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Paycheck Withholding: A Con on Taxpayers - FOX NEWS

Investor's Business Daily
Senator William Roth
April 14, 1999

The following are some quotes from an article in Investor’s Business Daily, page A-24, April 14, 1999, "Fighting The Power To Destroy," by Sen. William Roth. The article was not posted on IBD’s web page, but I thought it important enough to present a portion of it here:

". . . the IRS is shrouded beneath a cloak of secrecy that puts even the Central Intelligence Agency to shame. Section 6103 of the tax code, originally intended to protect sensitive taxpayer information, has been strengthened and stretched to the point that it can be used by IRS employees to cover their activities and mistakes. Historically, Congress and oversight agencies have not been able to get adequate information to monitor and investigate abuses within the system.

"Using section 6103, agency managers – 15% in one survey – admit to having observed instances of lying, deception or deliberate concealment of information from government audit agencies, while 3 out of 4 IRS managers responded that they believe they are entitled to deceive or lie while testifying before Congress.

"Only the chairman of the Senate Finance Committee and the House Ways and Means Committee have the authority under section 6103 to penetrate the veil of secrecy and investigate the agency. But until 1997, this authority had never been used.

. . . "Almost every examiner we interviewed told us that they were taught to assume that taxpayers were hiding something and that ‘all entrepreneurs, especially small businessmen and -women, are tax cheats.’

"One examiner said, ‘We were taught to assume beforehand that all returns had something wrong with them'..."

Senator William Roth, R-DE, is Chairman of the Senate Finance Committee and co-author of "Power to Destroy" (Atlantic Monthly Press, 1999).

IRS Taxpayer Abuse: Views From The Inside

IRS Agent: Some Evidence Falsified - "I have actually witnessed IRS management manipulate income tax return figures just to increase their office or division collection statistics," said Jennifer Long, a 15-year IRS employee now working as a revenue agent in the Houston office.

IRS Flunks Audit
Widespread Problems at Tax-Collecting Agency

ABC News
ABCNEWS Correspondent Jackie Judd
March 1, 1999

W A S H I N G T O N, March 1 - Just as millions of Americans struggle to meet the strict reporting standards set by the Internal Revenue Service, the tax-collecting agency itself has failed a federal audit.

The General Accounting Office today slammed the IRS for poor bookkeeping, paying out fraudulent refunds and leaving holes in computer security that may let outsiders ``access, alter or abuse'' taxpayer information.

Most significantly, the amount of money the IRS has failed to collect has reached a whopping $222 billion dollars - the same amount of money we spend every year on Medicare.

Most of it will never be collected, because it is owed by either bankrupt companies, failed savings and loans, individuals who are missing, or dead - or just plain deadbeats.

Congressman Blasts IRS

The litany of IRS failures was aired at a hearing today on Capitol Hill, drawing sharp criticism from lawmakers.

"I think the stockholders, the taxpayers, have every reason to demand a dramatic and immediate change and that includes debt collection," said Rep. Steve Horn, R-Calif., chairman of the government management subcommittee.

Debt collection was not the only problem found by the GAO. The IRS essentially failed the same sort of audit it forces upon taxpayers.

"Think of this as not balancing your monthly checkbook to the monthly bank statement," said GAO auditor Gregory Kutz, "and at the same time having a record-keeping system that was prone to error."

Shoddy Filing System

In some cases, the GAO said, the IRS had no record-keeping system at all. The IRS could not provide a list of what it owed outside vendors - such as utility companies that supply power to field offices.

Also, the IRS lost track of its own property. While some items may have been lost to theft, others simply could not be accounted for.

"We noted a missing Chevy Blazer, laptop computer and $300,000 printer," Kutz told lawmakers. "At one IRS field office, 19 of 130 computer assets over $50,000 each could not be located."

The IRS blamed antiquated computer systems for many of the snafus and asked for the same thing that many anxious taxpayers want: more time to fix the problem.

Making Government Immune From Law

NewsMax
By Paul Craig Roberts
January 14, 1999

If President Bill Clinton were being tried by the U.S. 10th Circuit Court of Appeals, he would be home free.

