Internal Revenue Act of 1954 (Major Acts of Congress)
Steven A. Bank
The Internal Revenue Act of 1954 (P.L. 83-591) was the first comprehensive revision of the federal income tax system since its origin in 1913. It is significant, however, not for its important changes, but for the process by which reform was achieved. In less than two years, representatives from various groups, including Treasury, Congress's Joint Committee on Taxation, and the House Office of Legislative Counsel, coordinated a massive information-gathering and legislative drafting process that culminated in the enactment of the Internal Revenue Code of 1954. While the income tax was codified in 1939, the 1954 code fundamentally altered its organization and for the first time addressed many of the deficiencies that had plagued the income tax for years. The 1954 code remained the standard for more than thirty years, until a new code was adopted as part of the Tax Reform Act of 1986, and many of the features introduced in 1954 survive to this day.
The decision to pursue fundamental reform was a long time coming by the early 1950s. Years of experience with the internal revenue laws had revealed many loopholes, weaknesses, and inequities, but the relatively low preorld War II rates had helped stem any pressure for revision. After the war, however, the top marginal rate jumped to 91 percent, and minor irritations became grave problems. The expansion of the tax base to include lower socioeconomic groups, the advent of such employer-provided benefits as pensions and health insurance, and the increased complexity of corporations and partnerships, all necessitated a more sophisticated system. With the 1952 election of Dwight Eisenhower, the first Republican president in twenty years, the time was ripe for fundamental reform.
Even prior to Eisenhower's election, Congress had begun laying the groundwork for reform in the summer of 1952. The Republican leader of the House Ways and Means Committee, Representative Daniel A. Reed of New York, demanded simplification and indicated his intent to block any tax legislation until revision was accomplished. At his insistence, the Joint Committee on Taxation, which was composed of members of the Senate Finance Committee and the House Ways and Means Committee, developed and distributed to taxpayers all over the country a questionnaire requesting suggestions for reforms of the income tax laws. In January 1953 the Joint Committee and Treasury staffs started holding informal meetings with over 200 taxpayer groups. That spring, based on the input it gathered in these meetings, as well as in the 17,000 responses it received to the questionnaire, the 25,000 private letters it received regarding tax revision, and the preliminary reports of an American Law Institute project on income taxation, the Joint Committee and Treasury personnel created a 150-page "bible" of suggestions and problem areas for discussion.
Once this information was collected, work began on the task of developing specific recommendations. The Joint Committee staff organized the law into fifty major areas and appointed various formal and informal working groups to address each. In the summer of 1953 the Ways and Means Committee held public hearings on forty topics. During these hearings 504 witnesses testified, and 1,000 statements were submitted. As tentative conclusions were reached toward the end of 1953, the working groups began drafting proposed legislation with the assistance of the House Office of Legislative Counsel.
By January 7, 1954, President Eisenhower was able to make a set of twenty-five specific recommendations in his State of the Union address, which included support for a variety of special relief provisions and a comprehensive technical revision of the code. Over the next two months the Committee held a series of closed-door meetings with Treasury officials to discuss the proposals. This secrecy was designed to block any pre-submission lobbying by special interests that would delay the process.
The streamlined legislative process proved successful. On March 9, 1954, H.R. 8300 was introduced in Congress, and within nine days it passed in the House. While the bill spent a little more time in the Senate, including a few weeks of public hearings before the Senate Finance Committee, interest groups had only limited time to speak. Even this limited input was sufficient to affect the final legislation, though, and many sections were partially or completely reworked as a result. By July 29, 1954, the final bill passed in Congress and was signed into law.
The act included literally thousands of technical changes to the tax laws and took hundreds of pages in committee reports to explain. In most cases, the changes were not considered radical. A variety of individual or job-related tax benefits were provided, such as exclusions for employer-provided lodging and retirement benefits as well as college scholarships and prizes, deductions for certain child care and medical expenses, and liberalized rules on accident recoveries. Other changes reflected the development of business entities by providing a new simplified system for small corporations. Perhaps the most controversial change was a four percent credit for dividends to individual shareholders. The legacy of the 1954 act, however, is not the individual changes it included, but its modernization of the code and the speed and efficiency with which this was accomplished.
See also: CORPORATE INCOME TAX ACT OF 1909; FEDERAL INCOME TAX ACT OF 1913; TAX REFORM ACT OF 1986.
Ratner, Sidney. Taxation and Democracy in America. New York: John Wiley & Sons, 1967.
Witte, John F. The Politics and Development of the Federal Income Tax. Madison: University of Wisconsin Press, 1985.