Historical Perspectives on the Federal Income Tax
The Revenue Acts
The Revenue Bill of 1940
Revenue Bill of 1942
Revenue Act of 1944
The Revenue Acts
Gross versus Net Income (Why employees pay income taxes):
“If we are going to depart during this war, as a emergency matter,
from the concept which has run through our tax system, that is to say,
imposing a tax on net income, there would seem to me to be little or no
purpose to the pending proposal if no one would be reached who was not
subject to the net-income tax provisions of the bill as passed by the House
and as reported to the Senate. In other words, if it would not bring
in additional taxpayers; if it would not reach the vast number of income
producers who will not pay taxes on net-income, there would seem to be
very little reason in departing from the net-income system and going to
the gross-income system in collecting a tax.”
(Congressional Record-Senate, Volume 88, October 9, 1942, page 7987. Senator George of Georgia, Chairman of the Senate Finance Committee.)
The Revenue Bills of 1940, 1942 and 1944, introduced a new concept in Federal taxation, that is, a “net-income” tax levied upon “gross income”, by a collection method, which supposedly was not in itself a Tax.
The 1940 Revenue Bill changed Section 51 (a), filing “Requirements”, from the basis of net income to that of gross income. However, it did not change the Tax Code section (Section 11) levying the tax on net income to gross income. Under the 1942 Revenue Bill the “Income Tax” was again based upon net income and, as such, only applied to those people subject to a “net income” tax (business, trades, professions, etc). But, the additional Victory Tax (a separate tax from the income tax) was levied upon “gross income”, sort-of, and applied to everyone who earned or received $624 or more that year. The Victory Tax was levied upon what was called “the Victory tax net income” of every individual. In this case the “Victory tax net income” meant the annual receipts of the laborer (wages) and or the “net income” of everyone else (Section 451 a). In conjunction with the Victory Tax, Congress implemented a program called: “Collection of Tax at the Source on Wages” (Withholding). The “withholding” provision (section 456), which was a method of collecting the tax at the source, withheld 5 percent of the employee’s “gross wages” (section 466), “to the extent that such wages are includable in gross income”, (but stops short of defining such “wages” as income). “Wages” then were defined as all remuneration received by the employee from the employer and the employers then were made responsible for withholding the tax from every employee’s wages, based upon a specific table. For the employee, this “withholding” provision was a method of contributing to the “war effort” through paying the Victory Tax, and for the Federal Government it was a method of bringing the employee into the “Income Tax” system.
Under the Revenue Bill of 1944 the Victory Tax was repealed and the “withholding” (tax) provisions merged into the normal “Income Tax” requirements. In order for the tax system to appear to be consistent, the method of determining taxable income was changed. The previous tax laws levied the tax upon the “net income” of the individual, net income meaning profit. Profit then meaning, gross income (receipts minus capital) derived from all sources, less business, trade and professional expenses (the cost of producing income or profit). Salaries, Wages, and or compensations for services received by the Individual (business person) were specifically included within the definition of “net income” under the prior tax laws. Under this tax bill, however, wages (annual receipts) earned by “labor for hire” were specifically included within the definition of “Gross Income” by the merger of the withholding provisions into the normal Income Tax. This change did not affect the salaries, wages or compensations for services received by business, trades or professions, they were still considered “net income”.
The 1944 Revenue Bill itself is a tax levied upon “net income” (Section 11. Normal Tax on Individuals), not gross income. The problem was to tie the existing meaning of “gross income” (business and sales receipts minus capital) to wages (annual receipts of the laborer) and have them both equal in meaning. Congress could not take away the allowance of expenses incurred in the production of income through business, trades and professions, because the definition of “income” is “the gain derived from”. Nor could they call their “salaries, wages and or compensation for services” gross income, because such compensation is paid out of the gains and profits (net income) of the business, trade or profession. In order to harmonize the annual receipts (wages) of employees with the net income (profit, including salaries, wages and or compensation for services) of business, trades and professions, they invented the term “Adjusted Gross Income” and placed it at the end of section 22 (Gross Income) of the tax code. Adjusted Gross Income was then used to replace the term “Net Income” under section 21 in the later tax codes.
