A special study which very aptly illustrates the competing pressures on the Treasury for long-run and for immediate wartime research projects was the study of intergovernmental fiscal relations undertaken by a special committee appointed by Secretary Morgenthau in June 1941. For years, various Federal officials, including the President himself, had urged Congress to set up a comprehensive study of the Federal-State-local fiscal relationship. It was finally decided to set up such a study by administrative action, with the understanding that the results, independently arrived at by leading students of the subject outside of the Government (though utilizing office space, Tax Research data, and other Treasury facilities), would be reported to the Treasury Department. The Secretary therefore appointed the three-man Committee on Intergovernmental Fiscal Relations to study and report on the problem, utilizing research funds and staff provided jointly from private and public sources. A large-scale study was visualized with a substantial staff which could analyze all major aspects of the coordination problem.

The study was actively carried on from the summer of 1941 through the summer of 1942, but on a more modest scale than originally intended. Instead of a staff of perhaps fifteen or twenty, a director carried on the bulk of the work with four or five assistants. Other personnel originally intended for assignment to the coordination study was diverted to the pressing problems of war finance. The study was pushed to a conclusion, and despite its limited scale in comparison with original plans, resulted in a more thorough-going survey of the problems than had theretofore been conducted in the United States. However, in terms of adopting or rejecting the studies' recommendations, action had to be tabled until after the war.

C. The Early War Period

1. 1942

With the declaration of war in late 1941, and the announcement a month later of the President's 1943 budget and steeply mounting Federal expenditures which were soon to hit the $100-billion mark, the pressures for now and increased sources of revenue became even more intense. It was obvious too that, operating under the forced draft of huge Governmental expenditures, the economy would be exposed to greatly magnified forces of instability, especially as to prices. It was clear that taxation still had an enormous job ahead of it.

a. Dual Research Program

Under these circumstances, the Division of Tax Research had to focus its research on a system of taxes which would on one hand raise huge amounts of revenue and have strong anti-inflation and anti-profiteering effects and would on the other hand serve the interests of equity by taxing according to ability and by avoiding unnecessary hardship. This confronted the Division with the difficult problem of allocating its research resources between broad-gauged studies aimed at maximizing the Nation's fiscal war effort and narrow-gauged studies aimed at tightening the tax laws to plug costly and inequitable loopholes and easing the law to protect taxpayers in special circumstances from unduly severe burdens. The major items of research on which the Division concentrated its efforts in 1942 illustrate this divided emphasis.

On the one hand, it undertook a series of more or less "global" studies dealing with the war tax problem in the aggregate or with large segments of it. Studies designed to implement the broad-scale attack on war finance problems related to (1) the inflationary gap, i.e., the gap between consumers' disposable income and the available supply of civilian goods and services, and the role of taxes in closing the gap (an analysis which was handled cooperatively with the O.P.A. and other Government agencies vitally concerned with the stabilization program); (2) compulsory savings, compulsory loans, expenditure rationing and spendings taxes as means of stimulating savings and discouraging spendings and thus supporting the anti-inflation program; (3) proposals to tax increases in individual income as a supplementary means of curbing individual profiteering from the war effort; (4) sales and excise taxes as instruments of war finance, with special emphasis on their discouragement of spending, their revenue prospects, and their possible interference with price controls; (5) various incentive taxes designed to serve such purposes as the encouragement of defense and war bond sales or the prevention of a postwar depression; and (6) alternative methods of raising huge amounts of revenue from the Federal tax structure as a whole. Plans to raise ten, sixteen, twenty, and twenty-five billion dollars annually in additional taxes were drafted in order to expose the problems involved in gearing the tax system up to those levels and in order to have plans ready for consideration by the Administration and the Congress in the process of over-all policy formulation.

