Populist Ambivalence to Tax Evasion

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In 1962, President John F. Kennedy proposed withholding to combat tax evasion from the non-reporting of more than $3 billion in dividends and interest on individual income tax returns. Kennedy's withholding proposal encountered an enormous wave of public opposition and was ultimately rejected. Steven Bank discusses why dividend and interest withholding generate such populist outrage.

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Institution: University of California Los Angeles

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In 1962, President John F. Kennedy proposed withholding to combat tax evasion from the non-reporting of more than $3 billion in dividends and interest on individual income tax returns. Kennedy’s withholding proposal encountered an enormous wave of public opposition and was ultimately rejected. Steven Bank discusses why dividend and interest withholding generate such populist outrage.

Image courtesy of interviewee. May 8, 2024

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This video video discusses the historical context and public response to proposed tax withholding measures in mid-20th century America, particularly focusing on wage withholding and the proposed extension to include dividends and interest. It highlights that wage withholding was introduced during World War II due to the government’s immediate revenue needs. The proposal in the 1960s to include a 20% withholding tax on dividends and interest was part of President John F. Kennedy's campaign against tax avoidance, aiming to capture revenue lost through unreported earnings.

Opposition came from the business community, which feared the administrative burden and potential loss of customers, as individuals might prefer tax-exempt investment options. Despite considerable business lobbying against the proposal, a significant public response emerged, characterized by widespread letter-writing campaigns to Congress. This video video reflected the public's understanding of how tax withholding could personally affect them, particularly among lower-income individuals who might be disproportionately impacted by the withholding tax.

This video video also notes that the proposal lost its moral ground due to the simultaneous introduction of tax breaks for the wealthy in the same legislative package. As lower-income people felt targeted by the withholding tax, their opposition represented a broader societal concern about fairness in the tax system, especially in the context of a high marginal tax rate for wealthy individuals and the availability of loopholes that allowed tax dodging.

Ultimately, the public successfully mobilized against the dividend and interest withholding proposal, revealing complex dynamics in tax policy discussions, and how tax issues resonate with various social classes. This video video episode is framed as an example of how tax dodging became culturally embedded in American society, highlighting the paradox where many citizens yearn for the same privileges of tax avoidance as the wealthy.

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The chapter is in part, a part

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of a broader project on, on tax avoidance, on tax dodging.

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So it was a question, about one of the

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major campaigns

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to reduce tax dodging in mid-century America,

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and how, how people responded to it,

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and what people did with it.

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First of all, the concept

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of wage withholding was well known in the United States.

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Uh, it goes back even as far as the origins

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of the modern income tax in 1913,

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when government salaries were subject to wage withholding.

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And all that means is that the employer, in that case,

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the government, would collect the taxes

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before they were paid to the employee.

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Uh, and, and in fact, just to simply hold onto it,

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for a third party employer, it wasn't

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until about the 1930s,

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that you started having some measure of wage withholding,

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and that was with respect to Social Security.

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During the New Deal under,

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president Franklin Delano Roosevelt, the

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big introduction of wage withholding was,

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in World War ii.

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And the reason for wage withholding in the United States was

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because, the great revenue needs meant that,

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they couldn't wait until the end of the year

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to collect taxes for the prior year.

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They needed the money now,

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and wage withholding was a way to collect it

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as you were paid.

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So, biweekly or, or monthly or

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however you were paid, the government would

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receive a portion of that.

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The employer would, would collect the,

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the money instead of paying it to you.

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They would pay it to the government directly,

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and that would, that would help fund the government.

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But dividend and interest withholding did not exist.

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It was proposed as part of that World War II package,

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but it was rejected.

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Um, and so they had wage withholding.

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And so the context for this, really, this,

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this proposal in the 1960s to extend

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wage withholding, to extend withholding to dividends

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and interest came out of a, movement

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by President John F. Kennedy to reign in tax dodging.

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Uh, so that is a, that's really the, the major context was,

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was tax avoidance.

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During the 1950s, the opposition to dividend

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and interest withholding, as I said, it was proposed

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during the World War, two bill that

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that created wage withholding.

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It was also proposed in the 1950s, early 1950s,

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always business opposition.

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So business lobbied against it.

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They were, clearly opposed to the idea.

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There's a, there's a variety of reasons why

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that I can go into, but it was really business opposition.

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The, the public wasn't all that excited about it.

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But at the time, during the World War ii,

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the issue was not an, an issue of, of public opposition.

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The public was actually quite patriotically, disposed

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to pay their taxes in, in the, during the World War ii.

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In fact, there was a Gallup poll conducted 1944

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and 90% of the tax paying population, said that their,

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their tax burden was fair, which is,

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which is highly unusual,

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to get 90% agreement on anything in a Gallup poll,

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let alone for taxes.

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So the issue was mostly business opposition to this dividend

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of interest withholding at the time.

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The biggest issue in the, in the earlier,

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proposals was simply transitioning the mass

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of the population to income taxation at all since they

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hadn't paid before World War ii.

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For, for the most part, business was, was openly hostile

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to the withholding proposal.

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Uh, and, and let me first back up

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and explain what the proposal was.

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So, John F. Kennedy proposed

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a 20% withholding tax on,

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on dividends and interest.

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Now, what that meant is that 20% of everybody's a flat rate,

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20% of everyone's dividends

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and interest would be, nominally paid.

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That is, you'd, you'd be reported as receiving that amount.

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But that it, that, that 20% of it had been withheld

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and submitted to the government on your

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behalf, for your taxes.

