The changes in the Internal Revenue Code of 1939, made by the Revenue Bill of 1940, made additional changes necessary through the Revenue Bill of 1941. In other words, the change from net income to gross income as a reporting basis, made under the 1940 Bill, created problems within the IRC itself, in that the tax was levied upon the basis of net income. There were no provisions for the tax to be levied upon gross income and no provisions for the small professional and businessman to determine their net income, upon which to base their tax liability.

The Senate Finance Committee Report, Number 673, changed the House Bill by decreasing once again the personal exemption. According to the Senate Report the expected changes that would occur by such reduction are set forth on page 5, it reads:

"Reduced personal exemption.—The House bill made no changes in the personal exemptions provided by existing law. The Committee bill reduces the personal exemptions in the case of married persons from $2,000 to $1,500 and, in the case of single persons, from $800 to $750. This broadening of the income tax base is thought to be desirable particularly during the present emergency in order that the greatest number of persons may contribute directly to the cost of the defense program.

It has been estimated by the Treasury Department that this reduction in the personal exemptions will increase the number of income-tax payers by 2,256,000. Under the House bill, it is estimated that 17,107,000 individual income tax returns would have been filed, of which 10,925,000 would have been taxable. Under the Finance Committee bill it is estimated that 22,108,000 individual income tax returns will be filed of which 13,181,000 will be taxable."

The employed labor force increased by approximately two million (50 million) between 1940 and 1941, the number of tax returns filed by some eleven million (26 million), and the number of returns actually paying a tax by more than ten million (17.5 million). Yet, the big change was still to come.

Why such a drastic increase over 1940? The changes made were basically only two, first the reduction in the personal exemption and second, the creation of a new, as in first time, tax table, which was based upon gross income. It was now possible for the people to pay their taxes based upon their gross income, instead of not being able to pay them under the net-income tax system. The Senate Committee Report explains this change under the "Detailed Discussions of the Provisions of the Bill", Title I—Individual and Corporate Income Taxes, Section 102. "Optional Tax on Individuals with certain gross income of $3,000 or less:

"Section 102 of the bill adds to the Internal Revenue Code a new supplement designated "Supplement T" and comprising sections 400 to 404 inclusive. No comparable provisions are contained in the House bill.

Section 400 of Supplement T imposes a tax upon individuals whose gross income is $3,000 or less and consists wholly of salary, wages, compensations for personal services, dividends, interest, rents annuities, or royalties. The tax is imposed at the election of the taxpayer and is lieu of the tax imposed by sections 11 and 12." [Sections 11 and 12 are the existing net-income tax provisions of the Internal Revenue Code dealing with "business profits."]

Congressional Record Volume 87:

Part 15, INDEX: House Bills 5413-5456, H.R. 5717

Part 15, INDEX: "Income tax", "Revenue" and "Taxation"

Part 6, pgs. 6363-69, 6459-66, 6472-87, 6523-61, 6598-6652, 6704

Part 7, pgs. 7250-76, 7279-7313, 7336-77, 7418-32, 7437-42

House Report Number 1040, Serial Set No. 1040

Senate Report Number 673, Parts 1-4, Serial Set No. 10546

Conference Report—House No. 1203, Serial Set 10557

55 Statutes, Chap. 412, Sept. 20, 1941