The Pay-As-You-Go Tax Plan
CASH MONEY IN TILL AND NO TAX DEBT
By BENNETT CHAMP CLARK, Senator from Missouri
Delivered on The Washington Star Forum—WMAL—Blue Network of National Broadcasting Company, February 3, 1943
Vital Speeches of the Day, Vol. IX, pp. 382-384.
IT is my belief that next to the actual events as they transpire from day to day on the various fighting fronts in which Americans are participating throughout the world and to the problems of supply and munitions to our forces, the most important problem which confronts the American people is the crisis in Federal taxation which is rapidly developing. It is this subject which I wish to discuss with you tonight.
I speak as a life-long advocate of the personal income tax as the fairest tax which was ever devised because it is a tax upon ability to pay as opposed to consumption taxes of various kinds which inevitably fall most heavily upon the poorest and neediest of our citizens. Before I was old enough to vote I was making speeches in Missouri attacking the decision of the Supreme Court of the United States in the Pollock case which invalidated the income tax feature of the Wilson-Gorman Tariff Bill of the early nineties. I was an ardent supporter of the Sixteenth amendment to the Constitution of the United States which specifically authorized the levying of the Federal income tax. I have always been proud of the fact that as Parliamentarian of the House back in 1913 I had a part in the passage of the first income tax law under the new constitutional amendment—a law which was actually drafted by that great American, Cordell Hull, now our distinguished and beloved Secretary of State.
I still believe that the income tax is the fairest and least burdensome of all taxes because it is a tax based upon ability to pay—which should be the basis of all taxation. It has been the backbone of our tax structure since the days of the First World War. A famous British Chancellor of the Exchequer once said that there was no such thing as the science of taxation—that the whole secret of successful taxation lay in "getting the greatest amount of feathers with the least amount of squawking."
The graduated income tax is unique among taxes in this that everyone who does not pay an income tax wishes that he did have to pay one and that everyone who pays in a lower bracket wishes that he had to pay in a higher one.
There was, however, in the original enactment of the income tax law one vital defect—insignificant at the time but of a magnitude which has constantly increased until it has become a tragedy to millions of American taxpayers. This defect is the provision that we do not pay taxes upon the income we earn this year currently, as the income is earned, but next year after the income has in the vast majority of cases been spent. Thus is created a vast tax debt that hangs over the United States like a storm cloud and haunts the dreams of millions of Americans.
I have said that the defect of paying taxes on this year's income next year instead of currently as the income was acquired was originally inconsequential. This was true because in the beginning the rates were not burdensome and only a relatively small number of taxpayers were affected and these in a large part of a class who were in the habit of budgeting their affairs and making some provision for the future.
With the comparatively low rates and comparatively liberal exemptions of those days it did not make a great deal of difference whether we paid this year out of what we earn this year, or paid this year's tax bill next year out of what we earn next year, except for those cases in which a taxpayer's income fell off so much from one year that he died insolvent or was unable to satisfy his tax liability out of a distraint warrant on his household effects in which case the government simply lost the revenue it might have had if it had had the foresight to collect the tax currently as the income was acquired. Defaults on income tax payments when the income had been spent or lost before the due date for the tax payment arrived have cost through the years theUnited States Government many hundreds of millions of dollars.
But with the tremendous increases in rates and the drastic cuts in exemptions bringing millions of new taxpayers from among the poorest of our citizens into the class of income taxpayers, the present system of paying last year's taxes on income, which has already been spent, out of this year's income spells stark tragedy for a multitude of taxpayers, large and small. Many of these taxpayers have had and will have no increase in income whatever since last year. In millions of cases the net income of the individual will be less this year than last, which is particularly true of the vast salaried class and the small businessman—who constitute so much of the backbone of America. It is sad to relate but incontestably true that very few of our citizens have had the forethought or the necessary information to set aside out of last year's income as it was acquired sufficient funds to pay the greatly increased taxes on that income.
Many new taxpayers, who never had to pay income taxes before in their lives of course have made no provision for paying taxes on income which was earned last year.
No one, so far as I know, has disputed the desirability or the absolute necessity of getting the nation on a current basis, that is to say of providing for a change in the system by which taxpayers will be permitted to pay as they earn. Very few will dispute either the desirability or the necessity of collection at the source. By collection at the source I mean some device such as a withholding tax which will prevent the individual from spending that portion of his income which the Government claims for itself and thus going in debt to the Government, by taking it before it ever gets into the hands of the individual.
