By early 1943, Congress had raised income taxes radically to finance the war and also imposed income tax on millions of Americans who had not paid it before. But polls showed that few Americans now subject to the tax for the first time were saving to make their payment.
With a March 15 tax deadline looming (not April 15 as now), the Treasury Department worried about the prospect of massive tax evasion. To the rescue came a man named Beardsley Ruml, an executive for R.H. Macy & Co. and an advisor to Roosevelt.
At Macy’s Ruml had observed that customers didn’t like big bills. They preferred making payments bit by bit, even if they had to pay interest to do so.
So Ruml devised a pay-as-you-go plan for taxpayers whereby employers would retain a percentage of taxes from every paycheck and forward it directly to Washington’s war chest. Withholding, as we know it today, was born.
Ruml didn’t invent withholding; in fact it had been used during the Civil War. Rather, his genius was to make its introduction palatable by adding a powerful sweetener: the federal government would offer a tax amnesty for the previous year, allowing confused and indebted citizens to start on a new footing.
Ruml’s ideas were hotly debated but passed into law in the Current Tax Payment Act of 1943. “Pay as you go” became the rule nationwide in July of that year.