income Tax achieved constitutional legality with the passage of the 16th Amendment in 1913. March 15th became the traditional due date for the last of yearly tax payments made quarterly by corporations and upper income groups. The lower income groups did not have to pay income tax at this time. However, the tremendous expenditures of monies by the United States at home and abroad during World War II created a fiscal nightmare. Henry Morgenthau, U.S. Secretary of the Treasury, advocated a pay-as-you-go format on an increased base of income levels so that there would be a constant flow of monies into the government coffers to meet the emergency expenses of war as well as to combat inflation.
On July 1, 1943 – after much debate and compromise - Congress passed the Current Tax Payment Act, placing a withholding tax on wages and salaries in order to allow workers to stay current with their tax liabilities, and to provide continuous and regular funding for the war effort. It was the result of efforts by Beardsley Ruml, Chairman of the New York Federal Reserve Bank and treasures of Macy and Company, who was championing the new form of collecting taxes. He asked in his pamphlet what would happen if American “just started paying income tax, but on this year instead of last year?” He proposed to “forgive” the 1942 tax bill in order to avoid double taxing. The end result of compromise and the wording of the new law forgave taxes on lower incomes, maintained them on high incomes, and began collecting through withholding on all incomes. The withholding rate during this financial crisis caused by the huge expenditures of World War II: 19% on an annual income of $2000, with up to 80% on incomes over $200,000.
A strong advertising campaign was organized in print and radio. Walt Disney was recruited to create a film showing that paying ‘taxes to beat the Axis’ was patriotic – a task that cartoon character Donald Duck did in The Spirit of '43. Noted composer Irving Berlin included lyrics in a song titled “I Paid My Taxes Today” that supported the income tax: "You see those bombers in the sky, Rockefeller helped to build them, so did I, I paid my income tax today."
The American public liked the idea, and by year’s end 74% of Americans were paying income tax – through withholding – financing the war effort. The idea of pay-as-you-go through withholding is still with us 64 years after war’s end.
Essential Question: How could students best investigate and analyze the advocacy used by the Federal Government to promote the concept of pay-as-you-go taxation?
Income Taxes are Cartoon Images of the Law
Kilroy was Here
Income Taxes, War, and the Mennonites
Randolph Paul Address, 1943
Revenue Objectives of the 1943 bill
The Dirty Truth About Income Taxes
The Plan That Slogans Built