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The Truth About Withholding -  How the People Have Been Had, Again

Devvy Kidd
March 26, 2003

Related and important article:

Bob Schulz' We the People Foundation has undertaken a nation wide campaign to educate employers and employees on the great hoax of withholding taxes from your paycheck:

The most famous front runner to recognizing what was wrong with this picture, is the late, great Vivien Kellems. See:

Vivien Kellems: Trial Files

How many people even know how the withholding process began? I didn't until I spent countless hours doing intense research. It began in 1943 as a "victory tax" for the war. A temporary, emergency provision. A sinister plan to "mop up" consumer disposable funds. In other words, keep you broke so you can't save for the future. Sell social security as the panacea to retirement heaven and an iron-fisted vice of deliberately created government dependency.

Current Tax Payment Act of 1943

There was a lot more to it than just a victory tax. The Unseen Hand behind the scenes that control our Congress and White House, had other plans for your money. Below is more historical documentation on this scam. I hope you will continue to follow the work of Bob Schulz' foundation and become a member of We the People Congress. We are going after the head of the beast instead of just treating the symptoms.

There is no reason for poverty in this country. Our economy, our standard of living and the future of our Republic would prosper like nothing you've ever seen before, but first, these destructive mechanisms have to be shut down. The inflation so highly touted below is a direct result of the central bank, aka, the "Federal" Reserve.

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Date 12 May 1942
Author unknown

Title: Treasury Anti-inflation Tax Proposals Description
Staff memo, Division of Tax Research, Treasury Department

Location: Box 34; Inflation, Depression, Recovery; Records of the Office of Tax Analysis/Division of Tax Research; General Records of the Department of the Treasury, Record Group 56; National Archives, College Park, MD.

May 12, 1942

Treasury anti-inflation tax proposals

The record shows that the Treasury in the autumn of 1941 was practically alone, among responsible groups in the executive and legislative branches in urging special anti-inflationary taxes; that other agencies and Congress were apathetic, and the press violently opposed, to the Treasury's program formulated in November, 1941; and that there was no demand for new anti-inflationary taxes on low- income groups until AFTER the Treasury had presented to Congress its proposals to meet the $7 billion dollar revenue goal set by the President in his budget message of January 5, 1942. When an over-all Administration attack on inflation was under consideration in April, 1942, the Treasury again stood practically alone, this time in advocating reliance on voluntary bond purchases rather than further taxes and compulsory savings plans directed at the low-income groups.

The Boston Speech

On September 9, 1941, Secretary Morgenthau delivered before the Advertising Club of Boston an address which was widely hailed in the press as the first clear call from a responsible administration lender for an all-out attack on inflation. He called for heavier taxes in 1942; larger purchases of Defense Bonds; extended controls over bank credit and capital expenditures; expansion of the social security program, with a "separation wage" contribution from workers to set up reserves against the day when they might lose their jobs; reduction of non-essential Federal expenditures; efforts to increase supplies of consumer goods; and release of farm surpluses from storage.

The Chicago Speech

Three weeks later, speaking to the American Bankers Association in Chicago, the Secretary again stressed the danger of inflation. "One indispensable method of paying for defense without inflation is 'all-out' taxation, a method that has not yet been tried." The tax bill next year will have to be genuinely 'all-out' bill."

The Secretary's Boston speech was well received in the press, but served editorial writers principally as a springboard for attacks on the farm bloc. Nowhere was there significant supportfor immediate taxes designed to help check inflation.

The Treasury Department, however, set about formulating a program of special anti-inflationary taxes.

Two plans served as starting points for the Treasury's studies of such taxes -- the Shoup report and the Barnard proposals.

The Shoup Report

A report prepared under the auspices of the Institute of Public Administration and the Carnegie Corporation by Carl Shoup, Milton Friedman, and Ruth Mack, entitled "Amount of Taxes Needed in June, 1942, to Avert Inflation", recommended a supplementary income tax, to be collected at the source, to raise $5 billion additional revenue and draw off that much excess purchasing power. They estimated that by June, 1942, the Government must be collecting at least $5 billion, perhaps as much as $9 billion, more from consumer incomes than it would collect under existing law, if a substantial rise in prices was to be prevented. They suggested a tax rate of 17 percent on that part of an individual's income in excess of exemptions of $1,000 (married) and $500 (single) and a $300 credit for each dependent. The tax rate, they pointed out, might later have to be increased and exemptions reduced.