“Section 22 (n) As used in this chapter the term ‘adjusted gross income’
means the gross income minus—
(1) Trade and business deductions
(2) Employee expenses for travel and lodging in connection with employment.
(3) Reimbursed expenses in connection with employment.
One must assumed that “gross income” includes the wages earned by employees (under the master-servant relationship), because Congress and the Tax Laws are silent on that point.
Now by allowing the laborer to deduct “expenses of travel and lodging
in connection with employment while away from home, and any reimbursed
expenses in connection with his employment” (as if they had any), from
their annual receipts (wages), Congress was able to change those “annual
receipts” (wages) to “Adjusted Gross Income” (Net Income). One problem;
most “employees” did not have employment related expenses nor could their
“wages” be considered “net income”; because they do not represent “gains
and profits”. Gains and profits are earned from the operation of
commercial activities, business and the use or sale of real and personal
property. The reasoning is found in a statement made by Senator Langer
of North Dakota, on page 4729 of the Congressional Record, 1944:
“Eleventh, the bill introduces a new concept, adjusted gross income. It is defined to mean gross income less business deductions…In the case of an employee, adjusted gross income consists of gross wages or salaries less expenses of travel or lodging…It will be seen, therefore, that in general adjusted gross income means gross income less business deductions.”
In other words, according to Congress; the annual receipts (wages)
earned by labor for hire are equal to “net income”, the gains and profits
derived from business, trades and professions’, even though the two bear
no resemblance to each other in fact or operation. This, in
turn, makes the inalienable right to “labor for hire” a privilege, like
that of business, trades and professions, taxable by an excise tax, which
is inconsistent with the fundamental law.
The Revenue Bill of 1940 (H.R. 10039), known as the “National Defense
Tax Bill”. Introduced June 11, 1940, page 7959 of the Congressional
“a bill to provide for the expenses of National preparedness by raising revenue and issuing bonds, and for other purposes…”
Reported by the Ways and Means Committee to the House of Representatives.
“The resolution provides for 6 hours of general debate and I regret that I am obliged to admit, if the charge is made, that it is a closed rule and that such a charge is correct. Yes, it might even be considered a gag rule. (Congressman Sabath of the Rules Committee) [Meaning that the general assembly could not offer changes]
An explanation of the bill, as presented by Congressman Allen of Illinois
on page 7961:
“Under title 1 of this bill it is intended to raise three hundred and twenty-two additional millions of dollars. This part of the bill is permanent legislation. It is intended to keep this increase indefinitely. It deals with a general increase of our income-tax laws. It provides for an additional 7,000,000 income-tax payers by lowering the base on single persons from $1,000 to $800; by lowering the base on married persons from $2,500 to $2,000.
Title 2 deals with additional excise taxes. Title 2 is intended to raise six hundred eighty-two millions additional taxes annually. While additional taxes under title 1 are permanent, additional taxes under title 2 are for a period of 5 years. The additional taxes under title 2 are to be used to pay off the bonds to be issued under title 3.
Title 3 provides for a $4,000,000,000 increase in our national-debt limitation. If this bill is passed, our national-debt limitation will be increased to $49,000,000,000.”
Congressman Cooper of Tennessee adds this bit of information overlooked
by Congressman Allen, page 7972-73:
“As has been pointed out, the bill provides that single people with $800 gross income and married people with $2,000 gross income must file income tax returns. As the law now stands, a single person must have $1,000 net income and a married person $2,500 net income, or a gross income of $5,000 before they are required to file income tax returns.”
Congressman Cooper, is then corrected by Congressman Dondero:
“Do I understand a single person with a gross income of $800 and a married person with a gross income of $2,000 will now be compelled to file a tax return?
Mr. Cooper. Yes; that is right.
Mr. Dondero; Instead of net income, as in the previous law?”
Interesting history on numbers; provided by Congressman Carlson of Kansas,
“Under existing law a married man with an income of $3,000 would pay a tax of $8. This bill increases his taxes to $30.80. The married man with a $4,000 income now pays $44. Under the proposed law he will pay $70.40. These increases will not be minor matters to millions of our lower-income groups.” (The average laborer earned $1,300 a year and most women did not work outside the home.)
Revenue Bill of 1942, H.R. 7378, introduced July 16,1942, page 6252.
“a bill to provide revenue”
Reported by the Ways and Means Committee to the House of Representatives.
