Date June 1947
Author unknown
Title Administrative History of World War II: Division of Tax Research
Description Component of larger, interdepartmental administrative history of World War II
Location Box 29; White Paper: U.S. Fiscal Policy in World War II; Records of the Office of Tax Analysis/Division of Tax Research; General Records of the Department of the Treasury, Record Group 56; National Archives, College Park, MD.

Treasury Department

June 1947

                          Table of Contents

I. Origin and functions
     A. Establishment of the Division in 1938
     B. The Division's functions and their development

II. Research program and activities
     A. The late Thirties
     B. The defense period
          1. 1940
               a. Financing defense: the Revenue Act of 1940
               b. Excess-profits taxation: the Second Revenue
                  Act of 1940
               c. Excess-profits tax relief: the March 1941
               d. Other studies
          2. 1941
               a. The role of taxation in wartime
               b. The Revenue Act of 1941
               c. The pattern of research assistance in
                  revenue legislation
               d. Problems in shifting research to a war
     C. The early war period
          1. 1942
               a. Dual research program
               b. The Revenue Act of 1942
     D. The later war period
          1. The Current Tax Payment Act of 1943
          2. The Revenue Act of 1943
          3. The Individual Income Tax Act of 1944
     E. Postwar tax revision
          1. Early investigation of the problem
          2. Joint research program
          3. Reorientation of research program
          4. Reconversion tax program and legislation
          5. Research on basic tax revision and reduction

III. Internal organization
     A. The late Thirties
     B. The defense period
     C. The early war period
     D. The later war and early postwar periods

IV. Special problems of organization and procedure
     A. Interagency coordination of tax research activities
          1. Coordination among Treasury units
          2. Coordination between Treasury and Congressional
             tax staffs
          3. Coordination among the executive agencies
     B. The handling of economic background and fiscal policy
     C. Field work
     D. Distribution of materials prepared by the Division
          1. Pros and cons
          2. Procedure

V. Personnel
     A. Fulltime staff
          1. Professional personnel
          2. Nonprofessional personnel
     B. Use of consultants


1a   -- Organization chart.
1b   -- Organization chart dated November 25, 1943.
1c   -- Organization chart dated January 7, 1944.
1d   -- Organization chart dated July 1, 1946.
2    -- Copy of letter to the Executive Director and Chief Examiner,
        United States Civil Service Commission, Washington, D. C.
        from the Treasury Director of Personnel.
3    -- Professional Employees -- by Grades, June 30, 1941 -- June
        30, 1946.


I. Origin And Functions

A. Establishment Of The Division In 1938

The Division of Tax Research was created by Treasury Order No. 18, March 25, 1938, and it became operative as a separate division in the Office of the Secretary on June 1, 1938. Previously, tax research was one of the functions of a general research organization. In 1934, responsibility for tax research was assigned to the Division of Research and Statistics. The tax research unit within that Division grew steadily in both functions and staff from 1934 to 1938, and had been put in charge of an Assistant Director in the fall of 1936.

Treasury Order 18 split off both the tax research and monetary research functions and created separate divisions to carry them out, but provided that the service units of the parent Division were to continue to serve the new divisions. In practice, the Research and Statistics Library, its Graphic Section, and in part its Statistical Section have continued to serve the Division of Tax Research. However, it was found expedient to handle such staff functions as personnel, budget, filing, computation, and messenger services within the Division of Tax Research itself in view of their direct, day-to-day importance to the smooth functioning of the Division.

Prior to the splitting off of the tax and monetary research activities, research responsibilities in the fields of public debt, public expenditures, domestic monetary problems, international financing, and tax research were all handled within the one Division, the Division of Research and Statistics. In retrospect, one is moved to ask why it was decided to lift out the tax research function and place it in a separate unit and whether subsequent events appear to justify this decision.

Viewed in historical perspective, the setting up of a separate organization to carry on tax research was both an expression of the growing recognition of research as an essential staff service in Government and a reflection of the growing importance of intelligent and informed tax policy to the effective functioning of the American economy. In the early phases of development of research as an integral tool in the formulation of Government economic policy, it was natural that most or all of the economic research function should be thrown into one division. As the various segments of the research function began to segregate themselves from each other and to become more clear-cut, and as particular segments developed out of proportion to the others, it was natural that a process of fission should take place.

