CHAPTER XXI
THE MAIN INSTRUMENT OF TAXATION
Through the income tax we go directly to the person upon whom we desire to levy taxation, and take from him such portion of his earnings or other profits as we consider to be his just contribution to the revenue. Through the income tax we can, if we care to do so, cause each subject of the State to contribute towards the expenses of government according to his ability.
It is the purpose of this chapter to show that the income tax could be so amended that, so far from being counted an obnoxious impost, it would be regarded as a just and proper instrument of taxation.
* * * * *
It is generally believed that the British Income Tax was originated by Pitt in 1798. As a matter of fact, however, the direct taxation of incomes in the United Kingdom dates back many hundreds of years. For the purposes of this work, I do not propose to trace the history of the subject to an earlier date than 1692.
The Property and Income Tax imposed in that year is commonly known as the "Land-Tax," and this name has given rise to a great deal of misunderstanding.
In their twenty-eighth report (1885) the Commissioners of Inland Revenue, in giving a detailed description of the Land-Tax of 1692, point out that the impost "was in fact a Property and Income Tax, and moreover that personal estate was quite as much the object of the charge as land." So few people are aware of these facts that it may be well to set out the actual provisions of the Act, as described by the Commissioners:
It (the Act of 1692) is entitled "An Act for granting to their Majesties an aid of four shillings in the pound for one year for carrying on a vigorous war against France"; and the second section enacts, "That every person, body politic and corporate, etc., having any estate in ready monies or in any debts owing to them or having any estate in goods, wares, merchandise, or other chattels, or personal estate whatsoever within this realm or without shall pay yield and pay unto their Majesties four shillings in the pound according to the true yearly value thereof; that is to say, for every hundred pounds of such ready money and debts, and for every hundred pounds' worth of such goods, wares, etc., or other personal estate the sum of four and twenty shillings."
The third section imposes a duty of four shillings in the pound upon the profits and salaries of all persons having any office or employment of profit (except naval and military officers).
And then the fourth section proceeds thus, "And to the end a further aid and supply for their Majesties' occasions may be raised by a charge upon all lands, tenements, and hereditaments with as much equality and indifferency as is possible by an equal pound rate of four shillings for every twenty shillings of the true yearly value, be it enacted that all manors, messuages, lands and tenements, and all quarries, mines, etc., tithes, tolls, etc., and all hereditaments, of what nature soever they be, shall be charged with the sum of four shillings for every twenty shillings of the full yearly value."
The rules for assessments follow the same order, and show that the charge on personal estate was as much to be attended to as that on land. Thus the assessors are directed in the first place to bring in certificates of the names of every person dwelling within their districts, "and of the substance and values of them in ready money, goods, chattels, and other personal estate." Every person is to be rated for personal estate at the place where he shall reside, and, if not a householder, at the place where he resides at the execution of the Act, or if out of the realm, where he was last resident; "and for the better discovery of personal estates," every householder is to give an account of his lodgers.
But although the Act of 1692 was the first of those so-called Land-Tax Acts, it was not until 1697 that the tax was imposed precisely in the form which has been preserved to the present day, that is to say, as a fixed sum for the whole kingdom, and to be raised in quotas specified in the Act for each county, city or borough therein named. That Act was renewed every year, with scarcely any difference in its provisions as to the mode of assessment, and although the amounts charged upon the counties, etc., varied according to the total sum required from the kingdom, they were always fixed in due proportions to the original quotas. The last annual Act, so far as land was concerned, was passed in 1797.
Now it is a remarkable circumstance that these Acts of 1697 and 1797 appear to mark, more strongly than before, the taxation of personal estate as the primary object of the law.
After the clauses imposing upon goods, wares, merchandise, etc., and upon pensions and offices, the fixed charge of four shillings in the pound towards raising the quotas, that relating to land appears to treat it as a subsidiary contributor, as it were, and for the purpose of making up the sum due to the Exchequer after exhausting the other resources. The words are: "And to the end the full and entire sums by this Act charged upon the several counties, etc., may be fully and completely raised and paid; be it enacted, that all lands, etc., shall be charged by a pound rate towards the said several sums by this Act imposed."
How the duty on personal estate was levied, or what was its proportion in the quotas, we have no means of knowing. All that we do know is that in Mr Pitt's time it had dwindled nearly to nothing; and that the tax annually voted under the name of land tax had become a land tax in reality. Thus we find in an assessment for the Tower Division in 1799 that the sum charged for personal estate was only £227, while the charge for lands, etc., is £29,964; and in one of the few accounts of later transactions which remain to us, that for the year 1823, we are presented with a return of £5,416, 10s. 0d. as the ludicrous result of a tax at one per cent. on the capital value of the personalty of Great Britain.
The Commissioners go on to remark that it seems almost incredible that year after year an Act should have been passed containing the most minute directions for the assessment of personal estate, and yet that nothing which could be called an assessment should have been made. They suggest that "Perhaps the explanation may be found in another peculiarity in the administration of this tax, the tendency to regard it as a _fixed charge_ upon the subjects on which it was originally levied. That this has been the case with land, both before and since 1797, is well known, and if the same rule was applied to personalty it is easy to conceive that, as the persons originally charged moved out of the parish, or became destitute, or otherwise unassessable, their proportion of the tax was shifted to the land as the readiest means of collecting it."
A certain amount of personalty was still assessed in the time of Pitt, however, as may be gathered from the following figures from the roll of the Tower Division.
