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151 West 34th Street

Kew York, 2 . Y.

NOVKMBFR 50, 1942
In our national effort in this totcl war, the finsncial and economic program,
though less ppectscxilar and less decisive thanw the military end the diplomatic,
9ust nevertheless moke its appropriate contribution in the winning of victory.
The policies guiding our financial and economic program have no*: been placed
under the unified command of Justice Byrnon. The ceveral operating departments and
•'gencioB which have the administrative responsibility of making this program
offoctive are now able to move vigorously ahead. They now know that individually
their policies are complementary end not contradictory, end that collectively they
vo an integrated whole.
The establishment of a unified command over our national financial and economic
r\ir program makes it increasingly worthwhile to correct important and long-standing
defects in our customary, ways of doing things. These defects, if permitted to
continue, will obstruct ond weaken actions the.t need to be taken. They will cause
avoidable hardship at s time when necessary v.^r-time measures rill inevitably bring
-J-eir 07Xi burden of hardship and distress.
The Pay-as-You-Go income t&x pirn tv 115 into the clars of corrective measures
which, if adopted, nill mnke it possible to do other things th*.t need to be done.
At the same time, it brings a just relief to millions who will one day be injured
because of our present income-tax procedure.
It is from this point of view that I wish to discuss the Pay-As-You-Go plan.
When the federal income tax bill was passed in this country in 1915, it had
one defect which at the timetfeemedof no practical consequence but which te* sine©
come to have the grcatost importance. This defect was th*t a citizen was required
to pay in the year 1914 a tax on his 1913 incomo. In this way, v e got started on
* vicious practice of ptyiag out of one year's income n tax on the year that had
Iready gone.


I have said that at the time the defcct W8 3 of no practical consequence • The
reason is that income tax rates were IOY: and affected comparatively few people®


1915 the rates began at 1% and the top, (normal * surtax) v/as 756. Exemption for
a single person woe $3,000. Contract this situation with that which confronts us
in the Revenue Act of 1942. Excluding the Victory Tax, after exemptions for a
single person of $500, rates begin at 19$ r i from that point move sharply up to

The consequence of these increasing rates is that the debt v;hich people owe to
the federal government for tax on their last ye:\rf s income hss become a national
danger. Nothing is to be gained by arguing tlwt people ought to have saved the tax
on last year's income out of Inst year's income. Thr: fact is that tkey did
it and now they cannot do it.
Few people seem to realize how much money they owe the government for income
tax. They seem to feel that since the&r have paid an installment on September 15,
and since the next payment isnft due until December 15, for the time being vt
least, they are not in debt for income tax. They are wrong. They are in debt no?/
for the installment still due this year, and worse, they are in addition in debt
for income tax on what they have already earned s> for this year. Under our present
system this debt will have to be paid whether next year they then hove any income
or not.
If they die, this amount vlli be taken fr-m v/hatever estate they leave. If
they lose their j :>bs, there v/ill bo a charge against what they have saved. If
their earnings are less, thr full tax has to be met out of the lover earnings.
Nothing can stop the march of the days, and when the due date comes they must pay
the tax they owe on the income they have already bed. It is k rtvA debt, rnd
practically all inc.:>me-tsx payers are actually in debt continuously for rbout one
year's full income tax.


•\±mvq ere two broad purposes for reforming our historic income tax practice
in order to place our income taxes on a current basis and to eliminate the
accumulated income—tax debt*

The firr-t purpose relates to the financing of the war^

:nd to the reduction or potentially inflationaiy purchasing power. It also relates
to the preservation of the integrity of jur incorat—tax jsystem through obtaining
the highest possible level of collections and the lowest possible level of defaults.
The second springs from the personal and humane desirability of removing from
dilions of citizens tho constant threat of unpaid tax debt, * debt imposed under a
faulty tax system, unwittingly unprovided for by our citizens, a debt now grown so
">?rge under present tax rates that loss of current income for any reason by the
dividual taxpayer brings acute financial and personal distress.
The first purpose, that of financing the var and maintaining the integrity of
the income-tax gystem appeals powerfully to all students of taxati:#i,4 in and out of
• h government*

They are well aware that the economic well-being of the country

111 bo safeguarded by collecting the taxes on our rising 1945 income in 1945 m d
• t i your later in 1944•

They are also a;:are of I he probability that it will be

aeccss&xy to supplement the present tax program vith a program of compulsory
Divings, and that this program too must be related

the current income of the

These authorities are also apprehensive about income-tax collections and

Can we expect ten million nev taxpayers tn make declarations end begin t >

ey income tax under the old scheme on what they earned Inst year?

