Talk by the Secretary on the American taxpayer's March 15 income tax problem
As March 15 again rolls around, I find that a lot of my fellow citizens are troubled about their income tax returns. I have talked with some of you and had letters from others, and I know that many questions are puzzling you. I should much prefer if I were able to talk with each one of you personally about your tax return. But since that is impossible, I have asked Mr. Blank and Miss Blank to represent you. They will ask me the questions that arise in connection with their income tax job. I am confident that in asking THEIR questions, they will be asking YOUR questions. They have looked over the new income tax forms and are sitting across the table from me now, ready to fire away.
Q: Every time I tackle an income tax return, I wonder: Why have returns at all? Why do we have to undergo this yearly quiz contest?
A: I'm glad you started out with this basic question. Your income tax return is Uncle Sam's attempt to find out a fair basis for your tax, or, I might add, for your refund. Of course, we might use the Gestapo method and say, "Here is the tax I think you ought to pay, now pay it, or else." But we Americans prefer a method taking full account of differences in individual circumstances. The quiz, as you call it, aims to find out from you and your neighbor how much income you get and what family obligations and allowable deductions you have. The income tax return enables us to look at one man and say, "You have an income of $3,000, but you are married and have two children and besides you had to pay $100 of interest on a mortgage and $500 for hospital and doctor's bills, so your tax is only $174," and at the same time it enables us to look at his neighbor and say, "You have $3,000 of income too, but you are single and have only $100 of deductions, so your tax is $540." So you see, your tax return tells us the various things we need to know to judge your ability to pay taxes.
Q: You said something about a refund a moment ago. Do you mean that this is a refund return as well as a tax return?
A: You might call it that, If the government has collected too much from you by way of withholding or other payments, your tax return will show this and will be an automatic claim for a refund. about 15 million taxpayers will find when they get down to the bottom of their March 15 return that the government owes them money. The tax return is a business-like way of seeing on one hand that the taxpayer gets a fair break and on the other that the government gets the tax that is rightfully due. You serve both your own interests and those of your own country in filling out your March 15 return.
Q: But why does my tax return have to be so complicated?
A: Your return is complicated because the law is complicated. In drawing up returns, the Treasury is bound by the law. Take a look at the short from, 1040A, for example. On the back of it you'll find a separate box for figuring out your Victory tax. The last thing in the world the Treasury wanted was to make you go through a lot of arithmetic. In fact, our whole idea in developing the short form in 1941 was to give you a table from which you could simply read off your tax without a lot of figuring. But the Victory tax upset the applecart this year. As the law now stands, it is impossible to work the Victory tax into the simplified table. The law ties our hands.
Q: But why couldn't something be done to simplify the laws?
A: As a matter of fact, a lot CAN be done, and later on I'd like to show you some of the things that OUGHT to be done. But it is worth keeping in mind that you can never have complete simplicity if you want an income tax that recognizes differences between you and your neighbor. Simplicity and fairness sometimes go hand in had, but I'm afraid in many cases you're forced to choose between the two.
Q: I'm not sure I see why we can't have both.
A: Perhaps a specific example will help. Under the new tax bill as passed by the House of Representatives, the size of your personal exemption each year would be determined by your family status on July 1 of that year. Regardless of what went before or after, your status on July 1 would control your exemption. Now this provision would simplify tax computations for millions of people whose marital or dependency status changes during the year. At present, unless they use the short form, they have to pro-rate their exemptions by months. For a child born on June 5th, you get seven-twelfths of the annual credit. Or if you marry on June 5th, you get five- twelfths of the single person's exemption and seven-twelfths of the married person's exemption. Under the House provision, you simply take the annual exemption applying to your family status as of July 1, and that's all there is to it. All well and good, and very simple -- but it also means that people who get married or have a baby on July 2 would lose about six months of the higher exemption. Fixing July 1 as the exemption date simplifies tax operations but deprives some people of their full exemption. Simplicity to all means unfairness to some, and you have to strike a balance.
Q: You say that the July 1 date already applies on the short form. Why is that?
A: Tying the exemption to this specific date is one of the things that had to be done to simplify the short form. Another thing was to assume that people using this form have average deductions of 6 percent. By this standardizing process, and by setting up the tax for income brackets $25 wide, we were able to develop the simplified tax table you find on the back of the short form.
Q: Can anybody file on this short form?
