Recommendations made to congress by the Treasury Department to simplify taxes and tax forms
(December 21, 1943)
January 4, 1944
MEMORANDUM FOR SECRETARY
Subject: Treasury recommendations on simplification.
AFFECTING MARCH 1944 FILING
The complexities of the March 1944 returns under the present law are attributable to two major causes: (1) the Victory tax, and (2) the shift to a current payment basis. The Treasury has made several recommendations designed to simplify the March 15, 1944 returns. These include the following:
1. ELIMINATION OF THE POSTWAR CREDIT UNDER THE VICTORY TAX
As originally enacted, the Victory tax contained a provision for a postwar refund. At the option of the taxpayer, however this credit could be claimed currently to the extent that he purchased war bonds, paid life insurance premiums, or reduced his indebtedness. The Treasury felt that the tax structure could be simplified without prejudicing revenues by providing that all taxpayers take the credit currently, since most persons had enough bond purchases or life insurance to take up the credit in full. This recommendation was enacted as Public Law 178, October 28, 1943. (See Appendix A)
2. SIMPLIFICATION OF THE VICTORY TAX RATE
The Victory tax rate credit is 3.75 percent for a single person and 3 percent for married persons, reduced in either case by 0.1 percent each dependent. At the time that Public Law 178 was under consideration, the Treasury indicated as one one method of simplifying the Victory tax, the substitution of a single flat rate of 3 percent for the variety of rates imposed under that tax. The Congress took no action on this at the time. However, this suggestion has now been given effect to in the Senate Finance Committee Bill. (See Appendix A)
3. SIMPLIFICATION OF DECLARATION BY ELIMINATING VICTORY TAX
The adoption of the Treasury's recommendation to integrate the Victory tax with the income tax would also have resulted in a simplification of the declaration of estimated tax for 1944. In preparing that estimate it would no longer be necessary to compute the Victory tax.
4. REDUCTION IN NUMBER OF DECLARATION FILERS UNDER GRADUATED WITHHOLDING
The present law withholding rate of 20 percent covers Victory tax, normal tax, and surtax at the first bracket rate only. Where wages or salaries are of amounts that render the taxpayer liable for surtax at higher rates, withholding does not ordinarily result in complete discharge of liability. Where the taxpayer has such higher amount of wages or salary, he is therefore required to file a declaration of tax and to pay on a current basis quarterly.
In his statement of October 4, 1943, the Secretary recommended to the Ways and Means Committee that graduated withholdings be adopted so as to obtain full collection at the source from such wage or salary earners. If this recommendation had been adopted, 2 million additional taxpayers would have been relived of the necessity of filing declarations in March 1944.
AFFECTING MARCH 1945 FILING
In addition to the simplification of returns and declarations filed on March 15, 1944, the adoption of the Treasury recommendations would have resulted in further simplification of returns filed March 15, 1945, in the following respects.
1. INTEGRATION OF THE VICTORY TAX
The Secretary in his statement of October 4, 1943 before the Ways and Means Committee, and Mr. Paul before the Senate Finance Committee, recommended that the Victory tax be absorbed into the regular income tax. This recommendation involved no loss of revenue and at the same time would have eliminated the complexities resulting from the computation of separate Victory tax. The house bill eliminates the Victory tax but substitutes a 3 percent minimum tax that introduces complications even more serious than those that exist under the Victory tax. The Senate Finance Committee bill retains the Victory tax but modifies it to a flat 3 percent levy on gross income in excess of a $624 exemption, as recommended by the Treasury in October in connection with Public law 178.
2. REPEAL OF THE EARNED INCOME CREDIT
The Secretary also recommended before the Ways and Means committee that the earned income credit be repealed as an unnecessary complication of the income law. The repeal of the earned income credit was provided in the House bill and approved by the Senate Finance Committee. (See Appendix B)
3. CONSOLIDATION OF NORMAL AND SURTAX RATE SCHEDULES
The Treasury also recommended that normal tax and the surtax be consolidated into one tax schedule. In addition, it was recommended that the double feature of normal tax net income and surtax net income give way to a single concept of net income. Under this proposal, the taxpayer would deal with only one net income figure and one graduated rate schedule in computing his income tax. Neither the House nor the Senate Finance Committee acted on this recommendation. (See Appendix C)
I. As originally enacted, the Victory tax contained a complicated postwar credit feature. Although the total Victory tax rate was 5 percent the net rate varied for different family statuses. Furthermore, the taxpayer could take the postwar credit currently to the extent of his bond purchases, life insurance premiums, and debt reduction. Computation of tax involved therefore:
II. The effect of Public Law 178 adopted on October 28, 1943, as a result of Treasury recommendation, was to eliminate steps (3) and (4) above. III. Under the provision in the Senate Finance Committee bill, changing the Victory tax rate to a flat 3 percent in accordance with a Treasury recommendation, computation of Victory tax would be simplified further. For all taxpayers, a 3 percent rate would be applied to the gross income less the $624 exemption.
