Mr. COUDERT. But he submits that to the Federal depositary? Mr. COUDERT. Does he pay that directly to the Treasury? Dr. ATKESON. Yes, sir. Mr. COUDERT. Thank you. Mr. GARY. I just cannot see why, as long as the collector collects those quarterly reports, and the balance payment, it would not be simpler to let him handle the whole thing. But you say you have that matter under study at the present time? Dr. ATKESON. Yes, sir. Mr. GARY. I hope you will give it a very thorough review, both as to withholding taxes and as to social security. NECESSITY FOR WITHHOLDING TAXES Mr. COUDERT. Let me add to that, Mr. Chairman, that I get constant complaints from people about the withholding tax and the burden that comes from their being required to do the Government's accounting without compensation and at their own expense. So, I do hope, Mr. Commissioner, you will do everything possible to reduce the clerical burden on the unfortunate taxpayer who has to withhold the tax and act as your collector. Mr. SCHOENEMAN. I believe, when they become accustomed to the procedure, things will be different. We had the same situation with the advent of social security, and again with the withholding tax; and I think, when they become accustomed to the procedure, any discontentment with it will disappear. Mr. COUDERT. I think it goes deeper than that. I think people resent having to do that accounting, as wages and costs of accounting go up. This continues to be a burden and a growing burden. In your judgment, what would be the effect of eliminating the withholding tax and requiring every taxpayer to take care of his own tax liability? Mr. SCHOENEMAN. In other words, go back to the previous system? Mr. COUDERT. Yes. Mr. SCHOENEMAN. I think it would be a great disadvantage from the standpoint of Government revenue, to begin with. I think, if we on our own volition decided to abandon the withholding system, the demand from the people would be terrific. I think the great majority of the people like this system of paying taxes. Mr. COUDERT. You mean those from whom taxes are withheld? Mr. SCHOENEMAN. Yes. I think they like the withholding idea. I am talking about the taxpayer himself, the individual. Mr. COUDERT. The taxpayer that withholds, or the taxpayer whose tax is withheld? Mr. SCHOENEMAN. At this point, I am talking about the individual who has to pay taxes. I think the headache he had at the end of the year, of trying to get the money to pay his taxes, was a considerable one. The little fellow would have trouble accumulating the kind of money he needs to pay his taxes if he only paid once a year on March 15. This idea of taking out enough from every pay period to almost meet taxes at the end of the year, or in many cases give him a refund, I think makes him very happy about the situation. Mr. COUDERT. Do you consider that elimination of the withholding arrangement would result in a very large loss of revenue to the Government? Mr. SCHOENEMAN. I believe it would. I believe that under our present system we are more certain of getting returns from the employees of the country, the wage earners. Mr. COUDERT. Generally speaking, do you think the large proportion of the employees who are now under the withholding system would for one reason or another fail to pay their taxes? Mr. SCHOENEMAN. It was impossible to check thoroughly all the wage earners of the country. We had information returns for years, the 1099's, that the employer turned over to us. Well, you can imagine the volume of information returns we would get on the wage income of the taxpayers of this country. We never were able to investigate those information returns the way they should have been investigated in order to prevent delinquencies. Under our present system, we do not have to worry about the wage earner, since we know we are going to get his return, because we have his money. And in 38,000,000 cases last year he was entitled to refund. He comes off better. He is really saving for himself a little bit of money, which he gets from the Government very promptly at the end of the year. Mr. COUDERT. Have you any way of estimating as to whether the additional enforcement cost to follow up such information returns would be any greater than the cost to taxpayers all over the country to do the bookkeeping on the withholding-tax requirement? Mr. SCHOENEMAN. I have no way of estimating what the comparative cost would be. Of course, I know in the case of these large withholding agents they have a large burden. But, as the chairman pointed out, I think they are glad to assume that burden, because at the end they are all better off. If one person does not pay his tax, another person has to pay it for him. Mr. COUDERT. Well, that does not necessarily follow. It might merely mean a larger deficit, under our present philosophy of govern ment. I would like to say that, while the Commissioner and the members of the committee who have commented on this subject