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You could collect, any, amount that was in excess of

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what you ultimately due, to pay taxes later at the end

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of the year when you settled up with the government.

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But the 20% flat withholding rate, and that was

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because a Treasury Department study.

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And from 1956, well

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before Kennedy had found that, among lots of tra tax,

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dodging tax avoidance

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that had occurred in the post World War II period,

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VINs in interest were notable.

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Four, $4.5 billion alone in 1956,

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went uncollected.

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Uh, and from a percentage perspective, while 14%

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of dividends were unreported, 50%

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of interest payments were unreported.

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And so the, the view was this is easy money, right?

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We should start with low hanging fruit dividends

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and interest are paid by third parties who they don't care.

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'cause it's not the banks

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or the corporations that are paying taxes,

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it's the individuals.

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So let the third parties report

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and the individuals will then settle up

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and, and we'll have the money.

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Uh, business,

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however, looked at it a little different, said,

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we may not be paying it, but we're gonna get hurt by it.

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Two issues for businesses and,

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and that they made arguments about, in,

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in prior periods as well.

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But really hit home in 1962

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after John F. Kennedy in, in his State

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of the Union address called

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for dividend and interest withholding.

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And for those of you who aren't familiar, state

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of the Union address is where you usually reserved

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for the kind of highest priorities for a president

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to bring up dividend

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and interest withholding in the State of the Union.

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Address suggests this is a big, target for him.

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Uh, what they brought up was, first the

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Administrative burden. What

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they're basically asking banks

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and corporations to do was to collect

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and remit taxes to the government,

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and then account for that to their customers and,

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and stockholders with that on their own expense, right?

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That, that is, that was just an administrative burden

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that they had not otherwise born.

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And they were gonna have to pay to, to,

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assign someone the oblig, the the job of, of doing all that.

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And that was gonna be troublesome.

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But more importantly

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for them is they were worried about losing customers.

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Now, you can imagine when, when the employer,

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when your employer starts,

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docking your paycheck, you get upset.

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Uh, in this case, it was the customers,

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and the investors, the employer at least has the advantage

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that you can leave.

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But we're not, you know, you gotta get a job somewhere,

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and all the jobs are gonna collect taxes on your wages.

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But for, for banks and,

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and corporations, there was the worry

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that there were other investments that people could shift to

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where they would not be subject

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to dividend and interest withholding.

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Most prominent of that was tax exempt municipal bonds.

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And in fact, the, some, brokers even

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advertised, Hey, you should invest with us in taxes

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and municipal bonds because we're not gonna be, subject

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to a dividend interest withholding.

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Uh, and, and you're gonna be able to avoid that burden.

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So that, that was the big concern. They'd lose the money.

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They made all sorts of arguments about what

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that would do to society.

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Banks said that we won't be able to lend money

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for mortgages, mortgage rates will go up dramatically.

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Uh, corporations said we won't be able

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to help expand the economy in the post-war period.

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Uh, but really what it came down to is, is both

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of them were worried that they were gonna lose profits.

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And, and this is where I enter into my,

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my big interest in this story originally was,

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how do wealthy people manage to leverage

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the kind of massive voice of the public to lobby

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for their own benefits, right?

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Because really, dividends

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and interest, there's on the one hand, dividends

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and interest are widely,

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spread a a across the, income spectrum.

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Those people could own, you know, widows

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and orphans can own stocks that get dividends and,

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and, you know, people with their,

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where their meager incomes could have interest on their

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savings accounts just as wealthy people can.

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So, on the one hand, it hit everybody,

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but that was what my initial, thought was.

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And so I started getting interested in this topic

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because banks, corporations, trade groups,

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stock exchanges, mutual funds, all engaged in

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mass efforts to, to

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organize letter writing campaigns, right?

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And so this is different in the 1940s, in 1944,

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when the wage withholding was, was up,

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and dividend interest withholding was part of that,

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bill banks lobbied directly

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to their congressmen when in the 1950s, early 1950s,

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which is also wartime

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because we had the Korean War at that time.

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Uh, they again, lobbied directly,

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but for a variety of reasons that had to do

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with John f Kennedy's popular, popular magnetism,

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the conversion from a, from a,

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to a Democratic administration, the, target

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that was being placed on dividends

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and interest withholding as a high pro profile, priority

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of the administration, let, led the business community

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to realize they needed to,

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to harness the power of the people.

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Uh, and so they organized letter writing campaigns.

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So what did they do? They, first of all, they sent letters

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to all their customers.

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So all the banks sent them out.

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And when I say all the banks did, so what happened

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to the United Savings?

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You know, United Savings and Loan Association,

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the trade group had 4,800 members.

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So they sent out all 4,800 members.

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Here's the package we suggest you send out

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to all of your customers.

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Uh, it included sample language, sample letters, how

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to approach this, all of that,

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what sample advertisements

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that they could place in their local newspapers.

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So they sent it out, corporations, sent out,

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with their dividend notices, they would send out a little,

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little insert that said, by the way,

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this dividend's gonna be a lot less if the proposal goes

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through to withhold taxes, and we're gonna start paying less

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because we have administrative costs associated with that.

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And you guys are gonna be the ones hurt.

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Uh, mutual funds send it out to all of their members, all

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of their, the, the, the brokerage houses

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and all of them, and they all send

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it out to their individual members.

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Uh, stock exchanges sent it out to every listed company,

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and the companies then send it out to everyone.

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Uh, they posted advertisements, they wrote,

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opinion editorial or, op-eds in newspapers.

