On This Day In Finance: June 9 - The Birth Of Modern Taxation

By Investopedia Staff | June 09, 2009 AAA
On This Day In Finance: June 9 - The Birth Of Modern Taxation

On June 9, 1943, the United States Congress signed into law the Current Tax Payment Act. The new tax law is known as the birth of today's modern income-tax withholding method, or "pay-as-you-go income tax".

Income tax withholding is the method in which the United States continues to collect personal income taxes. The withholding method is simply the withholding of taxable funds from individuals' paychecks, creating a "partial payment plan", as opposed to the previous method of collecting income taxes in a lump sum the following year for the previous year's income. (Learn more about income tax by reading the answer to our frequently asked question How does the marginal tax rate system work?)

The introduction of pay-as-you-go income tax was born through necessity to collect sufficient tax dollars to fund America's position in World War II. By collecting periodic payments, the United States Treasury ensured itself of a steady income stream to maintain the country's expenses during wartime.

To this day, the United States and many other countries around the globe continue to use this taxation method to collect income tax from their citizens. (To learn more about this topic, see our Personal Income Tax Special Feature.)

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