Some of the most intractable problems plaguing the federal tax system have been around for a long time. Complaints about complexity, for instance, appeared before Congress even finished drafting the modern income tax in 1913.
“I guess you will have to go to jail,” wrote Sen. Elihu Root to a correspondent while the bill was still being debated. (Prior analysis: Tax Notes, Sept. 30, 2013, p. 1490.) “If that is the result of not understanding the Income Tax law I shall meet you there. We will have a merry, merry time, for all our friends will be there. It will be an intellectual center, for no one understands the Income Tax law except persons who have not sufficient intelligence to understand the questions that arise under it.”
Such complaints grew rapidly, both in number and urgency. The dramatic expansion of the income tax during World War I created millions of new taxpayers in just a few years. The number of returns processed by the Bureau of Internal Revenue (BIR) increased almost tenfold in just four years, soaring from 358,000 in 1913 to 3.5 million in 1917. And the rise continued, thanks to a series of wartime revenue measures: The BIR processed 4.4 million returns for 1918 and 5.3 million for 1919.
‘No one understands the Income Tax law except persons who have not sufficient intelligence to understand the questions that arise under it.’
Taken together, the war years were an extraordinary moment in fiscal history. “We have just passed through probably the most remarkable year in tax history that any country in the world has ever known,” declared Commissioner of Internal Revenue Daniel C. Roper in 1919.
And the BIR had only barely pulled it off.
The Revenue Act of 1918, for instance, had been passed late in the year, leaving the BIR almost no time to prepare. “We could not get out the forms and distribute them in 19 days,” Roper said. “We could not analyze the law and construct the regulations to guide the taxpayers.” The agency resorted to shortcuts, which put much of the burden on taxpayers. Roper described one improvised solution suggested by his assistant, Joseph Callan. “Mr. Callan, with his ingenuity, constructed and brought to me an improvised form which simply said to the taxpayer ‘Estimate yourself what your taxes are under this law.’ It was the roughest deal that was ever put over on American citizens.”
Indeed it was, and many Americans didn’t like it. They complained loud and long to their elected representatives. For a window into those complaints, we can revisit a December 1919 hearing of the House appropriations subcommittee for the legislative, executive, and judicial appropriation bill.
The panel met to consider, among other things, the fiscal 1921 budget for the BIR. But members also discussed funding for the Bureau of Efficiency, an all-but-forgotten federal agency that played a pivotal role in federal tax administration during the mid- to late 1910s. As lawmakers questioned the leaders of both agencies, they gave voice to constituent complaints, focusing heavily on the issues of complexity and uncertainty.
Taxpayers, one lawmaker warned, were “terrorized.”
The Taxpayer’s Champion
Rep. Thomas Upton Sisson had a problem with complicated tax forms. Not complex tax law so much, although he acknowledged that the two were linked. But Sisson was unhappy with forms in particular. Those hastily drafted forms dashed off by an overworked BIR had become a threat to the survival of the income tax, Sisson warned — and to the survival of any presidential administration that tried to defend them.
A Mississippi Democrat elected to the House in 1909, Sisson landed a spot on the powerful Appropriations Committee at the start of his second term. By 1919, Democrats were in the minority, but that didn’t temper Sisson’s zeal in his battle against complex tax forms. Nor did the fact that a fellow Democrat still controlled the executive branch.
Sisson’s unhappiness first surfaced during testimony by Herbert D. Brown, chief of the Bureau of Efficiency. Congress established the bureau in 1913, first as a division of the Civil Service Commission and later as an independent agency. Lawmakers charged it with bringing the Progressive Era principles of “scientific management” to the hidebound halls of the federal government. Sometimes known as “Taylorism” after its most prominent champion, Frederick W. Taylor, scientific management comprised a set of principles that could be used to improve the efficiency and operations of large organizations.