The tax research function was one of those which rose rapidly to first-rank importance in the Thirties. This fact, combined with the distinctive character of the work required to carry out the function, the distinct set of inter-agency and Congressional contacts involved in the tax work, and the existence of a body of tax data largely separate from other economic data pointed clearly toward the separate organization of this work.

The following excerpt from a statement of the Division's functions (mimeograph of July 8, 1942, submitted to the National Institute of Public Affairs), sheds further light on the basis for setting up the Division as a separate unit:

Its establishment as a separate Division was due to the necessity for working very closely with the Assistant Secretary in charge of tax matters. Much of the work of the Division must be highly expedited to meet day to day demands in conjunction with work with Congressional Committees. In the light of previous experience a separate organization with direct responsibility was found to be the only satisfactory method for meeting the requirements of the situation. The economic research done by the Division is of a specialized character and incidental to the analysis of taxes and their operation.

During the defense and war periods, when the tax research function expanded enormously, the existence of a separate organization to handle the work stood the Treasury and the Government in very good stead. The vast demands for revenue, combined with the emergence of taxation as a tool of economic policy with an independent and strategic contribution to make to the stabilization program, gave the Division of Tax Research a job of such proportions that its resources, even as expanded, were subjected to a severe strain. The prospect of a postwar Federal tax system called upon to raise several times as much revenue as it raised at its pre-war peak again underscored the wisdom of segregating the tax research from other research activities to promote a more effective performance. To have handled the diverse research functions in a single unit might have led to unwieldy organization and created a barrier to the clear-cut flow of work and responsibility.

B. The Division's Functions And Their Development

In setting up the Division of Tax Research, Treasury Order No. 18 provided:

The functions of the Division of Tax Research will include the preparation of the analyses of tax systems and tax structures, and recommendations thereon to aid the Secretary of the Treasury in the formulation and execution of taxation policies; the analysis of proposed revenue legislation; and cooperation with the Congressional Joint Committee on Internal Revenue Taxation. This Division will be responsible for the assembly and publication of all statistical information pertaining to Federal taxation, and in this connection will exercise general supervision over the work of the statistical section of the Income Tax Unit, Bureau of Internal Revenue. This Division will function under the immediate supervision of the Director of Tax Research, who will report to the Secretary through the Under Secretary.

The general pattern of the Division's activities visualized by the Order held firm in its broad outlines throughout the defense and war periods. However, the pressure of events and the more widespread recognition and use of taxation as an instrument of national economic policy clothed some of the original functions with a broader meaning and brought about some shifts in emphasis.

As foreshadowed by Treasury Order 18, the Division's functions broke into several rather distinct parts: (1) analytical and information-gathering research, (2) statistical control, and (3) certain "service" functions such as (a) providing information on request to the public, Government officials and members of Congress, (b) holding conferences with the taxpayers or their representatives on special problems, and (c) appearing before Congressional committees as requested. Over the years, the relative emphasis on these different activities has changed considerably, not necessarily in a steady trend progressively emphasizing one function and de-emphasizing another, but rather, for the most part, fluctuating according to the demands of legislative action in the tax field.

In carrying out its assigned functions, the Division found that a large part of its resources had to be devoted to short-range projects and preparation of "spot" memoranda dealing with immediate problems arising in connection with pending or imminent tax legislation. When things were quiet on the tax front, legislatively, the Division's work program tended to stress long-run, basic research on the major problems of the tax structure in peace and in war. But during periods of Congressional consideration of tax matters, the Division had to concentrate its efforts on the specific problems arising in connection with the legislative program. This meant either "mining" previous research products or hurriedly preparing new analyses or compilations to provide the data required by Administration officials and members of Congress. Preoccupation with this essentially operational research ("operational" in the sense that it was directly tied to legislative operations in the tax field) correspondingly restricted the opportunities for underlying long-range research, especially from the period 1940 through 1943 when wartime tax legislation was almost continuously under active consideration.

