Persons of small means with income from such sources as business profits, professional fees, and farm incomes, could be put on a pay- as-you-go basis by the following steps:

FIRST. Every three months they would file a simple statement of their best estimate of net income from sources not subject to collection at source.

SECOND. On the basis of such income less prorated exemptions, they would pay a tentative tax each quarter at the basic-liability rate used in collecting taxes at source.

THIRD. After the close of the year, they would report actual income, compute the actual liability, and make the necessary adjustment,


If current collection at the basic-liability rate were adopted, only a small minority of taxpayers world not become current with respect to the greater part of their liabilities. Of the 44 million taxpayers estimated for 1943, only 4 million would have surtax net incomes in excess of $2,000, that is, in excess of the first surtax bracket. To provide complete current collection for this group in the higher income brackets presents obvious difficulties because of the graduation of the tax rates depending on the amount of income received.

Fortunately this is also the group for whom full current collection is least essential. Most of these taxpayers have been accustomed to paying taxes for many years, and they have the resources and in general the expenditure habits suitable to an advance accumulation of tax funds. If their income stops suddenly, they would generally still be in a position to meet their tax liabilities over and above the currently paid basic liability. Moreover, most of this group of higher bracket taxpayers would become substantially current if the methods previously described for collecting currently the normal tax and minimum surtax were put into operation. It should be observed that such current collection methods world apply to all of the income of the taxpayer regardless of the surtax bracket in which it feel. Thus a married couple with no dependents and a net income of $5,000 would at a 19 percent basic liability rate, pay currently $692 of a $746 total liability or 93%; a married couple with no dependents and a net income of $10,000 would pay currently 1,612 out of a $2,152 total liability, of 75 percent.

Continuing the present method of collecting liabilities in excess of the normal tax and surtax at the first bracket rate would, as previously mentioned, leave not fully current only 10 per cent of the taxpayers of these nine-tenths would have more than three- quarters of their total liability currently paid. For only one taxpayer in a hundred would the tax liability not paid currently amount to more than one quarter of his total liability.

Full current payment with only minor adjustments after the end of the year could be devised for all taxpayers if this were desired. To accomplish this the current quarterly payments previously discussed would be enlarged to include not only the basic liability, but also liability in the higher surtax brackets. Each quarterly payment could be, based either on an estimate of income for the year or on an estimate of income for the quarter, in either case with appropriate adjustments during and after the year.



Two distinct problems are involved in putting the income tax, on a pay-as-you-go basis -- first, the method of current payment that is best for steady year-in year-out use; and second, how to shift to that method. So far, I have been discussing the first problem. I should like now to turn to the second problem -- that of transition.

A transition problem arises because if we start collecting this year the tax on this year's income without any other action, taxpayers will be obliged to meet in a single year both the tax on last year's income and the tax on this year's income. To the extent that we go on a current basis in 1943, taxpayers will be paying in 1943 their liabilities on 1943 income while still owing their 1942 liabilities. If they are required to pay both year's liabilities this year, there will clearly be a doubling up of tax payments. The extent of the doubling-up depends on the amount collected currently. For example, if current collection applies to normal tax and the surtax at the first bracket rate, there is doubling-up with respect to this part of the tax, but there is no doubling-up with respect to the higher surtax rates. If current collection applies to the entire tax, there is doubling-up with respect to one year's whole tax.


One method of achieving transition is to forgive part or all of a year's tax liabilities. A second method is to require individuals to continue to pay their 1942 taxes as at present, and at the same time begin current collection of 1943 taxes. A third method is to postpone part or all of a year's liabilities, permitting the postponed amounts to be amortized over a period longer than a year.


A method of achieving transition that has been widely discussed is to forgive a year's liability. The overlapping of two year tax liabilities can be completely eliminated only through forgiveness. The amount of forgiveness would be geared to the degree of current collection achieved. If current collection were to apply to the total liability, the complete elimination of over-lapping would require the forgiveness of the whole of a year's tax. If current collection were to apply to the basic liability -- the normal tax and the surtax at the first bracket rate - the complete elimination of over-lapping would require the forgiveness of a year's basic liability, but not of the rest of the tax.

Considerable confusion has arisen in the course of the widespread discussion of proposals to forgive a year's taxes as a means of shifting to current collection. The main points need clarification (1) the effect of forgiveness in Federal revenues; and (2) its effect en the economic position of individuals.


The tax liability of the taxpayer is an asset of the Government although it is not counted as such in the general accounts of the Government. Forgiving a year's tax would wipe out assets of this kind amounting to close to $10 billion -- the estimated amount of individual tax liabilities on 1942 income. The Government by forgiving a year's tax liabilities would be discarding assets as a business would that canceled its accounts, receivable from customers. Such a business night be able to maintain its receipts by going on a cash sales basis. Yet no one would say that the business had not lost assets to the extent of the accounts canceled. The Government differs from the business, in that it has the power to make up the legs by compelling quicker collections and by imposing additional taxes en the same or other people. Through the resulting partial redistribution of the tax burden the cash receipts of the Treasury could be maintained even though the tax liability was forgiven.

