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Delay in the disposition of cases, including accumulations on the docket of the Board of Tax Appeals, is the subject of recommendations in this report, and delay is undoubtedly one of the most complicating factors in administration. Changes in section 220 relating to evasion of surtaxes are recommended which should simplify the administration of that section. Recommendations are made for simplifying releasing of Federal tax liens. Recommendations with respect to section 280 will tend to simplify procedure in collecting taxes from transferees of property.

The Bureau of Internal Revenue, during the past years, has made rapid strides toward the improvement and simplification of administrative procedure, particularly in the prompt closing of the smaller cases, decentralization of assessment and review, final settlement of cases under section 1106(b), and the creation of a special advisory committee to reduce the volume of appeals. In Volume III will be found a survey of administration, prepared for the committee by the Treasury Department.

The field organization which to-day is charged with a very large measure of responsibility in tax determination, should be designed, first, to encourage efficient collection of taxes; second, to make the collection and adjustment of taxes as little burdensome to taxpayers as is possible; third, to harmonize with the system of administration at headquarters; and fourth, subject to the foregoing requirements, to keep the cost of administration at a minimum.

At present there is a dual organization consisting of 64 collectors' offices and offices of revenue agents in charge with which the taxpayers must deal and which the administrative authorities of the Bureau of Internal Revenue must keep in harmony.

The collectors of internal revenue are charged by the statutes with the responsibility for collecting taxes and for canvassing their respective districts for delinquent taxpayers. To the internal-revenue agents has been assigned the task of auditing the more intricate individual returns and all corporation returns. However, in order to bring the audit work current, collectors of internal revenue have been assigned the task of auditing all the smaller individual returns, and during the past few years have also audited a majority of the larger individual returns. It is frequently necessary during the progress of the audit, to make a field examination of the taxpayers' accounts and the law specifies that but one examination of a taxpayer's account may be made each year. It is obvious that constant vigilance is required to avoid a duplicate examination, as a taxpayer may file a return one year that is to be audited by the collector's office and the next year he will file on a different form and the return will be audited by the internal-revenue agent. A single organization would avoid this duplication.

It is recommended that serious consideration be given to the consolidation of the offices of the collectors of internal revenue and the offices of the internal-revenue agents.

A single organization will promote efficiency and convenience to taxpayers in the collection of taxes for the following reasons:

(a) Better service will be rendered to the taxpayers since there would be one directing head and one office in each collection district to which a taxpayer would correspond or personally visit in conneo

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tion with the assessment, collection of his taxes and audit of his return.

The following incident illustrates what happens under the present plan of organization. An internal-revenue agent makes an examination of the return of a taxpayer residing in Des Moines, Iowa. The taxpayer appeals from the recommendation of the internal-revenue agent, and it is then usually necessary for the taxpayer to make a trip to Omaha, Nebr., where the internal-revenue agent in charge is located. During the conference with the internalrevenue agent in charge, it develops that a settlement can not be reached until first-hand information is obtained, which is available only at the office of the collector of internal revenue at Dubuque, Iowa, where the taxpayer originally filed his return and paid his taxes. There is delay, expense,

and annoyance, due to such situations, in numerous districts throughout the country.

This situation exists because it would be economically unsound to establish the office of an internal-revenue agent in charge in every district where we now have a collector's office.

(6) The central office at Washington will be in closer and more harmonious touch with its field organization, due to the fact that there will be one directing head in each field district with whom to conduct correspondence and to whom the bureau can look for settlement of any question that may arise. One supervisory organization operating from Washington could maintain a proper inspection of these offices. Two exist to-day. At present it is necessary to deal both with the revenue agent in charge and the collector of internal revenue before final action can be taken in the bureau. This is especially true in connection with bankruptcy cases, fraud cases, and claims for refund.

(c) A very careful study of the present organization has been made, and compared with the organization plan as recommended, and there is no doubt but that a saving of approximately $2,000,000 per annum can be effected. At present there are 100 administrative offices in existence, and it is believed that all of the field work can be effectively performed and executed in not more than 60 consolidated offices. There is a duplication of work in the mathematical verification of tax returns. There is a duplication in the numerous records that are required to be maintained. There is duplication in the correspondence and files. Other important elements on which savings will be effected are rentals of office space, telephones, consolidation of mechanical equipment, and traveling expense.

To accomplish this purpose it will be necessary that all employees in the field service be under the civil service. It is recommended that arrangements be made to continue in the service those employees who are now rendering efficient service to the Government regardless of their age. Many employees have rendered service for years without a civil-service status, and it is not believed wise to take any action by which the Government would lose the benefit of the experience already gained by these employees. They should be given a favorable opportunity to secure the proper civil-service status. The present turnover in the service is sufficient to take care of this situation without throwing out of employment a number of people who have given years to the service.

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The reorganization, to be fully effective, should be carefully and tactfully worked out, and the numerous problems involved sympathetically considered and solved. As the result of our examination of the subject, in which we have been assisted by a collector detailed by the Treasury for the purpose, we are convinced that the consolidation is desirable, and we recommend that the Treasury be requested to submit detailed plans for carrying it into effect.

EARNED INCOME

(Section 209) The present revenue act provides, in section 209, for a tax credit within certain limits and subject to certain requirements, amounting to 25 per cent of the tax which would be payable on the taxpayer's tarned net income if such earned net income constituted his entire net income.

Investigation discloses that at least 10 per cent of all taxable returns filed by individuals are in error on account of this provision, showing that many taxpayers fail to understand the principle of the credit or the method of its computation. As a consequence, taxpayers are obliged to pay for professional advice, administration is delayed, and expense increased.

