Proposed Statement by the Secretary on Simplification.
(Drafts, January 24, 1944)
STATEMENT ON INCOME TAX SIMPLIFICATION
Secretary of the Treasury
Henry Morgenthau, Jr.
Today fifty million taxpayers are demanding simplification of their income tax returns. They have every right to simplification. We in the Treasury recognize their right and have done everything the law allows to meet their demands.
We cannot afford to let the business of making out income tax returns needlessly consume millions of man hours desperately needed in our war effort. Some complexity was tolerable in a peacetime income tax applying to five million people. It is intolerable in a wartime income tax applying to ten times that many.
The record shows that, had the Treasury's recommendations for simplification been heeded, tax returns would be far less perplexing than the complicated forms which confront us today. Yet the complexity of these forms is being laid at the Treasury's door. Let me make clear that the Treasury cannot act as a free agent in drawing up tax returns. It acts under a law passed by Congress. Treasury proposals for changes in the law which would greatly simplify returns have fallen on deaf ears. Not until those changes are made can the Treasury accord American taxpayers the simplicity which is their right.
In 1941 the Treasury developed and Congress adopted a short income tax form to enable the growing number of small taxpayers to do their tax arithmetic more easily. At that time I pointed out that "we ought not to take into the income tax system millions of new taxpayers with small income without simplifying the way in which their tax is computed." (Senate Finance Committee Hearings, Revenue Act of 1941, page 4).
But instead of moving toward greater simplicity, we have veered off in the opposite direction. The principle of the short form has been grossly violated, first, by the highly complicated Victory tax and, second, by the forgiveness feature, both of which were strongly opposed by the Treasury. Moreover, many opportunities for simplification to which the Treasury has called attention have been ignored.
When the Victory tax was first considered in Congress, the Treasury exposed its complexities to the Senate Finance Committee and submitted alternatives which would have avoided setting up a separate tax with a separate base, separate exemptions, and separate rates. Since the enactment of the Victory tax, the Treasury again and again has advocated its integration with the income tax. Last October before the Ways and Means Committee I stressed "repeal of the Victory tax as the first and most important single step toward tax simplification." (Hearings, Revenue Revision of 1948, page 6). But the Victory tax with its devastating decimals is still with us.
In the face of the refusal to abandon the Victory tax we cast about for ways to alleviate its inexcusable complexity. We offered six alternative proposals to simplify the 1943 Victory tax. One was accepted -- converting the misnamed postwar credit into a simple current credit. By accepting it, Congress cut away the red tape of reporting War Bond purchases, insurance premiums and debt payments. Another suggestion, that the Victory tax rate for 1943 be changed to a flat 3 percent rate, was rejected at that time. However, this change is made for 1944 in the 1943 Revenue Bill.
Apart from Victory tax integration, the Treasury has made a number of other recommendations in the past two years to simplify the job of filing returns. In March 1942, we urged the repeal of the earned income credit because it complicated tax computations without substantially favoring earned income. (House Ways and Means Committee Hearings, Revenue Revision Revision 1942, page 81). I repeated this recommendation in 1943, (House Ways and Means Committee Hearings, Revenue Revision 1943, pages 6 and 7) stating 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 adopted in the 1943 Revenue Bill and will be reflected in the 1944 tax declarations and returns. But an invitation to misunderstanding remains in the form of the Victory tax. If it had been merged with the regular income tax as the Treasury proposed, we would have one tax schedule instead of the three that now stand side by side.
Last October I also recommended to the Ways and Means Committee withholding at graduated rates, as a further move to simplify the income tax. (House Ways and Means Committee Hearings, Revenue Revision 1943, page 7.) Had this recommendation been accepted, withholding would have applied to taxpayers' full liability rather than merely to their partial liability under the normal tax and the first bracket of surtax. This would have reduced the problem of year- end refunds and additional payments and, even more important, would have spared millions of wage earners the time and trouble of filing tax declarations.
The need for simplification and the precise measures the Treasury has brought forward to achieve it have been underscored by Mr. Randolph Paul, General Counsel of the Treasury, both in his statement before the Senate Finance committee last November (Senate Finance Committee Hearings, Revenue Act of 1943, pages 25-34) and in a series of public addresses. (October 15, 1943, before the Chicago Chapter of Chartered Life Underwriters; November 22, 1943, before the National Tax Association; January 7, 1944, before the Indiana State Bar Association; January 14, 1944, before the Second Annual Institute on Federal Taxation of Rhode Island State College.)
The Treasury has also submitted other simplification proposals for public consideration. One of these would extend the privilege of using the short income tax form to anyone with less than $4,000 or perhaps $5,000 of income instead of $3,000 as at present. Another would relax the present requirement relating to outside income other than salaries from $100 to higher figure, thereby relieving additional taxpayers of filing tax declarations. A third proposal would all but eliminate returns for persons whose tax is fully withheld. They would be required to submit only a few simple facts and the Treasury would do the rest.
In its drive for simplification the Treasury has not relied solely on the much maligned "experts". Field surveys have been conducted to get taxpayers' ideas and reactions. In the summer of 1942 we interviewed and enlisted the aid of some 500 employers throughout the country in developing a system of withholding. Last fall, after we had simplified the short form as much as we thought we could within the bounds of the law, we tried it out on several hundred people. They gave us a clearer picture of the trouble zones in our income tax returns. We 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.
But that is not enough. We must go further. We cannot go the whole way without the active aid of Congress.
February 12, 1944