Can we expect

taxpayers, or even the old ones, to keep up their payments for tax on

heir last year's income at present rates if their current income should slacken

• t abruptly ccpee?

Hov; would tho defaults betendled?

i'ould I ha federal government

fjoizf their savings, their war bonds, ^ n their homes?
All these considerations force the p i c U i c - ^ i r

n a current4 basis

Ahd 6t once, regardless of any personal or hum;>:u ^-ftions for doing so. But it is

impossible to g d 4>n a current basis without eliminating the tax debt on 1942 income**.
Uo current prog^Ri* whether it be withholding, compulsory savings, or spendings
troc, can be applied 8t the rates necessary os long r g the 194?. ter debt is als^
simultaneously payable. There is no escaping the conclusion that the income tax on
194* inc* hies must be either dropped or defrrr^d.
The second broad purpose for this income-tsx reform rests. \n personal end
humans grounds. On the first of January under m r present system some ?7,000,000
citizens will be in debt to the fedort-1 government fv? income. tsx. If vc estimate
»v> persons back of each taxpayer, x c ho v v 805000,000 ptoplc: involved in the hawrds
o? income-tax debt. It is inevitable, even in 1943, that some smell percentage of
our taxpayers rill suffer loss of income from one or another cause. Even if a c few
•• 4$ were so affected, this :vould mean more t c i a million taxpayers in trouble
because of income-tax debt. What are the reasons that might make for lower current
income for the individual income-tax payer? Men ?re called into the armed services>
others go into government work at lov;er pay, men and romen arc displaced from peacetime industry by war-time dislocation, come suffrr j1 ckness and accident, others
must retire because of advancing ye^rs. All of tlie^o find that non rith the new
high tax rates their income-nrx debt becomes an .inV\l ^ blc hardship, wiping out
swings that towo bceryieecuraulHted over the ye.?r;j. find for the hundreds jf ttomsands
that have already been injured, millions of us are in danger, because ~e are each
subject to the same hazards • nd the same inevitable lis? of income.
The present system is < bud system for all of ur>, and it should and c?m be

It is cle-r that tho government cvnmt

a time for long to be the

creditor of some ?7,000,000 trxpryers end their f^mUior in dobt f rc incomc tax,
particularly u.hen there is n> substantial question

i revenue involved in skipping

a year and getting the whole country on a currcnt


In cruder to accomplish this desirable objective of getting our income taxes
• • a current basis, I suggested to the Treasury in March of this year and to the


Senato Finance Committee in July a plan %hich I colli&d the Pey-As-You-Go income tax
X>lan. This plan is to be applied to individuals, not to corporations.

Since then

there had been a great deal of discussion, many suggestions and a little criticism,
I welcome this opportunity to make a statement ab<-:ut the plen which v;ill bring
it up to date, adding to and modifying the original plan in the light of the
suggestions and criticisms which I have received.
The first problem is how to get our personal income taxes on a current basis
vdthout pacing two years1 taxes in one year.

The answer is as staple as daylight

Let us turn our tax clocks she&d one year.

The taxes v e have been paying

this year out of our 1942 incomes are taxes on our incomes received in 1941.


can solve the problem in either of tvo ^ y s :
First, v/e can redefine our taxes, end simply s«y that the taxes'we are paying
in 1942 are taxes on 1942 income, and thereby let 1941 drop out of the tax calendar.
forever, or
Second, we can go on letting jut present income taxes be taxes on 1941, but
begin 1945 by paying on 1945, thereby dropping out 194? instead of 1941.
In my original testimony before the Senate Finance Committee^ I suggested
dropping out 1941, but the Treasury preferred that if any year v/as to be dropped, tfe
should be 1942.

As the year grows later, it becomes increasingly likely that the

Treasury is right, and that 1942 would be a better year to ship. But only on one
condition, that the income-tax payers who are serving

the people of the United

States in the armed forces or in the federal civil service should be allowed to ehooe*
whether they prefer to skip 1942 or 1941.

Since there is an alternative, each

should be allowed to choose the one that serves him best;
The question arises at once in everyone's mind, how can we drop en income-*
tax year out of tho calendar in this way without having the Treasuxy lose a lot of
money that is badly needed for the vox effort?

T a « answer is thot re shall all go

along paying our income taxes as. we have before, only they will be on a current

The Treasury will also go along getting its revenues.

The oily difference

is that when a taxpayer dies or ceases to receive income he does not ore a tax as
he does under the present system.

Peduction of tax payment by the taxpayer as a

result of setting the tax clock ahead occurs only ^t some future date, vhen rmd as


tho taxpayer's income ceases or declines.

