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agent in charge in every collection district where there is a collector's office, due to the small number of returns received, but a combination of the two offices could easily take care of the entire situation.

The following incident illustrates fairly well what transpires under the present plan of organization. This is a typical incident. 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 internal revenue 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.

Central control.-The central office at Washington will be in closer and in 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.

Duplication of work.--Under the present plan there is much duplication of work, such as

1. Index cards.
2. Mathematical verification of returns.
3. Filing systems.
4. Disbursement clerks.
5. Correspondence.

As an example of the duplication of work in connection with correspondence the following is a typical case: The collector of internal revenue may address a letter to the bureau requesting information relative to some assessment that has been placed on his books for collection. The bureau upon receipt of the correspondence finds that the return giving the information desired is in the files of the revenue agent in charge. It is necessary for the bureau to address a letter to the internal revenue agent, who replies to the bureau, and then the bureau can intelligently answer the collector's question.

It is obvious that a substantial saving both in time and in money would be made if there were one supervisory official in each collection district with whom the bureau could correspond to bring about a satisfactory settlement of the various problems that arise in connection with the assessment and collection of the tax. It is difficult to realize the loss in time and the cost to the Government that this duplication of work brings about, but the magnitude can be readily realized when it is considered that there are approximately 5,000,000 income tax returns filed each year that must be matheImatically verified as to their accuracy, indexed, and filed.

Better legal advice to taxpayers.- Probably every taxpayer in the country knows the location of the office of the collector of internal

60481—27-VOL 1-3

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revenue within his district. Each year the collector of internal revenue gives advice to many taxpayers. Naturally when any question arises subsequently about a taxpayer's return he expects to receive an answer from the collector of internal revenue. The features of the internal revenue laws are so intricate that it is almost impossible for one man to master them all. The taxpayer may receive legal advice from one of the collector's employees or from the collector, which is given in the best of faith. The return is filed accordingly and is sent to the internal-revenue agent for audit. The internal-revenue agent assigned to the case may place an entirely different construction on the law, and as a result either increases or decreases the amount of tax. The matter, of course, is eventually settled, but it is difficult for the Government to explain to the taxpayer why he received advice from an employee of one branch of the Government which is not sustained by another branch of the same bureau. Under a consolidated plan of organization as herein proposed there would be assigned to each office a sufficient number of employees to give advice to taxpayers and more consistent advice would be given.

Personnel.At present a large percentage of the employees in the offices of collectors of internal revenue are not appointed through the medium of the civil service. Deputy collectors are appointed by the collector of internal revenue, and as a result may or may not hold their positions during the tenure of office of the appointing officer and have no assurance of holding a position under a successor,

The employees in the offices of the internal-revenue agents in charge are selected from the civil service, and as a result the positions are more or less permanent; at least they are not subject to dismissal due to change of a supervisory official.

During the past three years there was a turnover in collectors' offices of approximately 3,000 employees, or 56 per cent of the present personnel. During the same period there were 993 resignations from internal-revenue agents' force, or 25 per cent of the present personnel.

It is estimated that the cost of training an employee is approximately one-third of the first year's salary, and therefore the cost to the Government in this turnover is slightly less than $500,000 per

It is believed advisable to require that all employees enter through the medium of the civil service. If such legislation is enacted, an undue hardship may be imposed on many employees who do not at present have a civil-service status, unless some arrangement is made to give them an opportunity to obtain a civil-service status by a noncompetitive examination upon recommendation made by the supervisory officials or by a competitive examination in which they will be given due consideration for meritorious service and the special training they have received at Government expense.

It is also suggested that provision be made that the age limit usually required for civil-service examinations be waived as to applicants now in the collection service. The present turnover in the service is sufficient to eventually take care of the substantial reduction in personnel without throwing out of employment a number of people who have given years to the service. It would be unwise for the Government to lose the experience gained by these employees in the service, providing, of course, their work has been satisfactory.

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In view of the enormous sums of money that employees attached to collectors' offices must handle, provision should be made for bonding civil-service employees either to the Government or to the supervisory officer in charge. The supervisory officer, however, should be bonded to the Government in such sum as the Commiss.oner of Internal Revenue may determine.

Appointment of the collectors of internal revenue.--In considering the appointment of collectors, attention is invited to four methods:

1. The appointment of collectors of internal revenue by the President, with the advice and consent of the Senate.

2. The appointment of collectors of internal revenue by the President, with the advice and consent of the Senate, the nomination to be made, however, by the President as the result of selection from the civil-service register or by the selection for promotion of an internalrevenue employee.

3. The appointment of collectors of internal revenue by the Commissioner of Internal Revenue without regard to civil service laws and regulations.

4. The appointment of collectors of internal revenue by the Commissioner of Internal Revenue, selection to be made from the civil. service register or by the selection for promotion of an internalrevenue employee.

Estimated economies. There were in the internal-revenue field service on September 1, 1927, 9,048 employees.