Side by side with the global studies, it was found advisable to conduct research on such ancillary problems as (1) the percentage-depletion, tax-exempt security, and community-property loopholes; (2) special deductions for extraordinary medical expenses and for working wives; (3) a whole host of "hardship cases" under the then current and prospective individual income tax rates as well as under the corporate income and excess-profits taxes; (4) a revision of the inventory valuation provisions for tax purposes, with special emphasis on the last-in first-out method; (5) various postwar reserves and credits designed to permit greater flexibility in the wartime use of income taxes by providing for refunds after the war; (6) collection-at-source and current payment as means of making income tax payment more convenient for the millions of new taxpayers being brought into the tax system under wartime decreases in personal exemptions; (7) broadening credits for dependents, especially those still in school; (8) special relief for individuals with fixed commitments like insurance, mortgages, etc.; (9) carryforward and carryback of net business losses and unused excess-profits credits of corporations; and (10) possibilities of applying special taxes to profits from sales of agricultural real estate.

b. The Revenue Act Of 1942

The Revenue Act of 1942, which was under consideration from March 3 until final passage on October 21, provided the largest Federal tax increases in history and at the same time enacted a host of administrative and technical changes designed to correct and prevent tax inequities. Under its stimulus, the Division's research activities reached an all-time peak of intensity, and the Division's staff was expanded to its maximum size of over fifty employees. It was a period of feverish activity in which unparalleled pressures for answers on substantive and technical questions led to an unparalleled volume of research output.

In contrast with the substantial harmony of views which prevailed between the Administration and Congress on revenue matters in 1940 and 1941, there were wide areas of disagreement in 1942 with respect both to revenue goals and to the distribution of burdens among taxes and taxpayers. Even though the act provided about $7 billion of additional revenue, this was less than half of the $15 billion finally recommended by the Treasury. Moreover, Treasury-proposed increases in corporation, excise, estate and gift taxes were drastically cut down; recommendations to plug the major income tax loopholes were not acted upon; the Victory tax, not favored by the Treasury, provided much of the increase in individual income tax yields; Treasury requests for the introduction of withholding for the regular individual income tax were adopted in the House only to be replaced in the final act by Victory tax withholding; $2 billion of additional social security levies requested by the Administration were not enacted; and the Treasury proposal for a spendings tax was rejected outright.

Aside from the Victory tax, income tax liabilities were sharply increased by raising rates and lowering exemptions of the regular net income tax; the excess-profits tax rate was raised to 90 percent; and excise taxes were substantially increased. At the same time that revenues were being increased, a strong effort was made to ensure that the burden fell squarely as intended, without evasion, discrimination, or excessive hardship. In this effort the Treasury, the Congressional committees, and the Joint Committee staff were unanimous, despite certain differences as to specific measures.

Corporations were safeguarded against undue taxation by (1) setting a top limit of 80 percent for combined normal tax, surtax, and excess-profits tax; (2) allowing a postwar rebate of 10 percent of the excess-profits tax; (3) provisions for a two-year carryback of losses and unused excess-profits credits; (4) broadening of reliefs under the excess-profits tax; ??? development of special relief for several classes of taxpayers ???, including mining operators and installment sellers.

???, the process of equalizing and mitigating the hardships ??? led to hundreds of corrective provisions, prominent ??? (1) a deduction for extraordinary medical expenses; (2) tax-??? the recipient rather than to the payer; and (3) allowance ??? expenses incurred in the production of income, though ??? regular trade or business.

??? exhaustive, this brief recitation of major accomplishment ??? points of controversy in the Revenue Act of 1942 will ??? the variety and complexity of the research problems which faced ??? in 1942. Day-to-day and week-to-week pressures arising out of the 1942 act constantly, and quite properly, interfered with the Division's previous research plans. The Congressional committees again and again requested special information and analyses to aid them in making the decisions underlying the final provisions of the 1942 act. /2/ This "interference" was of course entirely appropriate, since service to legislative policy makers was of top-priority importance in the Division's scale of activities. Yet for the period during which taxes were in the Congressional hopper, the Division's research program was bound to be in considerable part a response to expediency rather than to advanced planning.

As has already been indicated, many of the committees' questions could be, and were, anticipated. That is, schedules of tax rates, studies showing the effects of alternative methods of handling a particular tax problem, and analyses of various tax proposals were prepared in advance. In addition, of course, the great bulk of the Division's program of research on the basic methods and principles of war finance was aimed at providing the information and analyses required in the process of hammering out the outlines and filling in the details of the wartime tax structure. Although some material went to waste in the sense that it was not used in decision-making by either Administration or Congress, the great bulk of the Division's research output proved to be both used and useful in the formulation of tax policy.