"LAND-TAX." ABSTRACT OF DUPLICATES FOR THE TOWER DIVISION
+-------------------+------------------- | Quotas for the | | respective | Charge for | years 1698 and | the year | 1699, under | Quota 1693. | 9 & 10 and | for 1702. 4s. Aid. | 10 & 11 | | William III. | | 3s. Aid. | ------------------+-------------------+------------------- £ _s._ _d._ | £ _s._ _d._ | £ _s._ _d._ 34,057 5 5 | 25,542 19 0¾ | 34,041 12 10 ------------------+-------------------+-------------------
Quota for 1799.
+----------------+------------------- | | | Personal | Pensions Lands, etc. | Estate. | and | | Offices. ------------------+----------------+------------------- £ _s._ _d._ | £ _s._ _d._ | £ _s._ _d._ 29,964 15 0½ | 227 15 5 | 2,320 2 4½ ------------------+----------------+-------------------
This specimen also shows how the original assessments of 1692 were preserved until the time when, in 1798, over one hundred years after, Pitt made provisions for the redemption of the old tax, and simultaneously introduced a new Property and Income Tax based upon better assessments.
Unaware of the real nature of the so-called "Land-Tax" and as it would also appear, of the present "Property and Income Tax," it is often suggested by fiscal reformers that the old Land-Tax of 1692 should be reimposed upon present land revenues. Those who make the suggestion do not realize that what they desire has already been done and is actually in practice at this moment.
The old "Land-Tax" and the present "Income" Tax thus compare:—
The "Land-Tax" of 1692.
Section 2: Every Person ... having any estate in ready monies or in any debts owing to them or having any estate in goods, wares, merchandise or other chattels, or personal estate whatsoever ... shall yield and pay four shillings in the pound according to the true yearly value thereof.
Section 3: All persons holding any public office or employment of profit (except military and naval officers) and their clerks, etc., shall pay four shillings in the pound.
Section 4: And to the End, a further aid and supply for their Majesties' occasions may be raised by a charge upon all lands, tenements and hereditaments ... by an equal pound rate of four shillings ... be it enacted that all manors, messuages, lands and tenements, and all quarries, mines, etc., tithes, tolls, etc. ... shall be charged with the sum of four shillings for every twenty shillings of the full yearly value.
The Present "Property and Income" Tax.
Schedule D taxes the profits of trades and professions and from various forms of personal property.
Schedule E taxes the salaries of all who hold public offices or employments, whether they be officials or clerks.
Schedule A taxes the income from "all manors, messuages, lands and tenements, and all quarries, mines, etc., tithes, tolls, etc."
It is also remarkable that whereas Land and Houses are placed in Schedule A, the first branch of our Income Tax, the so-called Land-Tax of 1692 placed lands and houses in its third category. The Act of 1692, moreover, as we have seen, made the taxation of personalty its first aim, and brought in a charge on land, houses and other fixed property to make up any deficiency.
With our modern Income Tax, fortunately, personalty does not escape as it seems to have done in the seventeenth and eighteenth centuries, but it is still true that a great deal of personal income evades taxation, while it is impossible for fixed property to elude the assessors.
I have taken the trouble to set out the foregoing details at some length because the fact that Schedule A of the Income Tax, like Section 4 of the Act of 1692, is a Land-Tax, appears to have escaped the attention of many of those who desire to tax the unearned increment which so often accrues to the owners of land. At the present moment, the owners of land contribute 14 pence in the pound of its annual revenue to Imperial Taxation under Schedule A. In the case of a small landowner with an income of £750 a year that may be enough. In the case of a great landowner with a rent roll of £20,000 a year it is certainly too little. If, then, we would justly tax the income of those who derive unearned revenue from land, we must graduate our income tax. In doing so, fortunately, we shall not tax merely one form of unearned increment. The conclusive proof of unearned income is the possession of a great income. Whether it arises from rent, or from interest, or from the direct taxation of labour is a secondary consideration. Whether its owner has bought broad acres with profits drawn from the exertions of others, or whether he has bought railway stock or foreign investments with the proceeds of the sale of broad acres, we need not inquire. The great income, the fact that the individual who receives it is one of the small number of people who enjoy one-third of the entire income of the country, is sufficient proof of "ability" to contribute generously to the revenues of what should be the rich government of a rich State. And it is difficult to imagine a rich man so wanting in that social instinct which we call patriotism that, when once his extraordinary position in relation to his fellows is made clear to him, he will not consent freely to make such contribution.
* * * * *
The Income Tax, as it now exists, is an instrument of extraordinary clumsiness and complexity. An intelligent foreigner, coming freshly to the examination of its curious provisions, would be driven to the conclusion that a junta of bureaucrats, intent upon hiding the mysteries of statecraft from the knowledge of the vulgar, had of set purpose wrapped its machinery and intention in every device of obscurement which perverted ingenuity could suggest.
In "Riches and Poverty," edition 1905, I gave an account of the Income Tax as it then stood. I reproduce the account in order to make the subsequent alterations clearer.
Incomes, from whatever source arising, which do not exceed £160 per annum, are entirely exempt from the tax.
Incomes between £160 and £700 are allowed certain abatements which are equivalent to a rough graduation of the tax. The following table shows the nature of the abatements:—
INCOME TAX ABATEMENTS
Amount of Annual Income. Abatement. Between £160 and £400 £160 " 400 " 500 150 " 500 " 600 120 " 600 " 700 70
The following table shows how the abatements graduate the Income Tax when the nominal rate of tax is 1s. in the £.
