Paycheck Withholding

Gary North

The biggest cash cow in the history of government was paycheck withholding. It began in the United States in 1943. Tax revenues soared: from $3.2 billion in 1942 to $19.7 billion in 1944.

It was enacted as an emergency wartime measure. It never went away.

The economist who designed the program was a young Milton Friedman. His wife has never let him forget this.

The public accepted a huge increase in tax extraction because the process was automatic. Taxpayers never saw their money. They were therefore not tempted to spend it. Also, the extraction was paycheck by paycheck -- less painful because the money was removed in small chunks.

As investors, we can learn from this. If we make our savings program as automatic as payroll tax withholding, we can more reliably reach our financial goal of building an emergency reserve fund or even a retirement portfolio that will actually support us -- a long shot, admittedly.

Does your employer offer an automatic paycheck withdrawal savings program? If so, sign up for it. Put the money in a bank savings account or a money market fund until after the next recession.

If you pay your tithe the same way, so much the better.

We need all the tricks we can use to discipline our discretionary spending. This is one of the best: less discretion. Just ask Uncle Sam, who is a master at getting us to reduce our discretionary spending.