An example of a study which anticipated almost precisely the questions which the tax committees of Congress eventually asked was the field study, briefly described in Section IV below, designed to aid in drafting a workable procedure for collection-at-source of individual income taxes. In connection with both the Revenue Act of 1942 and the Current Tax Payment Act of 1943, the ??? employers' and employees' reactions to, and ideas on, ??? on the withholding prove to be a mine of information and a source of many improvements in the ??? withholding system.

Applying the same test of Congressional utilization of the research results in the making of policy decisions, one finds the investment in the summer of 1942 of a good share of the Division's resources in analysis and drafting of a spendings tax to be more questionable. In the spring of 1942, when the President enunciated his official 7-point stabilization program, /3/ alternative fiscal measures to boost civilian saving and cut civilian spending on a very comprehensive basis were tentatively examined. The aim was to select one which both the Treasury and the other agencies concerned with stabilization could endorse as not only offering powerful support to the stabilization program but also promising to be administratively workable. In other words, the Division's research was part of an Administration program of research on the control of inflation.

After primary investigation of four basic fiscal approaches to inflation control, the spendings tax was selected. The other measures which were considered in making the choice were: (1) an expenditure ration designed to limit each civilian's spending to a specified total amount; (2) compulsory lending, under which each taxpayer would lend the Government a certain proportion of his income, with or without allowance for other types of savings; (3) compulsory saving, under which civilians would be required to save specified proportions of their income in some form or another; and (4) the spendings tax, to be levied at progressive rates (after exemptions and certain deductions) on taxpayers' aggregate spendings, and thus to discourage spending. The spendings tax was selected on the ground that it would interfere least with the traditional freedom of consumer choice, would be administratively feasible if administered as part of the income tax, would accomplish the desired objective of more saving and less spending by a tax incentive rather than a compulsory requirement, and could be levied in a manner which would avoid hardship and inequity.

The research necessary to perfect the principles and to develop a practical plan to put the tax into effect was not completed until September 1942. It was then presented to the Senate Finance Committee for consideration in connection with other tax proposals as part of the Revenue Bill of 1942. Despite strong Treasury and Administration support, the spendings tax measure failed to get serious consideration in the Congress. It was apparently rejected almost immediately and played no substantial role in Congressional tax deliberations.

Judged alone by the degree of Congressional attention devoted to a subject, the investment of substantial resources in research on the spendings tax was a poor one. In terms of formulating an Administration program, of course, the research was used and useful. But the economic rationale of the proposal did not carry over into the political sphere, and in terms of the immediate war effort, the research efforts were largely wasted.

D. The Later War Period

As already stated, the Revenue Act of 1942 marked the peak of intensity of wartime tax research. That act had engaged the entire resources of the Division. No matter with what tax or what phase of taxation the individual or group within the Division was concerned, the pressures of war finance as expressed in the 1942 act were strongly felt. After its enactment, the pace slackened slightly, and the pressures, though continued, were less uniformly distributed. They were concentrated first in one part and then another part of the Division, as the emphasis of legislation shifted from tax to tax and from problem to problem.

During the first half of 1943, greatest workload fell on those concerned with the individual income tax. Other work on the problems of war finance was carried forward, especially with a view to implementing the request for an additional $16 billion which the President made in his Budget Message in January 1943. But the greatest pressure until the middle of the year was exerted by the imperative need of revising methods of income tax payment to accord with wartime realities.

1. The Current Tax Payment Act Of 1943

In the years from 1939 to 1943, the individual income tax had grown from a class tax into a mass tax, from 4 million taxable returns and $.9 billion of revenue to 41 million taxable returns and $13 billion of revenue. The old system of a one-year lag between the earning of the money and the paying of the tax proved unsatisfactory. It did not meet the budget needs of millions of new taxpayers in the lower brackets, who were accustomed to budgeting on a payroll-period basis. It did not meet the needs of the economic situation, which called for the withdrawal of purchasing power as promptly as possible. It did not meet the needs of income tax administration, which required aid in collecting taxes from a very mobile wartime population. With these needs in view, the Division had already examined collection-at-source and current payment methods as early as 1941, made exhaustive studies in 1942, and aided in developing various plans for introducing withholding and current payment. The Revenue Act of 1942 applied withholding only to Victory tax liabilities.

