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8 The Tax Review 1 (1947)

handle is hein.tera/tafoutaxt0010 and id is 1 raw text is: JANUARY 1947 THE TAX REVIEW Copyright, 1946, by Tax Foundation, New York, N. Y. A NEW INCOME YEAR FOR TAXPAYERS by HARLEY L. LuTz Professor of Public Finance, Princeton University A N essential condition for the proper control of the public finances is the integration of the tax year with the budget year. That is, tax levies, tax rates, and tax pay- ments should be adjusted to the fiscal period in which the revenues thereby provided are to be spent. Where there are wide differences between the spending year and the tax year, the coordination of expenditures with realized receipts is much more difficult and unlikely. The problem is encoun- tered at every level of government, local, state, and federal. In some instances there have been changes, in recent years, that have diminished the gap between the tax year and the budget year. There is one conspicuous instance, at the federal level, in which such a correction should be made. The case in point is the use of the calendar year as the period for which to report income and determine the total tax due on the income received during a twelve-month period. Individuals and corporations that regularly use a fiscal year for their own purposes are authorized by the tax law to report income and settle tax liability on the basis of this fiscal year. All other income taxpayers are required to make such reports and settlements on the basis of the calendar year. On the other hand, the federal*finances are managed on the basis of a fiscal year which opens on July 1 and closes on the next June 30. The budget is regularly planned with reference to this fiscal year. The estimates of revenue must be converted, from the results obtained out of the experi- ence of income reported and taxes paid on a calendar year basis, into approximations valid for the fiscal year which cuts across the middle of the income and tax payment year that is used by the large majority of all taxpayers. . The significance of the lack of synchronization between the tax year and the budget year has often been made appar- ent in the reports of the Congressional taxing committees. These committees have ordinarily framed their estimates of the yield to be expected under recommended tax changes in terms of a full year of operation, by which is meant a full calendar year after the changes had become effective. Seldom, if ever, in the reports on tax measures, has there been an attempt to indicate the effect of new legislation upon the revenues for the current or a future federal fiscal year. The situation faced by the Congress that will convene in January, 1947, gives particular emphasis to the condition under which the income tax has been handled from its beginning. The budget for the fiscal year 1947 is out of balance, on paper, by $1.9 billion. This deficit is predi- cated upon a volume of receipts which, to be realized in full, assumes the continuance of the rates of tax that were effective when the budget was formulated. It has been announced that plans are in the making for a substantial reduction of income tax under legislation to be introduced and enacted early in the session. Announcement has also been made that the reductions to be made will be immedi- ately effective, or possibly retroactive to January 1, 1947. In the latter event, upwards of one-half of the total tax reduction that may be realized for the calendar year 1947 would occur in the first half of the year. Accepting the figures of $3 billion to $3.5 billion as the total reduction to be accomplished by the tax changes under discussion, it follows that $1.5 billion or perhaps more would be lost from the budget for the fiscal year 1947. The deficit under this budget, by June 30, 1947, would therefore be corre- spondingly increased, possibly to $3.5 billion or more. The remedy is obvious and simple. In the first place, the tax reduction to be made next year should not become effective until July 1. In the second place, the occasion is most auspicious for a change in the income year and tax 1 VOLUME VIII No. 1

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