There is a chart attached to this volume which indicates an ultimate reduction in personnel of 988 employees. This number will be composed of supervisory employees, telephone operators, janitors, disbursement clerks, messengers, file clerks, and other employees occupying positions that would be merged as a result of consolidation.

There will be a better utilization of space under a single organization, a saving in mechanical equipment, telephones, filing equipment, and a large number of other miscellaneous items.

By taking into consideration all the various elements that will enter into the consolidation plan, it is believed that a saving of approximately $2,000,000 per annum can be effected.

The proposed change would increase the efficiency by securing unified personnel, management, and control. It would reduce turnover by giving employees the security of civil service and opportunity for advancement. It would promote uniformity of administration and procedure by placing all field forces under the Commissioner of Internal Revenue. It would permit the transfer of employees from one office to another to meet emergencies. It would save rent, equipment, and reduce pay roll. It would lessen clerical and supervisory work in Washington. The records would be collected in 64 cities instead of about 100. It would eliminate a vast amount of work necessary in two separate organizations, such as the preparation of transcripts of returns and tax accounts and the conduct of correspondence between the two agencies. It would mean infinitely better service to taxpayers.

There is no way to make field administration, which plays an important part in tax determination to-day, economical or reasonably efficient so long as the present scheme is retained.

PART III. INVESTIGATIONS OF PARTICULAR SUBJECTS

EARNED INCOME

(Section 209)

The present Revenue Act in section 209 provides for a tax credit, between certain limits, of 25 per cent of the tax which would be payable on the earned net income of the individual if such earned net income constituted his entire net income.

This provision has been investigated both as to the propriety of taxing earned income at a lower rate than other forms of income and also as to the possibility of simplifying the present method of computation.

The principal results of this investigation are set forth in the following synopsis, and public analysis and consideration of the data presented is invited.

SYNOPSIS

1. The principle of taxing earned income at a lower rate than other forms of income appears to be justified in our income tax law for the following reasons:

(a) Earned income is subject to more uncertainty than is the case with income derived from capital; further, the individual expends his energy and ultimately is worn out in the production of earned income, while the unearned income from capital leaves such capital unimpaired.

(6) The acquirement of earned income on the part of the individual places him in general under expenses not borne by the individual with unearned income, which expenses are not deductible as in the case of a corporation.

(c) Since relief is given taxpayers from full taxation on income from capital, through the capital gains tax and through depreciation and depletion deductions, justice requires a proper rate reduction on earned income.

(d) The principle of taxing earned income at a lower rate than other forms of income is recognized by such countries as Great Britain, France, Italy, Belgium, and Spain.

2. The earned income provision is not generally understood by the taxpayer and causes more errors in the computation of income taxes than any other provision of the act. Investigation reveals that at least 10 per cent of all individual returns are in error on account of the earned income feature, and 20 per cent of all individual returns over $5,000 are in error from the same cause. From the above it results

(a) That the clerical work in audit is increased, with consequent delay and expense.

(6) That many small refunds or additional collections are required.

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(c) That taxpayers are often obliged to bear the expense of technical advice in the preparation of their returns, which would otherwise be unnecessary:

3. The errors made by the taxpayers, with the consequent administrative difficulties, do not show, as has been argued, that the principle of earned income should be eliminated. These facts do show an urgent need for simplification in the method of computing the tax.

4. A method (caĪled Method No. 2 in this report) is suggested which allows 10 per cent of the earned net income as a credit from net income in arriving at net income subject to normal and surtax in lieu of the present 25 per cent tax credit. Earned net income is not to be allowed in excess of $20,000 or in excess of the net income. It may be said with respect to this method

(a) That it is very much simpler than the present method, resulting in reducing the number of entries required on the return by 13 distinct items and entries.

(6) That it results in practically the same net tax to the married man without dependents as the present law effects with the 25 per cent tax credit.

(c) That it results in a slight shifting of tax from the married person with dependents to the single person without dependents, but that this small shift in the tax burden is equitable and falls on those most able to pay.

(d) That the method is practical, as the same method is used in Great Britain with success.

5. The arbitrary 20 per cent limit placed on the earnings from a business where capital is a material income producing factor, which is assumed to represent earned income, is unjust in the case of small business men.

RECOMMENDATIONS

In view of the above and the discussion and facts presented later it is recommended

1. That the principle of taxing earned income at a lower rate than other forms of income be retained in future Revenue Acts.

2. That simplification of the method of computing the tax under a Revenue Act, retaining the earned-income principle, be effected by the use of Method 2, described in this report, which proposes in lieu of the 25 per cent tax credit:

A credit against net income in arriving at net income subject to normal and surtax, equal to 10 per cent of the amount of the individual's earned net income. If the tax payer's net income is less than $5,000, his earned net income should not be considered to be less than his net income, and if his net income is more than $5,000 his earned net income should not be considered to be less than $5,000. In no case should the earned net income be allowed in excess of $20,000 or in excess of the taxpayer's net income.

3. That in lieu of the 20 per cent limit on earned income, provided for in section 209 (a) (1), where capital is a material incomeproducing factor, it be provided that such limit be increased to 50 per cent.

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