The first Income Tax Form 1040, from the U.S. Internal Revenue Bureau, 1913. Source: National Archives and Records Administration.
The first Income Tax Form 1040, from the U.S. Internal Revenue Bureau, 1913. Source: National Archives and Records Administration.

A century ago today, the U.S. took a critical step toward embracing a permanent income tax when the House passed the Revenue Act of 1913, which led to the creation of the familiar Form 1040. For many years, however, few Americans were required to fill out the dreaded document because the income tax affected only a small number of wealthy taxpayers.

In 1943, Congress converted the income tax to a mass levy by drastically lowering exemption levels and introducing wage withholding. A Philadelphia lawyer, Clement J. Clarke Jr., told the House Ways and Means Committee that the mass tax could be designed so that returns wouldn’t be required for most taxpayers.

Under Clarke’s approach, the exact amount of tax could be collected by wage withholding. The taxpayers who would qualify for this simplified system had to meet several criteria: They could have only wage income; they had to qualify for the lowest tax bracket, and they had to claim the standard deduction (an innovation proposed by Clarke) in lieu of claiming itemized deductions, which had been the only option.

With the precise amount of tax paid through withholding, there would be no need for a tax return to reconcile the difference between the amount withheld and actual tax liability. Clarke estimated that this would mean that 30 million taxpayers -- more than half the nation’s total -- would be spared the bother of filling out a 1040.

Standard Deduction

The Associated Press reported that Clarke wowed the committee: “No witness got a more cordial reception before the committee,” a dispatch said. “The committee liked Clarke’s suggestions so well it asked him to submit a written elaboration as quickly as he could prepare it.”

But something got lost in the translation to legislation. Congress enacted a modified version of Clarke’s proposal in 1944, including his idea of an optional standard deduction as an alternative to itemized deductions. But instead of eliminating tax returns entirely for millions of taxpayers, as Clarke had envisioned, Congress retained a bare-bones filing requirement for everyone: Taxpayers had to file returns but didn’t have to calculate their tax liabilities. Based on the information supplied by a taxpayer, the government would calculate the tax, and refund any overpayment or bill the taxpayer for any underpayment.

At the time, no one saw a meaningful difference between Clarke’s original proposal for a truly return-free system of exact withholding and the enacted approach of letting the government do the arithmetic. Reporting on the legislation, the New York Times inaccurately asserted that “an estimated 30,000,000 Federal income taxpayers will be relieved in future years of filing tax returns supplementing the withholding of payments from their salaries or wages.”

No one complained that the law fell short of the original goal. Apparently, observers considered the elimination of the need to keep records to support itemized deductions (for most taxpayers), and the elimination of any need to add, subtract, multiply or divide, to be the practical equivalent of a return-free system.

As the tax code has become more complex, this seemingly trivial distinction has grown into a significant difference. The Internal Revenue Service is still willing to do the math for most of us. In Publication 967, it volunteers to calculate your tax if your income is $100,000 or less and if you agree not to take itemized deductions. Nonetheless, only about one taxpayer in 1,000 takes the IRS up on its offer. That’s because the real labor of preparing one’s taxes isn’t so much the calculation, but the record keeping that comes with increasingly complex versions of the 1040. As a consequence, what was viewed as the near-equivalent of a 1040-free income tax in 1944 has become a trivial curiosity today.

Things might have turned out very differently in the postwar era, if Congress had opted for genuine return-free taxation for most taxpayers, rather than for what it erroneously viewed as a close approximation of a return-free system. H&R Block Inc. and TurboTax might not be household names, and most taxpayers would have more free time and fewer headaches every spring.

(Lawrence Zelenak is the author of “Learning to Love Form 1040: Two Cheers for the Return-Based Mass Income Tax.” The opinions expressed are his own.)

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To contact the writer of this post: Lawrence Zelenak at zelenak@law.duke.edu

To contact the editor responsible for this post: Max Berley at mberley@bloomberg.net