The Barnard Plan

On October 16, 1941, Secretary Morgenthau called a conference of his chief fiscal advisers to consider Mr. Chester Barnard's program of "family reserves" and "business stabilization reserves."

The Barnard plan called for:

(1) a flat 5% levy on all incomes above an exemption of $1,000;

(2) a special graduated levy on the increase in incomes of persons whose incomes had grown larger from one taxable year to another;

(3) mandatory purchase, on a graduated scale, of "business stabilization certificates" out of corporate earnings exceeding 6 percent on invested capital, after taxes;

(4) tax inducements for establishing irrevocable trust funds for payment of dismissal wages and retirement pay. The additional taxes on individuals would be credited to the taxpayers as"family reserves" and repaid gradually after the emergency, or repaid earlier in case of urgent family need. The "business stabilization reserves" likewise would be repaid after the emergency, or earlier in certain cases.

Secretary Morgenthau expressed great interest in the Barnard plan and ordered that top flight men from various Treasury offices be assigned to study the plan carefully. Out of consideration of the Barnard plan and the Shoup-Friedman-Mack study, the Treasury's program of special anti-inflationary taxes gradually took shape.

The November Proposals

By October 29, 1941, the Secretary's advisers had come to agree on the main outlines of an anti-inflationary tax program.

This program placed major reliance on taxation rather than compulsory savings and on individual income taxes rather than corporate taxes. Emphasis was placed on taxation because compulsory savings are, dollar for dollar, less effective in reducing inflationary pressure than taxes, involve an increase in the public debt and post-war commitments under conditions that cannot be clearly foreseen in advance, and make additional levies in the form of taxes rather than compulsory savings more difficult. Further, it was felt that the amount of taxes required was not yet sufficiently large so that compulsory saving was essential to soften they blow and to provide incentive for increased effort. Emphasis was placed on individual rather than corporate taxes because the inflationary pressure was arising primarily from increased individual incomes and because direct measures were available and were being taken to curtail non-essential corporation expenditures on capital expansion.

The major points of the anti-inflationary program were:

1. The control of inflation required that by June, 1942, tax collections out of consumer income be increased by from $6 billion to $9-1/2 billion.

This estimate represented a revision of that contained in the Shoup-Friedman-Mack report based on a series of technical conferences with representatives from other Washington agencies. More than 20 persons participated in these conferences and eight agencies other than the Treasury Department were represented, among them the Office of Price Administration, the Office of Production Management, the Federal Reserve Board, and the Bureau of the Budget.

2. There was general support for the Social Security Board's proposed expansion of the social security program, with increases in payroll taxes (1% increase in tax on employees for unemployment insurance).

3. There was general agreement that there should be some form of flat tax on incomes above minimum exemptions, to be withheld at source of payment, and to go into effect January 1, 1942. Opinions differed as to the the rate of the special withholding tax and the amount which should be credited to the taxpayers as compulsory savings. A plan representing a median among the various proposals called for a tax rate of 12-1/2% with exemptions of $1,000 for married persons and $500 for single persons, and a $300 credit for dependents. About $0.5 billion of the revenue received form low- income groups should be credited to taxpayers for return after the emergency.

4. The impact of these special anti-inflationary taxes should be balanced by changes in the income tax in the higher brackets, increased corporation taxes, and the closing of loopholes in the present law. These additional measures were to be presented along with the special anti-inflationary taxation, but with the expectation that they would be embodied in a separate bill to be enacted at a later date.

This was substantially the program informally presented by Secretary Morgenthau to the Ways and Mean Committee on November 5, 1941. By that time the Treasury had decided upon a supplementary net income tax of 15 percent, to be withheld at source, with personal exemptions  fixed at $1,500 and $750, and with a $400 credit for dependents, plus the social security tax increases already mentioned. The plan called for no compulsory savings.

Congressional Attitude

Secretary Morgenthau invited Senator George and Chairman Doughton to confer with him concerning the Treasury proposals. They met on November 5, 1941, and the Secretary presented the results of the Treasury studies, pointing out that an inflationary gap of from $5 to $10 billion could be expected in 1942 and recommending a tax bill to raise about $5 billions. He then outlined how the Treasury proposed to raise this amount. Both chairmen thought the request for increases in social security taxes would bring on a long and heated Congressional debate. Both felt that Congress had no appetite for a new tax bill. Congress, they said, was tired and wanted a vacation. Chairman Doughton added that he thought Congress would be more interested in getting more tax revenue than in trying to block inflation through taxes.

