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sources of income are few and simple; the second, the collection of tax from a much smaller number of taxpayers whose incomes are derived from the highly complicated operations of modern business. It is necessary to keep this dual nature of the problem constantly in mind in formulating policies either of legislative or administrative simplification and recommendations have been framed accordingly.

It is impossible to make the law as a whole simple in its application to the infinite variety of business transactions without real hardship. It should be possible to make its application to the simpler forms of income readily understandable and so to arrange its provisions that the great majority of taxpayers could glean from it all that relates to their own cases without becoming involved in the very complex provisions necessary to provide for complex business transactions. Simpler means may be found in some cases for handling the inherently complicated questions and states of fact which as a rule appear in the larger cases, but this can only be accomplished by inquiry and study of these matters over a period of time. The making of such inquiry and study is recommended.

Purely formal simplification of the act need not await further investigation of the kind described. Simplification measures directed chiefly to matters of form, such as arrangement of sections, phraseology, typography, etc., are discussed below.

REARRANGEMENT OF THE ACT

At no place in the law can the taxpayer find a simple statement of the principles which underly the income tax. At the beginning there are a dozen pages of definitions and special provisions. Though the principles of the corporation and the individual tax are much alike, they are expressed separately in Titles II and III. The elementary provisions as to gross income, deductions, net income, credits, the making of returns and payment of the tax are spread throughout the first 50 pages. The basic provisions which apply to all taxpayers ought to be collected together at the beginning of the act. This involves a rearrangement of the law, which has been made and will be found in Volume II.

The plan of rearrangement, recommended after much consideration, is to divide the provisions into two classifications: General Provisions and Supplemental Provisions. The general provisions, appearing at the outset, are intended to cover the ordinary transactions of the great majority of taxpayers. It is believed that about 75 per cent of the taxpayers will find in these comparatively few pages of general provisions practically all the sections of interest to them.

In the main, the supplemental provisions are those applicable only to special classes of taxpayers or to occasional transactions. The rearrangement simplifies the act for taxpayers regardless of income.

PROVISIONS RELATING TO TAXES UNDER PRIOR ACTS

It has been the custom with each new revenue law to repeal preceding acts and to write into the new act provisions for the settlement of all the old cases. Most of these provisions are complicated. The bureau is practically current in its work. The Revenue Act of 1926 should remain in force to settle taxes for all years preceding the first year taxed by the new act. Necessary changes relating to earlier years may be made by amendments. This harmonizes with the suggestion for the compilation of a code of tax administration which will embody the administrative provisions relating to all years.

ESTATE TAX, EXCISE TAXES, AND MISCELLANEOUS TAXES It is recommended for similar reasons that all the estate and miscellaneous tax provisions of the last law be continued in force, with necessary amendments for the purpose of imposing and settling all such taxes. The result will be to make the next law purely an income tax act, and it will be free of the complications due to these titles in which income taxpayers have no concern.

TYPOGRAPHICAL SIMPLIFICATION

A great deal can be accomplished by the liberal use of catchwords, indentations, and varied types in printing the act. Though not heretofore used in the revenue laws, these are well-known in older forms of legislation and are effectively employed in the new United States Code. The value of utilizing these typographical aids is demonstrated by a comparison of the act as set forth in Volume II, with past acts. It is suggested that the Joint Committee on Printing be requested to authorize their use as shown in the rearrangement.

ADMINISTRATIVE CODE

About three-fourths of the current returns are accepted as filed. Most of the remaining fourth are settled by the bureau. The average number of appeals to the Board of Tax Appeals is about 7,200 a year, a small fraction of the total returns. The great body of taxpayers have no particular interest in the procedure of the board nor in the other administrative provisions. As a rule they become important only where counsel have been employed to carry a case beyond the bureau to the board or the courts.

