Pay-As-You-Go Taxation
Get Nation Out of Income Tax Debt Is the Widely Supported Plan Described Here
FIRST OF ALL, let me tell you what the Pay-As-You-Go income tax plan is. It is a plan to get every single income tax payer out of income tax debt and from that time on to keep him on a current pay as you go basis.
The plan itself is as simple as daylight saving. When we decided it was in the na- tional interest to save fuel and power by going to work an hour sooner in the morn- ing.. we simply turned all our clocks ahead and went about our business as usual.
The Pay-As-You-Go income tax plan pro- posed that we turn all our "tax clocks" ahead one year. What I mean is this: Mil- lions of us this year are paying income taxes but these taxes that we are paying are taxes on last year's income. That is, during 1942 we are paying on our 1941 incomes. Now suppose we turn the tax clock ahead and say that the income taxes we are paying this year are taxes on this year's income, that is during 1942 we will be paying on our 1942 income instead of 1941. What will be the result? We will go on paying our taxes, the Treasury will go on getting its revenue, but the income tax year of 1941 will drop out of the calendar forever, and we will all be free of income tax debt and ready to start on a pay as you go basis.
There will have to be a year-end adjust- ment, up or down. This would depend on whether finally our 1942 income turned out to be more or less than our 1941 income, our 1941 income having been used as a tentative declaration of our tax liability for 194 a. But this year-end adjustment can be easily made when we pay our first in- stallment in 1943. Following the same principle, in 1943, we will be using 1942 in- come as the basis of our tentative declara- tion; but we will be paying on the income °f 1943. So having once got ourselves free of income tax debt, we can stay free of it by paying as we go.
And that is all there is to it. A friend of mine, when he heard the plan, said, "It can't be as simple as that or it would have been done long ago." The fact is it hasn't been done yet, and it will still take some doing to get it done.
The first question that comes to every- one s mind is, "How can we skip the in- come taxes for 1941, helpful as that would be to all of us, how can we skip these 1941 taxes without having the Treasury lose a lot of money?" The answer is that since we go along paying our income taxes on our current income from year to year, the -treasury will actually receive less only we die or when we lose our incomes. Accordingly, the loss of 1941 taxes under the Pay-As-You-Go plan is spread over the whole life of the present income tax paying generation and the yearly amount lost on an average, in the neighborhood of 100 million dollars is not a significant amount. Then, too, some of this loss would be re- covered through a higher return on estate taxes, and through better tax collection and collection methods which will come from being on a current basis.
Fortunately, the Treasury has never con- sidered taxes receivable as an asset, and so from a bookkeeping point of view we can write off the taxes due on last year's income from the government's balance sheet with- out the change of a single penny.
PEOPLE ARE IN DEBT
It is surprising but very few people real- ize that they are in debt to the government for income tax, nor do they realize how much money they owe the government. They seem to figure that since the next in- stallment of their income tax isn't due un- til September 15, they won't be in debt to the government until September 15. They are wrong. They are in debt now, in debt for the two installments still due this year; and worse, in debt for the income tax on what they have already earned so far this year. If they die, this amount will be taken away from whatever estate they leave. If they lose their jobs, it will have to be paid out of what they have saved. If their earn- ings are less, the full tax will have to be met out of the lower earnings. Nothing can stop the march of the days and when the due date comes, they must pay the tax they owe in the income they have already had. It is a real debt and practically all income tax payers are actually in debt for about one year's full income tax.
Nothing is to be gained by arguing that people should have saved the tax on this year's income out of this year's income. The fact is they did not do it and now they can not do it.
Already many a taxpayer is in difficulties because of this income tax debt. Who are these taxpayers? First of all, men in the armed forces and those who have gone into government service at lower income. Next, those who had been successfully employed in peace time industries and have seen their income shrink because of priorities and allocations, and have not completed their adjustment to war occupation. Then, too, there are the thousands and thousands who every year suffer reduced income because of accident, sickness, and old age. For all of these, their income tax debt creates an intolerable situation.
And for the tens of thousands who are today actually in distress, there are millions who are in danger, in danger of loss of income through being drawn into military or government service, through wartime industrial displacement through accident, through sickness, through retirement because they can no longer keep up the pace. This danger will be felt with increasing apprehension by all of us as a friend here and an acquaintance there is engulfed by his income tax debt. To be sure, the lightning will not strike all in 1942, but it is sure to strike some of us which we do not know, but we are all in danger.
I feel sure that if the income tax payers of this country, each one of the millions of them, realized the danger that his income tax debt is to him and to his family, a cry would go up from every side that could be heard in Washington, and which would put the Pay-As-You-Go tax plan as Item Number One in the tax bill of 1942.
I want to make it perfectly clear that my interest in the Pay-As-You-Go income tax plan is in getting taxpayers out of the danger of income tax debt and by getting them on a pay as you go basis to keep them there. I have pointed out that by getting free of income tax debt, it will be practical to think about a withholding tax since no longer will we be faced with the intolerable situation of paying two years' taxes in one. And so, people who like the idea of a with holding tax will like the pay as you go plan, too. But the two must not be confused. It might turn out to be undesirable or impractical to have a withholding tax; but the human need for freeing our taxpayers from income tax debt would be as great as ever and the Pay-As-You-Go plan has been designed to meet the need. If it helps in other ways, so much the better.