It was arranged that Secretary Morgenthau should informally discuss his proposals with the Ways and Means Committee. This he did in the afternoon of November 5, 1941. Considerable hostility to the social security proposals was apparent, and it was generally thought that any revision of the social security system would involve a long period of discussion and consideration. Mr. Robertson indicated approval of social security tax increases, but wanted an assurance from the White House that there would be no social security reform message while the tax bill was under consideration.

The Secretary again met with Senator George and Chairman Doughton on the morning of November 6, 1941. Earlier in the morning the Secretary had seen the President, and he reported that the President had approved the Treasury proposals. He further reported that the President had agreed not to send the social security message to Congress until after Christmas, provided Congress would immediately start to consider the Treasury's tax proposals. The Secretary added that the President said he would be obliged to send a letter to Chairman Doughton asking for immediate consideration of the Treasury program in case the Committee decided to turn it down.

Chairman Doughton was not pleased with these remarks and proceeded to outline his own ideas of a proper time-table for considering tax measures. First, loopholes in the present law should be closed. Reduction on non-essential Government spending should then be effected. After these steps had been taken a tax bill, in his opinion, could be taken up and put through with much less delay and opposition. He thought the withholding tax would meet with strong opposition -- solid among Republicans, considerable among democrats. Senator George agreed that the program would be strongly opposed in Congress. Chairman Doughton repeated that he thought the way to  keep prices down was through the price control bill, not through taxes. He again alluded to restiveness in Congress and the desire of members to have a vacation.

Attitude of Other Administrative Agencies

On the same day that the Secretary first met with the Chairman of the Congressional Committees (November 5) Mr. Eccles and Mr. Paul conferred. Mr. Eccles felt there would be no serious inflation problem for about a year. In his opinion, the shift to war industries, temporary lack of employment, and the impact of existing taxes, should take care of the situation until about November, 1942. He doubted the effectiveness of a withholding tax, pointing out it would lead to demands for wage increases and higher farm prices. To control inflation, he said, it was necessary to control prices of important commodities and to impose effective controls on wages and farm prices. A withholding tax, he thought, would be politically impracticable until taxes on higher brackets had been stiffened.

On November 5, 1941, Mr. Henderson addressed a memorandum to the Supply, Priorities and Allocation Board entitled "How Fiscal Policy Can Aid the Work of the SPAB." Having estimated that there would be a considerable inflationary gap in 1942, he said that chief reliance must be placed on taxation to close the gap. His suggested tax program included (1) closing loopholes, (2) advancing income-tax payment dates, (3) collection of income tax at source, starting at a rate of 5 percent, (4) small increase in social security taxes, (5) stiffer excess profits taxes, and (6) selective excises to complement price control and curtailment of production for civilian use. He expressed opposition to compulsory savings for the time being. These proposals were much milder as anti-inflationary measures than the proposals then being developed by the Treasury.

A few days later, November 12, 1941, Secretary Morgenthau met with Messrs. Eccles and Henderson. Mr. Henderson felt that no accurate estimate of the inflationary gap could be made without information from the O.P.A. concerning plans for converting production to war purposes. In his opinion it seemed likely that ordinary production would be so curtailed that there would be, for a time, less rather than more purchasing power in the nation until the adjustment had been made and the adjustment might be a slow process. Mr. Eccles thought enactment of a withholding tax would not be politically feasible until loopholes in the present tax law had been closed, individual surtaxes raised, and the excess profits tax stiffened. It was arranged that the technical staffs of the Treasury, O.P.A., and Federal Reserve Board should meet to work out details of a tax program.

Press Reaction

The Secretary had presented his tax proposals to the Ways and Means Committee in confidence, to learn whether they were interested in holding hearings to consider such a tax program. The proposals, however, leaked out and were widely reported in the press. The proposals were in general misunderstood, the 15 percent withholding tax being regarded as a tax on gross income rather than on income above exemptions and as a payroll tax rather than an income tax. Editorial denunciation was prompt and vigorous. The press assailed the withholding tax as an indefensible burden on incomes which had not increased as a result of the defense program, scoffed at the idea that there was an excess of purchasing power which needed to be mopped up, and accused the  Administration of turning to taxation as a politically easier way of doing a job which could only be done by an effective price control bill.

When the President wrote to Chairman Doughton, November 8, 1941, to urge immediate consideration of the Treasury proposals, the press said that the first job of the Administration was to pass a strict price control law, restraining wages and farm prices as well as prices of other commodities. Next in order, the Administration should cut non-essential expenditures. Then, and only then, should new taxes be considered as a complementary measure to check inflation.