There is much to commend the compilation of a code of Federal tax administration, apart from the revenue acts. Stability of administration will be encouraged; the act will be made less bulky and more useful to the great number of taxpayers who are not concerned with the legal rights and duties of the commissioner or the statutory requirements of administrative procedure. To-day the administrative provisions are distributed at various places in the revenue acts and the general statutes. There is lack of uniformity as between the income tax, the estate tax, and other internal-revenue taxes. Some provisions duplicate or overlap others. Some antiquated sections ought to be adapted to modern conditions. This should be part of the work in compiling the code. The great benefit would be to collect for ready reference at one place all statutory provisions bearing on the administration of all internal-revenue taxes.

PHRASEOLOGY AND EXPRESSION Obviously formal simplification also implies simple language, economy of words, the avoidance of technical terms, and the judicious employment of general phrases where practicable, to replace unnecessary detail. More must be done than to read the law and attempt to express it concisely and clearly. The meaning of legislation is not in the statute by itself. Court and board decisions, regulations, rulings, accepted administrative practices, and prior legislation must be consulted and each section must be examined by itself and in its relation to others. The undertaking is a large one and every precaution should be taken to guard against fresh uncertainties and ambiguities.

SIMPLIFICATION OF THE SUBSTANCE OF THE ACT

Plainly, the complicated character of the body of the law operates to limit the possibilities of simplification by merely formal measures. Simplification of the substance of the law is the only way to get at the root of complication. Some of these complexities of substance may be mentioned.

The different bases for determining, gain or loss.-Several bases for determining gain or loss are prescribed in section 204 of the act. There is one rule if the property was purchased after March 1, 1913; a second if purchased before that time; a third if it is subject to inventory; a fourth if it was acquired by gift or transfer in trust after December 31, 1920; a fifth if it was acquired by gift or transfer in trust prior to December 31, 1920; a sixth if acquired by bequest, devise, or inheritance; a seventh if acquired by exchanges of certain types; an eighth if acquired by involuntary conversion and others. Intensive reexamination of the policies underlying section 204 is needed. It may prove possible to simplify these basic provisions. Mere formal simplification does not resolve this kind of complexity.

Credit for foreign taxes. Several readings may be required to grasp the purport of sections 222 and 238, which deal with the credits for foreign taxes. Each section occupies more than a page of the act. Both involve mathematical formulæ like the following from section 238:

The amount of such credit shall in no case exceed the same pro. portion of the tax (computed on the basis of the taxpayer's net income without the deduction of any income, war-profits or excess-profits taxes imposed by any foreign country or possession of the United States) against 'which such credit is taken, which the taxpayer's net income (computed without the deduction of any such income, war-profits or excess-profits tax) from sources without the United States bears to its entire net income (computed without such deduction) for the same taxable year. There are similar

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in other sections. Formal measures will not simplify statements of ratios and formulæ like these. The amount of credit allowable must be computed more simply or the complication must be accepted.

The detailed list of deductions.—Doubtless half the disputes between the taxpayer and the Government concern the deductions which by sections 214 and 234 the taxpayer is allowed to subtract from his gross income to arrive at net income. The deductions include interest payable, certain kinds of taxes and losses, bad debts, depreciation, obsolescence, depletion, gifts, contributions, ordinary and necessary expenses, and the like. The formidable list confront's all taxpayers and each must undertake to apply the list correctly, even though gross income may consist entirely of salary and the deductions amount to nothing. This is the case with thousands of small taxpayers. Formal simplification of the deductions does not

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simplify the law for such people. Simplification must go to the substance of the law. Perhaps those with negligible deductions might be given a slightly lowered rate to be applied to the gross income if all deductions are waived. It is not possible to express the substance of sections 214 and 234 much more simply than they are now expressed.

System of a normal tax and surtax inherently complicated.-Individuals with net income of $10,000 or more pay not one but two taxes, computed not on one but on two different bases. There is a flat normal tax and a graduated surtax. The surtax is imposed on net income, which is gross income less certain deductions. The normal tax is imposed on a different figure; i. e., net income less credits. The confusion of deductions with credits is inevitable. The system itself must be simplified (a difficult but perhaps not impossible undertaking) or the complexity must be viewed as inevitable.