Also, during this period, as in other periods of Congressional activity, the number of inquiries from the public and the number of conferences requested by taxpayers increased greatly. This meant devoting a larger part of the Division's resources to correspondence and to the consideration of problems and proposals of individual taxpayers or groups of taxpayers. In addition to this periodic expansion of the work of "servicing" the public, there became noticeable over the years a trend toward taxpayers' increased reliance on the Treasury generally and the Division in particular for tax information and the appraisal of tax ideas and proposals.

As the reference and service demands on the Division grew, the question arose of what balance to strike between the research and service activities of the Division. As an agency like the Division becomes recognized as the expert agency in its field, more and more people, both within Government and without, turn to it for information and aid. Unless a proper balance is maintained between these reference functions and the underlying research function, the danger arises that too much effort will be diverted from the basic job of advancing the state of knowledge in taxation to the derivative job of answering requests on the basis of the existing stock of data and analyses. Both functions are important. Neither is useful without the other. Analytical research is needed to provide reliable answers to tax problems. At the same time, the research results are of little practical use unless they are transmitted to and utilized by interested taxpayers and policy makers.

The problem of balance among these functions was more or less automatically solved by the pressure of events during the war years. The short-range projects and service activities had a natural priority in terms of their immediate value in formulating a tax program. That these functions had to be discharged, even at the expense of a larger basic research program, seems incontestable. The relative role of long-run research could have been maintained only by enlarging the Division's staff well beyond its wartime peak. Later in the war, and after VJ-Day, as the time for winding down and recasting the Federal tax system drew nearer, it was fortunate that the pressure of legislation relented and that the function of thoroughgoing analysis of basic structural tax problems could come back into its own. The Division used this lull, as it had used others, to further its research inquiries along lines of previously indicated taxpayer, Administration, and Congressional interest and in anticipation of probable future interests.

In addition to the increased reliance on the Division for reference purposes, some change took place over the years with respect to the Division's assigned responsibility for the assembly and publication of statistics pertaining to Federal taxation. This was especially true of statistical compilation work. In its early years, for instance, the Division had certain managerial responsibilities with respect to a W.P.A. study of income tax returns. But later, the Division undertook no sweeping statistical compilations. Rather, it relied largely on the statistics gathered by the Bureau of Internal Revenue, from time to time arranging with the Bureau to make special compilations, as needed, in connection with particular research projects. For general economic statistics, the Division came to rely on data originally gathered (sometimes at its request) by other Government agencies, limiting itself to the assembly and adaptation of the pertinent data to the purposes of tax research.

Part of the Division's statistical responsibility was to exercise general supervision over the statistical work of the Income Tax Unit of the Bureau of Internal Revenue. The Division participated in planning the collection and tabulation of data from tax returns and reviewed the statistics prepared for publication by the Bureau. The nature of this function did not change materially over the years, but its content became more clearly defined as the Division and the Bureau jointly worked out the problems that arose in the field of income tax statistics.

Another change in the Division's activities -- one which is rather intangible and relates more to the frame of reference of its research than to the research function itself -- concerns the economic effects of taxation. Although the analysis of these effects had always been an essential part of the Division's program, the effects grew in significance as the tax system grew in magnitude. Moreover, the widely publicized use of taxes during the war to fight inflation and profiteering led to a broader recognition and understanding of the economic role of taxation. Consequently, analyses of postwar tax adjustments both inside and outside of the Government gave increasing weight to the impact of proposed tax changes on levels of employment, business activity, and national income. The function of tax analysis had not changed. But as the acknowledged economic role of taxes had broadened, the terms of reference within which the function was carried out had also broadened.

II. Research Program And Activities

Within a framework consisting of its assigned functions and the projects dictated by official requests or by the demands of current developments, a research agency like the Division of Tax Research faces the problem of allocating its limited resources in the most efficient and productive manner. The process of allocation requires decisions as to what subjects to investigate and, even more important, decisions as to how much time and effort to invest in each project. In making these decisions during the war, the Division's primary aim was to aid policy makers in framing Federal revenue goals, in blocking out the role which the tax system might play in serving wartime economic objectives, and in selecting the specific measures to carry out the revenue and economic objectives of the tax system.