The press reiterated its strong opposition t using social security tax increases as a method of emergency financing. Changes in the social security system should be considered quite apart from any program to combat inflation or raise revenue.

On December 11, 1941, a conference on taxes was held at the home of Assistant Secretary Sullivan. Budget Director Smith, Price Administrator Henderson, Federal Reserve Chairman Eccles, and Mr. Lauchlin Currie were present from outside the Treasury. In the face of Congressional lack of interest in special anti-inflationary taxes, the lack of support for such program from other Administration leaders, and the strong press reaction against the Treasury proposals, the plans for a special withholding tax had been shelved. The Treasury was still concerned, however, over the problem of speeding up tax collections to divert purchasing power from the hands of consumers as quickly as possible. Should an immediate request be made for authority to withhold some part of the income tax at source of payment?

Mr. Mr. Henderson thought that due to dislocation in industry, the pressure of income on prices would not be resumed until March, 1942. Beginning in March, he said, the pressure of income would increase and larger withdrawals of purchasing power would be necessary. A plan for speeding up tax collections might be included in the regular tax bill and then enacted separately if the bill were delayed. Mr. Eccles seemed to agree with Mr. Henderson's position. Mr. Currie likewise agreed. He thought the case for a strong tax bill might be weakened if there was a prior request for discretion to advance the date of collection before the regular tax bill was presented. Mr. Smith took the same position.

Preparation of 1942 Tax Program

The Treasury then set about preparing its proposals for a 1942 tax bill. Guided by to reactions of other agencies to its earlier plans, the Treasury decided to present a single bill rather than urging the adoption of special anti-inflationary taxes prior to the enactment of other changes. The President set a revenue goal of about $7 billion (plus $2 billion in social security taxes) in his budget message of January 5 and the Treasury Plan was designed to raise this amount. In the course of its preparation during January and February, Mr. Paul conferred constantly with Mr.  Eccles of the Federal Reserve Board, Mr. Gilbert of the O.P.A., Mr. Colm of the Bureau of the Budget, as well as with representatives of other interested agencies. Until the first of March, when the Treasury proposals were about to be submitted to the Ways an Means Committee, there were no demands, from agencies concerned with inflation control, for a higher tax yield than that proposed by the President and by the Treasury.

On January 12, 1942, a meeting was held in Mr. Paul's office to consider a proposal by the Bureau of the Budget for a tax on value added. This meeting was attended by representatives of  the Bureau of the Budget, and a number of other agencies outside of the Treasury. Most of the persons present agreed with the Treasury representatives in opposing the proposed tax.

From January 25 to February 17, 1942, an Excise Tax Committee met frequently to consider what excises Congress should be asked to impose. The Treasury, O.P.A., Federal Reserve Board, W.P.B., Bureau of the Budget, and Staff of the Joint Committee on Internal Revenue Taxation, were represented on this committee. Deliberations proceeded on the assumption that a number of selective excise taxes, rather than a general sales tax, would be included in the tax program.

Anti-Inflation Program Since March 1, 1942

On March 3, 1942, Secretary Morgenthau and Mr. Paul presented to the Ways and Means Committee the Treasury's proposals for taxes to raise $7.6 billion.

One day earlier, March 2, Mr. Henderson wrote a letter to the Secretary, urging the institution of a compulsory savings plan to raise 5 or 6 billion dollars more than the revenue goal of the Treasury's tax program.

Mr. Henderson estimated that under the most favorable circumstances the excess of consumers demand over supply would be at least $12 billion, even AFTER the increase in taxes proposed by the Treasury. He expressed fears that price control and rationing would not be effective to keep prices down unless a large part of these $12 billion was diverted from consumers. Accordingly, he recommended a compulsory savings plan, with exemptions lower than those granted under the present income tax law.

This marked the beginning of efforts on the part of several agencies -- Treasury, O.P.A., Bureau of the Budget, Department of Agriculture, and W.P.B. -- to formulate an over-all inflation program. Agencies other than the Treasury insisted on the need of taxes much heavier, and more directly aimed at low incomes, than those suggested by the Treasury. After a period of intensive consideration of various anti-inflation measures, the program of these various agencies took definite shape.