But despite this universal recognition of the great necessity for getting the nation on a current basis with its taxes only two essential plans have been proposed for dealing with the transition period, one known as the Ruml plan for moving the tax clock forward, in much the same way that daylight saving was carried into effect, by a bookkeeping entry crediting the payments on personal income tax made in 1943 on the 1943 taxes instead of the 1942 taxes; and second, a fake "pay-as-you-go plan" proposed by Mr. Randolph Paul, General Counsel for the Treasury Department, which involves for a multitude of taxpayers an intolerable scheme of double taxation. In brief Mr. Paul's scheme, as I understand it, based on the proposals he made last summer to the Senate Finance Committee, would involve as to taxpayers with income in excess of two thousand dollars a year paying two years' taxes in one year and in many cases would involve a tax above a hundred per cent of the income actually received in 1943. He proposes to find new sources of revenue by whipping the pulling horse. It apparently has never dawned on Mr. Paul and other so-called experts on taxation who are now operating at large, that you can only confiscate once and that when the time comes that either through maladjustment of rates or unfair differences in the manner of collection, it will be possible for an individual to actually retain more for himself from a smaller income after payment of taxes than he could by increased effort retain from a larger income, incentive will be destroyed, total income will decrease and the total Federal income will be correspondingly diminished. I intend tonight to discuss these plans in some detail.
In that connection I may say that I have been asked many times as to the reason for the bitter opposition of the Treasury Department to the Ruml plan and I am always reminded of the classic remark of President U. S. Grant about SenatorCharles Sumner of Massachusetts. A bitter feud existed between them for years. On one occasion it is related that someone told Grant that Sumner did not believe in the Bible whereupon the Iron soldier is reported to have replied: "Yes, damn him, that is because he did not write it." I greatly fear that that is the explanation of the attitude of Mr. Paul and his associates on the Ruml plan. And the statements of some legislators that they favor pay-as-you-go taxation but are opposed to the Ruml plan leads me to the belief that either they have not taken the trouble to find out what the Ruml plan actually provides for or have not confronted the only alternative suggested of an unbearable system of double taxation.
Let me explain the authorship of the Ruml plan. Let me first emphasize that his name is R-U-M-L, Ruml—and he has no connection either by consanguinity or mental affiliation with Marshal Erwin R-O-M-M-E-L, with whom the Treasury would like to have him confused. Mr. Ruml is an American citizen, born in the great State of Iowa. He has enough college degrees to qualify him in any New Deal school, having graduated from Dartmouth, received his Ph.D. at Chicago and was Dean of the Social Science Department of that great University. He is a successful businessman and among other things is chairman of the Federal Reserve Bank of New York. He is also a public spirited citizen who as an economist of acknowledged renown devoted his talents to working out a solution for an admittedly desperate situation confronting millions of taxpayers in the United States.
The people of the United States are today faced with the most stupendous burden of taxation which has ever confronted any people on this earth. It is true that we are the richest nation in the world but it is also true that our expenditures already made or in contemplation are far greater than any other nation in the world has even dreamt of being able to make. The American people have looked this situation in the face. They are prepared for the sacrifices which are necessary in submitting to an unprecedented burden of taxation. But they are entitled to demand and do demand that this burden be imposed in as equitable and humane a manner as possible and that neither by inequity of rates nor unfairness of collection shall this burden be increased.
I hold no brief for Mr. Ruml. I had never seen or heard of him until he appeared before the Finance Committee of the Senate last August, some four or five months after he had presented his plan to the Treasury Department without being able to secure even decent consideration for it. His plan was so simple and so sensible, it accomplished so much of good without any loss to the Government mat I was immediately struck with its great possibilities of benefit to the nation as a whole without any injury to the revenue or unfairness to anyone.
The Ruml plan is as simple as A-B-C. I have already said that it is so simple and so sensible that some people seemingly cannot understand it but profess to see complexities in it which do not exist—in other words they are looking for bugs under the chip which are not there.
The Ruml plan briefly stated would simply provide that for bookkeeping purposes—and that is all that it is—tax on 1942 personal incomes be disregarded and that the payments which we will all have to make at the new and higher rates during 1943 be considered as taxes on 1943 income rather than 1942 income. As a practical rule of thumb the returns which under the present law we will have to make on 1942 income before March 15th would be taken as a tentative return on 1943 income, with the provision that if that resulted
in under-payment for 1943 at 1943 rates there would be an additional assessment and if there were overpayment there would be a credit or refund. After 1943 the system would of course work automatically. During 1943, the transition period all taxpayers would be treated exactly alike and the change to a current basis would be accomplished without subjecting any taxpayer to the dire outrage of being subjected to double taxation—that is to being compelled to pay two years' taxes in one or three years' taxes in two, which are mere variations of the alternative proposal.