Whether the Division's allocations were successful depends, in this conception, on how well its research anticipated and served the needs of its "public" -- primarily Administration officials and members of Congress -- in making decisions on tax policy questions. Judgments on the value of the Division's wartime research activity will rest, then, not only on the technical calibre of its research products but also on their timeliness and on the validity of the economic and political forecasts which determined their focus and served as their framework.

To the extent that the allocation of research resources to a particular project is judged by reference to its reception in Congress, one must, of course, guard against concluding that a decision not to adopt the proposal which was the subject of the research implies a bad allocation of research time. The research done may be extremely useful in reaching a negative decision, and therefore the time spent on a rejected measure can be just as well spent as the time on an accepted measure. For example, the Division's work on the sales tax proved invaluable in aiding the Congressional committees on very short notice both in 1942 and 1943. Yet, the sales tax was rejected.

Another puzzling and perhaps more basic question which has to be faced again and again in economic research in government is what weight should be given to political acceptability in selecting subjects for research and in developing recommended solutions for tax problems. If economic, equity, revenue, and administrative questions all point to a particular measure -- as was deemed to be true in the case of the spendings tax -- should the research unit, nevertheless, turn its attention to some other proposal or solution if it rates the first one low and the second one high on political acceptability?

A third point that needs to be made in this connection is that a great deal of the research, probably the great majority carried on by a division like Tax Research, is merely an implementation of policies and requests of "higher authorities" in the Administration. The amount of staff time and effort devoted to a particular subject, of course, involves the exercise of discretion at the division level and is to be judged accordingly. But the decisions to take up particular subjects, especially for major projects, are more often than not made at a higher level of authority.

A. The Late Thirties

During the first year or two of its existence, the Division of Tax Research worked primarily on peacetime, tax problems, although the problem of raising revenue to finance defense received considerable attention even in those early years.

At the outset, the subject matter of the Division's research was in considerable part of a long-run nature, concentrating on such recurring problems as that of loopholes in the Federal tax structure, Federal-State-local fiscal relations, and proposed basic revisions in some of the major Federal taxes. As has been true throughout the Division's history, the formulation of proposed programs to raise specified amounts of additional revenue was undertaken from time to time. During this period, as part of its function of statistical supervision and control, the Division was responsible for the direction of a W.P.A. study of income tax returns carried on at Philadelphia.

Illustrative of the specific studies undertaken in this period are: a report on the cosmetics tax, requested by the Ways and Means Committee; a study of the taxes paid by the shipping industry; several studies on tax-exempt securities; an analysis of conflicting taxation; a review of the TNEC studies on corporation taxes; and various reports on problems pertaining to individual income, corporate income, and estate tax inclusions, exclusions, deductions, exemptions, and credits.

In 1939, especially after war broke out in Europe, the emphasis of the Division's research studies began to shift toward defense and war finance problems. It was clear that additional revenue would be needed to finance the growing defense expenditures and that prevention of war profiteering might soon become an objective of Federal taxation. Preparatory studies in 1939 included an examination of Federal taxes enacted during the First World War as well as of wartime taxes in Canada and Great Britain. Alternative methods of raising additional tax revenues ($500 million and $1 billion were taken as goals) were analyzed during 1938 and 1939. Studies of war profits and excess-profits taxation were begun in the latter part of 1939, and a comprehensive program for research in this field was laid out early in 1940.

A significant development which expressed itself in the Division's research program in the late Thirties was the growing interest in the impact of taxes on the national economy. That taxes had economic effects was no new discovery. But the economic distress of the Thirties, the gradually mounting burden of taxes, and the emergence and development of "fiscal policy" as a tool of economic policy led to a greater interest in the relation of particular tax measures and taxes in the aggregate to the health and stability of the economy. In evaluating proposed tax changes, the Division continued to give full weight to their revenue and equity implications and to their administrative and taxpayer compliance aspects. But at the same time, increasing attention was given to the question of whether the changes would act as a depressant or a stimulant on the economy and whether they would strengthen or offset tendencies toward economic instability. Moreover, exploratory studies were undertaken of the influence of taxes generally on national income and business activity and of their effects on taxpayers' incentives to save, to invest, and to work.

