Historical Perspectives on the Federal Income Tax
1944: The Individual Income Tax Bill
Adjusted Gross Income
"The plan adopted in this bill is this: We are going to change the definition of "taxpayer". Everybody is going to be a taxpayer who has a net income of $500 or more. It makes no difference how old one is or where he is or what his circumstances are." [Congressman Jenkins, May 3, 1944, page 3982 of the Congressional Record]
His statement poses an interesting question, in regards to the Sixteenth Amendment. That is: Has the terminology used to define an income tax, change to the degree that under the definition of a "capitation" tax, i.e. a tax levied without regard to property, profession or circumstance, the original interpretation of the Sixteenth Amendment is no longer valid? In other words; is all that comes in (income) now considered to be net-income for tax purposes?
What does the term "adjusted gross income" mean anyway? Where did it come from? The term had never been used before, yet there is very little discussion about it in the Congressional Record. The Senate Committee Report does, however, provide an explanation, it is found on page 24 of Report Number 885.
"Subsection (a) of this section amends section 22 of the code by adding subsection (n) thereto for the purpose of defining the new concept "adjusted gross income’, which is used in determining the tax under supplement T. …
Fundamentally, the deductions thus permitted to be made from gross income in arriving at adjusted gross income are those which are necessary to make as nearly equivalent as practicable the concept of adjusted gross income, when that concept is applied to different types of taxpayers deriving their income from varying sources. Such equivalence is necessary for equitable application of a mechanical tax table or a standard deduction which does not depend upon the source of income. For example, in the case of an individual merchant or store proprietor, gross income under the law is gross receipts less the cost of good sold; it is necessary to reduce this amount by the amount of business expenses before it becomes comparable, for the purpose of such a tax table or standard deduction, to the salary or wages of an employee in the usual case. Similarly, the gross income derived from rents and royalties is reduced by the deductions attributable thereto (as defined in clause (4)) in order that the resulting adjusted gross income will be on a parity with the income from interest and dividends in respect of which latter items no deductions are permitted in computing adjusted gross income."
That is a roundabout way of saying that business net-income and employee gross receipts (or gross income) are both "adjusted gross income", for income tax purposes. This legislation provides the first real provision for the inclusion of the "wages’ earned by the common laborer, or common law employee, in a reportable form under the definition of "gross income". Prior to this legislation the Internal Revenue Code, under section 22 (a), provided only for the reporting of "gains and profits" (income under the old terminology) derived from such things as salaries, wages, compensation for personal services actually rendered, business and professional endeavors, and financial transactions. It did not provide for the reporting of "income" as reflected by its new terminology "all that come in". This is quite evident when one realizes that the phrase "income derived from salaries, wages, and compensation for services actually rendered" is referring to the net-profits of the business and or professional person. The salary, wage, or compensation is generally taken from the net-income of the business or profession during the year to pay "personal living and family expenses", therefore classed as compensation. In other words, the salary, wage or compensation referred to is a part of net income already and can not be excluded in the report of gross income without, in effect, allowing a double exclusion by reason of the "intent" of the personal exemption. Likewise, the salary paid to corporate and business managers, which generally far exceeded the wages paid to common employees, was to be included in the report of gross income. This reasoning stems from the fact that most people earning such large salaries also had other investments, or other "gains and profits" upon which to report income.
What apparently happened is that the terminology changed at the same time Congress provided a way for the small business or professional person to pay their "income" taxes based upon gross income instead of net-income (Supplement T under the 1941 Act). About the same time, the Victory tax was implemented along with a provision for collecting the war effort contribution (tax) directly from the worker’s paycheck. In 1943, because of the large number of worker's contributing to the war effort "without serious complaint", Congress extended the "withholding" provisions to help those who would possibly owe some amount of tax. None of the tax provision, however, actually made the employee’s "wages" reportable, unless combined with other forms of net income. Under the 1944 Act, however, Congress provided a specific section addressing the gross income of the common law employee, and provided for the deduction of certain "expenses" in order to conform the tax to the existing provisions of the "net-income" system. Thus, the term "adjusted gross income" was used to "make equivalent" the net-income of "business, privileges and employments" and the gross income (receipts) of the common laborer.
To further complicate and confuse, in other words, to make the new revision appear legitimate, Congress repealed the "earned income credit" and instituted the "optional standard deduction" in its place. Both allowances were designed around a 10 percent reduction in the amount of net income subject to tax. The "earned income credit" directly reduced the amount of tax paid, while the "optional Standard deduction" reduced the amount of net income subject to taxation. The "earned income credit" applied to business and professional earnings, whereas, the "optional standard deduction" applied mainly to those earning salary or wages subject to the "Supplement T" provisions.