The pressures for extension of the withholding system to the regular income tax on wages and salaries mounted steadily and culminated in the Current Tax Payment Act of 1943. The entire issue of what type of a current payment system to introduce and, more particularly, how to effect the transition from a delayed-payment to a current-payment system, bedeviled both the Administration and Congress. On the transition problem, the proposals ranged all the way from complete doubling up of two years' tax payments in one year to complete forgiveness of one year's taxes. Compromise proposals by the tens, even the hundreds, poured in. All this reflected itself in the Division's research program. Proposal after proposal had to be analyzed as to its equity implications, its revenue effects, its complications, etc. For a time, it appeared that no plan could gain acceptance by majorities of both Houses of Congress. Under these circumstances, it was inevitable that much of the research devoted to this problem bore no fruit in action. The entire issue illustrates the nature of the choices that must be made in programming research in the face of a great many alternative possibilities and no clear-cut agreement on any one of them.

2. The Revenue Act Of 1943

After the current tax payment controversy was resolved by the introduction of a withholding system for wages and salaries and a current-payment system of remitting income tax liabilities generally, emphasis shifted back to the further strengthening of the revenue system to raise a larger proportion of war expenses by taxes. Total Federal expenditures had risen from $12.7 billion in the fiscal year 1941 to $32.5 billion in fiscal 1942 and $78.2 billion in fiscal 1943, with an outlook for over $100 billion in fiscal 1944. Revenues, too, spurted upwards, starting at $7.6 billion in 1941, rising to $12.8 billion in 1942, $22.3 billion in 1943, and anticipated collections (August 1943 estimates) of $38.1 billion in 1944 (all fiscal years). The President had called for "sixteen billion dollars in added taxes, or savings or both" for the fiscal year 1944. The menace of inflation had not abated. Various analysts predicted an inflationary gap of as much as fifteen or twenty billion dollars. Under these circumstances, the Administration was impressed with the continued urgency of raising huge additional funds through taxation.

At first it was thought that the Congress would undertake general revenue legislation as soon as the current-payment controversy had been resolved. To that end, such major revenue measures as compulsory savings, compulsory lending, sales taxes, higher corporation taxes, higher individual income taxes, and higher excises were all given further attention. Alternative plans to raise amounts up to $16 billion were drawn up for consideration. However, in June the outlook changed, and it became apparent that Congressional action would be deferred until fall. During the interim, the revenue goal of sixteen billions was revised to twelve billions, in large part as the result of added revenues expected under the Current Tax Payment Act of 1943.

Throughout the summer, work went forward on the various basic methods of increasing wartime revenues and also on a number of special tax measures designed to cope with problems peculiar to a war economy. For example, under a directive from the Ways and Means Committee to "study and report on the feasibility of raising additional revenue by the means of an individual excess-profits tax," the Division accelerated its studies of taxes on increases in individual income. Various plans to relieve individuals with relatively fixed incomes from the full impact of rate increase were examined jointly with the Staff of the Joint Committee on Internal Revenue Taxation. Agreement was reached on the conclusion that a full-fledged tax on increases in individual incomes would not be desirable, though certain reliefs for persons whose incomes had failed to rise were regarded as fairly promising.

Possibilities of integrating the social security and individual income tax programs were examined. The integration would have consisted in increasing social security payroll tax rates for persons whose incomes fell below about three thousand dollars while applying individual income tax increases primarily to persons with higher incomes. As presented to Congress, the Treasury's program did not include the integration proposal, but rather proposed steep increases in individual income tax rates, suggesting that if social security tax rates were raised, proper adjustment should be made in the income tax rate increases adopted.

Other income tax studies dealt with various proposals for compulsory lending in the form of refundable income taxes, with methods of improving the withholding system, and with simplification. Both before and during the active consideration of revenue legislation by the Congress in the fall of 1945, possibilities of simplification of the individual income tax -- particularly through modification or dropping of the Victory tax --were carefully examined.