This increasing emphasis on economic effects was also reflected in the Secretary's statements before Congress. For example, in appearing before the Ways and Means Committee in 1939, he noted that tax exemption of governmental securities "operates as a magnet which pulls persons subject to high income tax away from investments in private business." In the same year, he suggested to the Ways and Means Committee that the absence of a carry-over of net business losses discriminated against businesses with fluctuating earnings. The Secretary also stated to the Ways and Means Committee that, while a balanced budget is "a fundamental objective of sound finance," "there are periods during which sound fiscal policy calls for an excess of outgo over income, and others when it calls for an excess of income over outgo." During the war, this emphasis on taxes as an instrument of economic policy was to be sharply intensified and was to play a major role in determining the course of tax research activities.

B. The Defense Period

1. 1940

During 1940, the stepping up of the defense program shifted the emphasis of the Division's research studies even more extensively toward defense and war finance. It was clear that additional revenues would be needed to finance the growing preparedness effort, though there was as yet little appreciation of the implications of financing a total war. Revenue objectives held the spotlight at first, but the prevention of profiteering and the establishment of a favorable tax environment for defense production rapidly came to the fore as the magnitude of the defense and war effort became to make itself apparent.

The course of revenue legislation in 1940, which saw the enactment of two revenue measures, illustrated this pattern of development. The first act, The Revenue Act of 1940 (which became law June 25, 1940) was intended to promote and finance national preparedness, and hence concerned itself principally with the raising of revenue. The second measure, the Second Revenue Act of 1940 (which became law October 8, 1940), grew out of a determination to take the profits out of war, and hence dealt almost exclusively with profits taxation.

a. Financing Defense: The Revenue Act Of 1940

Preparatory to consideration of the earlier of the two acts, the Division formulated alternative plans to raise added revenues approximating the $500 million called for in the President's Budget Message of January 1940. The possibilities of increasing liabilities under the various types of taxes were examined. Alternative methods of effecting increases were considered in each case, e.g., raising rates, lowering exemptions, imposing so-called super taxes consisting of flat percentages of the prior liability, and so forth. By the time the measure was introduced, the revenue goal had risen to between $600 million and $700 million annually -- enough to pay off in five years $3 billion of national defense obligations. After a Presidential request for additional appropriations and Congressional agreement to raise the debt limit by $4 billion instead of $3 billion, the goal was again revised upward to an annual $1 billion. The Division's research studies were correspondingly modified in anticipation of the repeatedly higher figures, and earlier Division studies which had postulated these sums were used to good advantage. The act went through the Congress in less than a month and embodied a program of super-taxes formulated jointly by the Administration and Congress and endorsed by the Treasury at each successive legislative stage.

b. Excess-Profits Taxation; The Second Revenue Act Of 1940

Speedy passage of the first 1940 act was facilitated by a general agreement to rule out of consideration tax measures to prevent war profiteering and to remove tax obstacles to all-out defense production. At the same time, Congressional leaders gave assurances that legislation for taxing war profits would be made a first order of business at the next session of Congress. In June 1940 both the House Ways and Means Committee and the Conference Committee on the first revenue act declared themselves in favor of early enactment of an excess-profits tax, retroactive to 1940, and instructed the Treasury to prepare definite recommendations to this end. The President's Message of June 1, 1940 calling for "the enactment of a steeply graduated excess-profits tax" gave further impetus to the studies of excess-profits taxation. When the Congress undertook actively to consider excess-profits tax legislation in the summer and early fall of 1940, studies of both the principles and the major technical problems involved were available for their use.

An interesting sidelight on the excess-profits tax studies prepared by the Division concerns the analysis of World War I experience with excess-profits taxation and of the proposals submitted to Congress during the inter-war period. In this case at least, previous experience did not prove to be very instructive in meeting current problems. The economic setting had changed so sharply and the body of tax knowledge had developed so substantially during the intervening years that, at most, the previous experience would no more than indicate some of the technical problems that had to be faced and some of the pitfalls that had to be avoided. It provided few positive answers to concrete questions.

