Uncle Miltie didn’t mean to do it, but the repercussions are undeniable.

Milton Friedman played a significant role in developing income tax withholding from employees' paychecks during World War II.

As an economist at the Treasury Department, Friedman was part of a technical group that developed the withholding system to collect taxes as income was earned rather than a year later.

The primary objective of introducing the withholding system during World War II was to finance a significant portion of the wartime expenditure with tax money, thereby mitigating the risk of inflation.

Despite his later regret and call for the repeal of withholding, Friedman acknowledged his inadvertent contribution to a system that made taxes seemingly invisible and painless for taxpayers, paving the way for the current practice of direct tax deductions from employees' paychecks.

Friedman wrote, “At the time, we concentrated single-mindedly on promoting the war effort. We gave next to no consideration to any longer-run consequences. It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too intrusive, too destructive of freedom. Yet, that was precisely what I was doing.”

Before World War II, when income tax rates were comparatively low, most people paid tax in a lump sum in March. Tax day was the shock it should be for the nation. The country got to see in real-time what the government actually cost them.

Yesterday was merely the day Americans filed. In a couple of months, they’ll get a “refund.” And they celebrate.

Pathetic.

Living in Singapore

When I lived in Singapore, I was blown away.

My paycheck arrived “gross” every month. That is, I received the entire paycheck in my bank account. Then, it was my responsibility to set aside enough money to pay my taxes at the end of the year. The Singapore government allowed a 12-month interest-free payment scheme if I couldn't do that.

The only caveat was that if I were to leave Singapore permanently, I would have to pay all the taxes due before I got on the plane.

Believe me, Reader, they enforce it. A friend of mine was stopped at the airport gate and forced to stay until he paid up. It took him a year to do it.

While the US system infantilizes the taxpayer, the SG system forces the taxpayer to grow up and take charge of his affairs. I know I’m much better with my money because I was forced to save for my taxes.

And I felt the pain of seeing that colossal cash outflow every year, though it was far less than I would’ve paid had I not renounced my US citizenship.

Steroids For The State

Withholding income tax at source is the equivalent of an interest-free loan to the government because the money that is withheld from an individual's paychecks is held by the government until the individual files their income tax return.

During this time, the government uses the withheld funds for its own purposes, effectively borrowing the money from the individual without paying interest. This means that the individual isn’t earning any interest on the withheld money, and the government uses the funds to finance its operations without incurring additional costs.

The withheld funds are typically refunded to the individual if they have overpaid their taxes, but this can take several months. In the meantime, the individual has effectively provided the government with an interest-free loan. This is significant for individuals who have large amounts withheld from their paychecks, as they may be missing out on the opportunity to earn interest on that money.

So you’re not losing only the cash itself, but the opportunity costs of that cash, too.

Why The State Loves Withholding Income Tax

These may seem like positives to you, but a government taking your money should be the hardest thing in the world.

Withholding tax ensures that employees have enough money to pay their taxes, making it harder for them to evade taxes. It also makes it practically impossible for tax protesters and evaders to keep their money out of the IRS's hands.

Withholding tax lowers collection costs because most people have all or most of their taxes sent to the government by their employers. Fewer taxpayer dollars are needed to fund the IRS's collection efforts.

The government uses the money sooner and steadily, allowing for a more predictable and stable revenue stream. This is particularly useful for financing bloated government programs and operations.

Withholding tax reduces the risk of non-compliance and underreporting of income, as it requires payers to withhold tax and remit it to the government. Tax authorities take your income as quickly as possible.

Withholding tax increases transparency in the tax system, allowing tax authorities to track and monitor tax payments more efficiently. Then, it’s easier to identify and address issues of non-compliance and underreporting.

Withholding tax encourages compliance with the tax system, as it makes it more difficult for taxpayers to avoid paying their taxes. This helps ensure that the government receives the revenue it needs to fund public expenditure and social programs sustainably.

Wrap Up

I’m sure yesterday sucked. And getting a return in a few months might feel good.

But I encourage you to consider what happens when your employer pays you directly. And if you haven’t already, start a side hustle that pays you the total amount. When you get around to paying taxes on that, you’ll understand much better the slogan “taxation is theft.”

And if you’ve already got a thriving business paying the government the fewest times a year you can, I salute you.

Starving the beast is the only way to solve our problems.