The reduction is therefore spread over

the whole life-timo of the prosent incomr-tox paying generation, snd occurs
beneficially for each taxpayer at the time when his income f^ils.

Ac f jt the

Treasury', the Treasury has never considered t \ j s receivable ? s an asfet, end
accordingly they can bo

written off the balance stect ?f the government 'vith-.m t the

change of a single penny.
Since the loss would be spread over a period of some 55 to 50 years, the
;gross amount of eight billion dollars estimated as the tax liabilities on 1942
Iincome would amount to an average of only $160,000,000 to $220,000,000 a year over
[this period. This gross lofcs of revenue in any case would be partially offset by
I bettor tax collect!Dns and collection methods and also by recoveries through
I the estate tax of part of whatfcouldotherwise have been payable as income tax. The
| loss in revenue is relatively not substantial,in comparison with the gross tax
revenues to bo received in those years. Another way of looking at it is that the net
loss over a generation would be abrut the same as one month1s current expenditures.
It is a small cost t > achieve o basic Income-t'tx reform, preserving tho integrity of
the system and affecting beneficially 27,000,000 citizens.
The question is sometimes raised as tj the effect of the plcn on inflation.
The only persons that would have more cash on hand under the plrm are the few whr*
have accrued their income taxes. These ere few indeed

they are n:,t spendthrifts.

As a matter of fact since Pay-As-You-Gv will make withholding taxes possible at a
high level, and since we will be collecting f >r 1945 in 1945, the total effect will
be anti-inflationaxy rather than otherwise.
The Treasury feels that a withholding tax at a high rate is important in
keeping taxpayers current.

I too favor a withholding tax, because it makes it easier

for people to keep » a pay-as-you-go basis. And if we want a withholding tax at a
high rate, tho Pqy-As-You-Go plan d003 0 *lve the problem of having a withholding tax
without having some amount of double taxation; that is, * f paying tw • years1 taxes
in :>ne. However, if a withholding tax provision * t a high rate turns out to be either
undesirable or impractical, the Pay-As-You-Go plan stands on its arm feet as a sound


The second point in the Pay*As-You-Go Income tax plan is designed to solve
the problem of how we can pay our income taxes on 9 current basis, when we do not
know <at the beginning of a year what our income is going to be in that year. The
wa^ of solving this problem is not too difficult.filewill go ahead as we do today,
filing an income tax schedule abotvt the fifteenth of March declaring our previous
year's income. But this will be a tentative return for the year than beginning
and we will

pay our current taxes on the basis of this tentative return. After

the year had ended there would have to be an adjustment up or down depending on
whether cur actual income for the year was greater or less than that on our
tentative return-

But this adjtastraent would be made o t the same blank and at the

rime time as our return for the following year. This return would be at one time
the final return for the old year and the tentative return for the new. There
would be no doubling of return* involved and only a few extra lines for the adjustment computations-*
The third feature of the plan is the provision for relief in case a taxpayer
knows his income in the current year is going to be lose or greater than that
of the year of his tentative declaration.

The plan provides that he may declare

his true knowledge of lower or higher income, as a result of salary changes, and
so forth, which have actually occurred, and make hie current payments accordingly.
This, provision eliminates the awkwardness of avoidable year-end adjustments
and keeps the plan closer to a true pay-as-you-go basis thar* it would otherwise be.
The fourth point about the plan covers the special provisions for minimizing
objectionable "windfall" cases. These provisions were not included in the original
plan and have been added to meet a widespread feeling that, even though the number
of cases be few, it is desirable US guard against them*
Any plan that gives equal treatment to all taxpayers would produce a certain
number of "windfall" cases, case? of individuals who will benefit unduly because of
»:i fact that for them, 1942, or whatever year is skipped, happened to be a year


of unusually

larce income, larger tiian that of the that preceded or that

Consequently, whatever year is cslected, some persons v/ould receive

unintended, benefits,
I have made the following throe suggestions for minimizing the problem of
these "windfall11 eases:
(1) Do not cancel tho income t i c 0 1 capital gains. Capital gains are not
<: 1
like ordinary recurring income, and can properly be separated out in the plan.
(2) Provide a special death ta:: to recover what may bo considered "windfall11
urijing because of death in 1942, or during some appropriate transition period*
(3) In xll cases where claim for credit exceeds $10,000, or 3oine other
juitcblo amount, take an average of 194.1? 1942, and 1943-

The average of the three

ysars will b© a practical way of determining a fair normal income instead of
"windfall" income,
These three

provisionstfillcatch all of the most objection»ble"win£fall"

eases, But even so, thers may still be a few remaining. T/hat then?
There aru sorae things that are worse than t few ' windfall" cases. One would
net to adopt any Pay^-As-Xou-Go p ? . at all. Another would he to adopt a plan
so cojn^iiccited or so uncertain in its effect tiiat

ths .^reat good of Pay-As~Iou~Go

v/ould not bo achieved. Aitother v/ould be not to givo equa.1 treatment to all taxpayers
under tho plan lost the "windfall" cusos receive undue boncfits.
Much as I dislike windfalls, evon if they cannot bo entirely eliminated, I
r n still Tor the plan.