Now at first blush it seems to come—unfortunately apparently including Mr. Paul, the current "brain" of the Treasury Department on tax matters—that this involves the loss of a year's taxes by the Government. Even if this were true it might not be a bad investment for the United States if it permitted us to escape the old, bad, improvident system by which the taxpayer is always a year behind with his payments and the Government a year behind with its collections.
But actually nothing could be further from the truth than that the Government would lose a year's taxes under the Ruml plan. No one would escape the payment of taxes. Each of us would go on in 1943 paying at the 1943 rates of tax on his income in 1943. The only difference would be that we would each be paying in 1943 on 1943 income, instead of paying in 1943 on 1942 income and waiting for 1944 to pay for the old dead horses of 1943. Theoretically it is true that the Government would lose a year's taxes scattered over a period of forty or fifty years as the present generation of taxpayers die or cease to be taxpayers. This would in the opinion of the most responsible authorities on accountancy, as represented by the leading firms of tax accountants in the nation, be offset and far more than offset by the greatest promptness and certainty of collection, particularly
if the Ruml plan is attached to a provision for collection at the source by a substantial withholding tax as is done in my bill, S. 280, which I introduced merely as a basis for discussion. It cannot be too strongly emphasized, moreover, that what the Government is gaining by this plan is cash-money in the till—while what the Government is giving up is nothing on earth except a tax debt unenforceable until Judgment Day or the date of the end of the Republic whichever occurs first and then uncollectible by reason of insolvency. I believe it cannot seriously be questioned that the actual cash position of the Government will be sensibly improved immediately by the adoption of the Ruml plan and that this improvement will progress from year to year, as it becomes the foundation for a scientific tax structure—which it has been impossible for us to have heretofore by reason of our philosophy or pay-a-year-later-on-birds-that-have-flown. i assert without fear of successful contradiction that as a mere matter of dollars and cents the Government so far from losing a year's revenue will actually make money immediately and every year thereafter by the adoption of the Ruml plan, if coupled with a substantial withholding tax for collection at the source as is provided in my bill S. 280.
One feature of the pay-as-you-go plan which cannot be too strongly emphasized is that its adoption would make possible the adoption of a bona fide system for collection at the source by means of a withholding tax. By this combination taxes could be collected with the greatest possible certainty and promptness and with the least amount of pain to the taxpayer—and I have never yet met anyone who really enjoyed paying taxes—because within the limits of possibility of the withholding tax, which necessarily cannot include the deductions and higher surtaxes the taxpayer would have his taxes paid without handling the money and possibly spending it and then having it or its equivalent taken away from him at a time when it would hurt the most.
The alternative is Mr. Paul's scheme—which he denominated last summer as a "modified Ruml plan"—which is a fake, pure and undefiled. It has nothing whatever to do with the Ruml plan or its objective of getting the nation free of its tax debt and established on a basis of being able to pay-as-you-earn. It represents the lowest form of class appeal. It simply proposes to forget the taxes for 1942 as to those taxpayers whose income is less than approximately $2000.00 but as to all others to undertake to compel them to get current by compelling them to pay all of 1942 taxes and most of 1943 taxes at the same time. In many cases Mr. Paul's proposal would run well above 100% of income. Mr. Paul is apparently not familiar with that sage old Dutch proverb which says: "Milk the cow but don't pull off her udder."
I predict without hesitation that unless the Ruml plan is adopted there will be hundreds of thousands of defaults and distraint warrants and that if the Paul plan—which is infinitely worse than no change at all—should be adopted there will be many million of defaults, distraint warrants, bankruptcy and suicide.
I urge all Americans who listen to me tonight to consider this problem, make up their minds and make themselves articulate. A recent Gallup Poll showed that ninety per cent of Americans who had considered the Ruml plan are in favor of it. The Treasury has obstinately set its head against it because it did not originate it. It is the business of the Congress under our Constitution to write revenue bills. The Treasury is trying to usurp this function. I urge every man and woman who is interested in this vital problem to write his Congressmen and Senators expressing his view whatever it may be.