(1) The Treasury should study and report to this committee on the Canadian attempt, undertaken in July 1940 and abandoned in 1943, to withhold on dividends and interest.

(2) Analysis should be made of the relationship of the ADP (automatic or electronic data processing) program, withholding and the numbering system requested by the Treasury. We see no correlation between the pending proposal for withholding and the numbering system. The numbering system, however, is vitally necessary to automatic data-processing system. Automatic data processing also has a relationship to withholding. Thus, in a recently published speech before the Tax Institute, the very able Assistant Commissioner of Internal Revenue (Planning and Research), who has since been promoted to the position of Deputy Commissioner, stated that automatic data processing "will have a vital relationship to withholding," and that the ADP system, among other things, would provide "a consolidated tax account for each taxpayer that will reflect his current tax status at any given point in time." Thus we are on the threshold of a system that will provide the Internal Revenue Service with the needed equivalent of a form W-2, to permit prompt refunding and ade quate policing of millions of returns. The planning for this system and all that it promises should entail intensive coordination between disbursing agents, dividend and interest payers, and the Treasury, so that the purchasing of processing machines can be made with a view to the requirements expected and needed by the Treasury. Either withholding will then be outmoded or, if needed, will be workable. We submit that it is better to have a sound system later than an unsound system earlier.

To this end, the New York Clearing House Association and the member banks stand ready to spend the time necessary in cooperation with the Treasury, making available our most technically experienced personnel in operations.

APPENDIX A

MEMBER BANKS

The Bank of New York.

The Chase Manhattan Bank.

The First National City Bank of New York.
Chemical Bank New York Trust Co.

Morgan Guaranty Trust Co. of New York.

Manufacturers Trust Co.

The Hanover Bank.

Irving Trust Co.

Bankers Trust Co.

The Marine Midland Trust Co. of New York.

United States Trust Co. of New York.

Grace National Bank of New York.

APPENDIX B

WITHHOLDING ON WAGES

The withholding rate on wages is 18 percent. This is the first or lowest bracket of 20 percent with a built-in adjustment for the standard deduction. Each employee is entitled to advise his employer as to the number of his personal and dependency exemptions. These exemptions adjust the amount of withholding to prevent overwithholding.

The employer not only pays the withheld tax to the Treasury but also supplies the Treasury and the employee with Form W-2. The employee must attach one copy of the W-2 Form to his return. This form shows the gross amount of wages to be reported on the employee's return and the amount withheld, which the employee takes as a credit. There is no need for the employee to "gross-up" his wages by mathematical calculation or for the Internal Revenue personnel to check such calculations.

On receipt of the tax return, the District Director's office, as a first step in processing returns, compares the Form W-2 with the amount reported on the tax return and the amount of credit taken. Refunds and overwithholding are easily and promptly checked by the Internal Revenue Service, again by the comparison of the W-2 Form with the return. In the absence of frand on the part

of the employer or forgery by the employee, the system provides a reasonably prompt check on the correctness of immediate refunds.

Refunds on overwithholding are made on an annual basis, without interest. Overwithholding, however, is kept to a minimum by the built-in allowance for the standard deduction and the dependency exemptions which are permitted on an individual basis. Some overwithholding comes about because employees, as a matter of choice, take less than their full number of exemptions to make sure no additional tax must be paid, particularly if such employees are in a bracket in excess of the lowest bracket or have some income other than wages. This type of overwithholding is at the choice and election of the taxpayer. Overwithholding is also kept to a reasonable minimum since most wage earners are presumptively taxpayers, a fact not as often the case with investment income, and typically wage earners receive more per annum than the nominal amounts of dividends and interest received by millions of individuals with modest investments or savings accounts.

It should be observed that withholding on wage income performs a function other than enforcement, namely, to prevent hardship. Under existing heavy initial tax rates, should employees receive the gross amount of their earnings as take-home pay and then be faced at the end of the year with a tax liability, severe difficulties would attend the raising of the funds necessary to pay the tax if the proper amount had not been reserved by the taxpayer. On the other hand, the yield on investment income is small in comparison with the values of the underlying securities or deposits, so that funds are available if necessary to pay a tax attributable to investment income. Admittedly, particularly in the case of a retired person with modest income, it would be self-defeating to rely on capital to pay taxes. However, for married couples over 65, considerable amounts may be received before tax liability is incurred. The double exemptions and maximum retirement credit for married couples over 65 amount to $4.800 a year.

