C. Harry Kahn

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National Bureau
of Economic Research
Volume Title: Employee Compensation under the Income Tax
Volume Author/Editor: C. Harry Kahn
Volume Publisher: UMI
Volume ISBN: 0-870-14480-4
Volume URL: http://www.nber.org/books/kahn68-1
Publication Date: 1968
Chapter Title: APPENDIX E
Chapter Author: C. Harry Kahn
Chapter URL: http://www.nber.org/chapters/c1080
Chapter pages in book: (p. 128 - 133)APPENDiX E
Provisions for Current Payments of Taxes,
1943 to Present, and Method of Estimating
interest Cost of Tern porary Overpaymenta
 
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.132 APPENDIX E
TABLE E-3
Computation of Interest Forgone on Tax Overpayment, by
Wage Earners and All Others, 1961
(millions of dollars)
Refunds of Inter- Estimated Distribution of
nal Revenue Individual Income Tax Refunds
Receipts, 1961
(all sources) Wage Earners All Others
Percent-
age of Cred- Cred-
Month AmountTotal Cash its TotalCashitsTotal
(1) (2) (3) (4) (5) (6) (7) (8)
January 62 1.1 55 55 1 1
February 528 9.2 469 469 12 12
March 1,790 31.2 1,588 1,588 40 40
April 1,292 22.5 1,147 349 1,496 29418447
May and later 2,062 36.0 1,829 1,829 46 46
Totals 5,734 100.05,088 5,437 128 546
Interest for-
gone 254 22
Month
Receipts from Individuals
of Internal Revenue, Ex-
cluding Withholding and
Declaration Payments,
1962
Estimated
Receipts
Distribution of
of Tax Due
From Wage
Earners
(11)
From All
Others
(12)
Percentage
Amount of Total
(9) (10)
January 90 1.9 53 58
February 786 17.1 462 507
March 832 18.1 489 536
April and later 2,893 62.9 1,699 1,864
Totals 4,601 100.0 2,703 2,965
Interest forgone:
From declaration date
From receipt of income a
—100
—144
—1 11
—169
a Includesinterest imputation on all declaration payments for time interval between re-
ceipt of income and payment on estimated declaration.APPENDIX E 133
Amounts of tax overpayment (credits and refunds) and tax due for 1961 were attributed
to wage earners and others by utilizing the 1959 distribution of returns with overpay-
ments and tax due, using the following four groupings of returns: only tax withheld, tax
withheld and deciaration payments, only declaration payments, and neither withholding
nor declaration payments. The year 1959 was the most recent to show this detailed
breakdown (see Statistics of Income, 1959, Table 12). The first two categories were
attributed to wage earners; the latter, to all others.
Monthly refunds of internal revenue receipts for January—May (Annual Report of the
Secretaryofthe Treasury,1961and 1962) were used to estimate the number of months
overpayments were at the disposal of the government at no interest cost to it. Refunds
later than May were treated computationally the same as May refunds, since the govern-
ment pays interest on all refunds made more than forty-five days after the last day of
filing, i.e., beginning June 1. A 1961 rather than a 1962 distribution of refunds was used
because figures for 1962 were not available in suitable form. The monthly distribution of
Internal Revenue receipts excluding withholding was used to estimate the length of time
that tax due at time of filing had been owed to the government. April and later were
grouped because interest must be paid to the government on amounts paid after April 15.
Estimated declaration payments, due January 31, April 15, June 15, and September 15
were subtracted from the monthly distribution of Internal Revenue receipts. It was
assumed that the January amount equaled one-fourth of the 1961 declaration payments
tabulated in Statistics of Income. Amounts for the other months were grouped and
assumed to equal three-fourths of the estimated 1962 payments; they were subtracted
from total receipts later than April 15.
Amounts of refunds attributed to wage earners in 1961 were distributed by the month
of refund. Amounts of credit were attributed to April (under the assumption that these
were used to offset the first declaration payment). Each month's refunds were then
distributed over the number of months held by the government, assuming that earnings
were stable over the tax year. For example, refunds made in January were distributed
equally among one to twelve months of interest-free holding by the government. Then
6 per cent simple interest prorated on the basis of the number of months held was
attributed to the total amounts of refunds and credits. A similar computation was made
for nonwage earners. Since in this case amounts were not withheld by the government at
the time earned but were paid in quarterly instalments on the fifteenth of April, June,
September, and January, refunds were divided equally between the four months, and the
number of months held was calculated on the basis of these dates.
To impute interest on tax due at the time of filing, two alternative calculations were
made. By the first, interest was estimated from the time of the quarterly instalments, the
amount of time owed the government being determined by the month of tax payment. By
the second (used in Table 21, above), interest was imputed from the time income was
realized, under the assumption that earnings were at a constant monthly rate over the
tax year. In addition to calculating interest on tax due at time of filing from the time
income was earned, one and a half months' interest was attributed to all declaration pay-
ments under this method.
The final estimates derived from Table E-3 may now be summed up as follows (in
millions of dollars):
Wage All
Earners Others
Interest forgone:
From declaration date 154 —89
From time income received 110 —147

Employee Compensation under the Income Tax

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