A lowered rate of tax on earned income appears expedient and proper and, therefore, a means of simplifying the present complicated method is desirable. After a study of several proposals the following is suggested in lieu of the present method:

In computing taxable net income allow a deduction equal to 10 per cent of the amount of the earned net income, subject to maximum and minimum limits equivalent to those fixed by the present act.

The advantages of this method are as follows:

1. It is simple, requiring but four entries on the general form of tax return.

2. It eliminates 13 separate entries from the present general form of return, and does away with much of the present complexity in computation.

3. It does not substantially increase, in any case, the tax which would be payable under the present method.

4. It slightly decreases the tax in some cases, generally to the advantage of the married man with dependents.

5. It is practical, for a similar method has been in use for some years in Great Britain.

6. Finally, it does not seriously affect the revenue. The present reduction in tax by the earned income credit amounts in round figures to $25,000,000 per annum. It is estimated that the reduction by the proposed method will not be increased by more than $4,000,000.

The above proposal is, it is believed, as effective a step toward simplification as is possible while preserving both the principle and the limitations of the existing credit.

It should be recognized that even with the present credit, earned income bears a greater burden than does income from capital. The opportunities for distributing capital among members of a family or among corporations and for determining just when gain shall be realized, the reduced rate of taxing capital gains, the allowance for depreciation and depletion are all important factors in making the effective rate of tax on income from capital less than the effective rate on earned income.

There are thus strong reasons for removing the limit on the earned income to which the credit is to be applied. It may be, that for reasons of policy or on account of practical difficulties of administration, this course is not feasible. In that case, there is much to be said on the ground of simplicity for the elimination of the earned income credit and a compensatory modification of the rate of tax on income between $5,000 and $20,000.

CAPITAL GAINS AND LOSSES

(Section 208)

The taxation of gains from capital transactions has long been the subject of discussion, although such gains have been taxable in all our income tax laws since 1913. The constitutionality of taxing these gains has been upheld by the Supreme Court.

Several years ago the Congress recognized that many normal business transactions were prevented by the high tax on capital gains and, accordingly, beginning with the taxable year 1922, a'maximum tax of 1212 per cent was provided on such gains as were realized on the sale of assets held for over two years. Since 1924, tax reduction on account of capital net losses has been limited to 121/2 per cent.

Suggestions for the entire elimination of the tax on capital gains and the credit for losses have been numerous. Arguments for this change have been based on economic grounds and on grounds of simplification. A careful investigation of the question has therefore been made. This study shows that no change in the existing law relating to this subject should be recommended at present for the following reasons:

1. The capital net-gains tax produces a very considerable revenue over the credit allowed for capital net losses as shown by the following figures: Net revenue from 1242 per cent tax, 1924.

$39, 567, 328 Net revenue from 1272 per cent tax, 1925_

109, 912, 033 Total for the 2 years.

149, 479, 361 2. To eliminate the tax on capital transactions would shift the tax burden from those realizing gains to those sustaining losses; in other words, it would put the burden on those less able to pay.

3. The flat 1212 per cent tax, while not operating, perhaps, in accordance with the principle of ability to pay, has nevertheless justified its place in the revenue acts, for it appears to have resulted in more tax, at least during the high-surtax years, than would have been collected if the regular rates had been applicable. This comes about through the encouragement given to profit taking.

Studies already made show that the elimination from tax computation of capital gains and losses would remove some complications but would create new ones, and it is doubtful if, on balance, there would be any material gain in simplicity.

EVASION OF SURTAXES BY INCORPORATION

(Section 220)

The Congress has recognized since 1913 that corporations could be formed, or availed of, for the purpose of avoiding surtaxes on the stockholders of such corporations. If a corporation permits its earnings to accumulate instead of declaring dividends, which are subject to surtax, the stockholders will escape such surtax as would have been payable if a distribution had been made.

In order to prevent avoidance, the present revenue act in section 220 provides for a tax of 50 per cent on the net income (including dividends received) of a corporation which permits its gains and profits to accumulate for the purpose of preventing the imposition of the surtax upon its stockholders. It is further provided that “the fact that any corporation is a mere holding or investment company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.'

A careful investigation of this subject and of individual cases which appear to come within the scope of the provision 'has been made, resulting in the conclusion that the present statute is obscure and difficult of administration. The provision has been effective only in so far as it has deterred the formation of personal holding companies or has stimulated distributions.

The two greatest difficulties facing the administration in applying the present provision consist, first, in proving the “purposes to evade, and, second, in proving what constitutes “the reasonable needs of the business.” The evidence necessary to prove the first point is almost always unobtainable, and the definition of the reasonable needs of a business, required in the second case, is generally beyond the power of the bureau, at least, in the case of operating companies.

The incentive to incorporate in order to avoid surtaxes has largely disappeared. In fact, there is now noted a tendency to disincorporate. To-day a resident of New York, subject to the maximum surtax, who holds property through a corporation, pays in Federal and State taxes on the corporate income 10 per cent more than he would pay in State tax and normal Federal tax as an individual; this is one-half of the surtax he would pay as an individual and he remains liable to that surtax on the amounts distributed by the corporation as dividends.

A provision is suggested which will tend to give some incentive than corporations to make reasonable distributions, without going to th

he extent of forcing unwise distributions. The principle can be statt as follows:

Allow the corporation a deduction in computing net income to io, say, 20 per cent of the excess of dividends paid over divath botili received, the deduction in no case to be more than, say, 25

profit of the corporation's taxable net income before such deductioni's pre

ulties the computation, no account should be taken of stock dividends.

end : Another very important advantage of this method consists in the fact that the full benefit of the deduction could be secured by smalu

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