Taxes

Milton Friedman Helped Invent Income Tax Withholding

Nobody's perfect.

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Columbia University

Before World War II, when income tax rates were comparatively low, most people who owed tax simply paid it in a lump sum in March. Tax day was a big annoying occasion on which the nation took a moment to be bummed about how much the government cost. 

Enter Hitler. And a young, brash economist named Milton.

In 1995, Reason's Brian Doherty conducted a wide-ranging interview with Friedman and asked him, essentially, "Daddy, what did you do during the war?":

Reason: You were involved in the development of the withholding tax when you were doing tax work for the government in 1941–43?

Friedman: I was an employee at the Treasury Department. We were in a wartime situation. How do you raise the enormous amount of taxes you need for wartime? We were all in favor of cutting inflation. I wasn't as sophisticated about how to do it then as I would be now, but there's no doubt that one of the ways to avoid inflation was to finance as large a fraction of current spending with tax money as possible.

In World War I, a very small fraction of the total war expenditure was financed by taxes, so we had a doubling of prices during the war and after the war. At the outbreak of World War II, the Treasury was determined not to make the same mistake again.

You could not do that during wartime or peacetime without withholding. And so people at the Treasury tax research department, where I was working, investigated various methods of withholding. I was one of the small technical group that worked on developing it.

Wikimedia

One of the major opponents of the idea was the IRS. Because every organization knows that the only way you can do anything is the way they've always been doing it. This was something new, and they kept telling us how impossible it was. It was a very interesting and very challenging intellectual task. I played a significant role, no question about it, in introducing withholding. I think it's a great mistake for peacetime, but in 1941–43, all of us were concentrating on the war.

I have no apologies for it, but I really wish we hadn't found it necessary and I wish there were some way of abolishing withholding now.

By making taxes relatively invisible and making paying them relatively painless, Friedman paved the way for the current status quo, in which significant portions of salaried workers' incomes are handed over to state and federal governments without much fuss. Tax refunds, which feel like a delightful windfall to those who receive them, complicate the matter further by making many Americans feel like they are getting a gift on tax day, rather than giving their hard-earned money to the government under threat of violence. 

To review:

1) War is the heath of the state. 

2) All your heroes are flawed.

Happy Tax Day! 

P.S. Ease the sting of this revelation by reading the rest of that interview to be reminded of all the great stuff Friedman did, too.

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85 responses to “Milton Friedman Helped Invent Income Tax Withholding

  1. Friedman was pure beefcake.

  2. 2) All your heroes are flawed.

    Not all.

    1. My hero, the great Bob Guccione, was known to make a few mistakes, so I get it.

      1. I had you pegged as a Hustler fan.

        1. You’re crazy. Crusty has class, man.

          1. Thank you. Not only was Caligula a wonderful historical drama, it also had a pretty libertarian message.

              1. +1 Your Emperor sees you are a virgin too!

        2. Yoou were right about the ‘pegged ‘ part, though.

    2. Hockey is for socialists.

      1. *drops gloves*

      2. Who is “Big Pink Monkey”, Alex?

  3. 3) No real expansion of government power ever gets rolled back

  4. I blame this more on Hitler than Friedman.

    1. Yeah, even Friedman admits this is terrible policy during peacetime.

    2. Agreed. “We need an efficient, quick way to get money to kill Nazis without causing massive inflation” is one of the only reasons tax withholding can be justified.

      1. There will always be some nazi to kill.

        1. Everyone who objects to Bernie raising taxes to sky high levels, are Nazis.

          1. I hope that they aren’t from Illinois.

            ‘Cause, well, you know.

      2. Actually, no.

        See – you’re *assuming* that withholding was *necessary*, rather than merely desired by the state. Did we need withholding? Probably not. But it was a ‘nice to have’ for the government at the time to make things a little easier for them. Even Friedman admits that WWI’s main problems from funding were post-war inflation and not getting money for the war itself.

        Hell, WW2 wasn’t even a ‘war for survival’ for the US – at least not in the European theater.

        This shit is why you never give an inch. NEVER COMPROMISE, NOT EVEN IN THE FACE OF ARMAGEDDON.

        1. The Constitution is a suicide pact, goddamnit!

          You are right, of course. But if Friedman weren’t there, someone with no regard for free markets and liberty at all would probably have done the same but even worse.

  5. I’ve made $64,000 so far this year working online and I’m a full time student. Im using an online business opportunity I heard about and I’ve made such great money. It’s really user friendly and I’m just so happy that I found out about it. Heres what I do,

    ——————— http://www.worknow88.com

    1. You made sure to declare this on your 1040, right?

  6. You know who else got off on being withholding?

        1. +1 Tantric Hot Seat

    1. Crusty’s first wife?

    2. Spencer’s mom, who was Crusty’s first wife?

      1. Crusty is dead?!

        1. Long live Crusty!

  7. This poor child doesn’t realize that it’s about to be eaten.

    1. It’s a girl, so she’s really just lucky Biden isn’t the one holding her since she’s a little too young to be french kissed.