A: No. In order to make it workable, it had to be restricted in general to people with gross incomes of not more than $3,000 derived only from wages, interest, dividends, and annuities.
Q: Do these restrictions leave very many people eligible to use the form?
A: Oh yes, the great bulk of the taxpayers are qualified to use it. In 1943, for example, almost 27 million people were qualified to use it, and 16 million actually filed on this short form.
Q: Eleven million people who had the option of using the simplified short form filed the more complex long form instead?
A: Yes apparently a great many people are willing to pay the price of complexity to get a more precise tax result -- especially if it saves them a few dollars of taxes! Although this fact in no way justifies complexity of returns, it gives us an interesting clue to the type of choice people will make. Not that I blame people for choosing the long form if they find it to their advantage. In fact, the instructions on the short form this year tell you that "Your may find it advantageous to use the long form . . . where (your) deductions for interest, contributions, taxes, alimony, etc., exceed 6 percent of your income, or if after July 1, your married or the number of your dependents increased."
Q: Looking at the short form I can see that it is a lot less frightening than the long form, and I can read my income tax from the table on the back of it. I like the new arrangement of it too. But I can't say that it looks completely painless.
A: That's not surprising, since it isn't painless. We in the Treasury have no illusions about that fact. We do take some comfort, however, and feel that you can too, in the thought that returns will never again be as complicated as they are this year. Because of the switch-over to pay-as-you-go, and because of the Victory tax, there is a hard core of tough going that no amount of draftsmanship could eliminate. But when the shift to pay-as-you-go is completed and when Congress modifies or eliminates the Victory tax, the worst will be over.
Q: One of the things that stumps me is this item on the return labeled "forgiveness feature."
A: You've put your finger on the most puzzling aspect of the entire return. I'm sure that if you carefully follow the guides set up by our drafting experts, you'll arrive at the right answer. But I don't mean to say that that makes it simple. A thing isn't really simple unless you understand what you're doing. As you know, we're in the midst of the process of shifting to a pay-as-you-go basis. In order to avoid a head-on collision of two years' taxes in one year. Congress decided to wipe out three-quarters of one year's tax. The unforgiven one-quarter is payable in two installments, one this March, the other next March. The first installment is part of your March 15 return, and that's why you have to go through that forgiveness computation. Luckily, this computation is a one-year wonder. It will never again clutter up your income tax return.
Q: Under the new pay-as-you-go system, how am I going to find out how much I have already paid and what I still owe the Government or have coming as a refund?
A: First of all, let's be clear on the types of payments you made during 1943. You will want to take credit, first, for the income and Victory taxes withheld by your employer, second, for any amounts you paid last year on your 1942 income tax bill, and third, for any estimated tax payments you may have made last September and December. We're trying to make this problem easier for you by enclosing with your return a little slip showing you how much your 1942 tax bill was and how much of it you paid last March and June. In addition, when you sit down and make out your return, you will want to have at hand the withholding receipt or receipts from your employer showing how much tax he withheld in 1943. If you have paid an estimated tax in September and December, you will also want your receipts or check stubs showing how much that came to. Having these things t hand will make it a lot easier to find out whether you owe the Government additional tax or whether the Government owes you a refund.
Q: That gives me a much better idea of what my income tax job involves. And I guess in the long run it's worth some complexity to have my taxes paid out of my income as I earn it instead of having a big lump-sum payment hanging over my head. But one thing I can't understand is why it's necessary to have a separate tax like the Victory tax on a different basis and with different exemptions that the income tax.
A: The answer is that it's not necessary, nor even desirable. Seeing that it would mean only confusion and complication, the Treasury in 1942 opposed the introduction of this tax. It has urged time and again that it be merged with the regular income tax. But, for the present, there it is, and there is will be when you fill out your return in the coming weeks. Those among you who are good at decimals will find yourselves very popular during this income tax season.
Q: Is it too late to do anything about this complexity before march 15 this year?
A: Yes, Unless Congress were to enact retroactive laws and unless we threw out several hundred million forms that are already on their way to you, we have no alternative but to stand by the present returns due March 15.
Q: Would you say that the returns have been made as simple as possible within the framework of the present law?