I cannot bring myself to the point of refusing to do good

Tor millions «imply because I will be doin.; too much good for a few' that don't
clcwcv* .it.
Tho fifth point about tha Pay-As-Yoit-Go irco^o t^x plan is that it proposes
to give equal treatment to all taxpayers under tho plan. This means to skip a tax
y*ar for »all alike in ovary bracket and start the whole country income-tax-debt froe.

Those are my reasons: For thoss in the iov/er brackets, the plan will
obviously have far-reaching beneficial results since unfortunate circumstances
oi loss of incomo will not be doubly unfortunate because of lost year*s debt.
For thoso in the middle brackets, the plan will

eliminate countless personal

and family tragedies, free many able citizens for public service, c o d step up the
officieney of American industry by making possible the retirement and pensioning
of executives who are holding on, largely to pay their income tax and nevor
oitching up,
For thoso in the upper brackets, it will mako much loss practical difference
than might appear. First, because like anybody else, as Ion* as they have their
income they continue to pay their taxos; and, when thoy die, what otharv/isc v/ould
•two been payable as incomo tax on the taxpayer's previous year's income is subjcct
to estate taxes in his highest brackets.
But apart from the practical considerations, the reason

I favor over-all

r.pnlicavieri of tho principle is because it giwa o-ju? 1 treatment to a.ll taxpayers
-ridor ta^ nlan,

In .adopting Pay-As-You-Go by skipping a year, I believe v e should
/ :.l citizem<> alike

As ve turn tho tax clock "-head for some., we should

turn it ahead for all, and yet th-j hole nation out of income-tax debt by tho
^/innin- of 1943.
In so far as v c want more equality of income and of wealth wo can have these
through the progressive income tax and the progressive estate tax, but v e should
rot U3e this general income-tax reform—Pay-As-You-Go—ion equally to accelerate
'• the impact of pro^ros »ive taxation.

Let m achiove such levelling,

cr Licit of it, as we dosiro, directly tlirou^h lo?i;olat3ve action on measures
explicitly dravn to servo that purpose The Tro^sury ha,* proposed a -nodi: ieel plan which would ^pply to tne full tax
debt of co»e taxpayers and to only a p-*rt of the t f c debt of the rest


the Treasury proposed that the tax year be skipped for only tho normal tax and the


lowest bracket rate of 3urtax,--that is, a total of 1 0 per cent and that the balance
o * the tax debt remaining should be paid over the next two years,
to currant income taxes that will be payable in tHoso years.

this in addition

The Treasury conceded

thut this would leave between 10 and 20 p»T cent or our taxpayers still owing tho
government for taxes on their last ye^r1* incoran

This group of 10 to 20 per cent

includes practically all of the country1 s technical, administrative, and professional v;orkors, men and women - : o need freedom from income-tax-debt danger as much as
••inyono olcc Much has been made of the differences betv/ecn the Treasury's proposal (macle
not rr> a recommendation, but as a. preferredalternative) ^rrithe Pay-As-You-Go plan,
a mttvr of fact, tho area of agreement is far nore significant than the
r^rr lining differences.
The p o i n t o f agreement are as follors :
(1) Tho Treasury proposal agrees vith tho plan as to tho high importance
of getting tho country out of income-tax debt and on to a current pay-as-you-go
b . s a as soon as practicable.
(2) The proposal accepts the principle of rotting the tax clock ahead, that
is, of skipping a tax year, as b means of arriving at this objective.
(3) The agrees to the use of the method of tentative return and
year-end adjustment as a method sound both in principle and in practice of keeping
income tuxes on a current basis from now on,
(/r) Tho Treasury //ants a withholding tax and I agree that tho plan would
bo a bettor plan if an acceptable withholding tax at a high rate can bo worked out.
(5) The Treasury prefers to skip 1942 rather than 1941 and I have agreed
subject to qualifications affecting the federal civil service and the armed forces.
(6) The Treasury has been apprehensive about "windfall" cases, and since
submitting the original plan, I have made three proposals that will catch all the
ont objectionable cauen.