The CHAIRMAN. Mr. Millikin, we thank you, sir, for bringing to the committee your thinking on this matter.

Are there any questions of Mr. Millikin?

Thank you, sir.

Mr. MILLIKIN. Thank you.

The CHAIRMAN. Mr. Smith.

Mr. Smith, will you identify yourself for the record by giving us your name, address, and capacity in which you appear?

STATEMENT OF PAUL L. SMITH, MEMBER, COMMITTEE ON TAXATION, THE MANUFACTURERS ASSOCIATION OF THE CITY OF BRIDGEPORT, CONN.,INC.

Mr. SMITH. Yes, sir.

Mr. Chairman and members of the committee, my name is Paul L. Smith. I am secretary and treasurer of the Bullard Co., a mediumsized corporation listed on the New York Stock Exchange, which manufactures machine tools. I am speaking today as a member of the Committee on Taxation of the Manufacturers Association of the City of Bridgeport, Conn., Inc., on the proposed extension of tax withholding to dividends and interest income.

The Manufacturers Association of the city of Bridgeport, is comprised of about 100 manufacturers in the greater Bridgeport labor market area, and I might say they rank in all sizes, including many large corporations.

As good citizens, the Committee on Taxation of the Manufacturers Association of Bridgeport recognizes the necessity of every citizen paying his just taxes and that probably some measures are essential to cope with willful tax evaders.

However, we do not believe that this should be accomplished by the confiscation of income which may never be due the Government and for which no records are supplied to the payee.

Therefore, the proposal for the extension of tax withholding to dividends and interest income strikes at the basic American freedom of the right of the individual to freely accumulate, own and hold private property.

It strikes at the sanctity of individual property ownership without confiscation by Government whether Federal, State or local.

In addition, it penalizes thrift on the part of those with minimum taxable income, nontaxable income or little cash reserve whose only chance to survive or get ahead is to save a dollar now and then.

The extreme weakness and immorality of this proposal is excused in the explanation by the Secretary of the Treasury on the ground that it "would minimize the work on interest and dividend payers."

It may well be noted right here that every interest and dividend payer has to account to the payee fully and accurately at some time and appropriate returns might well be made to the Federal Treasury.

The fact that "no payer records of withheld tax by individual payee would be required" constitutes confiscation by taxation without any record being made or any legal acknowledge to the owner of the property.

It is also acknowledged by the Secretary that "as a consequence, across-the-board withholding would necessarily involve overwithholding on payments made to tax exempt organizations and to certain individuals."

These "certain individuals" are the owners of small "nest egg" savings accounts who need every cent of interest they can earn for their future financial security. They are the first bracket taxpayers, including nontaxable individuals and minors who have their meager interest and dividend earnings forcibly withheld-actually taken away from them.

This proposal is the 1961 version of "robbing the widows and orphans" without any accounting whatsoever either to his Government who is taxing him or to him as an individual citizen to whom the Government owes full accountability for this or any other invasion of his private life or property ownership.

Unless an accounting is made to the minor, the aged whose life savings have all but vanished due to inflation, or other dependent, his parent, guardian or other trustee of a point account, how would they know how much such overheld amounts are so as to file for a correct refund?

To repeat some of the main features of the proposal:

Withholding agents would withhold at 20 percent from all interest and dividend payments subject to withholding. The agent would not be required to keep records of tax withheld from each recipient, nor would the agent be required to provide withholding receipts to the recipients. The withholding agent would merely remit to the Internal Revenue Service 20 percent of the total interest or dividends payable.

To account for the proper amount of interest or dividends on the tax return, the recipient would include the gross amount of dividends or interest in income and claim as a credit against tax liability the amount of tax withheld.

Certainly this violates the fundamental accounting principle of maintaining adequate control of receipts and disbursements.

Next, consider the effect of overwithholding of payments to taxexempt organizations.

With the encouragement of our tax laws, many corporations and individuals have established charitable foundations into which funds are placed in good years and contributions are made in good times and bad to colleges and universities, churches, community chests, hospitals and innumerable other institutions so essential to the well-being of our Nation and its citizens.