INCOME TAX. EFFECT OF THE ABATEMENTS ON INCOME TAX AT 1s.
Actual Rate of Abatement Income after Taxation when Income. Allowed. Abatement. the Tax is 1s. in the £. £ £ £ Pence in the £ 180 160 20 1.33 240 160 80 4.00 300 160 140 5.60 400 160 240 7.20 440 150 290 7.90 500 150 350 8.40 540 120 420 9.33 600 120 480 9.60 640 70 570 10.68 700 70 630 10.80 740 nil 740 12.00
Thus, when the Income Tax is at 1s., an income of £180 pays less than 1½d. in the £, an income of £300 pays less than 6d. an income of £500 pays less than 8½d., and an income of £700 pays less than 11d.
I now give an explanation of the various Schedules under which the tax is collected. The abatements, it should be understood, refer to all the Schedules.
* * * * *
Schedule A, sometimes called Property Tax or Landlords' Tax, is assessed upon the rents received by the owners of lands, houses, etc. It is directly assessed upon occupiers, who, if they are tenants, deduct the tax from their next payment of rent. Thus it is a Land and House Tax which the landowner or houseowner cannot possibly escape.
It should also be explained that the term "Lands," as used in connexion with Schedule A, refers to Agricultural lands, and the farm-houses and farm buildings, etc., thereon. The term "Houses" refers to houses, business premises, etc., together with the gardens, pleasure grounds or yards upon which they stand.
Owners of agricultural lands are allowed to deduct for repairs one-eighth of the rent. Owners of houses and other buildings are allowed to deduct for repairs one-sixth of the rent.
* * * * *
Schedule B covers profits from the _occupation_ of lands, and taxes the incomes of farmers, nurserymen, and market gardeners.
Farmers' profits (unless farmers elect to be dealt with under Schedule D) are assumed to be one-third of the annual rent of their farms. Thus a farmer paying a rent of £480 or less is not subject to income tax, as one-third of £480 is £160, and incomes of £160 or less are not taxable. Nurserymen and market gardeners, however, are taxed on their profits in the same way as in the case of other business men.
The chief point to which I direct attention is that very few farmers pay income tax at all.
The arbitrary assessment of farmers at one-third the rent of their farms is an absurdity. A farmer paying a rental of £480 is usually a well-to-do man, but he escapes income tax because his income is assessed as £160. A farmer who pays a rental of £600 and who in an average year probably makes at least £400 a year, is, on the one-third basis, assessed at £200. The income tax of farmers is for the most part paid for them by the industrial classes, who are taxed _pro tanto_ to relieve agriculture.
* * * * *
Schedule C deals with profits from British, Indian, Colonial and Foreign Government Securities. So far as possible these profits are taxed "at the source." Thus the Bank of England, in paying Consols dividend, deducts income tax, and leaves the fundholder to claim repayment afterwards if his income should be less than £160 per annum.
* * * * *
We now come to that important branch of the tax known as Schedule D.
The profits included in this Schedule consist of those from trade and industry, from professions, from all employments or vocations except public offices, from oversea investments which are not Government securities, and from interest on loans secured on the Public Rates, etc.
In the case of income from trade, assessments are made upon the average profits of the past three years. Let us suppose that a merchant in the period, 1893-1902, made the following profits: 1893, £1,100; 1894, £900; 1895, £1,200; 1896, £1,300; 1897, £1,400; 1898, £1,400; 1899, £1,500; 1900, £1,600; 1901, £1,200; 1902, £1,200; 1903, £1,500; 1904, £1,600. The table on page 301 shows how the profits are assessed under Schedule D.
Thus, while between 1893 and 1904, the income was in two years above £1,500, the assessment never rose above £1,500. The result, it will be seen, is to deprive the State of the advantage of the maximum income.
It follows that the assessments under Schedule D, from this cause alone, are always something less than the actual income of the persons assessed.
* * * * *
ILLUSTRATION OF THE PRINCIPLE OF AVERAGING UNDER Schedule D
+------------------------------------------------ Profits. | Assessment. -------+---------+-------------+-------------+-------------------- | | Year of | Amount of | Year. | Amount. | Assessment. | Assessment. | Remarks. -------+---------+-------------+-------------+-------------------- | £ | | £ | 1893 | 1,100 | | | 1894 | 900 | | | 1895 | 1,200 | | | 1896 | 1,300 | 1896 | 1,066 | Average of £1,100, | | | | £900 and £1,200. | | | | 1897 | 1,400 | 1897 | 1,133 | Average of £900, | | | | £1,200 and £1,300. | | | | 1898 | 1,400 | 1898 | 1,300 | Average of £1,200, | | | | £1,300 and £1,400. | | | | 1899 | 1,500 | 1899 | 1,366 | Average of £1,300, | | | | £1,400 and £1,500. | | | | 1900 | 1,600 | 1900 | 1,433 | Average of £1,400, | | | | £1,400 and £1,500. | | | | 1901 | 1,200 | 1901 | 1,500 | Average of £1,400, | | | | £1,500 and £1,600. | | | | 1902 | 1,200 | 1902 | 1,433 | Average of £1,500, | | | | £1,600, and £1,200. | | | | 1903 | 1,500 | 1903 | 1,333 | Average of £1,600, | | | | £1,200 and £1,200. | | | | 1904 | 1,600 | 1904 | 1,300 | Average of £1,200, | | | | £1,200 and £1,500. | | | | | | 1905 | 1,433 | Average of £1,200, | | | | £1,500 and £1,600.