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So all of this is clearly designed

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to get the public on their side.

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Uh, now the government believed that

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business was misleading the public.

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So they would tell 'em, Hey,

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you're gonna end up paying taxes when the reality is, is

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that you owe taxes on dividends.

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And interest, even without withholding, withholding,

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was a collection mechanism, not a imposition of a burden.

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So a lot of people,

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were being told, Hey, you're gonna pay taxes.

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They were like, we never paid taxes. I don't owe taxes.

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But in fact, they were supposed to be paying taxes.

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So having said all that

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letter writing campaigns were not,

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uniformly, successful, right?

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That is a lot of people get letters from, from the,

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you know, whatever, whoever's

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organizing this, and they throw it away.

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A lot of people look at it

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and are suspicious, why is the bank

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interested in this question?

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Um, maybe it's because it's their own self-interest.

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And I think people understood the banks

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and corporations didn't wanna do this

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because they were very public about it.

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So the real interest is why did the public take, take it on

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and, and, and enthusiastically respond?

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And when I say enthusiastically, the public,

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wrote letters to their congressmen

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like they'd never had before.

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According to, members of Congress,

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this was the single largest letter writing

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campaign in American history.

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Uh, it, the only close rivals were letter writing campaigns

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about the, the move to censure, Senator McCarthy

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and the, and the anti-Communist period.

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Um, there weren't letter writing campaigns about the war

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that were as close to the lettering letter writing campaigns

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about dividends and interest withholding,

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senators reported individual senators,

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and congressmen reported getting three

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to 5,000 letters a day.

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The Senate mail room had to double its staff

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because it was getting so many letters that it didn't know

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what to do with all the mail.

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They couldn't handle it. Uh,

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during the one week period when the Senate Finance Committee

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was considering the bill in which

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dividend interest withholding was proposed, just during

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that one week period, according to, Senator Harry Bird,

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a democrat from Virginia, who was the chair

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of the Senate Finance Committee,

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they received a hundred thousand letters, right?

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So there's a lot of letters.

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Not only that, but it was clearly had political impact.

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So, for example, there was a congressional race in,

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in Georgia where one of the, one of the,

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candidates was a member of the Ku Klux Klan,

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which is a, a, a racist organization,

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clearly a civil rights, opponent.

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Uh, he was running against another candidate, who was,

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who was the, the Democrat.

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So the Republican against the Democrat, the, the,

13:44.765 --> 13:47.285
Democrat candidate, however, had indicated

13:47.555 --> 13:48.685
that he was willing

13:48.865 --> 13:51.445
to support the dividend and interest withholding.

13:51.865 --> 13:54.605
And so while the, the,

13:54.665 --> 13:57.085
the Democrat was charging Republican with being a racist,

13:57.305 --> 14:02.005
and Ku Klux Klan, the, the, the, the racist was,

14:02.065 --> 14:04.485
was charging the, the Democrat with,

14:04.485 --> 14:06.005
with dividend and interest withholding.

14:06.005 --> 14:08.485
And that became the big issue in the campaign.

14:08.485 --> 14:10.885
There were huge advertisements about dividend

14:10.885 --> 14:13.005
and interest withholding, in that,

14:13.105 --> 14:14.205
you know, in that political campaign.

14:14.205 --> 14:15.725
So this is how much it resonated with people.

14:15.725 --> 14:16.885
It was a very salient issue.

14:17.305 --> 14:22.165
Um, and, and the public managed to kill it, right?

14:22.165 --> 14:25.325
There was so much, there were people who, who can't,

14:25.325 --> 14:28.725
there were politicians who candidly admitted, I'm up

14:28.725 --> 14:29.765
for reelection this year.

14:30.005 --> 14:32.765
I can't possibly support dividend interest withholding,

14:32.795 --> 14:34.685
even though I think it's probably a

14:34.685 --> 14:35.805
pretty sensible idea, right?

14:35.805 --> 14:37.125
They owe the taxes anyways. We're

14:37.125 --> 14:38.205
just collecting it ahead of time.

14:38.505 --> 14:42.485
No big deal. But they did not support it to me.

14:43.105 --> 14:47.605
The question then was why was the public so responsive

14:47.945 --> 14:50.485
to, to the opposition, to dividend interest withholding,

14:50.485 --> 14:53.165
despite their basic understanding?

14:53.405 --> 14:54.885
I believe that banks

14:54.945 --> 14:56.885
and corporations were engineering this campaign.

14:56.885 --> 14:58.205
They were in fact, getting letters from them.

14:58.205 --> 15:00.445
They knew that this was, you know, they were the ones,

15:00.745 --> 15:02.565
advocating this.

15:02.985 --> 15:04.045
So, couple things.

15:04.215 --> 15:07.605
First, it turns out more than half the US population

15:07.615 --> 15:10.525
owned either dividend paying, dividend paying stocks,

15:10.545 --> 15:12.045
or interest bearing accounts.

15:12.045 --> 15:13.485
Most of them interest bearing accounts,

15:13.585 --> 15:15.965
but literally half the US population,

15:16.265 --> 15:20.005
now half the US population didn't owe taxes, right?

15:20.005 --> 15:22.045
That was just, that was more than the tax paying population.

15:22.185 --> 15:23.205
That's a lot of people

15:23.665 --> 15:25.485
who are gonna say, this might affect me.

15:25.545 --> 15:27.165
And taxes are very personal.

15:27.225 --> 15:29.205
We think about them from our own perspective.

