REPORT OF THE JOINT COMMITTEE ON INTERNAL REVENUE TAXATION TO THE COMMITTEE ON WAYS AND MEANS OF THE HOUSE OF REPRESENTATIVES AND THE COMMITTEE ON FINANCE OF THE SENATE WASHINGTON, D. C., November 15, 1927. The Joint Committee on Internal Revenue Taxation was established under section 1203 of the Revenue Act of 1926. The committee is composed of 10 members, 5 of whom are members of the Committee on Ways and Means of the House of Representatives and 5 of the Committee on Finance of the Senate. The principal duties of the joint committee are to investigate the operation and effects of the Federal system of internal-revenue taxes; to investigate the administration of such taxes by the Bureau of Internal Revenue or any executive department, establishment, or agency charged with their administration; to make such other investigations in respect of such system of taxes as the committee may deem necessary and to investigate measures and methods for the simplification of internalrevenue taxes, particularly the income tax. The committee organized by electing a chairman and vice chairman and providing for a staff, to consist of two divisions, a division of simplification and a division of investigation. L. H. Parker was appointed chief of the division of investigation on August 2, 1926. The personnel of the division of investigation was later increased by the appointment of G. D. Chesteen, assistant chief, an engineer, and three auditors. Charles D. Hamel was appointed counsel for the committee and chief of the division of simplification in April, 1927. Edward H. McDermott was appointed assistant counsel. The personnel of the division of simplification consists of the chief of the division and two assistants. It was not possible to establish the division of simplification at an earlier date than that mentioned, due to difficulties encountered in obtaining the services of individuals qualified to perform the work required. The division of investigation has functioned since August, 1926, though until recently with a considerably smaller force than it has now. The work of the division of simplification began in April of this year. An advisory committee was appointed in April, consisting of Dr. T. S. Adams, A. A. Ballantine, George E. Holmes, George O. May, and Dr. Thomas Walker Page, the committee serving without compensation. Charles D. Hamel acted as chairman of the advisory 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 AL REPORT ON 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 |