We next come to Schedule E, which covers the salaries of all Government officials, and of the employees of Limited Liability Companies, County Councils, etc. For obvious reasons this branch of the tax is very easily assessed.
* * * * *
It is necessary also to remind the reader that a second form of income-tax is at present levied. I refer to the Inhabited House Duty, which is payable by all householders (in Great Britain only—not in Ireland) who live in houses of an annual value of £20 and upwards. The rates are graduated as follows:—
Above £20. Above £40. Above £60. Rate in the £. Rate in the £. Rate in the £. Private dwelling-houses 3d. 6d. 9d. Business premises used residentially 2d. 4d. 6d.
Houses used solely for purposes of trade, and in which no occupier resides, are not subject to the tax.
In the last financial year of which we have record (1907-8) the duty yielded £1,900,000.
The present Inhabited House Duty dates from 1851 when it was levied, to replace the stupid window-duty, by Sir Charles Wood. It can only be described as a clumsy income tax, and it bears very harshly upon poor Londoners, compelled by their circumstances to pay heavy rents to be near their work. To the heavy rent the State adds a second most unjust Income Tax.
* * * * *
In the above words the Income Taxes of 1905 were faithfully described in their essential details. In the years that have elapsed various reforms have been made.
In the Finance Act of 1907 the principle of _differentiation as between earned and unearned incomes_ was introduced. Mr Asquith embodied the principle in the following words (Finance Act, 1907, clause 19, section 1):
"Any individual who claims and proves, in manner provided by this section, that his total income from all sources does not exceed two thousand pounds, and that any part of that income is earned income, shall be entitled, subject to the provisions of this section, to such relief from income tax as will reduce the amount payable on the earned income to the amount which would be payable if the tax were charged on that income at the rate of ninepence."
As the nominal rate of tax was 1s., earned incomes thus enjoyed a substantial reduction. The abatement system, described on page 297, continued to apply to both earned and unearned incomes, so that two very roughly graduated scales of taxation came into existence, which are illustrated on page 304.
The number of tax-payers who understood what had been done for them may be described as negligible. Without working out such a table as that on p. 304, the income tax payer remained in ignorance of what treatment had been meted out to him. The moral effect of a considerable reform was almost completely lost.
In the famous Finance Act of 1909, which did not pass into law, owing to the action of the House of Lords, until the present year (1910), Mr Lloyd George, succeeding Mr Asquith as Chancellor of the Exchequer, made alterations in the Income Tax as excellent in principle and as obscure in operation as that just described.
He raised the nominal rate of taxation to fourteen pence in the £, and left the rate for earned incomes at ninepence, thus increasing the differentiation between earned and unearned incomes. He also introduced a new step in differentiation by enacting that earned incomes exceeding £2,000 a year but not exceeding £3,000 a year should pay twelve pence instead of fourteen pence in the £.
THE EFFECT OF MR ASQUITH'S DIFFERENTIATION OF THE INCOME TAX, 1907
+---------+----------------------------------- | | Income Tax on Earned Incomes. Income.|Abatement|-------------+----------+---------- | allowed.| Tax payable.| Nominal | Virtual | | | Tax. | Tax. -------+---------+-------------+----------+---------- £ | £ | £ _s._ _d._|Pence in £|Pence in £ 160 | 160 | ... | Exempt | ... 200 | 160 | 1 10 0 | 9 | 1.8 300 | 160 | 5 5 0 | 9 | 4.2 400 | 160 | 9 0 0 | 9 | 5.4 500 | 150 | 13 2 6 | 9 | 6.3 700 | 70 | 23 12 6 | 9 | 8.1 800 | Nil | 30 0 0 | 9 | 9.0 1,000 | " | 37 10 0 | 9 | 9.0 2,000 | " | 75 0 0 | 9 | 9.0 -------+---------+-------------+----------+----------
+---------+----------------------------------- | | Income Tax on Unearned Incomes. Income.|Abatement+-------------+----------+---------- | allowed.| Tax payable.| Nominal | Virtual | | | Tax. | Tax. -------+---------+-------------+----------+---------- £ | £ | £ _s._ _d._|Pence in £|Pence in £ 160 | 160 | ... | Exempt | ... 200 | 160 | 2 0 0 | 12 | 2.4 300 | 160 | 7 0 0 | 12 | 5.6 400 | 160 | 12 0 0 | 12 | 7.2 500 | 150 | 17 10 0 | 12 | 8.4 700 | 70 | 31 10 0 | 12 | 10.8 800 | Nil | 40 0 0 | 12 | 12.0 1,000 | " | 50 0 0 | 12 | 12.0 2,000 | " |100 0 0 | 12 | 12.0 -------+---------+-------------+----------+----------
In order to give further effect to the principle of graduating the Income Tax, Mr Lloyd George at the same time imposed a Supplementary Income Tax, or Super-Tax, upon persons whose incomes exceeded £5,000 a year.
