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
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