This article was published by The McAlvany Intelligence Advisor on Friday, March 30, 2018:
Vivien Kellems, along with her brother Edgar, invented a specialized cable grip for electrical cables and founded Kellems Cable Grips in 1927. The company prospered.
But in 1943, during the Second World War, Congress passed the Tax Payment Act, which required the payers of wages, not the receiver of wages, to withhold estimated taxes and remit them quarterly to the Bureau of Internal Revenue (later called the IRS).
The injustice was apparent to Vivien and in 1948 she refused, declaring that “If they wanted me to be their agent, they’d have to pay me, and I want a badge.”
They didn’t, and instead simply seized the amount the agency thought she owed from her company bank account. She sued in federal court and finally got her money back.
This [system of enforced withholding by employers of taxes due by their employees] greatly eased the collection of the tax for both the taxpayer and the Bureau of Internal Revenue.
However, it also greatly reduced the taxpayer’s awareness of the amount of tax being collected, i.e., it reduced the transparency of the tax, which made it easier to raise taxes in the future.
That’s why the system, which was originally sold to the American people as a temporary measure during the war, remains in place today. Libertarian economic historian Murray Rothbard, in his For A New Liberty, published in 1973, said, “the withholding system, of course, is the linchpin of the whole federal income tax system. Without the steady and relatively painless process of deducting the tax from the worker’s paycheck, the government could never hope to raise the high levels of tax from the workers in one lump sum.”
Rothbard applauded Kellems in his book:
It is perhaps significant that the federal government, challenged by Vivien Kellems to test the constitutionality of the withholding system, failed to take up the challenge. In February 1948, Miss Kellems, a small manufacturer in Westport, Connecticut, announced that she was defying the withholding law and was refusing to deduct the tax from her employees. She demanded that the federal government indict her, so that the courts would be able to rule on the constitutionality of the withholding system. The government refused to do so, but instead seized the amount due from her bank account. Miss Kellems then sued in federal court for the government to return her funds. When the suit finally came to trial in February 1951, the jury ordered the government to refund her money.
Unfortunately, the constitutionality of the system of forcing employers to forward taxes due their employees to the government was never tested. But Kellems was now a life-long enemy of the IRS and fought it until her death in 1975. That year, she told the Los Angeles Times that “our tax law is a 1,598-page hydra-headed monster [it is now 74,608 pages long] and I’m going to attack and attack and attack until I have ironed out every fault in it.”
She died that year, leaving an unpaid income tax liability behind. The IRS forced her heirs to pay the $265,000 they said she owed them.
How vastly different is the mindset of those in charge in Washington today. Even before he was confirmed as President, Trump’s Treasury Secretary, Steven Mnuchin, was making the case for increasing federal funding for the IRS. He said the agency was understaffed and “under-resourced” and made the case that billions of uncollected taxes were just waiting to be uncovered and rightfully returned to the U.S. Treasury. Mnuchin’s argument was augmented by William Gale, a senior fellow at the left-liberal Brookings Institution:
Adjusted for inflation, IRS funding in 2016 was the same as in 1998. As a result, IRS employment has fallen about 27 percent – by 30,000 workers – since then.
Gale wept over the increased workload those remaining employees had to handle: the number of income tax returns is approaching 170 million every year, but the agency is still using outdated computer technology to try to keep up with the flood: “Many of its computer systems and programs belong in museums – they are running applications from the 1960s.”
Gale estimated that American taxpayers are underreporting so much of their income that they are depriving the federal government of $458 billion a year, “and only $52 billion of that amount will [ever] be collected.”
Gale thinks the increased funding for the IRS will be returned in multiples: “Every dollar invested in the IRS yields $4 in higher revenues, with even greater returns for spending on enforcement.”
The saving grace is that, thanks to the “underfunded” and “under-resourced” IRS, the agency is only able to audit one out of every 160 tax returns. For those in the middle income bracket – $50,000 to $75,000 – they can only audit one out of every 200. Of course, for those making $10 million a year or more, the IRS does manage somehow to audit one out of every five of their returns. It’s called, “going after the low-hanging fruit.”
Economist Gary North has long offered his suggestion on how to cut off that “hydra-headed monster”: abolish withholding altogether and require that every taxpayer file and pay his taxes due with a personal check the day before Election Day.
The Wall Street Journal: The IRS Is Auditing a Lot Fewer Americans
RealClearMarkets.com: Steven Mnuchin makes a welcome case for boosting IRS funding