APPENDIX B Earned income credit Substantial simplification of steps necessary in computing tax liability is accomplished by the elimination of the earned income credit. To compute the normal tax, if the credit is not eliminated, involves:
Under the Treasury proposal the need for step (2) is eliminated.
Consolidation of normal tax and surtax schedules Under present law it is necessary for the taxpayer to determine his net income, then to subtract the personal exemption and credit for dependents to arrive at surtax net income and then to subtract further the earned income credit and the credit for partially tax- exempt interest to arrive at normal tax net income. To the normal tax net income, a 6 percent rate is applied; to the surtax net income, the graduated surtax rates are applied. With the elimination of the earned income credit, it becomes possible to eliminate dual tax bases and rates. Under Treasury proposal, the taxpayer would determine merely his net income and would then apply one rate which combined the present normal and surtax rates.
RECOMMENDATIONS MADE TO CONGRESS BY THE TREASURY DEPARTMENT, SINCE 1941, TO SIMPLIFY TAXES AND TAX FORMS
The treasury department has at various times made suggestions to congress for the purpose of simplifying taxes and tax forms. Among the most recent of these suggestions are: (1) The proposal of Secretary Morgenthau, on August 8, 1941, to the Senate Finance Committee, that "there should be a provision in the case of the small taxpayer for a straight, simple payment of some small contribution to the national tax income through a simple agency and on a simple return." The Secretary suggested that: "For such taxpayers a plain and easily understood table could be provided with the aid of which the small taxpayer could compute his tax bill in a very few moments." This proposal was adopted by the Congress in the Revenue Act of 1941, adding Supplement T to the Internal Revenue Code. The small taxpayer was given the option of using a simple short-form tax return in reporting his annual Federal income tax liability. The result was a saving to the taxpayers and to the Government of time, trouble, annoyance, and expense. (2) The proposal of Secretary Morgenthau and Randolph Paul, on March 3, 1942, to the House Ways and Means Committee, that:
Neither of these suggestions were enacted by the Congress. (3) The proposals made by Secretary Morgenthau to the House Ways and Means Committee, on October 4, 1943, that:
The repeal of the earned income credit was provided for by the House of Representatives and approved by the Senate Finance Committee. However, no provision was made in the revenue bill, by either the House of Representatives or the Senate Finance Committee, for a single set of tax rates and net income or for graduated withholding tax rates. With respect to the Victory tax a law was enacted, effective for 1943, which eliminated the complexities of the post-war credit feature. Appreciating the complicating effects of the Victory tax on the income tax system, the House of Representatives eliminated this tax entirely in the proposed revenue bill for 1943. But the simplification of a single and simple income tax thus gained was nullified by including a provision for a minimum tax in the general income tax structure, the purpose being to achieve the effects of the Victory tax in reaching even the recipients of small amounts of income. This method of integration was contrary to the method proposed by the Treasury Department for making up the loss of revenue resulting from repeal of the Victory tax. Both the Secretary Morgenthau and Randolph Paul, before the Senate Finance Committee on November 29, 1943, criticized the provision for a minimum tax. They stated that the difficulties which it creates counteracts the simplification advantages derived from eliminating the Victory tax. They stated that under the House bill there would not be a reduction of the number of returns involving a small amount of tax, that married persons would find it more complicated to determine whether joint returns or separate returns would be more advantageous, that the decreased exemption for married persons filing separate returns would preclude some taxpayers from filing the simplified return, and that the new set of exemptions in the minimum tax would complicate the withholding process since employers will be confronted with two sets of varying exemptions as well as two sets of tax rates. The Senate Finance Committee then eliminated from the House bill the provisions which sought to integrate the Victory tax into the general income tax structure. Failing to ascertain a better method of integration, however, they permitted the Victory tax to remain as it is except that starting with 1944 a flat rate of 3 percent applies and the post-war credit provisions are eliminated entirely. The result is that Congress is so far permitting the Victory tax to remain in effect as an additional income tax, requiring separate and different treatment from the general income tax, despite the proposals of the Treasury Department for its elimination.