http://en.wikipedia.org/wiki/Randolph_E._Paul
First as special assistant to the Secretary for the Tax Division, and later as the Department’s General Counsel, Acting Secretary of the Treasury for Foreign Funds Control, and the Roosevelt Administration’s chief spokesperson on tax matters on Capitol Hill, Paul convinced Morgenthau to embrace Keynesian principles and to consider taxation as a vehicle for social progress.
To this end, Paul was instrumental in defeating attempts to enact a regressive national sales tax and in transforming the federal income tax into the broad-based revenue source and tool of fiscal policy that exists today. The Government’s existing income tax system – in which taxpayers need not pay their tax bill for one year until the next, when the value of the dollar had fallen – exacerbated the problem. The confluence of these events required an exceptional solution, which the Paul-written Revenue Act of 1942 addressed. Paul is credited with modernizing the Internal Revenue Code and persuading Congress to enact the payroll withholding tax.
http://en.wikipedia.org/wiki/Beardsley_Ruml
In the summer of 1942 Ruml proposed that the U.S. Treasury start collecting income taxes through a withholding, pay-as-you-go, system. He proposed an abatement on the previous year’s taxes, making up the revenue by immediately collecting on the current year’s taxes. In 1943 Congress adopted the withholding system.
Perhaps the best essay ever published on withholding and its long-term effects.
http://www.cato.org/pubs/journal/cj14n3-1.html
EVOLUTION OF FEDERAL INCOME TAX WITHHOLDING: THE MACHINERY OF INSTITUTIONAL CHANGE
by Charlotte Twight