The modern withholding system was proposed in 1942 by Beardsley Ruml. At the time, Ruml was one of the directors of the Federal Reserve Bank of New York. Congress enacted Ruml’s plan with the Current Tax Payment Act of 1943.
Withholding produced a huge jump in tax collections (full table here):
|Year||Tax Revenue||% of GDP|
Prior to 1943, the USA used withholding off-and-on as far back as the Revenue Act of 1862.