15:29.465 --> 15:31.645
You even see this when there are debates on the floor

15:31.645 --> 15:33.805
of Congress about taxes.

15:34.275 --> 15:35.485
They start the,

15:35.625 --> 15:37.125
the representatives start talking about their

15:37.145 --> 15:38.525
own personal situation.

15:38.525 --> 15:40.245
That's, that's how they translate taxes.

15:40.545 --> 15:43.085
And so it, it, it resonated with a lot of people.

15:43.585 --> 15:47.805
Um, more specifically, it hit lower income people

15:48.715 --> 15:50.325
more than wealthy people.

15:50.385 --> 15:53.725
And, and lemme explain why there's a 20% withholding rate

15:53.725 --> 15:55.685
under the proposal, why 20%.

15:55.985 --> 15:57.965
20% was the lowest

15:58.675 --> 16:01.285
rate tax in the graduated marginal rate system.

16:01.945 --> 16:05.565
The highest rate tax was 91%, which is why there's a lot

16:05.565 --> 16:07.485
of tax dodging between 1951

16:07.485 --> 16:11.685
and 1963, the top marginal rate was 91%, which meant that,

16:12.075 --> 16:15.525
that after the threshold, the income threshold where

16:15.525 --> 16:19.885
that hit, which was about $200,000 at the time,

16:19.885 --> 16:22.365
then you started paying, you kept 9 cents

16:22.385 --> 16:25.765
and get, you know, transferred the remaining 91 cents

16:25.765 --> 16:26.965
to the government, right?

16:27.185 --> 16:29.405
So 20 20% was withholding rate,

16:29.405 --> 16:31.325
because that would hit everybody 20%.

16:32.325 --> 16:36.185
But you can imagine if you are a 20% bracket taxpayer,

16:36.645 --> 16:39.545
the entire amount is being taken from you with withholding.

16:39.805 --> 16:44.625
If you're a 91% bracket, only 20% was being taken,

16:45.125 --> 16:46.465
and you could defer the

16:46.465 --> 16:47.745
remaining amount till the end of the year.

16:48.125 --> 16:50.305
Or you could evade that tax by just not paying it

16:50.305 --> 16:51.345
and hope you weren't audited.

16:51.605 --> 16:53.025
So, and, and,

16:53.045 --> 16:55.625
and to say that it was targeting the poor, that was

16:55.625 --> 16:57.145
how the lower income people saw it.

16:57.145 --> 16:59.265
They say, wait a minute, this is a, this is directed at us.

17:00.005 --> 17:02.825
Uh, Stanley Sury, a Harvard law professor

17:02.825 --> 17:04.185
who was at the time,

17:04.185 --> 17:06.585
worked in the Treasury Department, admitted

17:06.655 --> 17:09.105
that this was indeed the goal, right?

17:09.105 --> 17:12.025
We, they felt basically that the, you know, the mass of,

17:12.125 --> 17:15.025
of the interest could be collected through withholding.

17:15.365 --> 17:17.705
And so we better set a rate that was at, you know,

17:17.765 --> 17:19.385
at the lowest rate and hit the,

17:19.685 --> 17:21.625
the people at the bottom of the, the bracket.

17:21.685 --> 17:24.345
We could go after the, the wealthy people through audits

17:24.345 --> 17:26.705
and other means, but clearly the poor were being targeted

17:26.805 --> 17:28.385
or the lower income were being targeted.

17:29.045 --> 17:32.305
The third big issue though, was, I think a, this is part

17:32.305 --> 17:36.265
of a broader issue in society in the 1950s and sixties.

17:37.045 --> 17:40.425
The, as I said, the top marginal rate was 91%.

17:40.845 --> 17:43.425
Uh, that was World War II era rate.

17:44.205 --> 17:48.345
Why was the World War II era rate retained for, for

17:49.155 --> 17:51.455
really 20 years after the war?

17:51.875 --> 17:53.695
Um, partly it was politics.

17:54.075 --> 17:57.695
So Eisenhower, a, a President Eisenhower,

17:57.715 --> 18:00.575
who was the president, immediately after Truman.

18:00.575 --> 18:01.695
So really in the sort

18:01.695 --> 18:04.455
of post-war period, he was a Republican.

18:04.635 --> 18:06.375
He was a deficit hawk,

18:06.375 --> 18:09.855
meaning he did not wanna incur budget deficits,

18:10.075 --> 18:13.135
did not feel it was appropriate to cut taxes on the rich,

18:13.445 --> 18:15.735
because as a Republican you couldn't do that.

18:16.115 --> 18:19.525
Um, said, Hey, you know, we gotta keep the high rates.

18:19.865 --> 18:21.965
And politically, they, the Republicans did not feel

18:21.965 --> 18:23.005
that they could cut the rates.

18:23.225 --> 18:24.285
So what did they do instead?

18:24.285 --> 18:28.005
They enacted lots and lots of loopholes and exemptions.

18:28.435 --> 18:32.885
They were not, tax evasion in a, in an illegal sense,

18:33.305 --> 18:35.805
but the wealthy were, were enjoying lots

18:35.805 --> 18:37.005
of ways of cutting their taxes.

18:37.545 --> 18:39.805
So you, that's, this is the birth of tax shelters

18:39.805 --> 18:41.285
and tax haven jurisdictions

18:41.425 --> 18:44.965
and, accelerated depreciation

18:45.305 --> 18:46.765
and capital gains benefits.

18:46.765 --> 18:48.725
These are all things that you need a lot

18:48.725 --> 18:50.325
of money to take advantage of.

