Historical Perspectives on the Federal Income Tax
1943: The Current Tax Payment Act
The Revenue Act of 1943, H.R. 3687, is said to be the first Revenue Act to be vetoed by the President, subsequently passed by the House and Senate, thereby overruling the President, and then superceded by the following year’s Revenue Act. [See 1944 Congressional Record and Congressman Carlson’s speech on May 4, 1944, Vol. 90, Part 4, page 4021].
However, in addition to the Revenue Bill of 1943 Congress enacted a separate piece of legislation requiring the payment of taxes in the year the income is earned, instead of the following year in which the taxes were normally paid. Basically the "Current Tax Payment Act of 1943 (H.R. 2570), deals with the "pay-as-you-go" concept of tax collection. In order to accomplish the transition, without collecting two years taxes in the same year, Congress had to come up with a workable plan. Part of that "plan" was the "withholding" provisions similar to that used by the Social Security Act. This is the beginning of our current "Collection of Income Tax at Source on Wages" (26USC3401) requirement. In addition, this is where the "estimated tax payment" requirement comes from. The Committee Reports provide a detailed explanation.
Some, no doubt, have heard of the "Ruml" plan and the proposal to forgive one year’s taxes in order to facilitate the move to a "pay-as-you-go" collection system. It did not happen. Instead Congress lowered the taxes due from 1942 income, based upon the 1941 schedules, and implemented the "withholding at the source on wages and salaries" provisions for the collection of taxes on current income (based upon gross receipts, or income under the new terminology). In addition, the provision for filing and paying estimated taxes was developed to facilitate the collection of current taxes from those acquiring their income through the operation of business and financial transactions (based upon net-income, or income under the old terminology). In other words, the tax would be taken from the paycheck of the employee on a scheduled basis as it was earned, whereas the sole-proprietor would file a quarterly statement and pay an estimated tax amount.
It is interesting to note that the "withholding" provision applicable to "wages", in relation to the Victory Tax, was based upon the "personal exemption" of $624 single, $1,248 married, and $312 in the case of a dependent. Whereas, for the net-income tax provisions the exemptions were $500, $1200, and $350, respectively. The reasoning used was that the "Victory" tax was based upon the gross income of wages and salaries, and temporary in nature. Therefore, the personal exemption allowance was based upon the statistical cost of "food and a little more", whereas under the net-income tax provisions the personal exemption was based upon an arbitrary amount. In other words, the Victory tax is where the value of the "personal exemption" changed from an amount adequate to cover the "personal living and family expenses" of the majority of the population, to an amount that barely covered the yearly cost of food. It remains that way today.
Accordingly, by a comparison of statistics from 1937 to 1943 taken from the Social Security records, average "wages" increased from $996 in 1937 to $1,462 in 1943, whereas the "personal exemption" decreased from $1,000 single, $2,500 married, and dependent $400 to $500 single, $1,200 married, and $350 for dependents. At the same time the Statistical Abstract of the United States shows that "personal consumption expenses" (actual average per capita cost of living) increase from $516 in 1937 to $726 in 1943. The difference between 1943 and 1954 is even more staggering, because the "personal exemption" was not increased, yet "wages" doubled along with the "per-capita" cost of living.
Congressional Record Volume 89:
Part 13, INDEX: House Bills 2452-2580, H.R. 2570
Part 13, INDEX: "Income Tax", "Revenue", "Taxation"
Part 3, pgs. 3733, 3835-61, 3914-58, 4136-37, 4249, 4257-86, 4334-54
Part 4, pgs. 4392-4448
Part 8, pgs A784-5, 1040 tax return for 1943
House Report Number 401, parts 1&2, Serial Set No. 10761
Senate Report Number 221, parts 1&2, Serial Set No. 10756
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