are probably right, I think it is a curious commentary upon the effect of the tax burden upon the great mass of American taxpayers. Mr. CROSS. I would like to add that, if the withholding system should be abandoned, the employer would later find himself in the position of having to withhold, through notices of levy filed with him by the collector of internal revenue, to enforce collection of taxes not voluntarily paid by the employee. Mr. FERNANDEZ. Just two questions. Really, the psychological effect is that the employee hardly considers the withheld taxes as part of his salary? Mr. SCHOENEMAN. I think psychologically that is true. Mr. FERNANDEZ. And if we went back to the old system, as I understand it, a good many of them would not even file a return, and you would have to catch up with them if you could. That is true; is it not? Mr. SCHOENEMAN. I think we had a better illustration of what you are referring to when social-security withholding first went into effect in 1937, when we found some of these people working, we will say, in laundries. When they first found they were subject to withholding, they quit. They said, "I will not work for you if you withhold from my wages." They then could not find any place else to work where there was not withholding from their wages; so they just gave in. That indicates clearly that they were not going to pay taxes. If we did not get it first, we would not get a return, unless we went out for it. Mr. GARY. I know, Mr. Schoeneman, prior to the adoption of the withholding tax for income-tax purposes, I had employers tell me that at that time the employer was required at the end of the year to give each employee a slip showing the amount of salary that he had earned during the year, so that he could file that with his income-tax return. And employers have told me that after they handed out those slips to the men in the factories you could go through the factories and sweep them up by the hamperful; that the men would just throw them away and would not pay any attention to them at all; which was a clear indication that they had no intention of filing income-tax returns. And a great many did not file them. Mr. SCHOENEMAN. I would like to say that if we went back to the previous system we would have to have a great many deputy collectors to get the same tax we are getting now. We would have to have a great many deputy collectors to investigate the information returns. But, by the time we got around to investigating them, it would be several months after the return was due, and I doubt very much if the taxpayer would have the money with which to pay the tax. And then we would go back to the difficulty that Mr. Cross referred to: of filing levies with the employer, which would be far more obnoxious to him than the records he has to keep on the withholding system. Mr. COUDERT. I take it, then, Mr. Commissioner, from all of the colloquy that has been going on, everybody is in accord that the average employee is not conscious that he is paying a tax, and that if he were he either would not or could not pay it. And that is why we resort to the withholding system: in order to bludgeon him into paying a tax that he would not or could not pay if he were left to himself. Mr. SCHOENEMAN. I do not consider it bludgeoning him, Mr. Congressman. I believe he has an obligation under the law. His failure to meet that obligation would not necessarily be because of dishonesty but because he runs out of money before the time of the filing of his return, and he would not be able to fulfill his obligations. I was one of those, back in 1937, who thought this system of socialsecurity withholding would not work, but I have definitely changed my opinion and think it is remarkable the way it is working. Mr. GARY. Yes. I do not think it is so much a question of dishonesty. It is a question of ignorance in a lot of instances. People were not familiar with the fact that they had to pay taxes. There are numerous causes. But the fact remains that a great many of them--not all of them, by any means; but a great many of them-did not pay. When people do not pay their proper share of the taxes, their burden is passed on to someone else who does. He has to pay his own and theirs, too, because it takes a certain amount of money to run this Government. Mr. SCHOENEMAN. I would like to say this, though, Mr. Chairman: As the other members of the committee and you have suggested, we certainly should keep studying this problem to reduce the burden on the employer as much as we can. Mr. GARY. To reduce the burden on the employer and also to determine whether, from the standpoint of economy and efficiency, it would not be better to handle the whole thing through your Department rather than bring the Federal Reserve bank into the picture. Mr. SCHOENEMAN. I am sure Dr. Atkeson has not finished his outline of improvements, but I think that is one of the important things we are going to have to come