In the field of business taxes, research was focused on such special problems as the tax implications of contract renegotiation; feasibility of taxing excess profits of unincorporated enterprises; the operation of the deduction for advertising expenditures; the proposed allowance of deductions for special wartime reserves; and the characteristics of certain industries which might call for modification of the tax laws applying to them.

In other fields, extensive analyses of further excise tax increases were made, and the Division's study on a Federal sales tax was pushed to a conclusion and submitted to the Congressional tax committees in connection with the 1943 revenue bill.

Although steep tax increases totaling $10.6 billion annually were recommended by the Administration for 1943 enactment, the bill passed by Congress provided for only about two billions in additional revenues, mostly from excises. This bill was passed over the President's vote in February 1944. The fact became clear, then, that the boundaries of the wartime tax system were largely fixed, and that further war tax research had best concentrate, not on methods of increasing the size of the pack on the taxpayer's back, but rather on methods of adjusting that pack to make it easier to carry.

3. The Individual Income Tax Act Of 1944

Although the Current Tax Payment Act of 1943 had greatly eased individuals' problems of budgeting for tax payment and had made the system of tax collection more water-tight, the problem of simplifying tax returns and the tax compliance process still remained; in fact, it was intensified by the complexities involved in the transition to a "pay-as-you-go" system of income tax payment. Underlying research on a simplification of the individual income tax system had been started in mid-1943. The staffs of the Division, the Bureau of Internal Revenue, and the Congressional Joint Committee all worked more or less independently toward the same goal of simplification. Modification of the Victory tax into a normal tax in the Revenue Act of 1943 was the first step toward that goal.

Late in 1943, the three staffs, together with the staff of the Treasury's Office of Tax Legislative Counsel, joined forces to work out a simplified plan. Intensive work was undertaken to simplify returns, to develop a system of using the withholding receipts as a super-simple return on the basis of which the collectors of internal revenue could calculate taxes, and to extend the use of the tax table method of computing liabilities to the greatest possible number of taxpayers. As part of this work, a system of per capita exemptions and the optional substitution of a standard deduction for actual itemized deductions were developed. After simplification plans had been devised, the services of a public opinion testing agency were employed to try out the end-products -- the tax returns themselves -- on a sample of taxpayers.

The coordination of the research of the various tax staff, combined with the testing of the results, proved to be a highly successful procedure. The final product was presented to the Ways and Means Committee, and was adopted by that Committee without substantial modification. In fact, the simplified plan adopted by the Congress as a whole in the Individual Income Tax Act of 1944 (signed by the President May 29) differed in only very minor respects from the plan originally submitted by the combined research groups.

E. Postwar Tax Revision

With the enactment of two revenue-increasing acts in 1940, and one each in 1941, 1942, and 1943, and with the payment of greatly broadened income tax made easier and simpler by special legislation in 1943 and 1944, the job of war tax research was largely completed. The problems of postwar tax revision, i.e., of adjusting the wartime tax system to peacetime conditions, began to come into focus. The wartime taxes had been attuned to an economy operating under forced draft, and were designed to curb excess profits and combat inflation at the same time that they raised huge revenues. But, however well they might serve their wartime purposes, it was apparent that wartime taxes would not meet the needs of the postwar period. Revenue requirements would be lower, high war profits would be a fading memory, and the need to avert inflation might be superseded by the need to maintain a high level of employment.

The economic and fiscal orientation of tax research would change sharply after the close of the war. It was clear that taxes would never again fall to their pre-war levels. It was equally clear that in imposing taxes to raise the needed revenue, the economic implications cannot be left out of consideration. The groundwork had to be laid for the adjustment of the tax system to its peacetime role in the fiscal and economic world. This would involve the difficult problem of winding down the tax system from wartime to peacetime levels, and, in the process, of revising the tax system to improve its equity and to create as favorable an economic environment as possible for a high level of business activity.

1. Early Investigation Of The Problem

As early as October 1943 the Director of Tax Research instructed one of his top staff members to "start devoting some imagination to blocking out the successive stages that post-armistice tax policy might conceivably take." By late 1943, a partial prospectus of postwar tax problems had already been drawn up. It listed a number of the problems that would need investigation and posed the major questions which needed answering. Among the problems were the so-called double taxation of corporate profits; the tax treatment of small business and of new business and new capital; the readjustment of the excise tax structure, taking into account its impact on postwar production and employment; adjustments in the income tax including action on capital gains and on such loopholes as the community-property privilege; and simplification and adjustment of estate and gift taxes. Thus, preliminary thinking on the postwar tax problem was undertaken coincident with the winding up of the wartime tax research job.

