Chronological summary of the Treasury's suggestions on simplification.
(Prepared for Hon. Lyndon B. Johnson, 2/19/44)
February 21, 1944
In response to your request for information on the Treasury's record on simplification, I am attaching a statement summarising in chronological form the various steps which the Treasury has recommended in the interests of simplification. I hope that this will serve your purpose. If you want any additional information, do not hesitate to call on me.
Chronological summary of the Treasury's suggestions on simplification
Recognising the need for simplification as the income tax system was broadened to take in many millions of additional taxpayers, the Treasury has taken a number of steps to simplify returns and has made a number of recommendations to Congress in that connection. These steps and recommendations are summarised below in chronological order.
1. In August 1941 the Secretary submitted to the Senate Finance Committee a proposed short income tax form to simplify tax arithmetic for the growing number of small taxpayers. At that time the Secretary said, "I think we ought not to take into the income tax system millions of new taxpayers with small incomes without simplifying the way in which their tax is computed." The Congress adopted the proposed form by enacting into law the so-called Supplement T tax table on which the form is based. The Supplement T table has been revised from year to year since that time to take account of changes in the law, but it was found impossible under the existing income tax to incorporate the Victory tax into the table.
2. In May 1942 the Treasury recommended to Congress that the earned income credit be eliminated. The earned income credit is the chief barrier to consolidation of the normal tax and surtax.
3. In July 1942 the Treasury conducted a nationwide survey of employers to aid in the development of a system of withholding. Some 500 employers were interviewed. The results were applied in subsequent recommendations to Congress for a workable system of Victory tax and income tax withholding.
4. In the fall of 1942, the Treasury opposed the introduction of the Victory tax into our income tax system. It stressed the complications involved in setting up a separate tax with a different income base, different rates, and different exemptions than the regular income tax.
5. In September 1943 the Treasury indicated to the House Ways and Means Committee in executive session various methods by which the intricacy of the 1943 Victory tax might be reduced. One method was to convert the misnamed postwar credit into a simple current credit. This was accepted by Congress, thus eliminating the need for taxpayers to report war bond purchases, insurance premiums, and debt repayments. The further suggestion that the Victory tax be changed to a flat 3 percent tax was not accepted at that time but was incorporated in the Revenue Bill of 1943 for application to the year 1944 and subsequent years.
6. In October 1943, as a part of the revenue program submitted to the ways and Means Committee, the Secretary proposed eliminating the Victory tax by merging it with the regular income tax. This recommendation was repeated and elaborated before the Senate Finance Committee in November by Mr. Randolph Paul, General Counsel of the Treasury. Mr. Paul had also stressed the importance of this step in public addresses in October and November.
7. In October 1943 the Secretary also repeated the recommendation for earned income credit pointing out that "the elimination of the earned income credit would make possible . . . a further important simplification through the consolidation of the normal tax and the surtax into one tax schedule." This proposal was accepted by the Congress and was designed to apply to the tax declarations and returns for 1944 and subsequent years.
8. In October 1943 the Secretary also recommended as a further move to simplify the income tax that withholding be applied at graduated rates. The acceptance of this recommendation would have meant that the taxpayers' full liability on wages and salaries rather than merely their normal tax and first bracket surtax liability would have been collected at the source. This move would have relieved millions of additional taxpayers of the job of filing tax declarations and would have brought withholding more nearly into line with final liabilities.
9. In October 1943, after intensive work by research and legal specialists to simplify the short form, it was pre-tested on several hundred small taxpayers who used this type of form. As a result of this testing process, a number of changes were made to improve the form.
10. In November 1943 the integration of the Victory tax with the income tax was again urged by the Treasury during the hearings before the Senate Finance Committee. This proposal was rejected.