“From the very inception of my service here I have been against closed rules. Today I am placed in the position, in the interest of our country, of favoring the adoption of a closed rule that some of you may designate as a gag rule” (Congressman Sabath of the Rules Committee).
“Of course, you are, but you are bringing in a closed rule so we cannot do anything and we have got to take this bill whether we like it or not. If we cannot say anything about it that would be effective we might as well go home.” (Congressman Rich of Pennsylvania)
An explanation of the bill by Congressman Doughton, Chairman of the
House Ways and Means Committee, page 6261-62:
“Not only is this the largest tax bill ever undertaken in the history of our Government, as I have stated, or by any other government, yet at the same time the cost of the war effort has placed on the American people a financial burden unqualified in all history. This burden makes necessary this tremendous tax bill.”
Points to ponder. Total income-tax revenue increased from 2.2 billion dollars in 1939 to 18.5 billion dollars in 1942 a 710 percent increase, over 3 years. The exemption decreased from $2,500 to $1,200 for married people and from $1,000 to $500 for single people during the same time. The person paying $30.80 under the 1940 law will now pay $324 and the person paying $70.40 will now pay over $500. (the average yearly earnings of the laborer are now $1,700 and a large percentage of women are employed)
“In order to secure the revenue more easily and to promote a convenient method by which our income taxes may be paid, the bill provides for the collecting a portion of the income tax attributable to wages, salaries, dividends, and bond interest at the source. It is believed that this method will make it easier for the taxpayer to pay his taxes, by collecting the tax currently, and also aid in preventing inflation.”
Congressional Record-House Volume 88, July 16, 1942, page 6254.
Congressman Halleck of Indiana
“The gentleman, who has made a splendid statement, referred to the fact that this bill would affect 30,000,000 taxpayers. I take it the gentleman refers to the direct effect upon the taxpayers in the number of 30,000,000, because, as I view it, this tax bill, if passes, will directly and indirectly affect every man, woman, and child in this country.”
Congressional Record-House Volume 88, July 16, 1942, page 6267.
“Does the Ways and Means Committee believe that the excise taxes and the broadening of the income tax base and increased rates will have that effect? Or shall we still under this bill be subject to the dangers of inflation due to the excess spending power of the people?”
Congressional Record-House Volume 88, July 16, 1942, page 6270.
Congressman Cooper of Tennessee, member of the Ways and Means Committee.
“The broadening of the individual income tax base will result in about 31,500,000 tax returns being filed. Of this number, 4,600,000 will be filed because of the lowering of the exemption; 7,000,000 returns will be made taxable by reason of lowering the exemptions.”
Congressional Record-Senate Volume 88, October 6, 1942, page 7797.
Senator George of Georgia, Chairman of the Senate Finance Committee
“The bill further broadens the individual income-tax base by reducing the personal exemption for a married persons, or head of a family, from $1,500 to $1,200, and in the case of a single person from $750. to $500….It is estimated that the reduction in personal exemptions will add approximately 7,000,000 new taxpayers….The bill levies a victory tax of 5 percent on all income in excess of $624 received during the year by individuals from salaries, wages, and other compensation for personal services, dividends, interest, annuities and net profit from business or profession….It is estimated that this tax will add an additional eighteen and one-half million taxpayers, who otherwise would pay no tax directly to the Federal Government. Without the victory tax, it is estimated, there will be twenty-seven and one-half million taxpayers. Thus, under the regular income tax and the victory tax there will be a total of 46,000,000 taxpayers.”
Congressional Record-Senate Volume 88, October 6, 1942, page 7799.
Senator George of Georgia
“The $624 exemption is given both to single and to married persons. That is a matter of convenience, and almost of necessity, I should say, because the victory tax is accompanied by a withholding tax.”
The Revenue Bill of 1942 further reduced the exemption, added a Victory Tax on “gross income” of $624 or more and instituted the withholding provisions; all in the name of preventing inflation while creating inflation through deficit spending and increased taxes.
NOTE: The Revenue Act of 1943 was passed by Congress, vetoed by the
President and then overruled by Congress, only to be superseded by the
“Individual Income Tax Bill” of 1944. (Congressional Record of May 4, 1944,
Revenue Act of 1944
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.”
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