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Historical Perspectives on the Federal Income Tax

1940: The Broadening of the Taxpayer Base



There are two major changes created by this legislation, first the lowering of the personal exemption and second, the reporting requirements were changed from a basis of net-income to that of gross income, although the tax "liability" remained on the basis of net-income. The former increased the number of taxable returns, while the latter increased the total number of returns filed, neither required the common law employee to file tax returns based solely on "wages". According to the Statistical Abstract of the United States there were forty-eight million employed persons in 1940, of which only fourteen and one-half million filed tax returns and seven and one-half million actually paid any taxes. The "average" wage paid to employees was shown to be $1,300 per year. Based upon the filing requirement of $800 single and $2,000 married the following report would not make logical sense when applied to those numbers, if employees were actually required to file tax returns.

House Report Number 2491, prepared by the Ways and Means Committee, was presented to Congress by Chairman Doughton on June 10, 1940. Under the heading "Discussion of Principle Income Tax Changes" the following information is provided regarding the anticipated affects of the proposed changes compared to the previous Revenue Act:

"(a) Lowering the personal exemptions."—Title I of the bill lowers the personal exemption from $1,000 to $800 in the case of single persons and from $2,500 to $2,000 in the case of married persons or heads of families. This will make approximately 2,190,000 new taxpayers.

(d) Requirement for filing individual income tax returns,--Under existing law, an individual, if single, is not required to file an income-tax return unless his gross income is $5,000 or more or his net income is $1,000 or more. In the case of a married individual, no return is required under existing law, unless his gross income is $5,000 or more, or the net income is $2,500 or more. A return is also required if such individual and his spouse each has a gross income and the aggregate gross income is $5,000 or more. The bill requires a return from a single individual if his gross income is $800 or more and from a married individual id (1) such individual has a gross income of $2,000 or more and the other spouse has no gross income or (2) if such individual and his spouse each has for the taxable year a gross income and the aggregate gross income is $2,000 or more. Many persons have failed to file returns upon the assumption that their income was insufficient, when, in fact, they were liable for the filing of a return and the payment of a tax. This change will require approximately 8,000,000 additional returns, and it is believed will result in the collection of substantial additional taxes. It is estimated that under existing law approximately 7,500,000 individual returns are filed."

According to the Statistical Abstract there were, in fact, seven and one-half million tax returns filed in 1939, of which less than four million paid any tax at all. The anticipated effects then were that of the seven and one-half tax returns filed the previous year, six million (2.2 million more than 1939) would be taxable in the current year simply because of the reduced personal exemption. In addition, approximately eight million (actually seven million more did file) people would file tax returns for the first time, of which one and one-half million actually pay any tax.

The "income tax" was a "business" related excise tax, therefore the levy based upon "net-income". The change in reporting basis from net-income to gross income simply meant that all sole-proprietors, or those conducting business, were required to now file tax returns if their "gross" income exceeded the specified level. The actual results of this change however, occurred in the following years 1941 to 1944


Congressional Record Volume 86:

Part 19, INDEX: House Bills 10016-10054, H.R. 10039

Part 7, pgs. 7959-8022,

Part 8, pgs. 8358, 66, 75, 8461, 74, 91, 99, 8505, 8573, 94, 8607, 8631, 9021-28

Part 15, pgs. 3502-04, "The Best Defense/Broaden the Tax Base"

House Report Number 2491, Serial Set No. 10443 "National Defense Tax Bill",

Senate Report Number 1856, Serial Set No. 10430

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