The Treasury secretary was exasperated. “Suppose we have to go out and try to arrest 5 million people?” Henry Morgenthau Jr. complained to his staff. How would that play out? Especially in the middle of a war?
Morgenthau wasn’t the only one worried in the winter of 1943 that taxpayers were about to fail miserably in meeting their tax obligations. Polls suggested that more than half of single filers and nearly a third of married taxpayers were unaware that they were, in fact, expected to pay income taxes. The Atlanta Constitution pointed the finger of blame directly at policymakers.
“This will mean the loss of millions of dollars in revenue, a condition chargeable directly to Congress and the Treasury, both of which have known for more than six months that the heavy new taxes would involve millions of new taxpayers in a category hitherto exempt from any association with the intricacies of federal income taxation,” the paper declared in a March 10 editorial.
“These persons are liable for possible jail sentences for failure to comply with the law – this despite the fact they are guilty of nothing more than ignorance,” the paper continued. “With these figures above in mind, it is easy to determine that this country will have a larger jail population than the Army if the matter is carried to its absurd conclusion.”
The editors were right: There was ample reason to worry. And they were also right about who deserved the blame. Congress, in particular, had created the problem by flirting with a plan for massive taxpayer relief, leaving many Americans hopeful that they could escape filing responsibilities — and income tax obligations — at least for a while.
In fact, there was never any serious prospect that Americans would get a pass on their tax obligations in 1943. But Congress, by debating and dithering during a crucial moment, managed to muddy the waters — and confuse taxpayers — just enough to create real problems. It nearly destroyed the filing season in the midst of a national crisis.
What follows is a story from the past. But it should serve as a reminder that taxpayers need clarity, especially in moments of crisis. Even when lawmakers are trying to help taxpayers by drafting relief provisions (like filing and payment extensions), it’s possible to create new problems along the way. Confusing messages and poor communication can undermine the best of intentions.
Taxpayers have a tendency to half-listen to political debates about tax relief. Policymakers have a responsibility to make sure that taxpayers get the facts straight — so they get the relief they need, and don’t find themselves saddled with new problems they didn’t expect.
Untested Taxpayers
In the early 1940s, U.S. political leaders dramatically expanded the number of Americans paying federal income taxes. In a series of legislative steps, they sharply lowered exemptions, increasing the number of taxpayers sevenfold between 1939 and 1945. One of the biggest jumps came after passage of the Revenue Act of 1942 — later described by a Treasury official as “the greatest tax bill in American history”; the number of returns filed by individuals grew by roughly 40 percent between the 1942 and 1943 filing seasons, from 26.3 million to 37 million.
After passage of the 1942 act, policymakers in Congress and at Treasury recognized that adding so many taxpayers to the rolls would create many challenges. Chief among them was simply notifying new taxpayers that they were now expected to pay income tax. In some respects, this notification was straightforward. But it was complicated by the fact that income taxes were widely regarded as a rich person’s problem, not something that regular working people should worry about. Changing that sort of ingrained assumption would require more than a simple postcard.
Treasury took the lead, organizing a major public relations campaign. Legal historian Carolyn Jones of the University of Iowa College of Law has described this campaign brilliantly in a series of articles, including a 1996 essay, “Mass-Based Income Taxation: Creating a Taxpaying Culture, 1940-1952.” The PR campaign included not just posters, advertisements, and the like, but a range of more creative outreach vehicles, including popular songs (“I Paid My Income Tax Today!” by Irving Berlin) and Walt Disney cartoons featuring Donald Duck as a more or less willing taxpayer.
The Ruml Plan
If Treasury officials had their work cut out for them, their task was further complicated by a heated debate over how to collect the new, mass-based income tax. Everyone, in both Congress and the Franklin D. Roosevelt administration, agreed that a withholding mechanism would be necessary. Previously, the income tax had relied on quarterly tax payments from a relatively small number of well-heeled Americans. Such a system, however, was considered impractical for an income tax paid by millions of working-class taxpayers, many of whom were unaccustomed to setting aside money for their tax liabilities.