Early in 1944, after enactment of the Revenue Act of 1943, the sections of the Division of Tax Research not directly involved in the problem of income tax simplification began to turn their attention to basic adjustments of the tax system which fitted broadly into the category of "postwar tax revision." In part, the problems were hang-overs from the pre-war period which had either been postponed or received inadequate attention under the severe pressure of wartime tax problems. In part, they were new problems created by the enormously rapid expansion of the tax system during the war. In part, they were problems directly concerned with the adaptation of the tax system to postwar conditions, both in the reconversion period and in the long run.

Among the subjects which the Division had under investigation in the first half of 1944 were: The proposed constitutional amendment to limit Federal income and estate tax rates to a maximum of 25 percent; postwar tax adjustments in relation to economic incentives; proposals for conversion of the estate tax into an accessions tax; the improvement and simplification of income tax returns for farmers; alternative methods of treating family income; the problem of tax-exempt securities; the tax treatment of pensions and annuities; economic effects of the 30-percent cabaret tax; proposals for special tax on resale profits of all capital assets; taxation of trust income; and the issues involved in integrating estate and gift taxes.

2. Joint Research Program

The work on postwar taxation received added impetus in June, 1944. On June 15, the Joint Committee on Internal Revenue Taxation adopted two resolutions designed to accelerate the postwar tax work. Under one, the Joint Committee, adding members from both Houses to equalize Republican and Democratic representation, organized itself into the Joint Committee on Internal Revenue Taxation for Postwar Taxation for purposes of postwar tax planning. The other resolution called upon the Treasury and Joint Committee tax staffs to make a special study of postwar taxation. These staffs, including Bureau of Internal Revenue personnel, undertook a series of joint studies relating to various aspects of the transition and postwar revision of the tax system.

The question of how to organize the joint research program was resolved by adopting the following plan of work: (1) The Committee staff and the Treasury staff would each give consideration to the problem as a whole, but detailed studies would be so planned as to avoid unnecessary duplication; (2) frequent meetings would be held between the two staffs to hammer out the basic outlines of possible programs of postwar tax revision, with a view to blocking out the areas of agreement and disagreement; (3) meetings would be arranged with representative groups outside of government who were themselves developing postwar tax plans; (4) finally, various reports both on the economic and budgetary background of the postwar tax system and on specific proposals for tax revision would be submitted to the reconstituted Joint Committee.

In the last five months of 1944 the Division, collaborating with the Joint Committee staff, held some 25 or 30 "off-the-record" conferences with representatives of business, labor, agriculture, and other groups. Through this series of meetings, the tax staffs obtained the views of the various groups and the conclusions growing out of private research on postwar tax problems. Concurrently, the Treasury tax staff held weekly conferences with representatives of the other Federal agencies concerned with tax and fiscal matters. These meetings served to round out the economic background for postwar tax research and to coordinate the research efforts of the Federal agencies with responsibilities in the fiscal field.

3. Reorientation Of Research Program

A great sense of urgency was imparted to the whole program of postwar tax study and planning in the summer of 1944 by the brilliant military successes in Europe. With Patton's armies sweeping to the threshold of Germany, it began to appear that the tax staffs would be called upon for technical assistance and analyses, together with alternative tax adjustment and reduction programs, long before all the research necessary for such a comprehensive undertaking could be completed. It appeared that legislation looking toward a basic revision of the tax system might even be undertaken in 1945. Had this prospect materialized, it would have meant that instead of progressing logically from (a) the general economic and budgetary outlook, to (b) the broad outlines of the tax system as a whole and to (c) the specific cogs in the tax wheel, the research program would have had to proceed on all fronts at once. In fact, for a time in the fall of 1944 this broadside attack on the problem was adopted. The spirit which led to partial relaxation of restrictions on the industrial economy led also to this intensified all-out attack on the postwar tax problem.