18:50.785 --> 18:53.445
And the, the lower income people were looking around saying,

18:53.755 --> 18:55.365
where's my window to crawl out of?

18:55.365 --> 18:56.525
Where's my tree to hide behind?

18:56.585 --> 18:58.085
How come I gotta pay all my taxes?

18:58.385 --> 19:00.045
And these wealthy guys got away with murder.

19:00.505 --> 19:02.565
The, the politicians acknowledged

19:02.565 --> 19:04.765
that they said we shouldn't have a 91% rate.

19:04.765 --> 19:06.085
That's why we would vote

19:06.085 --> 19:08.125
for a lower rate if we thought we could get away with it.

19:08.545 --> 19:11.965
We can't. So instead, we'll lower their burden to,

19:12.065 --> 19:14.805
to an effective rate that's closer to about 50%,

19:15.425 --> 19:16.805
but we're still gonna keep the poor,

19:17.145 --> 19:18.885
or the really not the poor, the lower income

19:19.425 --> 19:21.965
paying at the 20% rate we've set for them.

19:22.675 --> 19:23.805
Well, that didn't sit right.

19:23.905 --> 19:26.485
So the, the, this was kind of a self-help measure.

19:26.865 --> 19:29.045
You know, this is the one place, a little bit

19:29.045 --> 19:31.765
of meager interest on my savings account

19:32.115 --> 19:33.405
that I'm just not gonna pay you.

19:33.885 --> 19:35.365
'cause you know what, until you collect from

19:35.365 --> 19:36.965
them, don't come after me.

19:37.545 --> 19:39.005
But to add to that,

19:40.035 --> 19:42.215
and this is an important lesson for how

19:42.805 --> 19:45.655
this dividend interest withholding bill was couched,

19:46.085 --> 19:49.855
this is all part of a, tax avoidance measure, right?

19:49.855 --> 19:51.735
John F. Kennedy, a democrat comes in

19:51.735 --> 19:54.215
and says, alright, I can get away with it.

19:54.275 --> 19:57.295
We gotta, we gotta deal with tax dodging, right?

19:57.715 --> 19:58.815
And we're gonna lower the rates

19:59.315 --> 20:01.135
and we're gonna close the loopholes.

20:01.475 --> 20:02.535
Um, so he says,

20:02.535 --> 20:04.455
we're having dividend interest withholding is one

20:04.455 --> 20:06.295
of the ways we're gonna close the tax avoidance.

20:07.035 --> 20:08.695
Um, but in the same bill

20:09.235 --> 20:11.775
he puts in an investment tax credit, right?

20:11.775 --> 20:14.975
So an investment tax credit is a tax break for the rich.

20:15.315 --> 20:17.375
So he's talking on one side, Hey,

20:17.375 --> 20:18.735
we gotta cut out tax dodging,

20:18.735 --> 20:22.255
and he's giving to the wealthy another tax dodging break.

20:22.275 --> 20:25.055
And so from the, the lower income perspective, from the mass

20:25.675 --> 20:27.255
of the population, they're looking at

20:27.255 --> 20:28.375
it saying, wait a minute here.

20:28.875 --> 20:31.135
You are not cutting out tax dodging.

20:31.355 --> 20:34.815
You just are trying to raise revenue to increase tax dodging

20:34.815 --> 20:35.815
for the rich, right?

20:35.835 --> 20:38.055
And so they lost all the moral force

20:38.635 --> 20:42.095
of the dividend in interest withholding bill by putting it

20:42.285 --> 20:43.855
with a, with effectively a,

20:43.935 --> 20:46.855
a tax loophole giveaway on this particular issue.

20:46.855 --> 20:50.165
The broader implication is, is that, opposition to,

20:50.165 --> 20:54.845
to tax dodging is not so clearly a populist issue

20:55.145 --> 20:58.005
as most people think about taxes in with respect

20:58.005 --> 20:59.805
to their own individual circumstances.

21:00.185 --> 21:02.805
And they think about it as a, as how it's gonna affect them.

21:03.185 --> 21:05.805
But, but this, this chapter is part

21:05.805 --> 21:08.925
of a broader book on tax dodging in mid-century America,

21:09.545 --> 21:13.965
and it really is a book about this question of how did

21:14.705 --> 21:17.685
tax dodging enter American society?

21:17.745 --> 21:20.245
How did it become embedded culturally,

21:20.685 --> 21:21.805
structurally, socially?

21:22.305 --> 21:23.765
Uh, and part of that is

21:23.765 --> 21:27.325
because as you create a corrosive system

21:27.695 --> 21:30.805
where the wealthy are permitted to evade taxes,

21:30.875 --> 21:33.565
because we're gonna have a tax rate that's very high,

21:33.785 --> 21:36.245
but we're gonna end up with an effective rate that's lower,

21:36.705 --> 21:39.445
for political reasons, you end up really

21:40.005 --> 21:41.285
reducing taxpayer morale.

21:41.665 --> 21:45.885
And, and this episode in history, this opposition

21:45.885 --> 21:49.125
and dividend and interest withholding was an example of

21:49.125 --> 21:53.925
where, the, the politicians may have thought, Hey,

21:53.925 --> 21:55.325
we're gonna go after tax dodging

21:55.325 --> 21:56.605
and that's gonna be a populist issue.

21:56.765 --> 21:58.685
'cause the wealthy are the ones who dodge the most taxes.