There was still one problem; the Internal Revenue Code is a system of net-income taxation, that is, the income tax, by virtue of sections 11, 12, and 21 of the IRC, and the provision of the Sixteenth Amendment, was confined to the yearly net-income, not gross income, of the taxpayer. The option was available, however, under Supplement T, for anyone earning their income from salaries or wages to pay the tax imposed under sections 400-404, thus contributing to the war effort.
The Revenue Act of 1944, known as “The Individual Income Tax Bill of
1944” (H.R. 4646), introduced May 3, 1944, page 3969.
“to provide for simplification of the individual income tax”
Reported by the Ways and Means Committee to the House of Representatives
“This rule makes in order H.R. 4646, which is a bill to simplify income-tax returns, and is, I believe, favored by all. The rule provides for 2 days general debate, to be confined to the bill, committee amendments only, and. After debate shall have concluded, the bill will be taken up under the 5-minute rule. In other words, this is exactly the kind of rule under which the last tax bill came to the floor.” (Congressman Sabath of the Rules Committee) [You guest it, another gag rule. The Democratic way of passing questionable legislation]
Explanation of bill as made by Congressman Sabath:
“First. To relieve the great majority of taxpayers from the necessity of computing their income tax.” (And other measures to simplify the filing of tax returns)
Explanation made by Congressman Doughton, Chairman of the House Ways
and Means Committee:
“First. The bill repeals the Victory Tax, and thus makes it possible the use of a single tax base.
Second. A new normal tax is imposed upon the net income of every individual in excess of $500. This normal tax is necessary in order to retain as taxpayers 11,000,000 persons now subject only to the Victory Tax. Your committee felt these individuals should continue to pay a small tax and thus contribute to the war effort.
Third. The existing normal tax is integrated with the surtax. For surtax purposes a uniform exemption of $500 is allowed per person, that is, the taxpayer is allowed $500 for himself, $500 for his spouse, and $500 for each dependent.”
Fourth. (Definition of “dependent” changed and exemption raised from $350 to $500)
Fifth. (Grants a standard deduction of 10 percent or $500 maximum. Replaces earned income credit).”
Congressional Record-House Volume 90, page 3979, Congressman Jenkins
“We were yielding to the demand that there were many people in the lower brackets who would be willing to pay a small tax. We therefore levied the Victory Tax, which was a low-base tax. It applied to earnings above $624 per year. The Victory Tax applied to every man or woman or child who earned more the $624 a year.”
Congressional Record-Senate Volume 90, January 12, 1944, page 85, H.
R. 3687 “The Revenue Act” (1943). Senator George of Georgia, Chairman
of the Senate Finance Committee:
“The House version of the bill also contained as a substitute for the victory tax a minimum individual income tax and an increase in the normal rate from 6 to 10 percent. The minimum tax was designed to retain on the tax rolls approximately from 11,000,000 to 14,000,000 taxpayers who are not subject to the regular income tax but who were subject to the victory tax.”
Congressional Record-House Volume 90, May 3, 1944, page 3979.
Congressman Jenkins of Ohio.
“That was due to the fact that we had put into effect the withholding tax. The withholding tax made millions of taxpayers who had never been taxpayers before.”
Congressional Record-House Volume 90, May 4, 1944, page 4014, Congressman
Cooper of Tennessee:
“The gentleman will bear in mind something that we tried to emphasize several times, and there still seems to be some confusion about it. The withholding is not a tax. It is just a method of collecting the tax that the taxpayer owes,..”
Congressional Record-House Volume 90, May 4, 1944, page 4028. Congressman
Malloney of Louisiana:
“The Victory Tax and the earned income credit have both been abolished. The amount of the income from the Victory Tax has been continued by an adjustment in the normal tax.”
Congressional Record-House Volume 90, May 4, 1944, page 4017, Congressman
McLean of New Jersey:
“There will be a further increase by the change in the use of the exemption. Heretofore it has been permissible for a married couple to use the total exemption as was most advantageous. The entire amount could be used by either spouse. That is no longer possible. It may be divided equally between them if they are using separate returns. It can be used jointly in filing a joint return. As a result of either method many married couples will find themselves in higher brackets paying higher taxes.”
Congressional Record Volume 90:
Part 12, INDEX: House Bills, H.R. 3687 "The Revenue Act of 1943"
Part 12, INDEX: House Bills 4632-4674, H.R. 4646
Part 12, INDEX: "Income tax", "Revenue", "Taxation"
Part 1, pgs. 85-120, 659-60
Part 2, pgs. 2024-28,
Part 3, pgs. 3120-25, 3133-40, 3968-83, 4010-33, 4070-71
Part 4, pgs. 4482, 4569, 4702-30, 4783-87, 4829-31
House Report Number 1365, Serial Set No. 10845
Senate Report Number 885, Serial Set No. 10841
Act of May 29, 1944, Chapter 210, 58 Statutes 231
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