The question was how to transition from the existing system (which collected taxes directly from taxpayers with a final settlement at year’s end) to a withholding system that collected taxes currently directly from worker paychecks. Such a system, which Treasury favored, would combine collection at source with a transition to “pay as you go” current collection.
During the transition year, however, taxpayers would face a doubling up, having to settle the bill on last year’s income tax while also paying taxes incrementally on the current year’s income. For those who had saved adequately, that would pose no issue. But in practice, it seemed certain to cause problems. (Prior analysis: Tax Notes, Sept. 1, 1997, p. 1241.)
Enter Beardsley Ruml, chair of the New York Federal Reserve Bank, treasurer of R.H. Macy and Co., and (more to the point) a leading policy entrepreneur. Ruml had a simple solution to the doubling-up problem: simply forgive the past year’s taxes and start collecting on the current year. The flow of revenue into the treasury would be uninterrupted, he reasoned. “As we began to talk about what would happen, we discovered that nothing would happen,” he wrote in a pamphlet explaining his plan. “It would happen sometime during the generation, to be sure, but as far as the Treasury and income were concerned, things would move along just the same as time moves on under daylight saving.”
President Roosevelt denounced the Ruml proposal as a giveaway to the rich taxpayers who already owed money under the old system with its higher exemptions. “I cannot acquiesce in the elimination of a whole year’s tax burden on the upper-income groups during a war period when I must call for an increase in taxes and savings from the mass of our people,” FDR declared. But Congress continued to debate the idea.
Americans, meanwhile, were paying close attention to the argument. A Gallup survey from February 1943 showed that 71 percent of respondents were aware of the Ruml plan, and nearly the same number (70 percent) approved of it.
The taxpayers-in-waiting, however, were less clear about what the Ruml plan might actually entail. When asked if it meant “that persons will or will not have to pay a tax on their incomes for last year,” 34 percent said yes, 45 percent said no, and 21 percent said they didn’t know. In theory, assuming that Congress got the plan passed and implemented instantaneously, the correct answer was probably no. But in practice, given the short time frame, the likely answer was almost certainly yes: Taxes would still be due.
And lawmakers themselves certainly believed the answer was yes — a point they made repeatedly and ever more insistently as the filing deadline drew near. The week before the filing deadline, the Democratic and Republican leaders of both congressional taxwriting committees stressed that returns should be filed and taxes paid, as required by current law. The Ruml plan, which was still just an idea, had no bearing on current legal responsibilities.
“It is the duty and the privilege of every one of us to send our fighting dollars into battle alongside of our fighting men,” the lawmakers declared in a statement. “The nation needs your taxes to smash the Axis.”
The message seemed to be getting through to many Americans. Gallup found that 72 percent of poll respondents understood that the Ruml plan, even if passed, wouldn’t eliminate filing responsibilities.
Those same taxpayers, however, were still unclear about what those return filing responsibilities might be. When Gallup asked single individuals if they knew “how much money a single person had to make last year before he has to file an income tax report this March 15,” 54 percent got the number right (it was $500). When pollsters asked married men what the exemption was for married couples, 67 percent got the answer right ($1,200).
As the editors for the Atlanta Constitution had observed, those numbers were unsettling — especially because both questions were asked only of taxpayers who were above the filing threshold. The results implied a significant problem come March 15, with about half of single taxpayers and a third of married taxpayers poised to fail.
The Gallup survey was also revealing for what it discovered about taxpayer confusion more generally. Pollsters asked respondents an open-ended question: “What is there that you don’t understand about the income tax?” The most popular answer was the most reassuring: 32 percent said something along the lines of “nothing misunderstood, understood everything — nothing, no, everything that pertains to me.” Also reassuring were several specific areas of confusion, all with low numbers. Three percent were confused about exemptions, 6 percent found deductions to be a challenge, and 3 percent said it was hard to calculate the amount of tax due. Only 2 percent found the tax forms themselves to be a problem, complaining that “language is too hard to understand, questions they ask require a lawyer to interpret, why do they change forms every year.”
So far, so good. But how about this: 22 percent of respondents selected the option for “nothing understood, everything confusing, understood none of it.” Another 3 percent selected “don’t understand most of it.”