Until April 6 there was disagreement on details among all the agencies. For example, April 3 the representatives of O.P.A. insisted that the O.P.A. was strongly opposed to a general sales tax and lower income tax exemptions which were being urged by some other agencies. April 6 the O.P.A. united with the other agencies in recommending a sales tax, lower exemptions, and compulsory savings.

April 6, 1942, Budget, O.P.A., W.P.B. and Agriculture informed the Treasury that they were agreed on a tax and compulsory savings program to yield about $6-1/4 billion more during the fiscal year 1943 than the Treasury's program. Their tax program was to supplement an anti-inflation program calling for freezing of prices, rents, and wages; drastic restrictions of consumer credit; and specific rationing. Their tax proposals consisted of:

1. Lowering personal income tax exemptions to $500 for single persons and $1,000 for married persons, and a $250 credit for each dependent. Estimated yield - $2 billion.

2. Compulsory savings at the rate of 5 percent on income, excluding single income earners of $500 or less and married earners of $1,000 or less. Estimated yield -- $3 billion.

3. A war consumption (sales) tax of 5 percent to take effect January 1, 1943, which would raise$1-1/4 billion in the second half of fiscal 1943.

4. An excess profits tax rate of 100 percent (No estimate on yield).

5. Confiscation of all income above $50,000 or $100,000 (No estimate on yield).

This group insisted that such a tax and compulsory savings plan would be more equitable and effective than an intensified drive to sell War Savings Bonds. Such a drive, they said, would not raise the required sums of money unless coercive sales methods were used.

The Treasury stood alone in urging reliance on voluntary War Bond purchases and in opposing compulsory savings, a general sales tax, lower income tax exemptions, and freezing of wages.


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Date: 14 June 1943
Author:  Randolph Paul; General Counsel, Treasury Department
Title:  The Current Tax Payment Act
Description: Speech text
Location:  Box 54; Collection and Payment; Records of the Office of Tax Analysis/Division of Tax Research; General Records of the Department of the Treasury, Record Group 56; National Archives, College Park, MD.

(The following a dress by Randolph E. Paul, General Counsel for the Treasury, before the Philadelphia Bar Association, at the Midday Club, is scheduled for delivery at 8:00 P.M. Eastern War Time, Monday, June 14, 1943.)

The Current Tax Payment Act

1. Introduction

As you know, the Current Tax Payment Act, recently enacted by the Congress and signed by the President bids fair to revolutionize the methods of collection of the personal income tax in this country. It seems entirely fitting that you, as members of the Bar of Philadelphia, the birthplace of so many of the revolutionary ideas of the past, should desire to be among the first to become conversant with the new tax, legislation which will so soon become a part of our national structure.

You are aware of the policies and problems which dictated the change from our present delayed system of collection of income taxes to the new current collection plan. You are likewise no doubt aware in some measure of the problems involved in changing to the new system. Let me emphasize that it was only this transition situation which caused the smoke and fire which have  been present on the congressional battle-grounds during the last few months. For the reason that these policies and problems are known to you and are now a matter of history, I shall devote myself on, this occasion to giving you something more of the how of current tax payment, omitting any of the arguments on the why side of the problem.

For the sake of discussion the Current Tax Payment Act of 1343 is divisible into four parts. First, there are the provisions relating to the current collection of income and victory taxes through deduction and withholding at the source on wages. Second, there is the part of the Act which deals with the permanent system of current payment of income tax liabilities not collected by the withholding process Third, there are the provisions applicable only to this year and necessary to achieve the transition from the delayed payment to the current payment system. And fourth, the Act includes various miscellaneous provisions among which are those giving special tax treatment to members of the armed forces.

2. Withholding

You are all familiar with the technique of collection of taxes by withholding to the extent that this technique has been employed and is being employed in the collection of Social Security and Victory tax liability. As you know, withholding under the Victory tax was accomplished through a set of provisions specially enacted for that purpose, as part of Chapter 1 of the Internal Revenue Code. Our meager administrative experience with that tax has indicated the desirability of a more flexible system, which will have as its ultimate goal an integration between income tax collection at the source and Social Security collection procedure. Convenience for both employer and the Government will be served by the eventual achievement of this goal. For that reason, therefore, it was suggested by the Treasury, and agreed to by the Congress, that the income tax withholding provisions be removed from Chapter I of the Internal Revenue Code and be made a new subchapter under Chapter 9 of the Code relating to employment taxes.