The Bureau of Efficiency pursued its mission by analyzing the operations of various governmental departments. When it identified possible improvements, it reported these findings to Congress, the president, and the agencies themselves. Indeed, it cooperated extensively with the organizations it evaluated, including the BIR.
In 1916 the BIR had asked Brown and his colleagues at the Bureau of Efficiency to help devise “ways and means of collecting the revenues necessary to pay the expenses of the war.” The BIR was struggling to cope with the accelerating demands of wartime taxation, especially as Congress passed one mammoth tax law after another. Simply organizing the administrative procedures to process new returns was a Herculean task, and the BIR needed all the help it could get.
Experts detailed from the Bureau of Efficiency began by devising a plan for reorganizing the BIR to reflect its expanding workload. Next up, they took the lead in designing new tax forms — not just for the burgeoning individual income taxes, but for excise taxes too, including those on commodities, professional services, and transportation. Perhaps most challenging, efficiency experts helped design forms for the new excess profit tax, a levy that was both highly complex and entirely novel.
The Bureau of Efficiency’s work at the tax agency didn’t end with forms — its experts revised collection procedures, established a new system of accounts, supervised the purchase of machinery to assist with processing returns, and conducted extensive training for BIR employees.
Simply organizing the administrative procedures to process new returns was a Herculean task, and the BIR needed all the help it could get.
Both agencies considered the efficiency efforts a resounding success. “Members of our staff have assisted in carrying out plans for reorganizing and expanding the income tax unit of the Bureau of Internal Revenue to handle the stupendous number of income tax returns that have been received,” Brown declared with evident pride. And he was probably underselling his agency’s contribution, judging by the BIR’s gratitude.
“These officers of the Bureau of Efficiency have cooperated most effectively with us at every juncture during the past year and are now rendering very valuable assistance to us,” Roper told Congress. “I feel that much credit for the success of the Bureau of Internal Revenue during the past year is due to the work of the Efficiency Bureau, and I am very glad to have this opportunity to say so.”
Not everyone was convinced that the Bureau of Efficiency had performed well, at least when it came to designing tax forms. During Brown’s testimony, Sisson pressed him on the issue of complexity. “The forms sent out by the Internal Revenue Bureau to the taxpayers on which to make their returns are extremely complicated?” Sisson asked. And Brown was forced to acknowledge as much.
Think of the farmers, Sisson admonished the bureau chief. They had simple financial lives but were being forced to use complicated forms. “Not one farmer in a hundred will have more than a dozen transactions in a year,” Sisson said. “He will spend a certain amount of money to make his crop, and he knows about what that is. He then sells his tobacco, his corn, his wheat, or his cotton, and he knows what his return is; yet they send out very complicated forms on which to make returns.”
All that complexity meant farmers had to seek help. “They have to go to lawyers or certain businessmen in whom they have confidence in order to make out their returns,” Sisson said. “The result being that the people are highly incensed.”
Brown was unrepentant, rejecting the implication that his agency had done a poor job in designing the new tax forms. “The Bureau of Efficiency had nothing to do with the drafting of the income tax law,” he said. “The forms are complicated because the law is complicated. The forms are as simple as the law will permit.”
But Sisson would not back down, either. There was no reason, the lawmaker insisted, that a taxpayer with simple financial affairs should be forced to use the same form as one with complex business arrangements. The BIR could develop a “simpler form for the men with small incomes, for the men who are engaged wholly in farming, for the men who have small shops, like [an] ordinary blacksmith shop, or for the men who have a very small business, where they look after it themselves or with only a few clerks.”
Complicated forms posed a threat to the viability of the income tax.
Requiring small businesses to use the same forms as large ones was more than inconvenient — it was dangerous. Complicated forms posed a threat to the viability of the income tax. “They do not object to paying the taxes,” Sisson said of the farmers and blacksmiths among his angry constituents, “but they do object to making the complicated returns.”
