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committee. The advisory committee has cooperated closely with the staff of both divisions of the joint committee in carrying out the work assigned to each. Acknowledgment is also made of cooperation and helpful suggestions from Middleton Beaman, Esq., House legislative counsel; Frederic P. Lee, Esq., Senate legislative counsel, and members of their staffs; Mr. Charles R. Nash, assistant to the Commissioner of Internal Revenue; E. C. Alvord, Esq., special assistant to the Secretary of the Treasury; and to other officials and employees of the Treasury Department.

The committee has dispensed with formal hearings, but informal conferences have been accorded. Constructive criticism of the internal-revenue tax system, particularly the income tax, was solicited through the press and by communications to business organizations, bar associations, societies of accountants and engineers, and others interested.

The income tax seemed to merit first consideration, since it is more important than the other internal-revenue taxes in point of revenue produced and taxpayers directly affected.

To this report of the joint committee, submitted pursuant to section 1203 of the Revenue Act of 1926, are annexed three volumes, under one cover, as follows:

Volume I is a report prepared by the staff of the joint committee and concurred in by the advisory committee. The joint committee approves in principle the recommendations in Volume I except those relating to section 220, and the provisions relating to the expense of transfers in the field service, which it neither approves nor disapproves.

Volume II is a proposed rearrangement of the income tax provisions of the Revenue Act of 1926, prepared by the staff of the joint committee, the House and Senate legislative counsel, and the special assistant to the Secretary of the Treasury and approved by the advisory committee. The joint committee approves the proposed rearrangement.

Volume III is a survey of the administration of the income and profits tax laws, prepared for the joint committee by the Treasury Department. Respectfully submitted.

WILLIAM R. GREEN, Chairman.

ERRATA

The provision relating to the expense of transfers in the field service was disapproved by the Joint Committee.

WILLIAM R. GREEN, Chairman.

VOLUME I

REPORT OF THE STAFF OF THE JOINT

COMMITTEE ON INTERNAL

REVENUE TAXATION

(CONCURRED IN BY THE ADVISORY COMMITTEE)

3

REPORT ON INTERNAL REVENUE

TAXATION

PART I. GENERAL SUMMARY

Consideration has been given to the simplification of the law and its administration and to the modification of provisions in the last act which appear to operate harshly or unfairly. A complete investigation into the operation, effects, and administration of the income tax and the working out in detail of satisfactory measures of simplification is an undertaking of large proportions. The conclusions thus far formulated are not offered as a complete program for legislation but as important steps which may properly be taken at this time.

For convenience the contents of this report are summarized below:

SIMPLIFICATION

In approaching the simplification of the income tax, two essentially different aspects of its operation must be recognized and each measure of relief must be tested from both viewpoints. Relatively small sums are collected from a great many taxpayers whose sources of income are few and simple. On the other hand, relatively large sums are collected from a smaller group whose incomes often result from the highly complicated operations of modern business. It must be recognized that while a degree of simplification is possible, a simple income tax for complex business is not. The task is to simplify the law and the administration for all taxpayers so far as possible, without causing real hardship to those with complex sources of income and varied business enterprises who can not be taxed justly under a simple, elementary law.

The act itself may be simplified by two principal methods. The first is to simplify the underlying policies or principles; the second to simplify the arrangement, phraseology, and other matters of form. Both are indispensible. It is convenient first to discuss simplification of form.

The arrangement of sections in the act is not satisfactory. A taxpayer can not find at any one place, a simple statement of the basic principles of the income tax. A complete rearrangement, published in Volume II of this report, is recommended, a principal feature of which is that all provisions of general interest to the great body of taxpayers are collected in 16 pages at the beginning of the act.

In its present form the act embraces several complicated provisions relating solely to taxes under earlier laws. The Bureau of Internal Revenue is almost current with its work and

these provisions no longer have the importance they once had. They should be omitted from future revenue aets. Accordingly, it is recommended that the Revenue Act of 1926 be continued in force for the adjustment of old cases and that the sections above referred to be entirely omitted from the next revenue act. Similarly it is recommended that the estate 'tax and miscellaneous tax titles of the 1926 Act be omitted from the next act. This will result in an income tax act, less bulky-and more simple than the present law.

Typographical improvements, such as the use of varied types in printing the law, catchwords, headnotes, indentations, and the like, simplify the form of the statute, and these are incorporated in the proposed: rearrangement.

A code of Federal tax administration appears desirable. Its compilation is discussed in Part II of this report. It will result in collecting the administrative provisions relating to all kinds of internal revenue taxes in one act. At the present time, some are in the revenue acts and some in the general statutes. Most taxpayers have no great interest in these provisions and they seriously complicate the successive revenue laws. Simplification, uniformity, and other advantages will result from the compilation recommended.

The substance of the act is so complicated that simplification of form alone will not afford an adequate measure of relief. There should be a thorough reexamination of the entire statute for the purpose of developing simpler basic policies. This is the fundamental need in statutory simplification.

Some complicated policies may be mentioned as illustrating the need for simplifying the substance of the law. The act abounds in formulae and mathematical ratios; there are something like a dozen different bases for determining gain or loss; there is a long list of technical deductions to be mastered by all taxpayers, including the large group of wage earners who have few deductible items; the double structure of a graduated surtax on net income and a flat normal tax on net income less certain credits, in itself is inherently complicated; the bewildering complexity of sections 201, 202, 203, and 204, dealing with corporate distributions and the basis for and the determination and recognition of gain or loss, is universally recognized. Many of these and other similar provisions were placed in the law to alleviate intolerable hardships and to prevent injustice during a period when the income-tax system was growing rapidly and in the midst of great financial stress incident to war. The outstanding need to-day is to reexamine and simplify the substance of what has come into the act in the past 10 years. This large undertaking is a major element in any plan of simplification. Recommedations will be found in this report for simplification of certain provisions in the law, including the earned-income credit, the interest provisions, section 1106(a), and consolidated returns.

Simplified administration, the second branch of the general problem, centers to a large degree on the element of personnel within the bureau and it presupposes simplification of the act itself. The recommendations with respect to the earned income credit are calculated to simplify administration. Revenue agents are agreed that in its present form it is a prolific cause of mistakes, cost, and delay in handling returns, all of which complicate administration.

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