Such charitable foundations would not only be deprived of the humanitarian use of this overwithholding of payments but also any additional interest which might be earned during the period elapsing until recovery from the Federal Treasury was effected.

Since many such foundations have no paid employees, even the "quarterly refund" which "would be allowed upon claim" so as to "alleviate the extent to which organizations and individuals would be out of pocket on account of overwithholding" would cause, nationally, a serious loss of interest earnings until the refund claims were filed and refunds received.

There are in our country many thousands, even millions, of the fine people who due to lack of education, limited understanding of our language, or other deficiency, certainly could not cope with the problems entailed by this proposed new tax concept.

Although ignorance of the law is no excuse, permanent losses, and I emphasize "permanent losses," would undoubtedly be suffered by many nontaxable individuals, minors, their parents, et cetera, due to lack of knowledge of comprehension of the apparently simple provision for "accelerated recovery," the computation of tax withheld, or the "gross up."

Confusion might well reign supreme.

Despite the seemingly simple explanations afforded in the proposal, it is conceivable that implementation might necessitate an exhaustive set of regulations which would not be understood by most taxpayers who are unfamiliar with the intricacies of existing tax laws, with consequent mathematical errors and other mistakes requiring a more detailed check by the Internal Revenue Service.

There appear to be certain inconsistencies between the introductory remarks, paragraph 5, that is, in the section's explanation, containing "Illustrations of the Withholding Operation" and paragraph 12 concerning "Information Reporting by Taxpayers."

Up to this section on "Information Reporting by Taxpayers" it has been stated consistently that

No payer records of withheld tax by individual payee would be required. However, we here find that

For those with incomes taxable at higher bracket rates, compliance would continue to be enforced by the information document program.

Apparently, corporations will still have to file form 1099, which has been mentioned here before, on all dividend payments of $10 or over and banks on interest payments of $600 and more.

It further states:

The Internal Revenue Service would utilize the information reports to verify both the completeness of dividend and interest reported by taxpayers and the accuracy of withholding credits reported on tax returns and intra-annual refund claims.

At this point we find that despite earlier protestations we are to have corporate reporting as usual and Internal Revenue Service auditing procedures as usual.

In addition we find finally that:

A special audit program would be directed at the verification of withholding credits and intra-annual refunds claimed for dividends and interest below the minimum information reporting requirements. (This would discourage the deliberate overclaiming of refunds and credits for small amounts of interest and dividends.)

It would seem that this would be virtually impossible of accomplishment as "No payer records of withheld tax of individual payee would be required" to be reported to the Internal Revenue Service.

It would also appear that a swarm of additional Internal Revenue agents would be essential even to start such a "special audit program." In closing, we would advance a constructive and practical suggestion for solving these problems of tax evasion, and I understand this has been made by others since prepared this.

Extend the reporting of all dividend and interest payments in excess of $10 or possibly even less, both to the Government and the payee (taxpayer).

Advise each taxpayer that all interest and dividend payments of $10 or more or less, had been reported to the Federal Government and were subject to taxation.

Then, require the Internal Revenue Service to organize its information as does the social security system so that all information about each taxpayer is assembled at a single source and let the taxpayers know that the Internal Revenue Service has all of the facts on every taxpayer at hand.

The effect would probably be salutary, with taxpayers making a real effort to pay their just taxes and evasion dropping to a minimum. Ferreting out of evaders would be simple, practical, and effective. We believe that such a program would be much more practical, cost less, and produce the maximum Federal revenue honestly owed to the Government.

The CHAIRMAN. Mr. Smith, we thank you, sir, for bringing to the committee this discussion of your views on this matter.

Are there any questions of Mr. Smith?

Mr. KEOGH. Mr. Chairman, I would like to ask Mr. Smith this one question.

The CHAIRMAN. Mr. Keogh.

Mr. KEOGH. Your concern about the "widows and orphans" does not extend, does it, to those widows and orphans with income tax liability?

Mr. SMITH. Of course not,

sir.

Mr. KEOGH. I did not hear your beginning.

Mr. SMITH. I said, of course not. It was stated by us at the start of this that we are very much in favor of all those who owe Government taxes paying them. However, it is our concern that many who do not owe the Government any taxes would have their income reduced, and due to the lack of knowledge, sophistication on the part of these widows and orphans probably there would be many with permanent losses.