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V. CONCLUSION

In this discussion of current income tax collection, or pay-as- you-go, I have endeavored to indicate the principal problems in designing a satisfactory system. These problems are admittedly difficult. A summary of the issues, together with the best judgment of the Treasury as to their solution, may be helpful.

1. THE RATE OF COLLECTION AT THE SOURCE

The question arises whether the withholding rate under collection at the source should be sufficiently large to collect the basic liability, or should be high enough to collect the whole liability on the larger incomes at progressive rates. It would seem preferable to collect at the source the full basic liability (normal tax plus surtax at first bracket rates), thus by this step alone making fully current 70 percent of all income taxpayers. For the sake of simplicity and to avid unnecessary refunds, it seems desirable, at least in the beginning, not to attempt collection at source at progressive rates.

2. EXEMPTION UNDER WITHHOLDING.

Another question is whether allowance should be made for exemptions under a system of collection at, source and if so, whether they should be uniform for all salary and wage earners or should take into account marital and dependency status. The problem of collection at source is to collect the income tax which is computed on the basis, of exemptions, varying according to marital and dependency status. It seems imperative that the collection at source, system should be based on such exemptions, since otherwise the counts collected would be so far from the amounts due as to fail to meet the objectives of collection at source in any satisfactory manner. Such a collection at the source system can be readily handled by employers.

3. THE METHOD OF HANDLING OTHER INCOME.

Another question is whether the tax on income from sources not adapted to withholding procedure, should be tentatively based, on the previous year's income or on the current year's income. It seems very desirable that the tax be based on the current year's income. Further exploration may be needed to determine whether this could be done more simply by an annual estimate in March with periodic adjustments or by a quarterly statement of income.

4. THE CURRENT COLLECTION FOR HIGHER BRACKETS.

Another question is whether an attempt should be made to bring completely current the tax on the incomes which extend into the higher surtax brackets. It seems desirable that they should be made as nearly current as possible, subject to inevitable adjustments which cannot be made until the following year. But if the compliance difficulties of making taxes on such incomes fully current are deemed too great, substantial currency for the great majority of taxpayers can be achieved by making the basic liability current with payment of the balance in the same manner as the whole tax is collected at present, namely, in the following year.

5. THE TRANSITION PROBLEM.

Another question is whether the transition to current payment should be made by forgiving a year's liability, by paying two years taxes in one, or by postponing or deferring one year's taxes over several years. In the light of the revenue needs of the Government, and the equitable distribution of the tax burden, complete forgiveness seems very undesirable. Complete doubling up would undoubtedly be too harsh for some taxpayers. Accordingly, deferment of payment of taxes for the transition year to the extent necessary to relieve such hardships appears to be desirable. This is not to say that some discount, or even a certain amount of forgiveness, may not be found to be desirable for the same reason.

6. TIME SCHEDULE.

A further question relates to the timing of a current collection system. It seems desirable to pass legislation as soon as possible and to make it effective as soon thereafter as possible. Collection at the source should certainly not begin later than July 1 of this year.

7. MARCH 15, 1943 RETURNS

It should be emphasized that no matter when the system of current collection is established and what that system may be, returns on March 15, 1943, must be filed as usual. If the taxpayers do not clearly understand this point, great confusion will certainly result.


                               Table 1

      Individual net income tax: Estimated number of taxpayers
           for the income years 1942 and 1943, by size of
                surtax net income any type of income

                            (In millions)

                              1942                       1943 
                          Surtax net income        Surtax net income  
                   Total   Not Over   Over   Total  Not over   Over                   
                            $2,000   $2,000          $2,000   $2,000  
 
                  Estimated number of taxable income recipients /1/
 
Wages and salaries
 with not more
 than a nominal
 amount of other
 income             28      26.5      1.5      32       30       2        

All other /2/       11       9.0      2.0      12       10       2 

Total               39      35.5      3.5      44       40       4

                  Estimated number of taxable returns /3/


Wages and salaries
with not more
than a nominal
amount of other
income              25      23.5      1.5      29       27       2

All other /2/       10       8.0      2.0      11        9       2

Total               35      31.5      3.5      40       36       4
FOOTNOTES TO TABLE 1
 
/1/ Number of individuals receiving net income in excess of exemptions.

/2/ Including sources other than wages and salaries, and also wages and salaries combined with more than nominal amount of other income.

/3 Number of returns that will be filed on which a tax bill be due. This is less than the number of taxable income recipients because of the filing of joint returns including the income of more than one taxable income recipient, particularly in the smaller income classes.


Table 2
Statement for quarter ending June 30, to be filed on June 15
by individuals whose tax is not withheld at source. /1/

1. Income from all sources during the quarter

2. Income from wages and salaries

3. Quarterly exemption and dependent credit

4. Larger of (2) or (3)

5. Balance [(1) mints (4)]

6. Payment due: ______ percent of (5) (percentage to be same as that
used for collection at source)

FOOTNOTE TO TABLE 2
 
/1/ A final adjustment would, of course, be made the following March.

                               Table 3

   Tax liability for the period 1938-1942 if 1942 tax liability is
       forgiven, compared with tax liability computed without
 certain tax increases after 1935, at selected levels of net income

                   Married person - No dependents

           Income tax liability on selected net income /1/

                            Taxable year:  $2,000   $3,000    $5,000
1. Actual tax liability       1938           -      $    8    $   80
     for income year          1939           -           8        80
     1938-1942                1940           -          31       110
                              1941         $   42      138       375
                              1942            140      324       746
                              Total           182      509     1,391
 
2. Total tax liability                     
     the 1942 liability
     is forgiven                            $   42   $  185    $  645

3. Total tax liability
     assuming no tax
     increases under
     Revenue Acts of:
       A. 1942                             $   84   $  323    $1,020
       B. 1941 and 1942                      -         109       490
       C. 1940, 1941 and 1942                -          40       400
       D. 1936, 1940, 1941 
          and 1942                           -          40       400

4. Cumulative increase in tax
     liability
       A. Under Revenue Acts of            
           1940-1942                       $  182   $  469    $  991
       B. Under Revenue Acts of
           1936-1942                       $  182   $  469    $  991

5. Tax liability forgiven
    (1942 taxes) as a percent of:
      A. Increase in tax Revenue 
          Acts 1940-1942                    76.9%    69.1%    75.3%
      B. Increase in tax Revenue
          Acts 1936-1942                    76.9%    69.1     75.3

                          TABLE 3 CONTINUED

                   Married person - No dependents

           Income tax liability on selected net income /1/

Taxable year        $10,000    $25,000    $100,000      $1,000,000
  1938              $   415    $ 2,489    $ 32,469      $  679,044
  1939                  415      2,489      32,469         679,044
  1940                  528      3,843      43,476         717,584
  1941                1,305      6,864      52,704         732,554
  1942                2,152      9,220      64,060         854,000
  Total               4,815     24,905     225,178       3,662.226

   "  "              $2,663    $15,685    $161,118      $2,808,226

   "  "              $3,968    $22,549    $213,822      $3,540,780
   "  "               2,414     16,507     195,366       3,510,840
   "  "               2,075     12,445     162,345       3,395,220
   "  "               2,075     12,445     152,970       2,856,970

   "  "              $2,740    $12,460    $ 62,833      $  267,006

   "  "              $2,740    $12,460    $ 72,208      $  805,256

   "  "               78.5%      74.0%      102.0%          319.8%

   "  "               78.5%      74.0%       88.7           106.1
FOOTNOTE TO TABLE 3
 
/1/ Net income before personal exemption, assuming maximum earned income credit and no net long-term capital gains.