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As originally enacted, the Victory tax contained a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)
APPENDIX A
Victory tax
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:
(1) Subtraction of the Victory tax exemption from gross
income.
(2) Multiplication of the taxable amount by a rate.
(3) Totaling of amounts of bond purchases, life insurance
premiums, and debt reduction.
(4) Comparison of the total found in the step above with
another
figure derived by applying a percentage to the Victory
tax.
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:
(1) Subtraction of personal exemption from net income.
(2) Further subtraction of 10 percent of the EARNED net
income
(with complicated provisions relating to the limitation
of
the credit and the assumption that the first $3,000 of
net
income is all earned income.)
(3) Multiplication of the balance by 6 percent.
Under the Treasury proposal the need for step (2) is
eliminated.
APPENDIX C
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:
(a) The earned income credit should be eliminated, its
value
being out of all proportions to the complexities which it
produces in the computation of the tax.
(b) The capital stock tax and the associated
declared-value
excess profits tax should also be eliminated. The loss of
revenue could be made up by an adjustment of rates within
the corporation income tax structure.
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:
(a) The Victory tax be repealed. It is merely an
additional
income tax with a different scheme of exemptions and
complicated post-war credit features. It is confusing to
taxpayers and makes impossible any real simplification of
tax forms.
(b) The earned income credit be repealed as an
unnecessary
complication in the income tax law.
(c) The normal tax and surtax be consolidated into one
tax
schedule. In addition, the double feature of normal tax
net
income and surtax net incomes give way to one net income.
Thus, there would be one net income and one graduated tax
rate schedule to be applied to it. This would greatly
simplify calculations of tax liability.
(d) The withholding of taxes from wages and salaries be
made on
the basis of a graduated rate scale. As a result,
millions
of taxpayers would be kept on a strictly current, paid-up
basis, by covering the full liability in all brackets
instead of just the first bracket, as at present. This
would
reduce materially the number of persons required to file
trouble some declarations of estimated tax.
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.
SSMandell:blr
12-31-43
|