21:59.345 --> 22:02.565
But that what they had done is create a system where the,

22:02.785 --> 22:03.925
the lower income

22:03.925 --> 22:05.725
and middle class people were not

22:06.325 --> 22:08.285
thinking we should go after the rich.

22:08.555 --> 22:11.405
They were thinking, how come I can't have what the rich has?

22:11.945 --> 22:12.965
And that's the problem.

22:13.185 --> 22:15.285
You have to really think about it in those terms.

22:15.315 --> 22:17.165
Everybody wants a tax dodge.

22:17.825 --> 22:19.525
Uh, it's not that the poor want

22:19.525 --> 22:22.045
to get back at the ridge when it comes to taxo.

Quick Answers

Tax Avoidance and Wage Withholding History

00:00:00 - The chapter is in part, a part of a broader project on, on tax avoidance, on tax dodging. So it was a question, about one of the major campaigns to reduce tax dodging in mid-century America, and how, how people responded to it, and what people did with it. First of all, the concept of wage withholding was well known in the United States. it goes back even as far as the origins
00:00:32 - when government salaries were subject to wage withholding. And all that means is that the employer, in that case, the government, would collect the taxes before they were paid to the employee. and, and in fact, just to simply hold onto it, for a third party employer, it wasn't until about the 1930s, that you started having some measure of wage withholding, and that was with respect to Social Security. During the New Deal under, president Franklin Delano Roosevelt, the
00:01:05 - in World War ii. And the reason for wage withholding in the United States was because, the great revenue needs meant that, they couldn't wait until the end of the year to collect taxes for the prior year. They needed the money now, and wage withholding was a way to collect it as you were paid. So, biweekly or, or monthly or however you were paid, the government would receive a portion of that. The employer would, would collect the,
00:01:35 - They would pay it to the government directly, and that would, that would help fund the government. But dividend and interest withholding did not exist. It was proposed as part of that World War II package, but it was rejected. and so they had wage withholding. And so the context for this, really, this, this proposal in the 1960s to extend wage withholding, to extend withholding to dividends
00:02:08 - by President John F. Kennedy to reign in tax dodging. so that is a, that's really the, the major context was, was tax avoidance. During the 1950s, the opposition to dividend and interest withholding, as I said, it was proposed during the World War, two bill that that created wage withholding. It was also proposed in the 1950s, early 1950s, always business opposition.
00:02:36 - They were, clearly opposed to the idea. There's a, there's a variety of reasons why that I can go into, but it was really business opposition. The, the public wasn't all that excited about it. But at the time, during the World War ii, the issue was not an, an issue of, of public opposition. The public was actually quite patriotically, disposed to pay their taxes in, in the, during the World War ii. In fact, there was a Gallup poll conducted 1944

Public Sentiment on Tax Withholding Proposal

00:03:10 - their tax burden was fair, which is, which is highly unusual, to get 90% agreement on anything in a Gallup poll, let alone for taxes. So the issue was mostly business opposition to this dividend of interest withholding at the time. The biggest issue in the, in the earlier, proposals was simply transitioning the mass of the population to income taxation at all since they hadn't paid before World War ii. For, for the most part, business was, was openly hostile
00:03:42 - and, and let me first back up and explain what the proposal was. So, John F. Kennedy proposed a 20% withholding tax on, on dividends and interest. Now, what that meant is that 20% of everybody's a flat rate, 20% of everyone's dividends and interest would be, nominally paid. That is, you'd, you'd be reported as receiving that amount. But that it, that, that 20% of it had been withheld
00:04:12 - behalf, for your taxes. You could collect, any, amount that was in excess of what you ultimately due, to pay taxes later at the end of the year when you settled up with the government. But the 20% flat withholding rate, and that was because a Treasury Department study. And from 1956, well before Kennedy had found that, among lots of tra tax, dodging tax avoidance that had occurred in the post World War II period, VINs in interest were notable.
00:04:46 - went uncollected. and from a percentage perspective, while 14% of dividends were unreported, 50% of interest payments were unreported. And so the, the view was this is easy money, right? We should start with low hanging fruit dividends and interest are paid by third parties who they don't care. 'cause it's not the banks or the corporations that are paying taxes,
00:05:14 - So let the third parties report and the individuals will then settle up and, and we'll have the money. business, however, looked at it a little different, said, we may not be paying it, but we're gonna get hurt by it. Two issues for businesses and, and that they made arguments about, in, in prior periods as well. But really hit home in 1962 after John F. Kennedy in, in his State of the Union address called for dividend and interest withholding. And for those of you who aren't familiar, state of the Union address is where you usually reserved
00:05:48 - to bring up dividend and interest withholding in the State of the Union. Address suggests this is a big, target for him. what they brought up was, first the Administrative burden. What they're basically asking banks and corporations to do was to collect and remit taxes to the government, and then account for that to their customers and, and stockholders with that on their own expense, right? That, that is, that was just an administrative burden that they had not otherwise born.