    2. A wolf in Grandma Mao’s clothing.

      1. Grandma Mao. I’m stealing that.

        1. Grandmao?

          1. + 1 gray pantsuit

      1. *shudders*

        1. Holy shit. I’m gonna have nightmares, now.

  8. He was also a proponent of a guaranteed minimum income, saying it would shrink the size of government.

    Either he was long term trolling or simply wrong more than once.

    1. Friedman’s argument regarding the minimum income was that you could provide the same amount of welfare while completely eliminating dead weight bureaucracy and government union employees. I think he didn’t consider the unintended consequences (that, this being government, they’d just put the guaranteed minimum *on top of* already existing welfare), but his reason for advocating that is completely reasonable.

      Friedman also argued that welfare disincentivizes people leaving welfare because the way it’s set up you can actually wind up with less money if you make more money at your job. His guaranteed minimum idea was also meant to allow people to get off welfare more efficiently.

      1. It’s a shady argument at best. It’s a blatant wealth transfer with little to no incentive to the recipient to work more. It, in essence, turns them into government employees without a work desk.

        1. Friedman was not a libertarian – especially at work. His justification for the CBI was not that it was ‘fair’ or ‘moral’, only that it was *less* unfair and moral than the existing welfare framework.

          Starting from a point where you accept that there’s going to be welfare and wealth transfers – no way to get around that short of civil war – what do you do to minimize the negative effects of them? CBI, as proposed, is better than the current welfare system.

          1. Why not, then, just pay them to work? Clean streets, process papers, etc.? Even jobs with little to no value are worth doing when you’re paying someone for nothing.

            1. Do you really think having more government employees is a good idea? Next thing you know, you have a permanent class of unionized and useless ditch diggers and street sweepers and a whole new bureaucracy to manage them.

            2. Clean streets, process papers, build roads, prisons, high speed rail lines, staff agencies whose reason for existence is to find work for these people, build ‘infrastructure’. stuff like that?

              1. Right. And more of that isn’t going to cost less than just giving people money.

    2. From what I understand, he was a proponent of the negative income tax, and only as a less economically damaging form of welfare since he believed at this point it would be impossible to get rid of welfare entirely. He saw it as a step in the right direction and maybe someday in the future it wouldn’t be needed anymore.

    3. I don’t really hold any of it against him (though I’ll happily point out why it’s wrong). Friedman was a working economist who was trying to come up with ideas that might actually happen in the real world, not a libertopian. And it’s a damn good think that there were some people like him involved who could make the arguments for freedom and markets.

  9. Milton Friedman is and has always been an asshole with absolutely zero principles. He’s always been for “the greater good” and whatever that means in his head.

    That a couple of times, his idea of “the greater good” happened to line up with libertarian policy, I’m not even sure I should be thankful. A fucking wolf in sheep’s clothing that one is.

    1. Wow. I get you think Petersen and McAfee won the debates too, huh? 🙂

      1. Who did win? I mean, do we have a winner? Who’s going to the one to get one percent of the vote this time?

      2. Peace and Anarchy’s take:

        #AuthoritarianAustin flew his true colors by craftily avoiding any calls for abolishing government. For someone who wants to “take over government to leave you alone,” the sales pitch seems heavy on the taking over and weak on the leaving alone. #HardPressedJohnson simultaneously betrayed a fundamental misunderstanding of libertarianism and an implicit acceptance of egalitarianism when he hesitantly admitted that he thought Jewish bakers should be forced to bake cakes for Nazis. This is what happens when you rank pragmatism over principle.
        #LibertyLion John McAfee demonstrated a sound grasp of libertarian intuition as he efficiently dispensed pro-freedom insights throughout the Fox News Presidential Forum. While we hope he will see the error in calling for enhanced US government cyber-security, McAfee’s alpha-male presence, measured demeanor, and sufficient sophistication in libertarian principle make him a top contender.

    2. It’s going to be really hard to ever enact any libertarian policies if someone who wrote an essay called Why Government is the Problem doesn’t pass our purity test. I’d argue Friedman also became more libertarian as he aged, so most of the stuff we disagree with came from his work in the 50’s and 60’s, rather than his more libertarian work in the 70s, 80s, and 90s.

      Friedman worked to end the draft on the grounds that it was slavery and opposed the Drug War back when no one opposed the Drug War.

      1. No, this isn’t true. I opposed the drug war before Friedman.

      2. I agree. We’re too busy fighting each other to win elections.

      3. I was kind of just giving my honest opinion of Milton Friedman on a libertarian board. I want really trying to convince all the waffling statists who lurk on the reason site looking for material that might turn them to the dark side that Milton Friedman isn’t an appropriate stepping stone or some shit.

        But if you could have convinced Friedman that murdering everyone’s dog would bring economic prosperity he’d have supported it. (Thankfully, that’s hard to prove). I just don’t like it when I think a guy doesn’t get the “why”. I do appriciate that Milty usually helped with the what.

