This coming Monday is the filing deadline for IRS tax returns this year, which means Americans all over the country are preparing to “Render unto Caesar the things that are Caesar’s.”
For business owners, this process has unfolded throughout the year in the form of quarterly estimated payments. In short, entrepreneurs estimate what their tax burden will be for the year, and pay it in quarterly installments. According to the IRS, “if you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.”
This process probably sounds foreign to the roughly 85% of Americans who do not own their own business. For most of the country, taxes are “automatically withheld” from each paycheck.
It hasn’t always been this way, as Investopedia explains:
Tax withholding first occurred in 1862 under Abraham Lincoln for the purpose of helping to finance the Civil War. The federal government also implemented a plethora of excise taxes for the same purpose. But in 1872, not only was tax withholding abolished, but the income tax was repealed entirely.
After the ratification of the 16th Amendment in 1913, the income tax became permanent. The amendment was facilitated by the need to pay for World War I, and tax withholding was again implemented. However, withholding laws were repealed in 1917 because of employer complaints. Collecting income taxes from employees imposed a large burden on employers by placing them in the role of tax collector in addition to the role of businessman.
This time, it would be only 18 years before tax withholding resurfaced. After the Social Security Act passed in 1935, Social Security taxes were withheld by employers. This change paved the way for income taxes to be withheld again starting in 1943 with Congress’ approval of the Current Tax Payment Act. Once again, war expenses were used as justification for tax withholding. As the early 20th-century writer and intellectual Randolph Bourne once noted, “War is the health of the state.” Not only were taxes to be withheld again, but a massive tax hike was enacted. Income tax went from being a tax that was only paid by a few high-earning Americans to one that was paid by both the rich and the common man. The government wasn’t sure it could successfully collect the higher taxes from its citizens without withholding at the source.
When automatic tax withholding was implemented during WWII in an effort to raise cash quickly, one senator called it the best way to “get the greatest amount of money with the least amount of squawks.” It was never really intended to continue into peace time, and certainly not in perpetuity.
If every American had to physically write a check to the government each quarter, I dare say people would not accept having to work from Jan. 1 until mid-April each year just to cover our tax burden.
This is why I have come to the conclusion that automatic tax withholding is the most maniacally brilliant move the U.S. government has ever made. They quietly extract money from workers all over the country slowly over time, and many people don’t even pay attention to it.
Nowadays there are people who actually look forward to Tax Day because they get a refund. They actually think the government is giving them money, instead of realizing they actually gave the government an interest free loan all year!
Happy Tax Day, y’all.
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