to. I hope we will have time to tell you about some of our mechanical equipment. That might lead to what you are suggesting right now. OTHER MANAGEMENT IMPROVEMENTS Dr. ATKESON. Mr. Chairman, there were just three other broad categories I wanted to mention, and then you can explore them. Mr. GARY. I did not mean to interrupt you, but I thought this was very important, and I think the discussion has been very valuable. That is why I broke in there. Dr. ATKESON. Mr. Chairman, the remaining three major topics that I wanted to just mention, with the idea that you could follow them up in any way that you liked, were these: One is the new system that the Accounts and Collections Unit is going to use in the Processing Division in Kansas City in the matter of matching up the withholding documents that we are speaking of with the credits claimed on the individual returns. The second topic relates to the present and the proposed expanded audit-control program for the next year. The third relates to this big mechanization program to which the Commissioner just referred. Now, I mentioned those with the idea that you may at some subsequent time be interestd in some of them, and we may have to call some other people to give you the details. But I think that gives you the high lights of the major programs that are going on within the Bureau of Internal Revenue. Mr. GARY. Well, we would certainly like to have someone come in and high light each one of those programs for us; I mean, give us in a broad way a description of each one of them. Then the detail will. depend entirely on the questions of the members. Mr. SCHOENEMAN. We would like to have a chance to present it to you, Mr. Chairman, because we are rather proud of the improvements we have made. Mr. GARY. We want that. Mr. SCHOENEMAN. I think it was said at one time that we were in the horse-and-buggy days as far as our accounting is concerned. We have gone to the other extreme now. HOOVER COMMISSION RECOMMENDATIONS Mr. GARY. We are very much interested in these improvements. As you know, we have been working along with you, and we have been rather insistent that some of those improvements be made. Let me ask you one question, here. The Secretary, when he testified, inserted in the record a letter which he had written to Senator McClel lan, I think it was, with reference to the progress that had been made in connection with the adoption of the recommendations of the Hoover Commission. Were all of the Hoover recommendations pertaining to your department covered in that letter? Mr. SCHOENEMAN. My guess would be that they would be because the suggestions made by the Hoover Commission were matters that would be under the control of the Treasury rather than under the control of the Internal Revenue Bureau. The adoption or the rejection of those proposals would be matters of Treasury decision rather than Internal Revenue Bureau decision. Mr. GARY. He gave us this report, in which he covered the recommendations of the Hoover Commission, those that had been adopted; and, as to those that had not been adopted, the reasons for the failure to adopt them. But I understood that in addition to the broad recommendations, there were a good many recommendations made in the task force reports. Were any recommendations made as to the internal management of your Department? Mr. SCHOENEMAN. Not as to the internal management. There were other matters. Mr. GARY. They were covered in that letter? AUDIT OF INCOME TAX RETURNS Mr. COUDERT. Before we get too far away on the record from the discussion we had with reference to the withholding tax, I would like to ask this question: On page 10 of your general statement, Mr. Commissioner, you point out that the total number of returns filed is 83,000,000 plus. Now, in that 83,000,000, I assume there are included the returns of employees who are covered by the withholding-tax procedure? Mr. SCHOENEMAN. Yes, sir. Mr. COUDERT. As to those returns, do you audit them at all? Mr. SCHOENEMAN. We would like to audit more of them, Mr. Congressman. It is a physical impossibility, with our present force, to investigate all of those returns. Mr. COUDERT. What I am getting at is: First, what proportion of that total of 83,000,000 represents returns covered by withholding, and what proportion of that proportion is subject to audit in practice, last year and the year before? Mr. SCHOENEMAN. I could make some guesses, but I would rather have Dr. Atkeson do the guessing on that. He could give you some general figures that would probably, in a general way, answer your question. Dr. ATKESON. Mr. Chairman, I would like to suggest to the Congressman that this would be covered more appropriately under the discussion of our audit-control program. However, I would just like to indicate at this point the need for audit of returns where there is withholding involved, for three reasons: First, the other income that is not subject to withholding, received |