But the military setback in the Battle of the Bulge abated the sense of extreme urgency, and a more measured program of postwar tax research became possible. Although the earlier frontal approach to postwar tax revision was abandoned, the efforts had not been without some profit. A bird's-eye view of the entire postwar tax problem had been gained, thus providing a much better basis for further research programming. Nonetheless, progress had been somewhat jerky, as is bound to be the case whenever plans must be adjusted successively to rapidly changing events. Had it been possible to predict the timing more accurately, the program could undoubtedly have been planned more efficiently at the outset.

After reorientation of the program to an estimated termination date for the European War of spring or summer 1945, the combined tax staffs submitted several confidential reports to the Joint Committee. Late in 1944 and early in 1945, they submitted reports on the economic outlook, on the budgetary outlook, on the tax views of various groups and individuals as expressed to the two tax staffs, and on tax provisions adopted in Canada and Great Britain with an eye to the postwar period. All were in the nature of background, useful to both the research staffs and the Committee in formulating tax plans for the transition and postwar periods.

4. Reconversion Tax Program And Legislation

During the first half of 1945, the joint research activities were directed mainly to the problems of the transition period, i.e., the period between the close of the European and Japanese Wars and the months immediately following final victory. Particular emphasis was laid on the operation of taxes affecting business, the major concern being to facilitate reconversion. Methods were studied and devised for speeding up the payment to business of funds to which they were entitled under various provisions of the wartime tax laws. The special problems of the heavy burdens on small business were also very much in focus.

Based on the general background studies as well as a special transition tax study by the combined staffs, the Joint Committee and the Secretary jointly announced a reconversion tax program on May 10, 1945. The recommendations included: (1) an increase in the excess-profits tax specific exemption from ten to twenty-five thousand dollars; (2) a provision that the postwar credit of 10 percent of the excess-profits tax be taken currently with respect to 1944 and subsequent years' liabilities; (3) an advance of the maturity date of outstanding postwar refund bonds to January 1, 1946; (4) a speed-up of refunds resulting from carrybacks of net operating losses and unused excess-profits credit; and (5) a speed-up of refunds arising from the recomputation of deductions for amortization of emergency facilities. These recommendations indicate the focus of the Division's research on transition business tax matters during the early months of 1945. They were adopted very largely in their original form by the Congress and became law July 31, 1945.

5. Research On Basic Tax Revision And Reduction Problems

As soon as the reconversion business tax program had crystallized, emphasis shifted from the interim period to the later transition and postwar years. The cooperative work with the staff of the Joint Committee and the meetings with other Federal agencies continued, but the subject of research shifted to the basic revision problems. The whole question of social security financing was given more intensive study with a view to possible modification of methods in the postwar period. In the individual income tax field, methods of taxing annuities and pensions received further attention, the possibilities of changing withholding rates during rather than at the end of the year and of refunding withheld monies more speedily were investigated, and special tax provisions for veterans were analyzed. Corporation tax subjects under study were: methods of providing accelerated depreciation, relief of the so-called double taxation of corporate dividends, the tax treatment of cooperatives and other tax-exempt organizations and special tax provisions for small corporations. The adaptation of the excise tax system to peacetime conditions was given further study. The possibility of curbing inflation of capital values by special taxes on capital gains was investigated jointly with the Office of Economic Stabilization. Methods to facilitate the application and collection of State sales and use taxes on Federal surplus property sales were also examined jointly -- in this case, with the several disposal agencies.

In order to facilitate the joint work of the Congressional and Treasury tax staffs, working subcommittees were set up in the summer of 1945 to examine certain of the above subjects. The procedure, which was later adopted on a wider scale and proved to be highly successful in combining the research resources of the two staffs, was to parcel out parts of the research job to various members of the subcommittee; to have the subcommittee report to the full committee consisting of the two tax staffs; and to have the full committee develop its conclusions and recommendations on the basis of the subcommittee reports.

Until Hiroshima, the research program was pitched to the prospect of a broad-gauged tax bill late in 1945 or early in 1946 looking toward basic modifications of the Federal tax system. But, with the collapse of the Japanese war machine, VJ-Day, and the rapid relaxation of certain government controls, it became apparent that earlier tax action, limited mainly to tax reduction, would be taken.