The Super-Tax is nominally 6d. in the £, but in practice it is always less. For the Super-Tax of 6d. is payable only upon that part of the income which exceeds £3,000 a year. That, reflection will show, creates a _graduated_ Super-Tax, thus:
THE LLOYD GEORGE SUPER-TAX AS IT REALLY IS
---------+-----------+--------+-----------------+------------+------------ | Abatement | Income | | Nominal | Virtual Income. | on | really | Tax payable. | Rate of | Rate of | Income. | Taxed. | | Super-Tax. | Super-Tax. ---------+-----------+--------+-----------------+------------+------------ £ | £ | £ | £ _s._ _d._ | Pence in £ | Pence in £ 5,000 | Exempt | ... | ... | ... | ... 5,001 | 3,000 | 2,001 | 50 0 6 | 6 | 2.4 10,000 | 3,000 | 7,000 | 175 0 0 | 6 | 4.2 50,000 | 3,000 | 47,000 | 1,175 0 0 | 6 | 5.6 100,000 | 3,000 | 97,000 | 2,425 0 0 | 6 | 5.8 ---------+-----------+--------+-----------------+------------+------------
It will be seen that it is a great gain under this system to have £5,000 a year rather than £5,001. The extra £1 of income costs the tax-payer £50, 0s. 6d. Thus a premium is placed by the State upon false declarations, for if a Government is so unfair as to tax £1 of income £50, 0s. 6d, who can blame a tax-payer who retorts in kind?
It will be seen that it is impossible for the alleged 6d. Super-Tax to reach 6d. It can at the highest reach 5.9 pence.
But while the Super-Tax is so unfortunate in method it is excellent in principle, and largely carries into effect the suggestions made in "Riches and Poverty," edition 1905. It effects a rough graduation in the taxation of incomes over £5,000 a year, and extends the gamut of the Income Tax scale from zero at £160 a year to 19.8 pence in the £ at £100,000 a year.
I am now able to show the total effect of all the obscure provisions which it has been my misfortune to attempt to describe in plain language. The table on page 307 gives a faithful picture of the Income Tax, as graduated and differentiated by all the reforms made down to 1910. The table is the expression of the following provisions, existing in 1910, which I recapitulate for its better elucidation.
_Incomes not exceeding £160 a year pay no tax. Small and moderate incomes are relieved from taxation by being only taxed in part, i.e. "abatements" are allowed according to the size of the income. Over £700 a year there are no abatements. Unearned incomes are taxed at the nominal rate of fourteen pence in the pound. Earned incomes not exceeding £2,000 a year are taxed ninepence in the pound. Earned incomes over £2,000 a year, but not over £3,000 a year, are taxed one shilling in the pound. Finally comes what is called the "Super-Tax." Incomes, whether earned or unearned, over £5,000 a year are taxed an extra sixpence in the pound on such part of the income as exceeds £3,000._
EFFECT OF THE INCOME TAX IN 1910
-------+---------+-------------------------------------- | | Earned Incomes. Income.|Abatement+----------------+----------+---------- |allowed. | Tax payable. | Nominal | Virtual | | | Rate. | Rate. -------+---------+----------------+----------+---------- £ | £ | £ _s._ _d._ |Pence in £|Pence in £ 160| 160 | | Exempt | 200| 160 | 1 10 0 | 9 | 1.8 300| 160 | 5 5 0 | 9 | 4.2 400| 160 | 9 0 0 | 9 | 5.4 500| 150 | 13 2 6 | 9 | 6.3 700| 70 | 23 12 6 | 9 | 8.1 800| Nil | 30 0 0 | 9 | 9.0 1,000| " | 37 10 0 | 9 | 9.0 2,000| " | 75 0 0 | 9 | 9.0 2,100| " | 105 0 0 | 12 | 12.0 3,000| " | 150 0 0 | 12 | 12.0 3,100| " | 180 16 8 | 14 | 14.0 5,000| " | 291 13 4 | 14 | 14.0 5,100| " | 350 0 0 | 14 + 6 | 16.5 10,000| " | 758 6 8 | 14 + 6 | 18.2 50,000| " |4,091 13 4 | 14 + 6 | 19.6 100,000| " |8,258 6 8 | 14 + 6 | 19.8 -------+---------+----------------+----------+----------
-------+---------+-------------------------------------- | | Unearned Incomes. Income.|Abatement+----------------+----------+---------- |allowed. | Tax payable. | Nominal | Virtual | | | Rate. | Rate. -------+---------+----------------+----------+---------- £ | £ | £ _s._ _d._ |Pence in £|Pence in £ 160| 160 | | Exempt | 200| 160 | 2 6 8 | 14 | 2.8 300| 160 | 8 3 4 | 14 | 6.5 400| 160 | 14 0 0 | 14 | 8.4 500| 150 | 19 8 4 | 14 | 9.8 700| 70 | 36 15 0 | 14 | 12.6 800| Nil | 46 13 4 | 14 | 14.0 1,000| " | 58 6 8 | 14 | 14.0 2,000| " | 116 13 4 | 14 | 14.0 2,100| " | 122 10 0 | 14 | 14.0 3,000| " | 175 0 0 | 14 | 14.0 3,100| " | 180 16 8 | 14 | 14.0 5,000| " | 291 13 4 | 14 | 14.0 5,100| " | 350 0 0 | 14 + 6 | 16.5 10,000| " | 758 6 8 | 14 + 6 | 18.2 50,000| " |4,091 13 4 | 14 + 6 | 19.6 100,000| " |8,258 6 8 | 14 + 6 | 19.8 -------+---------+----------------+----------+----------
The table on p. 307 shows, as the mere relation of the complicated provisions does not show, both the virtues and the faults of Mr Lloyd George's Income Tax. There is graduation, but it is effected so clumsily that it positively bristles with anomalies. Consider, for example, the gross anomaly of making a man with £3,000 a year pay only £150, while a man with £3,100 a year must pay £180. Or, again, of asking from the £5,000 man a £291 tax, and demanding £350 from the £5,100 man. Perhaps the worst feature in the scale, however, is the fact that unearned incomes from £701 to £5,000 pay the same rate.
* * * * *
Now let us consider the reform of the Income Tax.
In the first place it is suggested that the Inhabited House Duty should be entirely abolished. As has been already pointed out, it is a clumsy second Income Tax and its incidence is most unequal. It is not paid in Ireland, and too much of it falls upon poor clerks and tradesmen in London and other big towns. It is urged here that if we properly reform the Income Tax it should not be necessary to levy a second one under another name.
It must be frankly recognized that, in principle, the Income Tax reforms urged in "Riches and Poverty," edition 1905, have been largely conceded. Method is so important in this connexion, however, that it is necessary to insist that the Income Tax still needs serious revision.
Why is it that so much misplaced ingenuity has been applied to our Income Tax law by successive Chancellors of the Exchequer? Why these alleged rates of Income Tax, which on inquiry prove to be nominal, and the enactment of a clumsy Super-Tax to amend a sufficiently clumsy Income Tax? Why should it be necessary to arrive at a "sort of" graduation by a series of provisions, which few men, inside or outside the legislature, pretend to understand?
The explanation is that we have not a complete Census of Incomes. The point is of the first importance. The establishment, within the limits of a very small possible margin of error, of the number of British Income Tax payers in 1903, which I effected by a careful examination of so far uncorrelated facts in "Riches and Poverty," edition 1905, brought to light the then unsuspected fact that about 750,000 out of about 1,000,000 Income Tax payers actually declared their individual aggregate incomes from all sources for the purposes of Income Tax.
These declarations, as already explained, were made by the smaller Income Tax payers in order to avail themselves of the abatement system, the abatements being granted only to those persons with incomes not exceeding £700 a year _who made declarations_. _In effect, those of this class who do not declare are heavily fined._
The number of the declarants was further increased in 1907 by Mr Asquith's differentiation of the Income Tax.
Mr Asquith enacted, as we have seen, that persons who earned their incomes, and whose incomes did not exceed £2,000 a year, should enjoy a lower rate of taxation _if they declared their incomes_.
This led to declarations by a fresh batch of Income Tax payers, and it became possible for Somerset House to collect and publish a new set of most valuable statistics. Unfortunately, the precise facts of the case have neither been collected nor published, important as the knowledge of them is if we are to tax wisely and justly. Nevertheless, there is little doubt that the new batch of declarations between £700 and £2,000 a year raised, or will soon raise, the proportion of Income Tax payers making personal declarations to over nine out of eleven of the whole body.
The question immediately suggests itself: Why should not the balance of two out of eleven, or thereabouts, be compelled to fall into line with the majority? This balance consists, of course, of the well-to-do and rich, chiefly those who derive their incomes from property. These persons are not taxed directly at all. The State relies upon what is called "taxing at the source." That is, dividends are taxed at the company's offices before they are distributed, and rents are taxed through the occupier, the occupiers being left to recover the Schedule A tax from the landlords and houselords.
This reliance upon an indirect form of "direct" taxation leads, of course, to much income escaping tax, for rich people, it will be seen, have not to make a return of their incomes, but are in the happy position of letting the State catch them when it can. No other country levying an Income Tax does this thing; yet we perversely maintain that there is no system so effective as ours. Happily, the Finance Act of 1909 (passed in 1910) still further increases the number of those who are to declare.
First, as to earned incomes, as noted above, Mr Lloyd George enacted that earned incomes over £2,000 but not over £3,000 are to continue to pay one shilling in the £, and that those over £3,000 are to pay fourteen pence. It follows that a new batch of declarations will be forthcoming from those, or most of those, between £2,000 and £3,000, in order to get the shilling rate.
Again, a Super-Tax is to be levied upon all those whose incomes exceed £5,000 a year, of whom there are not less than 14,000 or 15,000. This Super-Tax is to be collected by Special Commissioners. How will these Special Commissioners know to whom to apply? Obviously they have not a list of the fortunate 15,000. They will doubtless go to work by sending a form asking for a return of total income to all people who _appear_ to be very rich.
All the inhabitants of big houses, and, indeed, all the obviously rich, will receive a declaration form to fill up. And, of course, in order to catch the 15,000 the Commissioners will have to send notices to many times that number of people, for it is really exceedingly difficult to decide by appearance or reputation whether a man has £2,500 or £5,000 a year. The Budget provides that every person sent a form must fill it up, whether or not he has £5,000 a year. Consequently, at the very top of the scale, the Income Tax Commissioners will come into possession of personal declarations relating to 50,000 or more of our moneyed citizens.
And yet we shall not arrive at complete declarations from all Income Tax payers. Nearly all persons who earn their incomes will declare, but as to unearned incomes there is a big hiatus.
Small unearned incomes up to £700 a year will be mostly declared in order to get the abatements.
Very big unearned incomes must be declared, as we have seen, through the demands for Super-Tax.
_But, between £700 a year and £5,000 a year, the unearned scale is ungraduated, and, save for the people with less than £5,000 a year, asked in error to declare by the Super-Tax Commissioners, there will be no personal declarations._
Surely this ought not to be. If the poor are to declare and the very rich are to declare, why should not the middle incomes be declared? Why should the State continue to rely, in respect of the considerable amount of income concerned, upon taxation at the source? The question becomes the more urgent when we reflect that the fresh batch of declarations brought in by Mr Asquith's differentiation scheme of 1907, noted above, brought to light many millions of "new" income (see p. 14). Every new revelation of existing income, of course, lowers taxation _pro tanto_.
Perhaps the final argument for universal personal declaration of income is furnished by the following enactment of the Budget of 1907:
Finance Act (1907), Section 21.
"Every employer, when required to do so by notice from an assessor, shall, within the time limited by the notice, prepare and deliver to the assessor a return of the names and places of residence of any persons employed by him."
We thus go behind the backs of small tax-payers to their employers, and compel the divulgence of incomes which are usually the _total_ incomes of the employed. Yet the employer who, by our direction, hands his employee over to the tax-collector, is not compelled by us to declare his own total income, unless (1) he has no other income than his Schedule D income, or (2) he is a payer of Super-Tax.
Given a Census of Incomes it would become possible to arrive at a practical and just Income Tax.
We could set up a plain graduated scale of taxation, differentiated up to a certain point as between earned and unearned incomes, making it quite clear to the tax-payer what is demanded from him and revealing to him the justice or injustice of our methods by enabling him to compare his rate of taxation with that of those richer or poorer than himself.
We need not abandon taxation "at the source." We could levy on property incomes at the source a certain rate of tax, say 1s. in the £. Then when the total income was declared, the tax-payer would point out upon what items, if any, 1s. in the £ had been deducted at the source and pay the balance of the tax.
Let us take a hypothetical case—that of a barrister earning £2,000 a year, and deriving a further £1,000 from rents and a further £300 from Consols. The total income, £3,300, let us suppose taxed under the graduation scheme at 14d. in the £. The Income Tax on the £1,000 of rents would be paid by his tenants and deducted from the rents paid him, while the Bank of England would deduct 1s. in the £ from the interest on the Consols. Declaring his total income at £3,300 he would pay the balance due, thus:—
Total Declared Income. £ _s._ _d._ £3,300 at 14d. 192 10 0
Taxed at the source:— (1) Schedule A. 1s. in the £ on £1,000 of rent, deducted by tenants £50 (2) Schedule C. 1s. in the £ on £300 of interest deducted by Bank of England £15 --- 65 0 0 ------------ Balance of Tax Payable-- £127 10 0 ============
If, upon the introduction of such a system, local assessors were empowered to ask every householder assessed for local rates at £20 a year and upwards _to declare his income in the place where he resides_, there would undoubtedly be a great increase in the Income Tax assessments. A great part of the evasion of Income Tax results from persons being taxed at their places of business, where there is often little evidence of means. In a man's own neighbourhood it is difficult grossly to understate income.
For several years I put down in the House of Commons the following suggested amendment to the Finance Bill:
Every person upon whom notice is served in manner prescribed by section forty-eight of The Income Tax Act, 1842 (which section relates to the delivery of notices by assessors), requiring him to make a return of his income chargeable to duty under any and every schedule of the Income Tax, shall make a return, in the form required by the notice, which shall show the amount of his aggregate income from all sources, whether he is or is not chargeable with duty, and upon what part or parts of such aggregate income, if any, Income Tax has already been paid under the Income Tax Acts by deduction at the source, and in default shall be liable to a penalty under section fifty-five of The Income Tax Act, 1842.
On one occasion some twenty Members of Parliament consented to put down this amendment with me, but every attempt to obtain its enactment has failed. Until it is obtained there can be no just graduation of the Income Tax, and tax-payers who declare their incomes under the existing law will continue to pay too much because others pay too little.
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Some smaller matters claim our attention.
A minor but not unimportant reform, for which we have to thank Mr Lloyd George, is the concession made to small Income Tax payers who have young children, a concession which the present writer believes he was the first to urge in the House of Commons. The Finance Bill of 1909 (Sect. 68) provided that Income Tax payers with incomes not exceeding £500 should be entitled to exemption from taxation to the amount of £10 for each child under the age of 16 years. The effect of this provision is far-reaching. A clerk with £200 a year and three young children gets the £160 abatement and £30 abatement in respect of his children. His _taxable_ income is thus reduced to £10 and his payment of Income Tax to 7s. 6d.
On the same ground, respect for the principle of ability to pay, the Income Tax law should provide for special abatements in case of the illness of salary earners, special misfortunes, the support of poor relatives, etc. It is found possible to work such provisions in Prussia; it ought to be found possible to do so here.
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The importance of a thorough revision of the Income Tax law is growing. The view urged here is that the citizen's subscription to the National Club should not only be justly proportioned to his means, but presented to him intelligibly, and collected without waste or undue interference with business.
The phenomenon of an annual Budget debate has come to be regarded as a necessary Parliamentary evil, but is there any justification for it?
When the nation has decided, through its representatives, for good reasons or for bad reasons, that a certain sum of money must be raised for public purposes, it is not the function of the Chancellor of the Exchequer _qua_ Chancellor of the Exchequer to decide whether the purposes are good or bad, or whether the sum is too large or too small. As a member of the Government, the Finance Minister has, of course, a voice in deciding what sums should be spent and upon what purposes, but, as Chancellor of the Exchequer, his duty is not to reason why but to find the money. In the finding of the money, ought there to be, year by year, a long and painful discussion as to how it should be done?
We have also become accustomed to regarding the Budget as a great and glorious secret, to be carefully guarded until the Chancellor of the Exchequer makes his annual speech. Does the tradition of secrecy rest upon necessity? For my part, I call the necessity in question. I affirm that our annual Budget need present no difficulties; that it is not inherently a difficult thing to accomplish; and that the conception of a Budget as a great secret, to be carefully hidden until Budget Day, is an altogether childish conception. There is some excuse for reserving a child's Christmas presents until he wakes up and finds the gifts of Santa Claus in his stocking on the morning of December 25th, but there is no excuse whatever for the ridiculous secrecy with which tradition shrouds the annual Budget statement.
I do not deny that secrecy has been necessary in connexion with such Budgets as have been put on record in the past. Of what have these Budgets consisted? Year by year, a number of clumsy, inefficient and indefensible taxes have been tinkered by successive guardians of the national purse. Tea taxes, coffee taxes, beer taxes, sugar taxes, alleged income taxes, double inheritance duties, have had bits carved off them, or bits attached to them, without rhyme or reason. Year after year, Mincing Lane has been in throes of excitement as to whether there was to be a penny on tea, or a penny off tea. Cunning gentlemen have rushed in tea to evade a suspected inclination to tax that article further, or sugar brokers have been excited at the prospect of making something, or losing something, over a little less or a little more on sugar. We are a grave and respectful people, or assuredly we should laugh at this annual exhibition of mingled greed and incompetency. If as much intelligence were put into the making of boots, none of us would be able to walk.
The subject is made additionally interesting by the fact that all along men have known perfectly well how taxes ought to be levied. It is 130 years since Adam Smith wrote his first maxim of taxation, which I have already quoted:
"The subjects of every State ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State."
As long ago as 1848 John Stuart Mill wrote ("Principles of Political Economy," Book V. Chapter 2):
"As, in a case of voluntary subscription for a purpose in which all are interested, all are thought to have done their part fairly when each has contributed according to his means, that is, has made an equal sacrifice for the common object; in like manner should this be the principle of compulsory contributions: and it is superfluous to look for a more ingenious or recondite ground to rest the principle upon.... To take a thousand a year from the possessor of ten thousand would not deprive him of anything really conducive either to the support or to the comfort of existence: and if such _would_ be the effect of taking five pounds from one whose income is fifty, the sacrifice required from the last is not only greater than, but entirely incommensurable with, that imposed upon the first. The mode of adjusting these inequalities of pressure, which seems to be the most equitable, is that recommended by Bentham, of leaving a certain minimum of income, sufficient to provide the necessaries of life, untaxed.... The exemption in favour of the smaller incomes should not, I think, be stretched further than to the amount of income needful for life, health, and immunity from bodily pain."
In passing, this quotation may be commended to those who regard the exemption of very small incomes from taxation as a tenet of modern Socialism. Here we have it propounded in 1848 by John Stuart Mill, who got it from Jeremy Bentham.
It is in spite of such admired utterances as these that we have still, in the year 1910, such outrages upon common sense as taxes upon sugar, taxes upon petrol, taxes upon cocoa, taxes upon business contracts, taxes upon marriage certificates, and a great party in the State is at this hour ardently desirous of adding to the number of such stupidities by thousands or even tens of thousands.
When we inquire for the reason for the existence of such unbusinesslike and costly stupidities, we find a simple explanation. It has been held in the past universally, and is held in the present by many, that the Government has no business to inquire into the incomes of the people it governs. Lacking knowledge of incomes, it has been obviously impossible for Governments to tax people according to their ability to bear taxation. Consequently, Chancellors of the Exchequer have had to devise all sorts of trumpery and costly expedients to get by indirect means what should have been got honestly and directly.
In short, the first condition of fair budgeting is a Census of Incomes. Given that, we are able to throw away all the lumber of indirect taxation and of inefficient taxation. And it should be observed that fair budgeting means simple budgeting—budgeting admitting of no annual argument. The annual budget wrangle is the effect of our devious methods of taxation.
Given universal declarations of income, and an end could speedily be made of our present array of taxes. We could decide upon some minimum of income which should be totally exempt from taxation on the ground that it represented the smallest sum upon which a family can be sustained in health and decency. Above that margin, we could arrange a graduated scale of taxation which should present to each citizen a fair bill for public expenses. That bill could be made payable in two or even four instalments, to make the payment an easy matter for the tax-payer. This arrangement once made, any increase of taxation would simply call for a proportionate increase from each tax-payer. Argument would not lie in the province of the Chancellor of the Exchequer, for the matter would be finally settled. Argument would begin and end with the decision of Parliament to spend certain moneys; _that would not be a_ _Budget argument, but an argument upon public policy in expenditure_. And the plainer the bill for taxes, the more closely expenditure would be scanned.
My remarks, of course, must not be taken to condemn taxes upon alcohol or taxes upon inheritances. And beyond lies the question of the acquisition of monopolies by the State, and the consequent reduction of taxation by reason of the State carrying on revenue-producing undertakings.