June 13, 2021
by Steve Stofka
It has been 200 years since the cloth mills in Massachusetts instituted the “Lowell system,” employing young women and taking half of their pay for company provided room and board (Taylor, 2021, p. 234). 100 years ago, the states ratified the 16th Amendment, permitting the federal government to tax all income, including worker’s wages and salaries. 70 years ago, the government instituted payroll withholding. Today 145 million American workers receive salaries or wages, of which 30% is withheld by employers and sent to the federal government (Bird, 2021). Have we all effectively become government employees leased out to employers?
“Shan gao, huangdi yuan” is an ancient Chinese saying that reflected the attitude of many Chinese toward a central authority: “The mountains are high, and the emperor is far away.” Until the enactment of the 16th Amendment in 1913, most Americans felt the same. In Article 1, Section 8, the framers of the Constitution built a corral around the power of the federal government. The ink was barely dry on the document when Federalists like Hamilton argued for an interpretation of the Constitutional language that would give the federal government more power. In the next two decades, the Supreme Court headed by John Marshall, an appointee of Federalist President John Adams, did just that (Taylor, p. 54). During his 35-year tenure as Chief Justice, the decisions of the Marshall court effectively restated the Constitution.
Still, the federal government’s reach was limited enough that it took an amendment to that Constitution to permit the federal government to tax U.S. citizens directly. Richard Byrd, a delegate from Virginia and an opponent of the 16th Amendment, warned that “A hand from Washington will be stretched out and placed upon every man’s business; the eye of the Federal inspector will be in every man’s counting house . .” (Tax Analysts, 2021). He warned that the new amendment would feed the growth of a Washington bureaucracy remote from the interests of ordinary people. Many of those living today have great-great grandparents who voted for that amendment. Why did they consent?
When the 16th amendment to the constitution was ratified more than a century ago, the IRS enacted a system of withholding. Employers complained and the withholding provision was repealed a few years later in 1917 (Higgs, 2007). Most people who did owe taxes paid only 1% in quarterly installments the year after they incurred the tax burden. During WW2, the federal government wanted more revenue to support the massive wartime spending, and instituted withholding for income taxes.
The federal government employs almost 9 million workers (Hill, 2020), about 6% of the total workforce, but its effective reach is so enormous that employers today only borrow workers from the federal government. Each employer must abide by so many employment regulations that even a small business has to dedicate at least one person to administering regulations. The hiring of an employee initiates an implicit contract not between the employer and employee, but between the employer and the federal government. The employer faces stiff penalties for violating any provisions of that implicit contract. How has the tentacled reach of the federal government affected employees?
Like the young women at the Lowell mills, workers are not allowed to touch their pay until taxes, insurance and fees have been withdrawn. Some taxes are silent, withdrawn by lowering gross pay. After state and local taxes and the employee portion of health insurance is deducted, a worker today may be left with only half their pay. Unlike the women at the Lowell mills, the federal government does not provide room and board for most workers. As Richard Byrd warned a century ago, a federal government is only remotely concerned about those needs. Instead, it takes from the worker in the now and gives back to the worker in the future after forty years or more of work – a pension and medical care after retirement.
In addition to future needs, a worker’s taxes feed a bureaucracy that safeguards the security, wealth and needs of the upper 20%, and selected regional interests. Like the Chinese emperor, the $1 trillion spent on current military needs and past military promises seems far away from the daily security needs of most Americans. That spending supports local economies in some regions and may be the key economic base in some rural communities who strongly support military spending to maintain a global empire. After all, their local economic security depends on such spending.
Larger than Amazon’s football sized warehouses is the largest warehouse in the nation run by the federal government. It is bounded not by walls but by a web zealously tended by lawyers and regulators, and inescapable for most employees and employers. The restrictions and harsh working conditions of the Lowell mills strike us today as paternalistic exploitation. The parents of the young women welcomed the discipline and extra money that their daughters earned. The hard work instilled moral character in the women before they returned home to marry a local lad.
Many of us today welcome the paternal oversight of the federal government as a safety net. The children of our children 200 years from now will certainly regard this age differently. Will they see the complex net of laws that bind employees and employers as a safety net or a trap?
Bird, B. (2021, May 26). How much does the average American pay in taxes? Retrieved June 11, 2021, from https://www.thebalance.com/what-the-average-american-pays-in-taxes-4768594.
Higgs, R. (2007). Wartime Origins of Modern Income-Tax Withholding. The Freeman, (November). Retrieved from https://admin.fee.org/files/doclib/1107higgs.pdf. Also, see IRS history Timeline (2021) and LOC (2012).
Hill, F. (2020, November 05). Public service and the federal government. Retrieved June 11, 2021, from https://www.brookings.edu/policy2020/votervital/public-service-and-the-federal-government/
IRS. (2021). IRS history Timeline. Retrieved June 10, 2021, from https://www.irs.gov/irs-history-timeline
Library of Congress (LOC). (2012). History of the US income tax. Retrieved June 10, 2021, from https://www.loc.gov/rr/business/hottopic/irs_history.html
Tax Analysts. (2021a). The Income Tax Arrives. Retrieved from http://www.taxhistory.org/www/website.nsf/Web/THM1901?OpenDocument. For PDFs of original tax forms that your great-great-grandparents might have filed, see
U.S. 1040 Tax Forms, 1913 to 2006. Retrieved from http://www.taxhistory.org/www/website.nsf/Web/1040TaxForms?OpenDocument
Taylor, A. (2021). American republics: A continental history of the United States, 1783-1850. New York, NY: W. W. Norton & Company.