In a horrendous ruling devastating for justice, fair play and the rule of law, the 10th Circuit has ruled (9-to-3) that the laws of the United States do not apply to officers and agents of the government unless Congress specifically designates that the law applies to the government.

"Statutes of general purport do not apply to the United States unless Congress makes the application clear and indisputable," says the court, citing a 1873 case that "it is a familiar principle that the King is not bound by any act of Parliament unless he be named therein by special and particular words."

At dispute in the case, Singleton v. U.S., is the federal statute that specifies punishment for "whoever" promises anything of value to a witness in exchange for testimony for or against another person. Under the normal reading of the statute, prosecutors who promise defendants reduced sentences in exchange for testimony against others are violating the prohibition.

According to the majority opinion, federal prosecutors are not bound by the law against bribing witnesses, because they serve as alter ego for the government and "the word 'whoever' connotes a being," whereas "the U.S. is an inanimate entity, not a being. The word 'whatever' is used commonly to refer to an inanimate object. Therefore, construing 'whoever' to include the government is semantically anomalous."

In other words, "whoever" doesn't mean "whoever" if the "whoever" is an officer of the government. This Clintonesque word-play is necessary because, as the court acknowledges, "no practice is more ingrained in our criminal justice system" than convicting people with purchased testimony. Faced with an emptying of the prisons, the court ruled that the U.S. government is not a government accountable to law, but a "sovereign" above the law.

Prosecutors have found that it is far easier to purchase with leniency the testimony of accomplices against their confederates than to build a case against the confederates. When this practice began it was aimed at known criminals against whom evidence was lacking. But once the practice began, it has taken on a life of its own.

Today many innocents are ensnared by untrue accusations from criminal defendants seeking reduced charges by producing more fodder for prosecutors. Less and less does the criminal justice system work by police investigating a known crime and building a case. All too often, the first knowledge of the "crime" occurs when a defendant seeking reduced charges accuses others. In these cases, the accusation is the sole "evidence" of the crime, and prosecutors, who serve career instead of justice, are increasingly destroying innocents with purchased testimony.

A recent example is Khem Batra of Burke, Va. Mr. Batra, married with two children, came to the U.S. in 1974 from New Delhi, India. He has been a U.S. citizen since 1981 and was successfully operating his own travel agency. His troubles began when the husband of one of his employees approached him for loans to enable him to purchase distressed properties at auction. Soon Mr. Batra found himself in partnership, pooling money to bid on properties.

Unbeknownst to Mr. Batra, his sometime partner was illegally obtaining multiple mortgages on the same property. When the partner was apprehended, instead of being indicted, he was wired and promised leniency in exchange for implicating others. The partner managed to implicate some mortgage companies in technical infractions and apparently made an unsuccessful attempt to implicate the Burke and Herbert Bank in Alexandria, Va.

Mr. Batra was never implicated in the illegal financing schemes, but his partner, desperate to earn his leniency, testified that his money-pooling partnership with Mr. Batra was a conspiracy to under-bid the properties. On the basis of his partner's plea-bargained testimony, Mr. Batra was convicted in federal court of one count of violating the Sherman Anti-trust Act.

It is a definite sign of prosecutorial abuse when the Sherman Anti-trust Act, designed to bust up large monopolies, is applied to a small-time local partnership speculating in distressed properties sold at auctions where Mr. Batra and his partner comprised one of many bidders.

Such a dubious interpretation of the anti-trust statute shows an extraordinary determination to convict. But justice is forfeited when, in addition, the conviction is obtained solely through the purchased testimony of a defendant who committed a real crime and is seeking to reduce his charges.

Until the Glorious Revolution when Parliament established the supremacy of law over the sovereign, kings dealt with enemies by bribing or compelling witnesses to testify against them. Once law and not the king's government was supreme, Matthew Hale established the maxim that testimony purchased with reward has no standing in court.

It is an abomination that the 10th Circuit has enabled unscrupulous prosecutors to resurrect the ancient practice of convicting defendants with paid testimony.