        1. But if you could have convinced Friedman that murdering everyone’s dog would bring economic prosperity he’d have supported it.

          That’s the Chicago school way of doing things. They’re primarily consequentialists whose view is that the most moral economic interactions are those that produce the most overall wealth. It just so happens that this usually means government planning ist nicht gut, but they happen upon this position as a consequence of government inefficiency, not a belief that such planning is intrinsically illegitimate.

          If I were a drunk that was destined to piss my money away on delicious whiskey, it would comport with the Chicago theory of justice, taken to it’s logical conclusion, that an investor could come along and take that money out of my wallet to put it to better use than I would. The Chicago school controversy over eminent domain isn’t that it’s immoral to steal, but that it’s unconstitutional in that governments are overly broad in their interpretation of ‘public use’. I see that as a problem, but if you criticize these rationales and outcomes, many libertarians will line up to call you “purist”. I just call it logical consistency.

          1. I agree with pretty much all you say there. But the problem is that most people just don’t care that much about principle and want to see what works. So while I don’t consider Friedman an intellectual hero, I think it’s a damn good thing people like him were around and in public rather than preaching to the choir of principled libertarians.

            I feel I must also mention that a lot of libertarians think of immigration in a consequentialist and not very principled way.

            1. I think it’s a damn good thing people like him were around and in public rather than preaching to the choir of principled libertarians.

              I can’t argue with that. And I’m by no means saying Friedman was an awful guy. Some of my favorite take downs of conventional wisdom have come from Milton Friedman. There’s a great video of him thrashing a young, not yet fat, Michael Moore. He’s been a net gain for the liberty movement but that’s not to say he hasn’t set us back on other specific issues.

              I feel I must also mention that a lot of libertarians think of immigration in a consequentialist and not very principled way.

              I agree with that but I could see how one might apply that argument to either camp when they’re arguing about the issue purely on the benefits or detriments with little thought about ‘justice’.

  10. For more evil, the income tax itself was what made Prohibition possible. Before the income tax, something like half the government’s income came from the booze tax.

    And the Fed was created the same year, 1913. I wonder if we could have joined WW I in 1917 if not for the Fed and the income tax.

    1. It makes me want to vomit. Damped women and preachers.

      1. It’s what happens when SoCons and Proglodytes unite. Pure evil. If it ever happens again, we’re doomed this time.

    2. I heard this story, about Jeckyll Island. All of these one percenters met up and came up with the fed and income tax, and other evil stuff. Is any of that story true?

        1. Damnit! It was an interesting story. Now you done ruined it.

            1. Well, this guy obviously believes it.

    3. Terrible things come in threes: 1913 also brought direct election of senators, eliminating one more check on the passing of bad legislation.

  11. Tax refunds, which feel like a delightful windfall to those who receive them, complicate the matter further by making many Americans feel like they are getting a gift on tax day, rather than giving their hard-earned money to the government under threat of violence.

    If you want even more complication, I didn’t pay any estimated tax this past year. So I have the pleasure today of repaying a 4% loan on the amount of the government’s money that I’ve been collecting since last April.

    What bank would give me that rate? The government is so generous.

    1. See Americans DO get a gift on tax day.

  12. 2) All your heroes are flawed.

    Especially if your heroes are members of the Chicago School of Making Statism Look Like Freedom. If I had a nickel for everytime someone argued in favor of an increased role for government saying “Even Milton Friedman believed X, Y and Z would be beneficial.”

    That said, his son David Friedman is Chicago School and decidedly better at it, minus some support for IP law. At the very least he didn’t inherit his father’s penchant for making the government a more efficient criminal enterprise.

  13. Unfortunately, this was Milton’s greatest blunder. Income tax withholding, why may carrying some practical benefits for the state, is entirely immoral and unlibertarian.

    The state has no business knowing what I make, where I make it, why I make it and what I do with it. Withholding has created an justification for mass domestic-spying– so vast and accepted, no one even thinks of it as such.

    1. *Withholding* did no such thing. All that was caused by the existence of the income tax itself. You still had to report your income and pay tax on it. All withholding did was make it less painful for people being taxed – they never see the tax money before its taken away and so its far easier to raise taxes without the pips squeaking.

      Plus there’s the umpteen billions of dollars the federal government gets loaned to it interest free every year by people who don’t/can’t get their withholding set right.

  14. It would be mind-bogglingly delicious if we had to write checks today for the entire amount. The wife and I withheld a spectacular amount last year and still owed $7k.

    The corollary is – make April 16th (18th, whatever) election day.

    1. It wouldn’t matter. You think Bernie is getting fewer cheers while essentially running a campaign straight in the middle of tax season that says whatever you’re paying now isn’t nearly enough?

  15. Happy Tax Day!

    Tax Day 2 in some jurisdictions.

  16. War is the heath of the state

    coined by a big fan of the Kaiser….

  17. We need a constitutional amendment that says any power the government assumes in wartime must be surrendered at the war’s end.

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