The duty to withhold an amount for income and victory taxes is net imposed on all persons making payments of compensation for personal services rendered. First, there must exist, as in the Social Security tax, the employer-employee relationship, as distinguished from the relationship of independent contractors. Then even where this relationship exists, wage payments in certain enumerated types of occupations, are excepted from the withholding requirement. The three main peacetime groups to which this exception applies are:

(1) agricultural laborers

(2) domestic servants in private homes, college clubs or fraternities

(3) casual laborers not engaged in the course of the employer's trade or business. In addition, the service pay of members of the military or naval forces is excluded from the withholding provisions. Services performed for a foreign government or instrumentality and services performed while outside of the United States, where a major part of the services for an employer during the calendar year is to be performed outside of the continental limits, are also excluded. In this regard, however, the law specifically states that services performed on or in connection with an American vessel, or as an employee of the War Shipping Administration, are not services performed outside the United States. A further exception, new to withholding, is made in the case of remuneration paid for Services performed by a minister of the gospel.

From the letters we have received at the Treasury while this Act was under consideration, I know that many persons, particularly in the lower wage levels, have been greatly alarmed at the prospect of having 20 percent of their salaries withheld from them. Much of this alarm arises from an inaccurate conception of the withholding provisions. For the most part theme persons fail to recognize that withholding does not result in the imposition of any new tax but is merely a convenient method of paying the tax liability which existing law imposes.

In addition, these same people fail to realize that 20 percent withholding is applicable only to the balance of the wages over and above the family status withholding exemption of the particular employee. For a single person with no dependents, the annual family status with holding exemption is $624. For a married person or a head of the family, the family status withholding exemption is $1,248 and an additional $312 is added to the exemption for each dependent of the individual employee except the first dependent in the case of a head of a family.

In the case of married persons where both spouses are employed, the exemption may be divided by each spouse claiming half of the exemption, or either the husband or the wife may claim the entire exemption and the other spouse claim none. It should be noted, however, that the manner of claiming the withholding exemption will have no binding effect when it comes to the division of personal exemption which the spouses may wish to adopt in filing their returns for the year.

You will readily see that these figures are not, the exact figures provided with respect to the personal exemption for income tax, but you will also readily discover that there is an arithmetical ratio between the figures which makes them particularly useful in applying the system of withholding. For instance, where accounting machinery is used, the sorting operations are considerably reduced by having the exemption for a married person claiming half the personal exemption for withholding but having no dependents the same as that for a single person, or. a married person claiming half the exemption but having two dependents the same as that of a married person claiming all of the exemption and having no dependents.

It must be recognized that the collection of income taxes at the source through withholding will, at best, only approximate the actual income tax liability of a particular taxpayer. Every taxpayer liable for income tax is subject to a 6 percent normal tax, and a 13 percent surtax, and a net 3 percent victory tax over the victory tax exemption. These percentages total 22 percent. Withholding, however, is required only at the rate of 20 percent. Thus a 2 percent leeway for average deductions of the taxpayer is taken into account. Further, the family status withholding exemptions for the most part are slightly larger than the income tax exemption applicable to the particular taxpayer.

There are some married individuals, however, who although not liable for income tax because they earn less than $1,200 in any year are nevertheless liable for victory tax on amounts earned over and above the annual victory tax exemption of $24. These persons have been subject to withholding at the rate of 5 percent above the victory tax exemption since January 1st of this year.

Because the current credit available through debt repayment, payment of insurance premiums, and bond purchases will be claimed by most taxpayers, it seemed wiser to reduce the rate of victory tax withholding to 3 percent which will more nearly approximate the actual tax liability of these persons. Therefore, in the case of these married persons withholding will be required at the 3 percent rate but not at the 20 percent rate.

Beginning with the first payroll period commencing on or after July 1st of this year, it will be the duty of every employer to deduct and withhold the amount required under the new Act. The determination of the amount required to be deducted and withheld will be based upon the withholding exemption certificate which is required to be filed by each employee, with his employer, setting forth his family status and the amount of the withholding exemption which he claims. In the case of married persons, the withholding exemption nay be divided between the husband and the wife or may be claimed by either one.

The Bureau of Internal Revenue has already prepared forms for theme certificates and has made them available to the public for use by employers either on the forms furnished through the Collectors' offices or on forms reproduced by the employer to fit his particular accounting machinery. Employers may rely upon the information furnished in the withholding exemption certificates and will be under no duty to question the correctness of the statements contained in the certificates. Penalties are imposed in the case of an employee who furnishes false or fraudulent information with respect to the withholding exemption.