Return of the 'Audits From Hell'

Former Critics of IRS in Congress Now Clamor for Tough Enforcement
Sen. Charles Grassley, Chairman, Senate Finance Committee:

Oct. 1, 1997:

"The management culture at the IRS has led to institutional arrogance and abuse of taxpayers. Substantial changes must be made to eliminate the 'we-versus-them' mentality at the agency."

March 25, 2002:

"I'm amazed at the creativity of those who like being Americans but dislike their American tax obligation. Since tax cheats are endlessly creative, the IRS has to be just as creative to catch the crooks."

Uncle Sam's Audit Gap

Government Fails Fiscal-Fitness Test

U.S. Federal Government Accounting Methods

$3,400,000,000,000(Trillion) of Taxpayers' Money Is Missing

The War on Waste - Rumsfeld Says 2.3 Trillion Dollars Missing

1.1 Trillion Dollars Missing At Defense Department

HUD Missing 59 Billion

Billions Lost By Feds

Cooking The Books At The Department Of Education

7 YEARS OF HELL AT HANDS OF IRS

Home| About Hoover| Library & Archives| Research| Publications| Involvement
HOOVER INSTITUTION
HOOVER DIGEST
1999 No. 3
Amity Shlaes
The Greedy Hand in a Velvet Glove
How a little-known man in the front office of Macy’s invented tax withholding and gave rise to the modern welfare state.

Illustration by William Bramhall

If you’re looking for a name to attach to the huge tax bite that was taken out of your last paycheck, try this one on for size: Beardsley Ruml.
Ruml was treasurer at R.H. Macy & Company during World War II. He was also an academic and chairman of the New York Federal Reserve Bank’s board of directors, a polymath so glittering that he stood out even in that era of big talkers. Ruml was so well known for his dinner party expositions that Moss Hart and George S. Kaufman made him a model for a character in The Man Who Came to Dinner.
But it is Ruml’s role as New Deal spinmeister that keeps him in our thoughts today. He devised the legislation that gave us withholding as we know it. Today Americans give up more money in federal taxes than at any time except when the country was at war: 20.7 percent of the economy. Without withholding, it would be difficult to envision this scale of taxation persisting in a land born of a tax revolt. Indeed, without withholding the outsized government we have today would be hard to imagine.
Birth of the Mass Tax
The Ruml tale is worth recalling. In those years Washington was busy marshaling the forces of the American economy to halt Japan and Germany. In 1942 lawmakers raised income taxes radically, with rates that aimed to capture twice as much revenue as the previous year. They also imposed the income tax on tens of millions of Americans who had never been acquainted with the levy before. Chroniclers of the period say that the “class tax” became a “mass tax.”
But even in this most patriotic of moments, it was not evident that Americans were willing to pay the new tax. In those days, taxpayers sent one big check to the government. And as spring arrived in 1943, it appeared that many citizens might not ante up and file returns. Henry Morgenthau, the Treasury secretary, confronted colleagues about the nightmarish prospect of mass tax evasion: “Suppose we have to go out and arrest five million people?”
Enter Ruml, man of ideas. Like other retailers, he had observed that customers didn’t like big bills. They preferred installment payments, even if they had to pay interest to relieve their pain. So Ruml devised a plan, which he unfolded to his colleagues at the Fed and to anyone who would listen in Washington. The government would get business to do its work, collecting taxes for it. Employers would retain a percentage of taxes from workers every week and forward the money directly to Washington’s war chest. No longer would the worker ever have to look his tax bill square in the eye. He need never even see the money he was forgoing. Thus withholding as we know it today was born.
To tame resistance to the new notion, Ruml offered a powerful sweetener: The federal government would offer a tax amnesty for the previous year. It was the most ambitious bait-and-switch plan in America’s history.
Ruml advertised his project as a humane effort to smooth life in the disruption of the war. He noted that it was a way to help taxpayers out of the habit of carrying income tax debt, debt he characterized as “a pernicious fungus permeating the structure of things.”
Ruml’s genius did not lie in inventing withholding, already a known, if largely untried, tax concept. His genius lay in packaging so clever it provoked envy from his peers. Randolph Paul, a tax authority at Treasury, wrote distastefully that Ruml seemed to have convinced taxpayers he had found “a very white rabbit”—a magic trick—“which would somehow lighten their tax load.” Ruml called his program not “collection at source” or “withholding,” two technical terms that might put voters off, but “pay as you go,” a zippier name. Most important of all was the lure of the tax amnesty.
The policy thinkers of the day embraced pay as you go. This was an era in which John Maynard Keynes dominated economics, and Keynesians placed enormous faith in government, which they thought could end depressions, bring world peace, and build economies. The Ruml plan would give them the wherewithal to have their projects. The Keynesians also held that high taxes were crucial to controlling inflation.
CREATING THE MONSTER
Conservatives played their part in this drama. From a junior post at Treasury, a young economist named Milton Friedman helped plan the details of withholding. Later, Mr. Friedman called for the abolition of the withholding system. In their memoirs, Two Lucky People, Mr. Friedman and his wife, Rose, write that in the 1940s “we concentrated single-mindedly on the promotion of 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.” One can almost hear Mr. Friedman sigh as he writes: “There is an important lesson here. It is far easier to introduce a government program than to get rid of it.”

