The Great Tax Resister

Vivien Kellems holding a Kellems grip (Library of Congress)

By Amity Shlaes

This essay is from Amity Shlaes’s regular column “The Forgotten Book,” which she pens for “Capital Matters” as a fellow of National Review Institute.

When it comes to taxes, Americans are surrender monkeys.

We go limp at even the news that a legion of IRS auditors is mobilizing. We give in the moment the auditor’s letter shows up in the mailbox. We pride ourselves on discounting for statutory tax increases, not on opposing them. This despite the fact that President Joe Biden seeks major tax increases. And even without action from Democrats, tax increases are set for the end of 2025, next year, when the 2017 Tax Cuts and Jobs Act expires. The Republican presidential candidate, Donald Trump, supports preserving those tax cuts—they are his, after all. But he is certainly not making taxes the centerpiece of his campaign. With a few exceptions—Senator Tim Scott—the party of Reagan mounts no serious counteroffensive.

Recently Jason De Sena Trennert offered an explanation: Americans have lived in a tax stupor since the federal government suborned business into playing tax agent during World War II. Long before the legalization of marijuana became debatable, the very process of withholding numbed us into a cannabis state. When Treasury ordains, and employers collect, who resists such a team?

Not Milton Friedman, who against his better judgment lent a hand in the construction of the apparatus. There was, however, a great resister in our past, a manufacturer of cable grips from Westport, Connecticut.

Her name was Vivien Kellems.

 

A Real-Life Dagny Taggart

Kellems was the kind of character Ayn Rand dreamed up, a regular Dagny Taggart, both rebel and innovator. Her brother, Edgar E. Kellems, patented a cable grip. Vivien commercialized his invention. Their firm, Kellems Cable Grips Inc., produced large grips that stabilized bridges and buildings, including the Chrysler Building. The company also sold tiny cable grips to immobilize broken fingers of injured soldiers. And unlike Dagny, Vivien existed, itself a heartening fact.

The context for the Kellems Tax Revolt was World War II, when the imperative of funding an armamentarium to defeat Hitler and Tojo inspired our federal government to new levels of tax creativity. Until then, the income tax had been a class tax, mostly applying to higher earners. Now lawmakers made it a mass tax, widening the numbers of those subject to the tax by tens of millions. The requirement of victory notwithstanding, many citizens were not enthusiastic about paying the tax, a fact that had potential to embarrass the Treasury. In 1942, Gallup announced that fewer than 15 percent of taxpayers were setting aside money to make that year’s tax payment.

At the time, March 15 was tax day, with citizens making payment on that day for the preceding year’s income. Newspapers played the coincidence of that date with the date of the assassination of Julius Caesar for all it was worth: “Beware the Ides of March,” commented the papers to the new taxpayers. “Start saving now,” advised the Lewiston (Maine) Evening Journal. Many didn’t.

An executive at R. H. Macy’s and director of the New York Federal Reserve, Beardsley Ruml, pitched a plan to the nervous Treasury. Lure voters by announcing that a large share of their past tax obligation would be forgiven. But package that tax abatement with withholding, a then-novel idea.

As tax scholar Joseph Thorndike reports, Congress couldn’t resist the idea of giving a country that was sacrificing so much for the war an unexpected financial gift. Lawmakers voted in a version of the combination: forgiveness for 75 percent of one year’s tax obligation, plus 20 percent withholding. Withholding of the “Victory Tax,” a war surtax, commenced in January 1943. Later in the year, employers would begin to withhold on the rest of workers’ earnings.

Most citizens swallowed this tax bait and endured the switch.

One would not: Kellems. She announced that her company, which employed 150, needed to set up a postwar reserve fund and so couldn’t afford to pay taxes. “So I have not paid my Dec. 15 income tax,” she told the Daily News in January 1944. “I do not have the money, and to raise the amount I would have to mortgage my house, cash in my war bonds,…and go into bankruptcy.”

Not shy about using the weapons at her own disposal, she warned that her company’s bankruptcy would disrupt construction of war tools such as shell lifters and minesweeping cables. Kellems also offered a few recommendations on savings for the wartime government: “Abolish at least 2,000 useless silly federal bureaus”; “eliminate every world wide boondoggling project”—there were plenty even then—“which has no connection with winning the war.”