If a quarter of all taxpayers were hopelessly confused about the income tax, how successful could the filing season actually be?
Slow Start
As March 15 drew near, policymakers began to panic. Morgenthau posed his famous question about the prospect of arresting 5 million delinquent taxpayers, while congressional taxwriters made their urgent declaration about the short-term irrelevance of the Ruml plan (which still hadn’t passed in any form).
At the local level, officials of the Bureau of Internal Revenue (BIR) mounted a coordinated but geographically localized campaign to whip taxpayers into shape — and disabuse them of any notion that Ruml might save them. The collector in Boston worried to a reporter that returns were running behind their pace from 1942, suggesting that “there is an erroneous impression that legislative proposals before the Congress will relieve taxpayers from filing their returns for 1942 and paying the first quarterly installment on or before March 15.”
In New York, BIR employees had time on their hands. “The deputies and agents have been for the most part sitting around sucking their fingers,” complained William J. Pedrick, collector of internal revenue of the Second New York District. He, too, cited all the media attention going to the Ruml plan. “The people have confidently expected that prior to March 15 some legislation would be enacted that would relieve them of paying their taxes on March 15,” Pedrick said. “They are kidding themselves if they believe they do not have to file and pay at least one-quarter of the tax before the deadline.”
In Los Angeles, the collector similarly warned that “no blanket extensions of time will be given.” In a March 9 article for the Los Angeles Times, he rattled off a few acceptable justifications for an extension: absence from the state, destruction of records by fire or flood, a heavy workload associated with war contracts. But the most popular excuse was the least compelling. “It is doubtful whether the collectors’ office here would give more time to people who are waiting to see what Congress does about the payment of income tax,” the paper noted.
At least one member of Congress was adding to the problem. Newspapers were quoting Sen. Guy M. Gillette of Iowa as saying that extensions would be widely available for taxpayers needing extra time. But BIR Commissioner Guy Helvering dismissed the report, saying extensions were rare and case-specific. Helvering said he had discussed only a single case with Gillette, not any sort of blanket extension.
Within a few days, this BIR campaign seemed to get some traction; returns were picking up in collectors’ offices around the country. On March 12 The New York Times reported that crowds were increasing at the local BIR offices. “Throngs of taxpayers crowded into the offices of the Collectors of Internal Revenue here yesterday,” the paper reported. “Some were gay, some were grim, and some wore the expression that might follow a reading of the line, ‘All hope abandon, ye who enter here.’” Hope for an extension, that is.
On March 14 The Washington Post quoted Treasury sources saying that return filings were on the upswing in many cities across the country, running 25 percent above 1942 levels and 156 percent above 1941. And on March 16, the paper described the final-day crush at BIR headquarters, as well as its notable finish. “Exactly at the stroke of midnight Mrs. Jeanne Gordon, wife of Seymour Gordon, an employee of the department, dashed through the door to the office of the cashier to offer her husband’s income tax return.” Asked why it was late, Seymour Gordon gave the obvious reply: “I was busy helping other people make out their returns.”
On March 19 Morgenthau offered a happy assessment of the filing season as it had actually played out. “I feel I have every reason to be satisfied,” he told reporters. “Considering how much confusion there was for several months in advance of the 15 of March as to what the people might expect in the way of taxes.”
Indeed, the 1943 filing season wasn’t a disaster. But it was a near thing, thanks chiefly to the extended congressional dalliance with Ruml’s plan for tax forgiveness. As it happened, Congress continued to debate that plan — and endless variations on it — for months after the filing deadline had passed. Not until June did lawmakers finally settle on a compromise, forgiving half a year’s taxes and shifting to current collection through a system of wage withholding at source.
To be fair, Congress had been trying to ease the pain involved in its transformation of the income tax and its administrative machinery. But the near disaster of the 1943 filing season was a lesson in how not to conduct such debates — or perhaps more to the point, when not to conduct them. By choosing to let that debate unfold in the midst of the filing season, Congress courted disaster. Only through the last-minute exertions of panicked policymakers did the fisc manage to avoid a major crisis.