ST. CHARLES — In "On personal finance: A century later, income tax law still a hot issue" (Business, Jan. 9), Kathy Kristof attempted to trace the history of the federal income tax in the United States. But there was one major omission and some misleading statements.
The omission is the action taken by the Roosevelt administration, Congress and numerous outside advisers (some say meddlers) during the early years of World War II to increase tax revenues sharply. While tax rates had been raised in 1941-1942, in late 1942 further rate increases were proposed along with measures to advance timing of tax payments and, most importantly, to require partial withholding of tax on payrolls at the source. All these proposals were controversial, both in Congress and with the public. After much debate, the rate increases were scaled down, and the advance timing of payments greatly reduced. Withholding became law as proposed, and by mid-1943, 20 percent of all payroll was being withheld as federal tax. This was called "pay as you go" by the measure's supporters.
After Germany invaded the Low Countries and France, and Japan attacked Southeast Asia and U.S. possessions in the Pacific, it became obvious that the United States had to aid Britain on a large scale and also fight Japan. Wars cost money, and the public reluctantly accepted these tax changes as necessary measures for a wartime economy.
During the war, the federal debt rose. After the war ended, the tax structure remained unchanged. Because of sharp inflation, which raised payrolls, the debt was reduced somewhat during the Truman and Eisenhower administrations. Withholding came to be accepted by most of the public.
The original withholding rate was 20 percent, but now the rate is variable, depending on the taxpayers' circumstances: less if the tax obligation is low, more if it is high, but it must total 90 percent of the tax due to avoid penalty. With the withholding closely matching the tax due, the taxes have become less apparent.
The perversity of this wartime measure, which could never have been enacted in a normal economy--then or now--is that it conceals the tax. Everyone should know exactly how much tax she or he is paying. The success in hiding the true extent of income taxes has led to other similar measures. States withhold payroll taxes. Gasoline taxes, which often exceed the wholesale price of the gasoline, by law cannot be quoted separately. Liquor taxes are always included in the price of the product.
Also the ability of the federal government to collect tax has led to disbursement of "grants" to the state and local governments. Governors and mayors love grants--funds they don't have to collect themselves. There is no doubt that if people had to sit down and write out a check for the full payment of federal income taxes on April 15, the United States tax code would be changed on April 16.
Ms. Kristof states that "By the 1980s, virtually everyone paid" income tax. The tax code is so exceedingly complicated and contains so many special provisions that it is difficult to generalize. There are so many exemptions, deductions and tax credits that families with even moderate incomes may pay no or trivial tax. It is easy to construct a reasonable case in which a couple with income of $40,000 a year pays no tax. At the other end, tax-free investments, depreciation allowances, investment tax credits and "charitable" donations can enable some with very large incomes to avoid tax. The alternative minimum tax was set up to force people with extremely high incomes, but with active and passive losses and tax-exempt income, to pay some tax. But it doesn't really create much tax liability in most cases.
The people who really pay federal income tax are those in the middle whose income is mostly from wages and salary. They simply have no place to hide, and they pay tax at the marginal rate of 28 percent to 40 percent. Many people pay income tax, but not all.