Wars have always been the most important occasions for the introduction of new forms of taxation. At the outset of a war the state suddenly needs greatly increased revenues to pay for personnel and matériel to prosecute the war. Although governments typically increase the rates of existing explicit taxes and raise the rate of the hidden “inflation tax” by abruptly augmenting the money stock, these measures often prove insufficient, and other means must be devised to extract resources from the public quickly. One way to capture more revenue is to reduce tax evasion by seizing the people’s earnings before the earners ever lay hands on them. This procedure has come to be known as tax withholding at the source, or simply withholding.
Precedents for withholding U.S. taxes go back as far as the War Between the States, when the Treasury withheld taxes owed by federal employees under the income-tax law adopted in 1862 until an 1864 amendment exempted federal salaries from taxation.
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