Accordingly it Is net correct to assume that the forgiveness of a year's tax liability combined with corresponding current income tax collection would reduce the cash flow into the Treasury. The effect on the amount of money taken into the United States Treasury resulting from placing the income tax on a current basis and forgiving a year's taxes can not be determined except by comparing this treatment with some alternative. If the comparison is with the present payment method at existing rates, the cancellation of 1942 liabilities combined with current collection of subsequent liabilities need not involve either an increase or decrease in the amount of money taken into the Treasury in any given span of years. Each individual subject to taxation in 1942 has one year' liability canceled, but he is at the same time required to pay another year's liability sooner than he otherwise would. Individuals who were not taxpayers in 1942, but who become taxpayers subsequently, will be obliged to pay their liabilities one year sooner than under existing law. Individuals who die, or who cease receiving an income, pay the Government one year's less taxes, but by and large the money loss on their account is offset by the gain from new taxpayers who begin paying their taxes a year earlier.

The net result in money paid to the Government depends on whether the payments dropped out exceed or fall short of the payments added in the same year. The payments dropped out will be spread over a period of years. If any given year is a year of higher national income than the war boom year of 1942, the actual receipts of the Government for that span of years would be increased by the change. If it is a year of lower national income, governmental receipts would be decreased by the change.


Since the cash receipts of the Treasury could be maintained even though the tax liability was forgiven, the effect of wiping out an income tax asset through forgiveness can be more readily visualized and measured in terms of its relative effect on the different groups in the community who will be called upon to maintain the flow of revenue. The fact that the Government may take in as much money in a fiscal year, despite the forgiveness of a year's tax liabilities, reflects larger payments by some taxpayers, offsetting smaller payments by others. The taxpayers who pay less are those whose incomes have declined or ceased. The taxpayers who pay more are those whose incomes have increased so that they become taxable for the first time or those who have to pay a larger amount of tax sooner than they otherwise would. The forgiveness of 1942 liabilities thus affects tax payments in different years for different taxpayers. So long as an individual's income is stable, forgiveness combined with corresponding current collection will not immediately affect his tax PAYMENTS. However, if he has accumulated liquid funds or has purchased tax anticipation notes to discharge his tax liabilities, these will be available to him for other uses. And, in any event, he will ultimately escape the payment of a year's income tax when he dies or his income ceases.

While the effect of forgiveness on tax PAYMENTS is not felt until the individual dies or until his income declines or ceases, cancellations has a significant immediate effect on his economic status. The amount of taxes cancelled represents an immediate addition to the individual's not wealth. This addition, which depends on the income of the individual in the year for which taxes are cancelled, varies widely from individual to individual. If an individual had no income in that year, and was not subject to tax, his economic position would not be improved. If a married person without dependents had an income of $3,000, and the entire tax was cancelled, he would gain $32. If he had an income of $1,000,000, he would gain $854.00.

The existence of an immediate gain has been denied on the ground that tax payments continue. The fact is, however, that throughout the history of the income tax, our taxes have been computed on a liability basis; that is, we have taxes for the year 1942, for the year 1943, and so forth, measured by the incomes of those years. The tax liability for each year depends on the income of that year and the rates applicable to that year. Under standard accounting practice they must be accrued for that year. A shift to the current collection basis wiping out a year's liability, adds that much to the wealth of each person by diminishing, his liability. The result is a real gain to the taxpayer.

One way to judge the effect of forgiving the 1942 tax liability is in terms of the increases in tax liability which have been imposed to finance the war and which have given rise to the need to shift to a current collection system. This is shown in the attached Table 3, where it appears that the complete forgiveness of the 1942 tax liability would, in these terms, benefit persons with large incomes relatively more than persons with small incomes. A married person with no dependents having a net income of $2,000 owes $146 tax for 1942, or 7 percent of his income; with a $10,000 net income, he owes $2,152, or 22 percent of his net income; with a net income of $100,000 he owes $64,000, or 64 percent of his net income; with a net income of $1,000,000 he owes $854,000, or 85 percent of his net income.

The increase in income taxes for the 3-year period 1940-42 amounts to $182 for a married person with no dependents and a net income of $2,000. The amount that would be forgiven this individual is $140, or 77 percent of the increase for the three years. At the $100,000 level, the amount forgiven equals 102 percent of the increase `in taxes and at the $1,000,000 level, 320 percent. For an individual with a $1,000,000 income in each of the five years 1938- 1942 the reduction in tax liabilities resulting from complete forgiveness would. more than offset al1 tax increases enacted since 1935.

These results follow, of course, from the nature of the tax increases that have been imposed to finance the war. These increases have had to come primarily from the low and middle income groups. The rates on the under surtax brackets could not be increased correspondingly. At the same time, the amount of tax forgiven is greatest for the highest income groups. In consequence, the forgiveness of 1942 taxes, urged as a means of adjusting payment methods to war-time tax rates would benefit most just those groups who have been called upon to make the smallest relative addition to their tax payments to finance the war.