Concerns Over Tax Withholding and Customer Loyalty

00:06:19 - assign someone the oblig, the the job of, of doing all that. And that was gonna be troublesome. But more importantly for them is they were worried about losing customers. Now, you can imagine when, when the employer, when your employer starts, docking your paycheck, you get upset. in this case, it was the customers, and the investors, the employer at least has the advantage that you can leave. But we're not, you know, you gotta get a job somewhere,
00:06:51 - But for, for banks and, and corporations, there was the worry that there were other investments that people could shift to where they would not be subject to dividend and interest withholding. Most prominent of that was tax exempt municipal bonds. And in fact, the, some, brokers even advertised, Hey, you should invest with us in taxes and municipal bonds because we're not gonna be, subject to a dividend interest withholding.
00:07:21 - So that, that was the big concern. They'd lose the money. They made all sorts of arguments about what that would do to society. Banks said that we won't be able to lend money for mortgages, mortgage rates will go up dramatically. corporations said we won't be able to help expand the economy in the post-war period. but really what it came down to is, is both of them were worried that they were gonna lose profits. And, and this is where I enter into my, my big interest in this story originally was, how do wealthy people manage to leverage
00:07:57 - for their own benefits, right? Because really, dividends and interest, there's on the one hand, dividends and interest are widely, spread a a across the, income spectrum. Those people could own, you know, widows and orphans can own stocks that get dividends and, and, you know, people with their, where their meager incomes could have interest on their savings accounts just as wealthy people can. So, on the one hand, it hit everybody,
00:08:25 - And so I started getting interested in this topic because banks, corporations, trade groups, stock exchanges, mutual funds, all engaged in mass efforts to, to organize letter writing campaigns, right? And so this is different in the 1940s, in 1944, when the wage withholding was, was up, and dividend interest withholding was part of that, bill banks lobbied directly
00:08:58 - which is also wartime because we had the Korean War at that time. they again, lobbied directly, but for a variety of reasons that had to do with John f Kennedy's popular, popular magnetism, the conversion from a, from a, to a Democratic administration, the, target that was being placed on dividends and interest withholding as a high pro profile, priority of the administration, let, led the business community

Public Mobilization Against Tax Withholding Proposal

00:09:30 - to harness the power of the people. and so they organized letter writing campaigns. So what did they do? They, first of all, they sent letters to all their customers. So all the banks sent them out. And when I say all the banks did, so what happened to the United Savings? You know, United Savings and Loan Association, the trade group had 4,800 members. So they sent out all 4,800 members. Here's the package we suggest you send out to all of your customers. it included sample language, sample letters, how
00:10:00 - what sample advertisements that they could place in their local newspapers. So they sent it out, corporations, sent out, with their dividend notices, they would send out a little, little insert that said, by the way, this dividend's gonna be a lot less if the proposal goes through to withhold taxes, and we're gonna start paying less because we have administrative costs associated with that. And you guys are gonna be the ones hurt. mutual funds send it out to all of their members, all of their, the, the, the brokerage houses
00:10:32 - it out to their individual members. stock exchanges sent it out to every listed company, and the companies then send it out to everyone. they posted advertisements, they wrote, opinion editorial or, op-eds in newspapers. So all of this is clearly designed to get the public on their side. now the government believed that business was misleading the public. So they would tell 'em, Hey, you're gonna end up paying taxes when the reality is, is
00:11:04 - And interest, even without withholding, withholding, was a collection mechanism, not a imposition of a burden. So a lot of people, were being told, Hey, you're gonna pay taxes. They were like, we never paid taxes. I don't owe taxes. But in fact, they were supposed to be paying taxes. So having said all that letter writing campaigns were not, uniformly, successful, right? That is a lot of people get letters from, from the,
00:11:36 - organizing this, and they throw it away. A lot of people look at it and are suspicious, why is the bank interested in this question? maybe it's because it's their own self-interest. And I think people understood the banks and corporations didn't wanna do this because they were very public about it. So the real interest is why did the public take, take it on and, and, and enthusiastically respond? And when I say enthusiastically, the public, wrote letters to their congressmen
00:12:08 - According to, members of Congress, this was the single largest letter writing campaign in American history. it, the only close rivals were letter writing campaigns about the, the move to censure, Senator McCarthy and the, and the anti-Communist period. there weren't letter writing campaigns about the war that were as close to the lettering letter writing campaigns about dividends and interest withholding, senators reported individual senators,

Political Impact of Dividend Withholding Proposal

00:12:39 - to 5,000 letters a day. The Senate mail room had to double its staff because it was getting so many letters that it didn't know what to do with all the mail. They couldn't handle it. during the one week period when the Senate Finance Committee was considering the bill in which dividend interest withholding was proposed, just during that one week period, according to, Senator Harry Bird, a democrat from Virginia, who was the chair
00:13:08 - they received a hundred thousand letters, right? So there's a lot of letters. Not only that, but it was clearly had political impact. So, for example, there was a congressional race in, in Georgia where one of the, one of the, candidates was a member of the Ku Klux Klan, which is a, a, a racist organization, clearly a civil rights, opponent. he was running against another candidate, who was,
00:13:41 - So the Republican against the Democrat, the, the, Democrat candidate, however, had indicated that he was willing to support the dividend and interest withholding. And so while the, the, the Democrat was charging Republican with being a racist, and Ku Klux Klan, the, the, the, the racist was, was charging the, the Democrat with, with dividend and interest withholding. And that became the big issue in the campaign. There were huge advertisements about dividend
00:14:13 - you know, in that political campaign. So this is how much it resonated with people. It was a very salient issue. and, and the public managed to kill it, right? There was so much, there were people who, who can't, there were politicians who candidly admitted, I'm up for reelection this year. I can't possibly support dividend interest withholding, even though I think it's probably a pretty sensible idea, right? They owe the taxes anyways. We're just collecting it ahead of time. No big deal. But they did not support it to me.
00:14:47 - to, to the opposition, to dividend interest withholding, despite their basic understanding? I believe that banks and corporations were engineering this campaign. They were in fact, getting letters from them. They knew that this was, you know, they were the ones, advocating this. So, couple things. First, it turns out more than half the US population owned either dividend paying, dividend paying stocks, or interest bearing accounts. Most of them interest bearing accounts,
00:15:16 - now half the US population didn't owe taxes, right? That was just, that was more than the tax paying population. That's a lot of people who are gonna say, this might affect me. And taxes are very personal. We think about them from our own perspective. You even see this when there are debates on the floor of Congress about taxes. They start the, the representatives start talking about their own personal situation. That's, that's how they translate taxes. And so it, it, it resonated with a lot of people.