As passed, the Second Revenue Act of 1940 provided for a tax on corporate profits in excess of a credit based either on invested capital or on average earnings during the 1936-1939 base period, whichever resulted in the larger credit. Such excess profits were taxed at rates graduated from 25 to 50 percent (subsequently increased to a flat rate of 90 percent in the 1942 act and 95 percent in the 1943 act, with provision for a postwar credit equal to 10 percent of the gross tax). The act also increased the normal tax on corporations to 24 percent. In addition, the act provided for special amortization of defense facilities as a means of encouraging producers to expand their plant for war production purposes. The annual addition to Federal revenues effected by this act was estimated to be about $400 million, the greater part of which would come from the increase in the corporate normal tax.

c. Excess-Profits Tax Relief: The March 1941 Amendments

The enactment of the excess-profits tax in October accelerated rather than terminated the Division's research program in this field. In the Committee of Conference on the Second Revenue Bill of 1940, the managers on the part of the House had made the following statement with respect to further action regarding excess-profits tax relief: "It is understood that the Treasury and members of the Staff of the Joint Committee on Internal Revenue Taxation will give further study to the entire problem covered by this section and will report to the appropriate committees on the subject as soon as possible." /1/

Pursuant to these instructions, the Division of Tax Research made further studies as a basis for amendatory legislation. These studies were concerned primarily with (1) the provision of relief in special situations involving abnormalities of income and capital and (2) the special problems of avoiding the taxation of profits which were not truly excessive through the use of such devices as the carryforward and carryback of net losses and unused excess-profits credits. A technical bill incorporating the proposals worked out by the Treasury and Joint Committee staffs was introduced in late February 1941 and became law March 7, 1941. The amendments made by this act comprised a series of special and general profits tax-reliefs and became effective as if they had been incorporated into the Second Revenue Act of 1940. It was estimated that these reliefs would reduce the revenues under the Second Revenue Act of 1940 by about $100 million annually.

In addition to examining the problems of income and capital abnormalities and devising appropriate relief provisions, the Division continued its research in the basic problems of the excess-profits tax structure and rates. The issues of a graduated versus a flat rate, of a high versus a moderate rate, and of rate ceilings versus refunds and credits as methods of protecting taxpayer incentives were among those examined with a view to possible further Congressional action on these matters. To aid in developing solutions to these problems which would carry out the objective of preventing excessive profits and yet be fair to the taxed corporations, protect incentives, and still be capable of administration and compliance without undue difficulty was a task which called for the investment of a considerable part of the Division's resources, especially during the defense and early war periods.

d. Other Studies

Although greatly increased attention was given in 1940 to problems of stepping up tax revenues to finance defense and developing a workable excess-profits tax, a considerable part of Division's research program was still given over to projects initiated during the preceding period of peacetime operations. For example, the Division studied the tax treatment of life insurance companies (at the request of the TNEC); the tax treatment of mutual investment companies; the operation of section 101 of the Internal Revenue Code, pertaining to tax-exempt corporations; the problem of tax avoidance through ownership of tax-exempt securities; taxes on building and loan associations; types of inequities in the tax system and their revenue significance; and the course of Federal tax rates and changes from 1913 to 1940.

2. 1941

As the likelihood grew that the United States would be drawn into the war, the magnitude of the country's defense program and the problems of financing it grew apace. By the same token, the responsibilities of the Division of Tax Research expanded rapidly. In his January 1940 Budget Message, the President had called for $460 million annually of additional revenues. Upward revisions brought the figure to $1 billion before mid-year, and the Revenue Act of 1940 as passed met this goal. Less than a year later, $3.5 billion of added annual revenue was agreed upon as the target and realized in the Revenue Act of 1941. The mounting pressure for revenue finally burst all previously known bounds after Pearl Harbor, when the President's "impossible" goals, expressed in his January 1942 Budget Message, called for a jump in Federal expenditures from $31 billion in fiscal year 1942 to $59 billion during the fiscal year 1943, to be financed in part by the raising of $7 billion of additional annual tax revenue. Even these unbelievably high goals were soon revised upward. Fiscal year 1943 expenditures were estimated at $85 billion by the fall of 1942, and the Treasury with Presidential approval recommended tax increases to yield $15 billion of added revenue.

a. The Role Of Taxation In Wartime

Thus, the tax system was in the process of conversion to a total war footing. It was becoming an instrument for raising enormous and unprecedented amounts of revenue. But more than that, an economy which was girding itself for war had to face the prospect of inflation and the necessity of the Government intervening as referee between the demands of the civilian economy and the war economy. Taxes were quickly recognized as one of the important tools in the Government's program of defense and wartime stabilization. In broad outlines, though not yet in intensity, the patterns and problems of war finance were already taking shape in 1941.