The law provides that employees shall file new certificates in the event of changes in status; it is desirable, in order that withholding in the case of an employee whose status changes will closely approximate his tax liability, for employers to give effect to these new certificates as soon as possible, and they may do so immediately. They are required, however, to give effect to these changes only twice a year, on January 1st or July 1st, Such a requirement is necessary in the case of many very large employers in order that their payroll systems will not be constantly, disrupted.

Employers are given the option to use tables somewhat similar to those employed in connection with the victory tax to determine the amount to be withheld, rather than computing by the precise method of subtraction of the exemption and multiplying by the percentage figure in the case of each employee. The withholding tables set out in the, law cover the common payroll periods used in business organizations, and a determination of the amount to be withheld can be quickly ascertained by finding the proper column and line on the applicable table for the employee with the. withholding exemption stated in the certificate filed by him.

At the end of every year and even before that time, should an employee cease his employment with a particular employer, the employer is required to furnish to each employee a receipt showing the wages paid during the calendar year and the amount of tax withheld with respect to his wages. A duplicate of this receipt filed with the Commissioner will constitute the information return in lieu of the form 1099 now required to be filed by employers. Under the law, as passed by the Congress, the requirement of the employer to return and pay over the tax withhold is general in language and follows the provisions of the law with respect to Social Security taxes. For the present time, at least, it is contemplated that the Commissioner's regulations will call for return of the tax at quarterly intervals as in the case of Social Security taxes.

A new feature is one under which the Secretary of the Treasury may authorize depositories and financial agents of the United States to accept deposits of taxes withheld from employees from time to time and may prescribe the conditions under which the receipt of much taxes by authorized depositors shall be treated as payment of the taxes by the collectors. This provision is a very necessary and helpful one both to the Government and to employers. Large employers whose collection of taxes withheld. at the source from their employees would run into millions of dollars each quarter of the year are reluctant to accept the risk of holding these funds for the quarterly period at the end of which returns are ordinarily filed.

By a system of current monthly or more frequent deposit of funds in United States depositories not only does the risk of loss become transferred from the employer to the Government but also the Treasury is more quickly able to utilize the funds flowing in from collection at the source. The instructions to employers which have already been prepared and are now being distributed carry the statement that it will be the duty of every employer who withheld more than $100 during the month to pay the withheld amounts to a depository within ten days after the close of each month, except for the last month of the quarter for which the return will be filed. The amounts collected in this last month will be remitted to the Collector with the return.

These are the highlights of the details of the new withholding technique which, it is contemplated, will in itself make some 70 percent of the taxpayers of the country substantially fully current in their income tax liabilities to the Government. These taxpayers will have only minor year-end adjustments by way of tax payment or refund to be made at the time of filing their annual returns. In developing this technique, the Treasury and the Congress were able to utilize many helpful suggestions which cane from employers and their representatives upon whom the burden of collection at the source is necessarily cast. These suggestions were principally useful to reduce the complications of the withholding system which takes into account the individual employee's family status. The splendid cooperative spirit exemplified by these businessmen constitutes a fine example of the American enthusiasm for getting large tasks accomplished.

3. Current Payment of Tax Not Collected at Source

Since withholding applies only to wages and not to all types of wages and since there is collected through withholding only the normal tax, the surtax at the first bracket rate and the net victory tax, additional changes in our tax collection system are necessary to insure that all taxpayers are completely current. What I am about to describe to you is the system devised under the Current Tax Payment Act for persons whose wages exceed the first surtax bracket and for persons who are in the situation of most of you, that is, those who are individual entrepreneurs, professional men and the like, with respect to whose income the system of collection of taxes by withholding has no application. I am going to describe this system of current tax payment, first in its setting as a permanent feature of our income tax law. The special provisions with respect to the year 1943 in which the transition is made, I will discuss later.

As a year-in, year-out system, it is contemplated that each individual income taxpayer (other than an estate, trust, or non- resident alien whose wages are not subject to withholding) who fulfills the requirements for the filing of declarations will file at the time of filing his income tax return for the preceding taxable year, a declaration showing the amount of his estimated total tax liability for the current year, the amount of tax which he estimates will be withheld at the source and the difference between these two amounts.

This difference will constitute his estimated tax for the year. At the time of filing these declarations, one-fourth of the estimated tax shown on the declaration twill be paid and in the event that circumstances occurring later in the year do not operate to make the original estimate incorrect, an additional one-fourth of the estimated tax will be paid on or before the fifteenth day of the last month of the remaining quarters of the taxable year. Where later circumstances show the original estimates to be inaccurate, be it either too high or too low once in each quarter of the taxable year.