The Kellems Rebellion attracted the attention of authorities. Someone in the government—the post office or the censors—tried to smear Kellems by leaking her love letters to a German engineer in Argentina to the snaky columnist Drew Pearson. (“The letters may have been mushy, but they weren’t seditious,” concluded Senator Clyde Reed of Kansas.) Treasury Secretary Henry Morgenthau denounced her as “disloyal,” in wartime an allegation with a punch.

Speaking to the Boston Globe, Kellems punched back at the insult to her integrity: “We have blueprints and classifications in our plant of highly secret materials we are making for the country which the enemy would give his eye teeth to get his hands on.”

Pressed further, Kellems paid up, collecting taxes from her employees’ wages for the feds, albeit “with the greatest reluctance.”

Commentators approach past tax rebellions with the same cool distance with which archaeologists approach Pompeii.

“To Lull the Taxpayer to Sleep”

After the war, when it became clear that withholding was here for good, Kellems launched a serious anti-withholding campaign. Kellems Cable Grip ceased withholding and announced in a 1948 letter to Treasury Secretary John Snyder that “no one has the right to take money out of the pay envelope of another person.” If her employees were going to pay tax, they would do it themselves. Kellems hoped to become a test case on the constitutionality of withholding. “I respectfully request,” she wrote to Snyder, “that you please indict me.”

Apparently Treasury declined. But the Bureau of Internal Revenue did, predictably, force Kellems into a game of tax cat and mouse in the ensuing years. The bureau scared Westport Bank and Trust into coughing up the amount she should have withheld from employees’ pay packets, $1,685.40; she refused, providing proof that her employees paid taxes on their own. The revenuers demanded $6,100 and, again, squeezed it out of the poor bankers in the Connecticut suburb. Kellems sued to get the money back.

The feds never sent Kellems to jail but never let up either. In the early 1960s, she sold the company. Overtaxation, she told the Baltimore Sun, was the reason: “We never have been more prosperous, but when you finish paying taxes…there is no money left.”

In a book published about a decade into her tax battles, Toil, Taxes, and Trouble (Dutton, 1952), Kellems explained why she persevered. The era’s heavy tax burden—that year the top marginal rate was 91 percent—mattered. But so, very much, did the process.

“The one main object of the withholding tax was to lull the taxpayer to sleep, to deceive him that not he but someone else was paying the tax.” What’s more, “if he did feel any resentment it would be directed at the employer, not the government.”

And of course that was the effect of withholding.

 

The Next Crisis

Even in her day, Kellems was not easy to love. She shifted from cause to cause, now waging her tax war, now running for office—one of her opponents, in a Senate race, was Prescott Bush, the father of President George H. W. Bush. She always lost. Her categoric demands and extreme postures anticipated Dagny Taggart but also President Trump. She routinely threw out comparisons that weakened her credibility: “Today Truman stands exactly where Hitler stood in 1931,” she wrote of the president.

Yet to call Kellems “feisty” or “daffy,” to use the kind of term with which the press described her, is to miss something. Kellems displayed bravado, but also bravery.

And what made her brave? For starters, a network of free-market friends. Among them was Rupert Hughes, the uncle of aviation’s wild man, Howard Hughes. Rupert Hughes penned the introduction to her book. “Before the Income Tax was foisted upon us, it was accepted without question that ‘a man’s home is his castle.’ Now he and his home and his offices have the privacy of a fishbowl,” commented Hughes.

Our 2024 fishbowl is of course more exposed than even Hughes could have imagined. Yet we live in a moment when policy-makers or commentators approach past tax rebellions, Kellems’s or those of say, Howard Jarvis and California’s Prop 13, with the same cool distance with which archaeologists approach Pompeii. This despite the reality that a series of tax increases will make the next crisis—whether war, another COVID, or the federal debt—harder to pull out of.

The most disappointing parties are, as per above, the Republicans, who have turned their scrutiny and their weapons to the Culture Wars. Those who dare to push the GOP to take up serious tax reform represent a thinning minority. This time around the necessary first mutiny isn’t the mutiny against the IRS. It is the mutiny within the Republican Party.

Amity Shlaes chairs the Coolidge Foundation, is the author of Great Society, and is a fellow of National Review Institute. This article first appeared in National Review’s “Capital Matters.”

Amity Shlaes

Amity Shlaes chairs the Coolidge Foundation and is the bestselling author of Coolidge, The Forgotten Man, and Great Society.

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