As tax rates skyrocketed and as the number of taxpayers increased by leaps and bounds, the traditional objectives of fairness and simplicity in taxation became harder than ever to achieve. Avoidance became more costly, hardship more painful, and the prevention of both more urgent. In this respect, the problems of wartime tax research were merely an intensification of peacetime problems.

But in other respects, the problems were war-born. Taxation was called upon to play a major role in restricting war profiteering and curbing inflation. Taxes came to be relied upon to remove billions of dollars of excess civilian spending power and thus to buttress the economic stabilization program. Steep taxes were to help make civilian demand more controllable and to case the strain imposed on the direct controls relating to priorities, wages, and prices. Taxes on excessive profits, combined with high taxes on high individual incomes, became a means of not only pouring funds into the Nation's war coffers but also of limiting the financial gains from war and of helping to promote acceptance of the many direct controls necessary in wartime. Wartime tax policy was thus formulated, not merely in terms of gigantic revenues but as an integral part of a wartime economic policy designed to promote the maximum war effort without encroaching upon minimum living standards.

The shift of taxes and tax policy to a war footing during 1941 was reflected both in the Division's research program and in the revenue legislation which was enacted during that year. The specific subjects taken up as well as the objectives emphasized in the research and legislative processes became more and more oriented to a wartime setting.

The major projects on which the Division concentrated its efforts in 1941 illustrate clearly the new orientation: (1) possible revisions of corporate and individual income taxes, estate and gift taxes, liquor taxes and other excises to raise additional annual revenues of varying amounts (1/2 to $1 billion being taken as goals earlier in the year and much higher amounts later in the year -- by April the official goal was already $3.6 billion); (2) various excess-profits tax problems, including carryovers of excess-profits tax credits, special excess-profits tax provisions to spur the production of strategic minerals, numerous other relief provisions, and problems that would be involved in a 100 percent profits tax; (3) excise taxes on certain luxury items and durable consumers' goods, with particular emphasis on revenue yields and on discouraging the consumption of such items where they were competing with the war effort; (4) collection-at-source of taxes on wages, salaries, interest and dividends, with special emphasis on speeding the withdrawal of excess purchasing power by withholding taxes currently from income; (5) methods of prepayment of income taxes; (6) the use of value-added taxes or other forms of sales taxes as a wartime revenue and anti-inflation measure; and (7) the impact of the defense program on State and local taxes and revenues.

b. The Revenue Act Of 1941

A number of these studies were aimed directly at assisting the Administration and Congress in formulating a revenue program for 1941. The announced goal of this program was $3.5 billion of additional revenue, a figure which was agreed upon by Administration and Congressional leaders in response to the rapidly mounting war expenditures and the growing threat of inflation. The hearings on this act opened in April, and the bill was signed September 20. The Treasury submitted specific tax proposals under which about 70 percent of the added tax yields would have come from income and excess-profits taxes and about 30 percent from excises. It opposed a general sales tax and recommended that the average-earnings method of measuring excess profits be dropped and that the invested capital method be made the sole standard. The Treasury also recommended lowered exemptions and increased rates for the estate tax. During the summer, it added to its recommendations the removal of certain special privileges in the tax laws and a lowering of individual income tax exemptions, together with the introduction of a simplified tax return for small income recipients.