Brown acknowledged that Sisson had a point. The BIR and the Bureau of Efficiency had actually considered devising forms targeting specific professions and occupations, with an eye toward keeping the filing process simple. But targeted forms would not have been simpler for taxpayers with more than one type of income, Brown said. Those taxpayers would have been forced to use multiple forms — and they might simply have failed to report certain kinds of income entirely.
Moreover, the BIR was already struggling to design, print, and distribute the forms already in use. Increasing the number of forms by targeting them more narrowly would pose a serious challenge, both to the BIR and to the overworked Government Printing Office.
But Sisson wouldn’t let go; the stakes were simply too high. Angry constituents were sending a message, and Brown needed to heed it. “Get out among the people,” he urged the chief. He would discover legions of taxpayers who were “almost terrorized” by the complex, unfamiliar, and uncertain task confronting them. Most were eager to pay, but they didn’t know how or how much. So they were forced to scurry, seeking help from experts. And they were getting angrier by the day.
Sisson ended with a warning. “You are going to make it so unpopular,” he said, “that if the administration which happens to be in power does not simplify these tax returns, it is going to be swept out of power, because it is the most unpopular thing I ever saw.”
Roper on Complexity
A few days after Sisson finished grilling Brown, he turned his attention to Roper, who appeared before the appropriations subcommittee to defend his own 1921 budget. Not surprisingly, Sisson returned to his complaints about complex tax forms.
Roper began by giving the panel an upbeat report. Despite enormous and rapid changes in the federal tax system, Americans were adapting swiftly. “Knowledge of the tax system is becoming more general, and people are understanding it better all the time,” he told lawmakers. That optimistic assessment invited a challenge, and subcommittee Chair William R. Wood, R-Ind., was eager to offer it.
“It occurs to me that one of the great difficulties is in the intricate forms you get up or somebody gets up,” Wood said, echoing Sisson’s complaint from several days earlier. Roper agreed but gave Wood the same answer as Brown: The complex forms were the direct result of “the intricate laws you send down to us.”
Sisson jumped in to reprise his litany of complaints on behalf of the nation’s farmers. “I find that the chief objection in our section of the country to the income tax is not the rate and not the amount, but the great difficulty in determining just exactly what is owed and what is not owed,” he said. Business people had little problem navigating the new procedures of filing and paying taxes. They kept the sort of records that facilitated the process. But small merchants and farmers were another story.
“A farmer simply knows that he has expended a certain amount of money in making his crop, and he knows that he has sold his crop in three or four transactions with the net result of receiving so much money,” Sisson said. “He does not know how to itemize it nor how to answer all of those questions, one question referring back to certain other questions, all of which tending to confuse him.”
And then Sisson returned to his dark warning: Complexity posed a threat to the very survival of the income tax. “The great objection and the great sentiment created against the income tax law is its difficulty in operation due to the character of questions the people must answer,” he said.
When Sisson warned about “the great sentiment” gathering in opposition to the income tax, he wasn’t making things up — although he was certainly exaggerating them. By 1919, opponents of the income tax were mounting a campaign to repeal the levy, replacing it with a national sales tax or simply a return to traditional excise levies and tariff duties. That repeal campaign would gather steam over the coming months and years, and income tax supporters had reason to be nervous — especially after Warren G. Harding’s victory in 1920. With Republican control of the White House and both houses of Congress, the income tax faced the most serious challenge since the last time it had been repealed, in the wake of the Civil War.
As it happened, repeal was not in the cards. An archconservative, tax-cutting Treasury secretary rescued the levy by withholding support for its replacement. But Republicans did manage to capitalize on simmering discontent with the wartime tax regime, including its administrative problems. Tax forms didn’t get much simpler over the course of the 1920s, but the income tax got smaller, starting in 1925. Thanks to exemption increases, the number of individual income tax returns filed dropped from 7.4 million in 1924 to 4.2 million in 1925. The tax wouldn’t return to its former level until 1939.