Illustrations might be multiplied, including provisions relating to interest, limitation periods, nonresident aliens, recognition of gain or loss, procedure in case of a deficiency, and others.

SIMPLIFICATION OF ADMINISTRATION

The determination of taxes may be complicated, though the act is simple. Regulations may be restrictive, returns abstruse, or administration cumbersome and technical. Effective simplification means making tax determination simple.

Whether or not the return is simple depends both on the statute and on administration methods. Such provisions as the earnedincome credit in its present form can not be accommodated to a simple return. So long as the normal and surtax are separate taxes on separate bases, returns for those subject to surtax will be more complicated than the normal tax return. A certain minimum of information is absolutely necessary to verify the correctness of any return. The more information on the return, the less need of requesting further data or of examining books and records. The problem is to strike a proper balance. Further examination of the law and administration is needed to form the basis of recommendations which will produce simpler returns.

The underlying factor of complication in administration is the element of personnel

. Unless employees have the requisite judgment, impartiality, and executive ability, decisions become faulty, the disposition of cases is delayed, appeals to the board are multiplied, and there is great loss to the Government and taxpayers alike. The improvement of bureau personnel is indispensable to the solution of difficulties of the kind described.

Inquiry into methods of simplifying the administration of the tax laws has not been completed. A considerable amount of material is being assembled bearing on this difficult problem, and this will be analyzed for the purpose of making recommendations for improvement. Attention is invited to a survey of administration prepared by the Treasury Department for the joint committee and published herewith as Volume III. The recommendations with respect to earned income, section 1106 (b), section 280, and other subjects will tend to simplify administration.

CONSOLIDATION OF FIELD FORCES

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:

Better service.—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 connection with the assessment, collection of his taxes, and audit of his return.

Under the present arrangement it is the exception rather than the rule when the office of the internal-revenue agent in charge and the collector of internal revenue both being in the same city are located in the same building. In many instances the collector of internal revenue occupies space in the Federal building, while the office of the internal-revenue agent is in rented quarters. The reverse may be true in some instances where the Federal space is inadequate to house the collector of internal revenue and it is occupied by the internal-revenue agent if the requirements of the agent's office are less than that of the collector.

It is obvious that in the same city taxpayers are confronted with the situation of going to two offices to effect adjustments of their taxes. In the agent's office the amount of tax due may be determined satisfactorily to the taxpayer and then he must go to the collector's office to make payment. Taxpayers, as a general rule, are not familiar with Government procedure and can not understand why one Government official can not determine the amount of tax due as well as accept payment. The situation is more complicated in those States where there is no internal-revenue agent's office. As an example, the States of Idaho, Montana, and Utah are combined in one internal-revenue agent's division, with the office of the agent in charge located at Salt Lake City, Utah. Taxpayers in Montana and Idaho must look to the agent in charge at Salt Lake City for a settlement of their taxes and then make payment to the collector of internal revenue at Helena, Mont., or Boise, Idaho, depending upon the residence of the taxpayer. Assessments made by the bureau are received by the collectors in Idaho and Montana and occasionally controversies arise, in which case the taxpayer must appeal to the internal-revenue agent in charge or to the bureau. The collector of internal revenue, not being charged by law for the assessment of taxes, has very little, if any, information to give to the taxpayer. Their returns are considered either in the office of the agent in charge at Salt Lake City or in the bureau. If there were one office in each State, the internal-revenue official in charge would be in a position to conduct the business of collecting the internal revenue far more expeditiously and with more satisfaction to both the Government and the taxpayer. The case of the agent's division, including the States of Utah, Montana, and Idaho, is a typical one.

There are 64 offices of collectors of internal revenue and 36 offices of internal-revenue agents in charge. Attention is invited to organization chart No. 1 at the end of Volume III herein. It would be economically unsound to establish an office of an internal-revenue

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