We may have turned away from big government and the welfare state, but our enormous Washington bureaucracy and our bewildering tax code remain with us, unwieldy artifacts of an earlier era.

Although withholding was supposed to be a war measure, by 1945 there was a certain inexorability to the project. Even as the nation girded for VJ day, the big thinkers were laying out justification for expansive taxation in the postwar period. In 1945 Ruml himself published a book, Tomorrow’s Business, that described future national tax policy. Taxes, he said, were important “as an instrument of fiscal policy to help stabilize the purchasing power of the dollar” and “to express public policy in the distribution of wealth and of income, as in the case of progressive income and estate taxes.”
Early on, while the nation was still recovering from the shock of the war, there were several famous resisters. In the late 1940s, a Connecticut cable-grip maker named Vivien Kellems actually tried to create a movement to protest withholding. She refused to withhold for the hundred-odd employees of her company and challenged the Internal Revenue Service collectors in federal court. She even wrote a breathless volume of protest, titled Toil, Taxes and Trouble: “Under the hypnosis of war hysteria, with a pusillanimous Congress rubber-stamping every whim of the White House, we passed the withholding tax. We appointed ourselves so many policemen and with this club in our hands, we set out to collect a tax from every hapless individual who received wages from us.” Her protest earned her a modicum of respect in serious quarters. The journalist Harry Reasoner compared her battle to that of Gandhi and Martin Luther King. Most people, though, depicted her as a kook, and she spent her waning years until her death in 1975 holding forth at the soirees of the far-right fringe.
The feisty Adolph Coors family also tried to protest. The papers reported that Coors wanted to show workers the scope of the government take. The company gave them their full pay—without withholding—for two months. In the third month it took out three months’ worth of withholding. Yet Coors too soon abandoned its withholding experiment.
In recent decades it has become clear that Keynesianism is only window dressing for big government, and most policy leaders have ceased to see taxation as the principal monetary tool. From time to time, lawmakers, always Republicans, have questioned withholding. Ronald Reagan talked about challenging state withholding in his campaign for California governor—but did not follow through while in office. In this decade, House majority leader Dick Armey has pushed a plan to end withholding with his flat-tax proposal. Instead of the annual 1040 reconciliation, Americans would send the government a check every month, “rather like a monthly car payment.”
Still, withholding prevails, a testament to the force of Mr. Friedman’s wistful insight. We may have turned away from big government, the welfare state, and spending as a way of managing inflation, but our voluminous Washington bureaucracy and our bewildering tax code remain as unwieldy artifacts of an earlier era. It is a breathtaking contradiction and one that might not exist but for the powerful marketing skills of a wartime package man.

Reprinted from the Wall Street Journal, April 15, 1999. Reprinted with permission of the Wall Street Journal. © 1999 Dow Jones & Company, Inc. All rights reserved.
Available from the Hoover Press is The Flat Tax, by Robert E. Hall and Alvin Rabushka. Also available is Frontiers of Tax Reform, Michael J. Boskin, editor. To order, call 800-935-2882.

Amity Shlaes is a media fellow at the Hoover Institution and a member of the editorial board and economic editorialist for the Wall Street Journal.