On the basis of my experiences in Washington this past week, I think I can fairly report to you that there is wide and clear understanding of what the Pay-As-You-Go plan aims to do and how it works. The question now seems to be whether the plan should be applied to all the income tax debt of all taxpayers or whether it should only be applied to some.
On last Wednesday, following a closed hearing before Senator Clarks' subcommittee of the Senate Finance Committee, the Treasury announced to the press a modified Pay-As-You-Go income tax plan, not as a specific Treasury recommendation, but as a proposal preferred by the Treasury to the original plan. Study of this modified plan discloses certain points of agreement and of disagreement with the plan which I originally submitted. The points of agreement are as follows:
1. The proposal agrees with the plan as to the high importance of getting the country out of income tax debt and on to a current pay-as-you-go basis as soon as practicable.
2. The proposal accepts the principle of setting the tax clock ahead, that is, of skipping a tax year, as a means of arriving at this objective.
3. The proposal agrees to the use of the method of tentative return and year-end adjustment as a method sound both in principle and in practice of keeping income taxes on a current basis from now on.
The Treasury has said that without a withholding tax the plan would be "inacceptable"; but it has not explained what it means, and the reason for the statement is not apparent on its surface.
The principal point of disagreement is that whereas the original Pay-As-You-Go plan applied to all the income tax debt of all individual taxpayers, the Treasury's modified plan would apply to the full tax debt of some taxpayers and to only a part of the tax debt of the rest. Concretely, the Treasury proposes that the tax year of 1942 rather than 1941 be skipped and then for only the first $2,000 of net taxable income and that the balance of tax debt remaining should be paid over the next two or three years, this in addition to current income taxes that will be payable in those years. The Treasury concedes that this would leave between 10 and 20 per cent of our taxpayers still owing the government money for taxes on their last year's income, and that as a nation we would not be income-tax-debt free until the end of 1944 or 1945. This group of 10 to 20 per cent includes the great majority of administrative, technical, and professional men and women. The Treasury's proposal to change the year from 1941 to 1942 would eliminate from benefits of the plan the millions of men who have gone into the armed services this year.
Quite apart from the details of who is included or excluded or for how much, I personally favor as a matter of principle the all-over application of the Pay-As-You-Go plan for eliminating income-tax debt, giving all taxpayers equal treatment under the plan.
AVOID TAX DEBT
These are my reasons. For those in the lower brackets, the plan will obviously have far-reaching beneficial results since unfortunate circumstances of loss of income will not be doubly unfortunate because of last year's debt.
For those in the middle brackets, it will eliminate countless personal and family tragedies, free many able citizens for public service, and step up the efficiency of American industry by making possible the retirement and pensioning of executives who are holding on, largely to pay their income tax, and never catching up.
For those in the upper brackets, it will make much less practical difference than might appear, first because, like anybody else, as long as they have their income, they continue to pay their taxes at the then existing rate; and second, when they die, what otherwise would have been paid by an individual as income tax on the previous year's income is subject to estate taxes in his highest bracket.
But apart from the practical considerations, the reason I favor all-over application of the principle is because it gives equal treatment to all taxpayers under the plan. In adopting Pay-As-You-Go by skipping 1941, I believe we should treat all citizens alike. As we turn the tax clock ahead for some, we should turn it ahead for all, and get the whole nation out of income tax debt by the beginning of next year.
In general, in comparing the areas of agreement and disagreement between the original Pay-As-You-Go plan and the Treasury's modified plan, it seems clear that good progress has been made. One might almost say that the discussion is moving over from whether we shall have a Pay-As-You-Go income tax plan, to whatkind of a plan we should adopt.
The kind of a Pay-As-You-Go plan that is adopted will be adopted by Congress during the next few weeks. What kind of a plan it is will affect every single income taxpayer in the country. And so it is something we should all know about and have an opinion about, and talk about. In this way we can have the kind of a plan that most of us want.
BEARDSLEY RUML '15 ORIGINATOR OF THE Pay-As-You-GoIncome Tax Plan and author of the accompanying article is Beardsley ("B") Ruml '15.He first submitted his proposal to the FinanceCommittee of the U. S. Senate in July. It hassubsequently had wide discussion throughoutthe nation and Mr. Ruml has appeared beforethe Senate Committee and has talked to thepeople on national radio broadcasts, on whichthe following description of the plan was firstused over a CBS hookup. Beardsley Ruml istreasurer of R. H. Macy & Cos., New York City,and is chairman of the Federal Reserve Bankof New York. He received the Ph.D. degreefrom Chicago after graduating from Dartmouth in 1915 and later served with the Carnegie Corporation, the Laura Spellman Rockefeller Memorial, and as Deati of the SocialScience Division at the University of Chicago.The Pay-As-You-Go Plan is still being debatedin Washington and, as we go to press, its author says the plan is "very much alive" andpredicts its adoption in whole or 'in part. Theeditors endorse the plan and wish to do theirpart in giving a description of it the widestpossible distribution.—ED.