 As to how to make an accurate estimate of your tax liability on March 15th of any year, I imagine that you may well be turning over in your minds the idea of asking me whether I have any recommendation as to the particular type of crystal ball which you can use. I concede that the problem may, in some cases, be a difficult one, especially for persons in your situation but there are a few suggestions which may be of help to you. Perhaps your experience over a number of years will indicate to you that your prior years' income adjusted for any special circumstances which you may be able to foresee will form a foundation for your estimate.

Also, you will recognize the fact that making a conscientious attempt to estimate as nearly accurately as possible, you may obviate the necessity of making amended declarations in the course of the year and finding yourselves required to make extra heavy payments later in the year. But if that unexpected fee should come in later in the year, you have until December 15th to revise your original estimate of income and consequent tax liability. The law provides that, whenever an amended declaration is filed, the quarterly payment of estimated tax which accompanies the amended declaration and any subsequent payments not yet due shall be adjusted in amount to reflect the change in the amount of estimated tax.

The law gives special recognition to the farmer in connection with this requirement for filing of a declaration and paying estimated tax. A person who comes within the definition of farmer -- that is, a person who "derives at least 80 percent of his gross income from farming -- is given the option of filing his declaration on or before the fifteenth day of the twelfth month of the taxable year. At this time he is required to pay the total amount of the estimated tax shown on thedeclaration.

Let me point out that it will not be necessary for all taxpayers to file a declaration. Persons who are principally wage earners earning less than $27O0 per year in the case of a single person and $3500 in the case of a married person and his spouse will have most of their income tax liabilities completely paid through the withholding process. To eliminate unnecessary paperwork for such persons, therefore, the law prescribes in the case of a person having a gross income of $100 or less from sources not subject to withholding, he will have to file a declaration only if he either had in the prior year, or expects to have in the current year, wages. In excess of $2700 or $3500 depending on whether he is single or married. Thus instead of requiring declarations from all of the estimated forty-four million taxpayers of the country, declarations will be required from only fourteen million.

For persons whose income from sources other than wages subject to withholding exceeds $100, declarations are required only from those whose gross income was sufficient for the preceding taxable year, or is expected to be sufficient for the current taxable year, to require the filing of an income tax return. The privilege is extended to husbands and wives to make a joint declaration but an election to do so will not be binding for the purposes of filing the annual returns of the spouses and any payments on account of estimated tax made by husband or wife in a joint declaration may be treated as payments on account of the tax liability of either the husband or the wife or may be divided between them in any manner they see fit.

Of course, no system of income tax collection would be found workable if there were no sanctions for its enforcement. Accordingly, as you would expect, there are sanctions which will insure that individual income taxpayers will make a diligent effort to estimate their tax and to pay it during the taxable year as their income is earned. The law provides that where the estimated tax of a taxpayer together with the amounts actually withheld at the source falls short of 80 percent of his actual gross tax liability -- that is, his total income and victory tax liability before credit for amounts withheld at the source -- there shall be added to the tax for which he is liable an amount equal to 6 percent of the difference between the actual gross tax liability and the estimated tax plus withholding credit or the amount by which 80 percent of his gross tax liability exceeds the estimated-tax plus withholding credits, whichever is the lesser. In the case of farmers exercising the option to file year-end declarations, the tolerance limit for accurate estimation of the total tax liability is 66-2/3 percent.

For example, a salaried person estimates that his total tax liability for the year will amount to $800. He estimates that there will be withheld from him $600 and he files a declaration showing an estimated tax of $200, paying $50 on each quarterly installment. His actual gross tax liability, however, comes to $1200, and he actually has withheld from him $700. He would pay on his return filed after the close of the taxable year in addition to the $300, by which his estimated tax and payments by withholding during the taxable year fell short of his actual tax liability, the sum of $18 that being 6 percent of the S300 difference. There are, of course, additional sanctions for the failure to file a declaration and for failure to pay any installment of estimated tax.

At the time of filing returns after the close of the taxable year any balance of tax liability not paid currently during the taxable year must be paid in full and the installment privilege no longer is available to individual taxpayers. In some cases, of course, there will have been paid during the taxable year more than an individual's total tax liability. In a case of this sort where the return filed indicates such an overpayment, a new provision of the law allows the taxpayer to use as a credit to discharge his liability for estimated tax shown on the declaration filed at the same time as the return, the amount of the overpayment.


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