Although the bill as enacted hit the $3.5 billion revenue mark, it did not follow Treasury recommendations on enlargement of the estate and gift tax base, on abandonment of the average-earnings method, and on the removal of certain special privileges and loopholes. However, individual surtaxes were increased, exemptions were decreased, the corporate surtax was imposed, and the excess-profits tax was strengthened.

c. The Pattern Of Research Assistance In Revenue Legislation

Until the 1942 bill became law, the Division of Tax Research concentrated its major efforts on those subjects which were under active Congressional consideration. Moreover, it provided direct technical assistance to Treasury officials and the Congressional committees in a pattern which was repeated in the Revenue Acts of 1942, 1943, and 1945 and with some modifications, in the Current Tax Payment Act of 1943, the Individual Income Tax Act of 1944, and the Tax Adjustment Act of 1945. It took part in the drafting of programs and statements for presentation to Congress and then assisted, as called upon, in the official Treasury presentations which customarily opened the public hearings before the Congressional tax committees. Hearings were followed to appraise trends of taxpayers' thinking on Federal taxes and to be on the lookout for ideas and suggestions which might be worthy of investigation. After the close of public hearings, Treasury representatives were commonly asked to attend the committees' executive sessions to render technical advice and to state Treasury views where these were sought.

The executive sessions, generally attended by the Division's Director and an Assistant Director, generated a great deal of "spot" research. Questions constantly arose about various technical aspects of the law, about previous practice and experience in foreign countries, and especially about the burden and equity effects of various proposed changes in the law. Some of the questions were anticipated, and the answers were immediately available. Others required quick marshaling of forces, rapid computations, and night work to have the answers ready for the morning sessions of the committees. Still other questions which were anticipated never arose, and parts of the stockpile of brief analyses and statistical tables never had occasion to leave their pigeonholes in the Division's archives.

Had the staff been able to expand and contract on short notice, accordion-like, in response to legislative and other pressures, less work would have gone into building a stockpile, since more work could have been turned out currently as specific demands developed. But the Division had to rely on stockpiles, overtime, and temporary neglect of longer-run projects to meet its peak loads. This process was bound to involve some wastage of effort.

d. Problems In Shifting Research To A War Footing

Although the 1941 act had all the earmarks of a wartime revenue measure, and the focus of tax research activities had largely shifted to defense and war problems, the eventual magnitude of the war effort and the enormous potentiality of the tax system were not fully foreseen during the defense period. In fact, magnitudes as translated into revenue goals were constantly growing. The revenue objectives set in the President's Budget Messages in early 1941 and 1942 undershot the mark and had to be revised upward repeatedly. Especially in reference to the 1942 act, the initial goals proved much too modest, and the later revisions, as the war budget matured, caused constant recasting of revenue programs and recommendations. Again, there was some lost or partially misapplied effort, in this case largely growing out of imperfections in economic and military forecasting. America's productive potentiality and the speed with which it could be brought into full play far outstripped all the expectations of the forecasters.

The inability to foresee the gigantic magnitudes of the war effort may be illustrated by one example from the tax field: Early in 1942, a calculation was made showing that the United States individual income tax would yield in the neighborhood of $16 billion if levied at the rates and exemptions then prevailing in the British income tax law. At the time, with individual income taxes on 1941 incomes yielding about $4 billion in 1942, this seemed an utterly unattainable goal in the United States. Yet by 1944, by a combination of steep increases in rates (even though not as steep as the Treasury had recommended), decreases in exemptions, and a great rise in national income, the Federal individual income tax produced $17 billion of revenue.

The overwhelming pressures of war did not blot out all semblance of peacetime activity in tax research, partly because war merely adds new problems rather than replacing the old, or peacetime problems of taxation, and partly because many of the wartime problems are merely intensified peacetime problems. For example, research projects on such major income tax loopholes as the tax exemption of State and local bond interest, the community-property privileges in eight States, and the generous percentage-depletion provisions found themselves on the Division's docket in the Thirties and again in the Forties. The problems were the same in kind, though they had become more serious in degree. Treasury work on these problems led to recommendations to Congress in 1941 and again in 1942, but no legislative action resulted.

Although many of the subjects of wartime tax research were similar to those of the pre-war period, the priorities on various projects were radically changed by the advent of war, and many which were pressing for attention in peacetime had to be postponed in wartime. In part, this process of selection was an unconscious response to the fiscal demands of war, which crowded out a portion of the peacetime studies. In part, however, it was a conscious process of tabling studies concerned principally with long-rum structural improvements or with minor inequities or loopholes in the tax system.