Understanding the 20% Withholding Tax Proposal

00:15:48 - more than wealthy people. And, and lemme explain why there's a 20% withholding rate under the proposal, why 20%. 20% was the lowest rate tax in the graduated marginal rate system. The highest rate tax was 91%, which is why there's a lot of tax dodging between 1951 and 1963, the top marginal rate was 91%, which meant that, that after the threshold, the income threshold where
00:16:19 - then you started paying, you kept 9 cents and get, you know, transferred the remaining 91 cents to the government, right? So 20 20% was withholding rate, because that would hit everybody 20%. But you can imagine if you are a 20% bracket taxpayer, the entire amount is being taken from you with withholding. If you're a 91% bracket, only 20% was being taken, and you could defer the
00:16:48 - Or you could evade that tax by just not paying it and hope you weren't audited. So, and, and, and to say that it was targeting the poor, that was how the lower income people saw it. They say, wait a minute, this is a, this is directed at us. Stanley Sury, a Harvard law professor who was at the time, worked in the Treasury Department, admitted that this was indeed the goal, right? We, they felt basically that the, you know, the mass of, of the interest could be collected through withholding. And so we better set a rate that was at, you know,
00:17:19 - the people at the bottom of the, the bracket. We could go after the, the wealthy people through audits and other means, but clearly the poor were being targeted or the lower income were being targeted. The third big issue though, was, I think a, this is part of a broader issue in society in the 1950s and sixties. The, as I said, the top marginal rate was 91%. that was World War II era rate. Why was the World War II era rate retained for, for
00:17:51 - partly it was politics. So Eisenhower, a, a President Eisenhower, who was the president, immediately after Truman. So really in the sort of post-war period, he was a Republican. He was a deficit hawk, meaning he did not wanna incur budget deficits, did not feel it was appropriate to cut taxes on the rich, because as a Republican you couldn't do that. said, Hey, you know, we gotta keep the high rates.
00:18:21 - that they could cut the rates. So what did they do instead? They enacted lots and lots of loopholes and exemptions. They were not, tax evasion in a, in an illegal sense, but the wealthy were, were enjoying lots of ways of cutting their taxes. So you, that's, this is the birth of tax shelters and tax haven jurisdictions and, accelerated depreciation and capital gains benefits. These are all things that you need a lot of money to take advantage of.

Tax Dodging: Inequities and Political Manipulation

00:18:53 - where's my window to crawl out of? Where's my tree to hide behind? How come I gotta pay all my taxes? And these wealthy guys got away with murder. The, the politicians acknowledged that they said we shouldn't have a 91% rate. That's why we would vote for a lower rate if we thought we could get away with it. We can't. So instead, we'll lower their burden to, to an effective rate that's closer to about 50%, but we're still gonna keep the poor, or the really not the poor, the lower income paying at the 20% rate we've set for them.
00:19:23 - So the, the, this was kind of a self-help measure. You know, this is the one place, a little bit of meager interest on my savings account that I'm just not gonna pay you. 'cause you know what, until you collect from them, don't come after me. But to add to that, and this is an important lesson for how this dividend interest withholding bill was couched, this is all part of a, tax avoidance measure, right? John F. Kennedy, a democrat comes in and says, alright, I can get away with it.
00:19:57 - And we're gonna lower the rates and we're gonna close the loopholes. so he says, we're having dividend interest withholding is one of the ways we're gonna close the tax avoidance. but in the same bill he puts in an investment tax credit, right? So an investment tax credit is a tax break for the rich. So he's talking on one side, Hey, we gotta cut out tax dodging, and he's giving to the wealthy another tax dodging break. And so from the, the lower income perspective, from the mass
00:20:27 - it saying, wait a minute here. You are not cutting out tax dodging. You just are trying to raise revenue to increase tax dodging for the rich, right? And so they lost all the moral force of the dividend in interest withholding bill by putting it with a, with effectively a, a tax loophole giveaway on this particular issue. The broader implication is, is that, opposition to, to tax dodging is not so clearly a populist issue as most people think about taxes in with respect
00:21:00 - And they think about it as a, as how it's gonna affect them. But, but this, this chapter is part of a broader book on tax dodging in mid-century America, and it really is a book about this question of how did tax dodging enter American society? How did it become embedded culturally, structurally, socially? and part of that is because as you create a corrosive system where the wealthy are permitted to evade taxes,
00:21:33 - but we're gonna end up with an effective rate that's lower, for political reasons, you end up really reducing taxpayer morale. And, and this episode in history, this opposition and dividend and interest withholding was an example of where, the, the politicians may have thought, Hey, we're gonna go after tax dodging and that's gonna be a populist issue. 'cause the wealthy are the ones who dodge the most taxes. But that what they had done is create a system where the,

Desire for Wealth Over Tax Equity

00:22:19 - and middle class people were not thinking we should go after the rich. They were thinking, how come I can't have what the rich has? And that's the problem. You have to really think about it in those terms. Everybody wants a tax dodge. it's not that the poor want to get back at the ridge when it comes to taxo.

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