While the basic studies were not suspended, a certain part of the Division's resources was shifted to the immediate problem of postwar tax reduction. The economic, revenue, and equity aspects of repealing the excess-profits tax at the end of 1945 were carefully examined. Methods of reducing individual income taxes, particularly by repealing the 3 percent normal tax, were studied. Special relief for servicemen and veterans; the timing and extent of excise tax reductions; the desirability of eliminating the capital stock and declared-value excess-profits taxes; and the problem of corporate tax rates and exemptions were all analyzed as part of the job of aiding the Secretary in formulating tax recommendations.

The Revenue Act of 1945 became law November 8, 1945, little more than a month after hearings on it had opened. It provided for nearly $6 billion of tax reduction annually, consisting largely of corporate and individual income tax decreases, including repeal of the wartime excess-profits tax as well as the capital stock tax and declared-value excess-profits tax. No action was taken on excises, except to repeal the Federal automobile use tax.

Passage of the 1945 Revenue Act was recognized as only the first of several steps in reconverting the wartime tax system to peacetime conditions. The Division's research program continued to focus on the longer-run problems of postwar tax revision, with emphasis divided between basic changes to modernize the Federal tax structure and a series of technical and administrative amendments on which action was postponed during the war period. Indicative of some of the major lines of research activity were the subjects on which additional subcommittees of the two tax staffs were organized late in 1945: excise tax revision; carryback and carryforward of unused excess-profits credits (which had unexpectedly become an issue in labor disputes); deferred maintenance; farm cooperatives; the 80-percent corporate tax limit; war losses; the 2-percent penalty tax on consolidated returns and the tax on intercorporate dividends; the earned income credit; and individual income tax exemptions. Throughout 1946, the Division's research consisted in large part of long-range studies on these and related subjects looking toward servicing the Administration and Congress in their task of redesigning the tax structure.

The way in which, broadly, the Division visualized the nature and difficulty of the postwar tax revision problem was stated in a report to budgetary officials in October, 1944 on postwar adjustments in its program:

In the transition and postwar era the Congress and those responsible for making tax recommendations to it will face tax problems which are different in nature but perhaps even more difficult than wartime problems. The major post-war problems are (1) to remove or reduce wartime taxes in orderly sequence and at the proper time; (2) to adjust the tax system so as to provide the minimum interference with employment and business activities; and (3) to make the necessary adjustments without sacrificing equity in the distribution of tax burdens and simplicity in administration and compliance.

In contrast with the wartime situation, when tax changes could be made against a background of record levels of income and of an economy operating at full capacity, tax adjustment for the postwar transition must take into account the many uncertainties as to levels of production and employment associated with converting the economy from war to peace. In this setting tax revisions will involve technical and economic problems which are at least as difficult as those faced during the war. Moreover, an accumulation of recurring problems that have had to be postponed because of the war, as well as a number of new problems created by the wartime expansion of the tax system, will be faced in the postwar period.

In magnitude and economic significance, then, the tax problems with which the Division dealt and would deal in the postwar period were no less important than those of the war itself. But the extreme sense of urgency felt in wartime no longer prevailed. With immediate pressures lessened, the Division's research program gradually went through its own transition from a wartime to a peacetime footing. By the end of 1946, it was once again on a steady course looking toward the building of a sounder peacetime tax structure.

III. Internal Organization

Organizing the Division for effective performance of the tax research function raised a series of questions which had to be faced again and again. Should the staff be organized as a single unit or divided into subunits? Should subunits or staff groupings be set up on a tax-by-tax, functional, project-by-project, or some other bases? Should diversification or specialization of staff members' skills be promoted? How should the "housekeeping services" -- especially stenographic and secretarial services -- be set up?

The answers to these questions varied from time to time, depending principally on the size of the staff and the nature and magnitude of the demands made on the Division. Throughout, the objective was to set up enough of an organizational structure to facilitate getting the job done, but not so much as to thwart research efforts by binding them in red tape and forcing them through unnatural or unnecessary channels. Over the years as the Division expanded, its organization developed from a very fluid and informal grouping, with only limited specialization, to a rather formal structure involving a very considerable degree of specialization along tax-by-tax lines.