The attached Table 4 shows the effect of cancellation on the individual's economic status in another way The amount available to an individual each year to use for consumption or to add to his wealth is the income he has left after taxes. Table 4 shows the amount of tax forgiven as a percentage of the income left after taxes. For the individual with $2,000 income the forgiven tax represents only about 7-1/2 percent of a year's income after taxes -- or the equivalent of less than one month's income for the individual with $1,000,000 income the forgiven tax represents almost 600 percent of a year's income after taxes. The forgiveness of a year's taxes enables him to add to his wealth at one stroke as much as he could add in nearly 6 years by saving every dollar he had left after paying taxes and spending nothing, and as much as he could add in 12 years by saving half of what he had left after paying taxes.

It has been urged that the gain from forgiveness is offset by the resulting increase in estate tax when the individual dies. But the gain would be subject to the estate tab only if it is not spent or given away in the meantime, and if the estate is sufficiently large to be taxable under the liberal estate tax exemptions. And even if subject to the estate tax, the offset is only partial, reaching 50 percent or more only for net estates in excess of $2,500,000. A special estate tax could, of course, be devised to recapture a larger part of the forgiven amount if it were not spent or given away in the meantime. These loopholes, too, could be closed by still other special taxes. But any of these devices, for recapturing, to the extent that they are effective, amount simply to not forgiving as much in the first place.


A second method of achieving transition is to require individuals to pay their 1942 taxes at the same time they are paying their 1943 taxes. The ability of particular taxpayers to pay two years' tax liability in one year would vary widely. Those who had accrued their taxes during 1942 and saved to pay them could pay the two years' taxes in 1943 with no difficulty whatever. Others, who had not accrued or saved especially to meet taxes but who had other credit or accumulated liquid savings could also meet the two years' liability in 1943 without undue hardship. Still other taxpayers, the amounts of whose income subject to tax were small, and whose taxes were small, might be able to meet the two years' taxes out of 1943 income without substantial difficulty.

There would be, however, numerous taxpayers who failed to accumulate tax reserves in 1942, and who counted on paying 1942 taxes out of 1943 income. For many of these the rates of tax would be so high and financial circumstances so pressing that the payment of two years' taxes in one year would be a severe hardship, if not an impossibility, Accordingly, a policy of paying 1942 and 1943 taxes all in 1943 would undoubtedly need to be moderated in view of the substantial hardship it would cause.

In this connection it should be noted that the President, in his Budget Message, asked that collections for the fiscal, year 1944 be increased by 16 billion dollars. Practically all of this $1.6 billion increase in collections will have to be derived for individuals in the final analysis, whatever forms the levies may take. Revenue measures to meet the president's request would take from individuals in the fiscal year 1944 an additional amour larger than the total expected 1943 income taxes at present rates. Clearly, carrying the Presidents' Budget Message into effect will mean partial or complete doubling of payments for individual taxpayers generally. Of course, the doubling would not fall on the same taxpayers in the same proportions, as would result from collecting 1942 income taxes in 1943.

Under these circumstances, shifting to a current collection system and at the same time requiring that individuals continue to pay their liabilities on 1942 income is one way of raising some of the additional revenue we need. The extra burden involved in paying part or all of 1942 tax liabilities must not be compared with no burden at all. The correct comparison is between that burden and the burden of other methods of raising the same amount of additional revenue. Accordingly, the simultaneous collection of 1942 and 1943 taxes should not be compared with complete forgiveness and no change in tax rates; but with complete forgiveness combined with a rise in tax rates. Otherwise, the comparison is simply between more taxes and less taxes.


In view of the hardships for some individuals involved in the simultaneous collection of 1942 and 1943 taxes, it may be desirable to postpone or defer the payment of part of the 1942 liabilities. One method of collecting the postponed tax would be simply to require the taxpayer to pay the postponed tax at his discretion within a certain number of years, say before March 15, 1945. A second method would be to divide the postponed tax into fixed installments that, the taxpayer would have to meet. A third method would be to increase the rate of current collection, whether at source or by quarterly payments, and treat the additional amount collected as an offset to the postponed liabilities, with appropriate provision for persons not having any 1942 liabilities.

I should like to repeat that the method of transition must be determined in the light of the revenue problem of the Federal government, to which I have previously referred. Very great increases in Government revenue are going to be required in the coming years. It seems more equitable to collect at least to a substantial degree the tax liabilities which have been imposed by past legislation than to forgive a year's liability and, raise the additional revenue by increases in rates. The method of rate increases, combined with cancellation, would largely free higher incomes from a year's taxes while imposing the additional burden more heavily on the low income groups, since it is at this level that the income tax is capable of further expansion.

Furthermore, in view of our revenue needs, the forgiveness of a year's tax liability might be generally misconstrued as an indication that tax burdens could be made lighter instead of being made heavier. Indeed, there is considerable evidence that even the recent discussion of tax forgiveness have confused and demoralized the public and caused them to doubt whether they will really have to bear tax burdens as high as those imposed by the Revenue Act of 1942.