A: I think I can fairly say that the Treasury did everything in its power to simplify returns. We took a new approach on the simplified short form to make it more understandable to the average taxpayer. I think you'll be interested to know that after we had simplified the short form as much as we could within the bounds of the law, we tried it out last fall on several hundred people. We got their reactions and made a number of changes at their suggestion. So, we do have some confidence that, tough as it is, the short form is about as well suited to the needs of the little fellow as the law will permit. We also revamped the long form. I won't claim that the final products are very simple, but I think we've gone as far as we can, short of changing the law.
Q: Then I take it the next order of business is to change the law. Where's the best place to start?
A: I'd say the Victory tax is the most logical place. Right now, it's the biggest stumbling block to a simpler income tax return for you and me. One small step has already been taken to improve it. At the recommendation of the Treasury, Congress last fall converted the mis-named post-war credit of the Victory tax into a simple current credit. This doesn't change your tax burden, but gets rid of a lot of red tape. Because of the change, you will get the credit currently without reporting war bond purchases, insurance premiums, and debt payment. This was one of those happy cases where simplicity and fairness went hand in hand. I firmly believe that merging the entire Victory tax with the income tax is another change that combines simplicity with fairness.
Q: What other changes should be made to simplify our job of filing returns?
A: Several things can be done. One of the things the Treasury recommended to Congress as long ago as May 1942, is the repeal of the earned income credit. The special detour this credit requires on your return might be justified if the credit actually benefited earned income. But at best, the benefit is small, and below the $3,000 income level it doesn't exist because everybody gets the credit whether his income is earned or not. The tax bill now in Congress would repeal the earned income credit. Balancing its complications against its benefits, I'd say, "good riddance."
Q: Another thing I don't see much excuse for is having a separate surtax and normal tax. Why not have a single rate schedule?
A: If you look up the Hearings before the House of Ways and Means Committee last fall, you'll see that I recommended exactly what you're suggesting, a merger of the normal tax and surtax into one schedule. If this were done, you would no longer have to worry first about a 6 percent normal tax and then a 13 percent surtax in the first bracket, a 16 percent surtax in the next bracket, and so on. If at the same time the separate Victory tax were merged with the regular income tax, we could have one tax instead of the three that now exist side by side, without much rhyme or reason.
Q: I've been wondering, too, whether the quarterly declarations of estimated tax can't be simplified.
A: Yes indeed. The changes in the law that would allow us to simplify the March returns would also permit us to simplify those declaration slips. For that matter, if Congress would adopt the Treasury's suggestion for withholding of taxes at graduated rates, many people now filing declarations would be entirely relieved of that job. At present, if your annual wage or salary goes beyond the first surtax bracket, you have to file a declaration even if you have no other source of income. Under graduated withholding, you wouldn't have to file one unless you had substantial income from sources other than wages or salaries.
Q: While we are talking about the future, is the Treasury studying any other basic changes in the filing procedure?
A: Yes, we have been looking into several things. One is the possibility of extending the privilege of using the short form up to a $4,000 or $5,000 income level. At present, you know, it's set by law at $3,000.
Q: Do you think that people whose full tax is collected at source can be relieved of the job of filing returns?
A: We're studying that possibility, and a pretty good case can be made for it. But don't forget that withholding rarely hits the tax nail right on the head. Generally, it overcollects or undercollects your tax, even if only by a few dollars. The annual return protects the Government from losing out on some of the tax it should get and prevents injustice to taxpayers who might otherwise miss out on refunds. It may be feasible to relieve some taxpayers of the job of filing returns, but if we do, we'll have to accept a rougher adjustment of the tax to individual circumstances. Perhaps some compromise plan could be worked out whereby you would send us a few simple facts and then we would figure out your tax and what you had already paid, and bill you for the rest. I think I have said enough to indicate that we are keenly aware of your filing problems and that we are trying to work out methods of simplifying them.
Under the pressure of war finance, the income tax has grown from a tax paid by 4 million taxpayers in 1939 to a tax payable by about 52 million taxpayers this year. Naturally it has had growing pains and you will share in those when you file your March return. but we will be over the hump by the time March 1945 rolls around. The forgiveness feature, which is a means of shifting to the improved pay-as-you-go basis, will be a thing of the past. Chances are, the earned income credit will be gone. If the Treasury's suggestions are adopted by Congress, you would, at worst, pay a simplified Victory tax and preferably no Victory tax at all; you would use only one schedule of rates to compute your taxes. I don't visualize any taxpayers' Utopia. But I do foresee steady improvements from now on.