The difference at the present time seems to rest solely on the point that
whereas tho Pay-As-You-Go plan applied to all tho income-tax debt of all individual
taxpayers, the Treasury's modified plan would apply to the full tax debt of some
taxpayerraid to only % part of the tax debt of the rest.
the Treasury

In other words, what

saying is that as a practical political matter, the full benefits

of the Pay-As-You-Go plan cannot hu givm to taxpayers in the higher brackets,
'won though measures to minimise "windfall11 exstx are adopted.

I feel that tho

!ic3$LSury mis judges the political tii'%s because it is too close to the waves.


beJ ieve thatthe country is tirod of indirection in tho attempt to achieve a
2availing beyond the explicit act;; of Congress.

In all my cpe&king to varied

groups, the plan has never been attacked or even questioned for the reason that
it proposed to skip a tax year for all citizen?; aliko*

And personally it is a

point of principle that I have felt worth while defending.
But this point of principle 5s one that Congress properly will decide,


r ' i b point out frankly that if the principle is not so important, or if I nave
rongly construed it, then it is entirely practical to draw xxp a pay-as-you-go plan
d\y,t would leave a residue of debt remaining to bo paid by taxpayers in tho higher

The Treasury plan is of thjs sort, and so also is a proposal which has

V»een draw; up by Representative iicLcan of New Jersey. Neither of these plans
&s they stand is satisfactory bocauso the residue of debt remaining is not sufficiently closely rqlatod to ability to pay

But a plan could bo drawn up that

would leave a rosidue of debt payable and at th<* onaa time relate this debt
sharply to tha taxpayers ability to pay.
Ons criticism of tho plan that has teen m-;do by 3one individuals stems from
a feeling that somehow it is wrong to cancol a debt. 3ut it is a coramon practice,
as evidenced by the experience of banks and othe;/ commercial institutions, to
reorganize debtor-creditor relations, upon the Initiative of either party,
«riOT it. becomes necessary in furthering the bost continuing interests of both.


And certainly the cancelling of debt, in order to further the welfare of all
concerned, has had the high approval of age-oldmoral authorities*
An interesting suggestion has been made recently by Senator George, "In
order to avoid tremendous hardships and many defaults in 1943% he said, "we
are going to have to &dopt some sort of pay-as~you~earn method of collecting
income taxes, To do that, it may be necessary

to postpone an entire yearfs tax

liability for individuals until after the war when it could be amortised and paid
off in instsJLl-nents.
This suggestion by Senator George seems to reflect the urgency of doing
something about the problem now, together with sone uncertainty as to whether the
best solution can be found in the few weeks remaining before action must be taken.
It seems unfortunate that we cannot have a final solution now oy simply turning
the tex clock ahead,

Perhaps this can yet be done, but if it proves impossible,

a postpone.-i solution is better than a makeshift compromise that might do more- harm
Uuui good-

If in the end it ia decided that any postponed

income-tax debt should

Ve -i^ortiZK) rather than cancelled, let us be sure that the amortisation program
is closely related to ability to pay.
The chances of getting tho new year 1943 on u pay-Mti-you-^o basis seem to me
to be distinctly good-

I feel that a Pay-As-You-Oo plan in a form acceptable to

Confess will certainly be adopted, because income-tax payors want to pay their
taxes on a current be sis, they want to te free of income-tax debt and they know
it can be done yithovt hurting the Treasury and without paying two years11 taxes
rn one. The taxpayers know that Pay-As-You-Go solves the problem simply and
fairly by skipping an income-tax year. They know the whole trouble was caused
by a basic defect in our income-tax Lxw which has existed from the beginning,
that of paying a tax on ye^r'.s income out of this yc?j»fa receipts. This
defect was not their fault and they know it

They want it corrected and they

want to be on a pay-as-you-go bisis by the beginning of 1943

Enough time has elapsed sinco the plan went to the Treasury and since it was
mado public before the Senate Finance Committee to permit the development of
criticism, suggestions, and modifications of the plan.

The critics have not been

negligent and I feel 3uro that tho objections which have been raised are the result
of painstaking examination. At the same time, the lack of force in the objections
which have been me.da to the plan has been apparent to press and public alike
. . d has been the subject of nation-wido comment
It seems to me that wo are rapidly approaching the time when the Pay-As-You-Go
plan will be in the realm of legislative action,

I hope that this may be tho last

public speech I shall make on the subject—not because my interest is any less,
but because the needed decisions and compromises are the appropriate responsibility
of others.

The evidence is in, Let us have earnest consideration and early action.

As a nation of individuals we will be better able to meet tho present and
to attack whatever the future has in store for us if we are paid up in our income
tax, and, being out of incoiae-ta* dobt, wo can pay as v a fo out cf what we earn: