Chapter 5

It is a commonplace of political theory that the Government has a right to take the whole of the property and the whole of the labour of its citizens. But it would not, of course, have been possible for the Government immediately to inaugurate a policy of setting everybody to work on things required for the war and paying them all a maintenance wage. This might have been done in theory, but in practice it would have involved questions of industrial conscription, which would probably have raised a storm of difficulty. What the Government might have done would have been by commandeering the buying power of the citizen to have set free the whole industrial energy of the community for supplying the war's needs and the necessaries of life. At present the national output, which is only another way of expressing the national income, is produced from certain channels of production in response to the expectation of demand from those whose possession of claims to goods, that is to say, money, gives them the right to say what kind of goods they will consume, and consequently the industrial part of the population will produce.

Had the Government laid down that the whole cost of the war was to be borne by taxation, the effect of this measure would have been that everything which was needed for the war would have been placed at the disposal of the Government by a reduction in spending on the part of those who have the spending power. In other words, the only process required would have been the readjustment of industrial output from the production of goods needed (or thought to be needed) for ordinary individuals to those required for war purposes. This readjustment would have gone on gradually as the war's cost increased. There would have been no competition between the Government and private individuals for a limited amount of goods in a restricted market, which has had such a disastrous effect on prices during the course of the war; there would have been no manufacture of new currency, which means the creation of new buying power at a time when there are less goods to buy, which has had an equally fatal effect on prices; there would have had to be a very drastic reform in our system of taxation, by which the income tax, the only really equitable engine by which the Government can get much money out of us, would have been reformed so as to have borne less hardly upon those with families to bring up.

Mr Sidney Webb and the Fabians have advocated a system by which the basis of assessment for income tax should be the income divided by the number of members of a family, rather than the mere income without any consideration for the number of people that have to be provided for out of it. With some such scheme as this adopted there is no reason why the Government should not have taken, for example, the whole of all incomes above £1000 a year for each individual, due allowance being made for obligations, such as rent, which involve long contracts. For any single individual to want to spend more than £1000 a year on himself or herself at such a crisis would have been recognised, in the early days of the war, as an absurdity; any surplus above that line might readily have been handed over to the Government, half of it perhaps in taxation and the other half in the form of a forced loan.

So sweeping a change would not have been necessary at first, perhaps not at all, because the war's cost would not have grown nearly so rapidly. All surplus income above a certain line would have been taken for the time being, but with the promise to repay half the amount taken, so that it should not be made a disadvantage to be rich, and no discouragement to accumulation would have been brought about. By this means the whole of the nation's buying power among the richer classes would have been concentrated upon the war, with the result that the private extravagance, which is still disgracing us in the fourth year of the war, would not have been allowed to produce its evil effects. With the rich thus drastically taxed, the working classes would have been much less restive under the application of income tax to their own wages. We should have a much more freely supplied labour market, and since the rise in prices would not have been nearly so severe, labour's claim to higher wages would have been much less equitable, and labour's power to enforce the claim would have been much less irresistible.

What the Government has actually done has been to do a little bit of taxation, much more than anybody else, but still a little bit when compared with the total cost of the war; a great deal of borrowing, and a great deal of inflation. By this last-named method it produces the result required, that of diverting to itself a large part of the industrial output of the country, by the very worst possible means. It still, by its failure to tax, leaves buying power in the hands of a large number of people who see no reason why they should not live very much as usual; that is to say, why they should not demand for their own purposes a proportion of the nation's energy which they have no real right to require at such a time of crisis. But in order to check their demands, and to provide its own needs, the Government, by setting the bankers to work to provide it with book credits, gives itself an enormous amount of new buying power with which, by the process of competition, it secures for itself what is needed for the war. There is thus throughout the country this unwholesome process of competition between the Government on one hand and unpatriotic spenders on the other, who, between them, put up prices against the Government and against all those unfortunate, defenceless people who, being in possession of fixed salaries, or of fixed incomes, have no remedy against rising prices and rising taxation. All that could possibly have been spent on the war in this country was the total income of the people, less what was required for maintaining the people in health and efficiency. That total income Government might, in theory, have taken. If it had done so it could and would have paid for the whole of the war out of taxation.

All this, I shall be told, is much too theoretical and idealistic; these things could not have been done in practice. Perhaps not, though it is by no means certain, when we look back on the very different temper that ruled In the country in the early months of the war. If anything of the kind could have been done it would certainly have been a practical proof of determination for the war which would have shown more clearly than anything else that "no price was too high when Honour was at stake." It would also have been an extraordinary demonstration to the working classes of the sacrifices that property owners were ready to make, the result of which might have been that the fine spirit shown at the beginning of the war might have been maintained until the end, instead of degenerating into a series of demands for higher wages, each one of which, as conceded to one set of workmen, only stimulates another to demand the same. But even if we grant that it is only theoretically possible to have performed such a feat as is outlined above, there is surely no question that much more might have been done than has been done in the matter of paying for the war by taxation. If we are reminded once more that our ancestors paid nearly half the cost of the Napoleonic war out of revenue, while we are paying about a fifth of the cost of the present war from the same source, it is easy to see that a much greater effort might have been made in view of the very much greater wealth of the country at the present time. I was going to have added, in view also of its greater economic enlightenment, but I feel that after the experience of the present war, and its financing by currency debasement, the less about economic enlightenment the better.

What, then, stood in the way of measures of finance which would have obviously had results so much more desirable than those which will face us at the end of the war? As it is, the nation, with all classes embittered owing to suspicions of profiteering on the part of the employers and of unpatriotic strikes on the part of the workers, will have to face a load of debt, the service of which is already roughly equivalent to our total pre-war revenue; while there seems every prospect that the war may continue for many half-years yet, and every half-year, as it is at present financed, leaves us with a load of debt which will require the total yield of the income tax and the super-tax before the war to meet the charge upon it. Why have we allowed our present finance to go so wrong? In the first place, perhaps, we may put the bad example of Germany. Then, surely, our rulers might have known better than to have been deluded by such an example. In the second place, it was the cowardice of the politicians, who had not the sense in the early days of the war to see how eager the spirit of the country was to do all that the war required of it, and consequently were afraid to tax at a time when higher taxation would have been submitted to most cheerfully by the country. There was also the absurd weakness of our Finance Ministers and our leading financial officials, which allowed our financial machinery to be so much weakened by the demands of the War Office for enlistment that it has been said in the House of Commons by several Chancellors of the Exchequer that it is quite impossible to consider any form of new taxation because the machinery could not undertake it. There has also been great short-sightedness on the part of the business men of the country, who have failed to give the Government a lead in this important matter. Like the Government, they have taken short views, always hoping that the war might soon be over, and so have left the country with a problem that grows steadily more serious with each half-year as we drift stupidly along the line of least resistance.

Such war finance as I have outlined--drastic and impracticable as it seems--would have paid us. Taxation in war-time, when industry's problem is simplified by the Government's demand for its product, hurts much less than in peace, when industry has not only to turn out the stuff, but also find a buyer--often a more difficult and expensive problem. There is a general belief that by paying for war by loans we hand the business of paying for it on to posterity. In fact, we can no more make posterity pay us back our money than we can carry on war with goods that posterity will produce. Whatever posterity produces it will consume. Whatever it pays in interest and amortisation of our war debt, it will pay to itself. We cannot get a farthing out of posterity. All we can do, by leaving it a debt charge, is to affect the distribution of its wealth among its members. Each loan that we raise makes us taxpayers collectively poorer now, to the extent of the capital value of the charge on our incomes that it involves. The less we thus charge our productive power, and the more we pay up in taxes as the war goes on, the readier we shall be to play a leading part in the great time of reconstruction.

V

A LEVY ON CAPITAL

_January_, 1918

The Objects of the Levy--Its Origin and History--How it would work in Practice--The Attitude of the Chancellor--The Effects of the Scheme in discouraging Thrift--Its Fallacies and Injustices--The Insuperable Obstacles to its Application--Its Influence on Production--One of the Tests of a Tax--Judged by this Test the Proposed Levy is doomed.

By some curious mental process the idea of a levy on capital has come into rapidly increasing prominence in the last few months, and seems to be gaining popularity in quarters where one would least expect it. On the other hand, it is naturally arousing intense opposition, both among those who would be most closely affected by its imposition, and also among those who view with grave concern the possible and probable economic effects of such a system of dealing with the national debt. I say "dealing with the national debt" because, as will be clear, as a system of raising money for the war the suggestion of the levy on capital has little or nothing to recommend it. But, as will also be made clear, the proposal has been put forward as a thing to be done immediately in order to increase the funds in the hands of the Chancellor of the Exchequer to be spent on war purposes.

A levy on capital is, of course, merely a variation of the tax on property, which has long existed in the United States, and had been resorted to before now by Governments, of which the German Government is a leading example, in order to provide funds for a special emergency. This it can very easily do as long as the levy is not too high. If, for example, you tax a man to the extent of 1-1/2 per cent. to 2 per cent. of the value of his property, on which he may be earning an average of 5 to 6 per cent. in interest, then the levy on capital becomes merely a form of income tax, assessed not according to the income of the taxpayer but according to the alleged value of his property. It is thus, again, a variation of the system long adopted in this country of a special rate of income tax on what is called "unearned" income, i.e. income from invested property. But it is only when one begins to adopt the broadminded views lately fashionable of the possibilities of a levy on capital and to talk of taking, say, 20 per cent. of the value of a man's property from him in the course of a year, that it becomes evident that he cannot be expected to pay anything like this sum, in cash, unless either a market is somehow provided--which seems difficult if all property owners at once are to be mulcted of a larger amount than their incomes--or unless the Government is prepared to accept part at least of the levy in the shape of property handed over at a valuation.

Before, however, we come to deal in detail with the difficulties and drawbacks of the suggestion, it may be interesting to trace the history of the movement in its favour, and to see some of the forms in which it has been put forward. It may be said that the ball was opened early last September when, in the _Daily News_ of the 8th of that month, its able and always interesting editor dealt in one of his illuminating Saturday articles with the question of "How to Pay for the War." He began with the assumption that the capital of the individuals of the nation has increased during the war from 16,000 millions to 20,000 millions. A 10 per cent. levy on this, he proceeded, would realise 2000 millions. It would extinguish debt to that amount and reduce the interest on debt by 120 millions. The levy would be graduated--say, 5 per cent. on fortunes of £1000 to £20,000; 10 per cent. on £20,000 to £50,000; up to 30 per cent. on sums over £1,000,000; and the individual taxpayer was to pay the levy "in what form was convenient, in his stocks or his shares, his houses or his fields, in personalty or realty."

Just about the same time the _Round Table_, a quarterly magazine which is usually most illuminating on the subject of finance, chimed in with a more or less similar suggestion in an article on "Finance After the War." It remarked that the difficulty of applying a levy on capital is "probably not so great as appears at first sight." The total capital wealth of the community it estimated at about 24,000 millions sterling. To pay off a war debt of 3000 millions would therefore require a levy of one-eighth. Evidently this could not be raised in money, nor would it be necessary. Holders of War Loans would pay their proportion in a simple way by surrendering one-eighth of their scrip. Holders of other forms of property would be assessed for one-eighth of its value and be called on to acquire and to surrender to the State the same amount of War Loan scrip. To do this, they would be obliged to realise a part of their property or to mortgage it, "but," added the _Round Table_ cheerfully, "there is no insuperable difficulty about that."

The first thing that strikes one when one examines these two schemes is the difference in their view concerning the amount of capital wealth available for taxation. Mr Gardiner made the comparatively modest estimate of 16,000 millions to 20,000 millions; the _Round Table_ plumps for 24,000 millions, and, incidentally, it may be remarked that some conservative estimates put it as low as 11,000 millions. Thus we have a possible range for the fancy of the scheme builder of from 11,000 to 24,000 millions in the property on which taxation is proposed to be levied. But it is when we come to the details of these schemes that the difficulties begin to glare. Mr Gardiner tells us that millionaires would pay up to 30 per cent. of their property, and that they would pay in what form was convenient, in houses, fields, etc., etc. But he does not explain by what principle the Government is to distribute among the holders of the debt, the repayment of whom is the object of the levy, the strange assortment of miscellaneous assets which it would thus collect from the property owners of the country.

In commenting on this scheme the _Economist_ of September 15th took the case of a man with a fortune of £100,000 invested before the war in a well-assorted list of securities, the whole of which he had, for patriotic reasons, converted during the war into War Loans. He would have no difficulty about paying his capital levy, for he would obviously surrender something between 10 and 20 per cent. of his holding. But, "in exchange for nearly two-thirds of the rest, he might find himself landed with houses and bits of land all over the country, a batch of unsaleable mining shares, a collection of blue china, a pearl necklace, a Chippendale sideboard, and a doubtful Titian," The _Round Table's_ suggestion seems to be even more impracticable. According to it, holders of all other forms of property besides War Loans would be assessed for one-eighth of its value--it does not explain how the value is to be arrived at, nor how long it would take to do it--and would then be called on to acquire and to surrender to the State the same amount of War Loan scrip. To do this they would be obliged to realise a part of their property or to mortgage it, a process which would seem likely to produce a pretty state of affairs in the property market; and a very pleasant state of affairs indeed would arise for the holders of War Loan scrip, since there would be a large crowd of compulsory buyers in the market from whom the holders would apparently be able to extort any price that they liked for their stock.

The next stage in the proceedings was a deputation to the Chancellor of the Exchequer, concerning which more anon, of leaders of various groups of the Labour Party, to press upon Mr Bonar Law the principle of what is called "the Conscription of Wealth," and the publication at or soon after that time, which was about the middle of November, of a pamphlet on the subject of the "Conscription of Riches," by the War Emergency Workers' National Committee, 1, Victoria Street, S.W. Among what this pamphlet describes as "the three practicable methods of conscripting wealth" No. 1 is as follows:--

A Capital Tax, on the lines of the present Death Duties, which are graduated from nothing (on estates under £300, and legacies under £20) up to about 20 per cent. (on very large estates left as legacies to strangers).

If a "Death Duty" at the existing rates were now levied simultaneously on every person in the kingdom possessing over £300 wealth (every person might be legally deemed to have died, and to be his own heir), it might yield to the Chancellor of the Exchequer about £900,000,000. It would be necessary to offer a discount for payment in cash; and in order to avoid simultaneous forced sales, to accept, in lieu of cash, securities at a valuation; and to take mortgages on land.

Here it will be seen that the Emergency Workers had improved on the _Round Table_, and agreed with Mr Gardiner, by providing that the Government should take securities at a valuation and mortgages on land in lieu of cash in order to avoid simultaneous forced sales. But they do not seem to have perceived that, in so far as the Government took securities or accepted mortgages on land, it would not be getting money to pay for the war, which was the object of the proposed Conscription of Wealth, but would only be obtaining property from which the Government would in due course later on receive an income, probably averaging about one-twentieth of its value.

Perhaps, however, it would be more correct to say that those who put the scheme forward did not ignore this drawback to it, but rather liked it, for reasons quite irrelevant to the objects that they were apparently pursuing. A good deal of prominence was given about the same time to the question of a levy on capital in the _New Statesman_ well known to be the organ of Mr Sidney Webb and other members of the Fabian Society. These distinguished and very intellectual Socialists would, of course, be quite pleased if, in an apparent endeavour to pay for the war, they actually succeeded in securing, by the Government's acquisition of blocks of securities from property owners, that official control of industry and production which is the object of State Socialists.

It will be noted, however, in this scheme that no mention is made of any forms of property to be accepted by the Government in lieu of cash except securities and mortgages on land. Items such as furniture, books, pictures and jewellery are ignored, and in one of the articles in the _New Statesman_, discussing the question of a capital levy, it was distinctly suggested that these commodities should be left out of the scheme so as to save the trouble involved by valuation. Unfortunately, if we leave out these forms of property the natural result is to stimulate the tendency, lately shown by an unfortunately large number of patriotic taxpayers, of putting money into pearl necklaces and other such gewgaws in order to avoid income tax. If by buying fur coats, old masters and diamond tiaras it will be be possible in future to avoid paying, not only income tax, but also a capital levy, it is to be feared that appeals to people to save their money and invest it in War Bonds are likely to be seriously interfered with.

Unfortunately, the _Statesman_ was able to announce that the appeal for this system of taxation had been received with a good deal of sympathy by the Chancellor of the Exchequer, and the next stage in the history of the agitation was the publication on Boxing Day in several of the daily papers of what appeared to be an official summary, issued through the Central News, of what the Chancellor had said to the deputation of Labour Leaders introduced by Mr Sidney Webb, which waited on him, as already described, in the middle of November. Having pointed out that he had never seen any proposal which seemed to him to be practicable for getting money during the war by conscripting wealth, Mr Bonar Law added that, though "perhaps he had not thought enough about it to justify him in saying so," his own feeling was that it would be better, both for the wealthy classes and the country, to have this levy on capital, and reduce the burden of the national debt when the war was over. It need not be said that this statement by the Chancellor has been very far from helpful to the efforts of those who are trying to induce unthrifty citizens to save their money and put it into National War Bonds for the finance of the war.