TAXATION AND THE COST OF LIVING. Price - ONE SHILLING. LONDON : Oo-operative Printing Society Limited, Tudor St., New Brddge St., E.C.4j And at Manchester and Newcastle. 1921. PARLIAMENTARY COMMITTEE, TRADES UNION CONGRESS. JOINT COMMITTEE ON THE COST OF LIVING. SECOND INTERIM REPORT. TAXATION AND THE COST OF LIVING. Price - - ONE SHILLING. LONDON : Co-operative Printing Society Limited, Tudor Street, E.C. 4 ; and at Manchester and Newcastle — 12550. 1921. Parliamentary Committee, Trades Union Congress. JOINT COMMITTEE 6 ON THE COST OF LIVING. Parliamentary Committee, Trades Union Congress : — Mr. E. L. POULTON, J.P. (Chairman). Et. Hon. J. H. Thomas, M.P. Mr. E. B. Walker. Et. Hon. C. W. Bowerman, M.P. (Secretary). Mr. P. Bramley (Assistant Secretary). The Labour Party : — Mr. C. T. Cramp. Mr. J. Eamsat MacDonald. The Co-operative Union : — Mrs. M. E. Cottrell. Mr. J. Dickinson. The Triple Alliance : — Mr. E. Smillie. Mr, Frank Hodges, J.P. The Federation of Engineering and Shipbuilding Trades : — Mr. A. A. H. Findlay. Mr. A. Gossip. The National Federation of General Workers : — Mrs. F. Harrison Bell. Mr. A. Hord. The National Federation of Building Trades Operatives : — Mr. G. Hicks. Mr. T. Otley. ARTHUR GREENWOOD, Secretary.. CONTENTS. PAGE. The National Eevenue 5 National Expenditure 6 The National Debt 8 The Eeduction of the National Debt 9 A Forced Loan ? 12 A Levy on War Wealth? 13 A Levy on Accumulated Wealth 15 The Proposal of the Committee 18 (a) The General Character of the Levy 18 (b) The Exemption Level 19 (c) Graduation 20 (d) Valuation 20 {e) Form of Payment 21 (/) How the Proceeds Should be Used 22 The Ee vision of Taxation. (a) Indirect Taxation 24 (6) Excess Profits Duty 27 (c) A Tax on Business Profits? 28 (d) The Income Tax 29 (e) Estate and Death Duties 31 Taxation and the Cost of Living 32 Government Ketrenchment 32 Tariffs. (a) Key Industries , 34 (6) Dumping 37 Local Taxation. (a) The Present Position 38 (b) Grants in Aid 42 (c) The Equalisation of Local Rates 42 (d) The Local Tax on Site Values ,.... 43 (e) Municipal Banking and Other Services 44 Summary of Conclusions 45 458774 TABLES. PAGE. I. Analysis of the National Revenue 5 II. Comparison of Annual Revenue with Loans 6 III. National Expenditure in a " Normal" Year 6 IV. Items of Expenditure in the " Civil Services " 7 V. Percentage of National Revenue devoted to Certain Services in a "Normal" Year r- 8 VI. Showing Receipts from Indirect Taxes on Food, Drink, Tobacco, and Entertainments 24 VII. Indirect Taxes on Certain Groups of Commodities for OK Family of Eive Persons *° YIII. Yield of Indirect Taxes proposed to be remitted or reduced .. 27 IX. Showing Receipts of Local Authorities from Rates and Government Grants X. Total Amount per Pound of Assessable Value of Local Rates levied (or to be levied) during the year ending March 31st XL Showing Increase of Rates in England and Wales from 1914 to 1921 40 REPORT ON TAXATION AND THE COST OF LIVING. We devoted our first report to a consideration of the general causes of the rise in the general level of prices. Before proceeding to a detailed discussion of the many causes contributing to the high cost of living, we have thought it desirable to prepare an Interim Eeport on Taxation, which has an important bearing on the subject of our inquiry.- It is necessary in the first place to examine in some detail the present financial situation of the country : — f The National Revenue. The position of the nation's finances can be best understood by an analysis of the Imperial revenue and expenditure since 1913-14 down to the present time. The following table shows the sources of the national revenue during the past eight years. Direct taxes include property and income tax, super-tax, estate duties, land tax and duties on land values, house duty, and stamp duties (other than those on fee and patent stamps). The indirect taxes are those obtained from customs and excise duties. Receipts from the Excess Profits Duty, which has contributed substantially to the revenue, are dealt with separately. The non-tax revenue comprises receipts from, the postal, telegraph, and telephone services, Crown lands, Suez Canal shares, and sundry loans. The item of miscellaneous receipts includes fee and patent stamps and receipts by Civil Departments. These figures are swollen in the later years by the sale of war stores. The sums derived from the disposal of Govern- ment property ought not, of course, to be regarded as current income. They should have been devoted to debt reduction. In the table below the year in each case runs from April 1st to March 31st:— TABLE I. ANALYSIS OF THE NATIONAL REVENUE. (000' s omitted.) Excess Direct Indirect Profits Non-tax Miscel- Grand Year. Taxes. Taxes. Duty. Revenue. laneous. Total. £ £ £ £ £ £ 1913-14 ... 87,989 75,040 32,910 2,304 198,243 1914-15 ... 108,330 80,975 31,472 5,917 226,694 1915-16 ... 169,132 120,816 140 36,882 9,797 336,767 1916-17 ... 247,244 126,941 139,920 42,806 16,517 573,428 1917-18 ... 282,793 110,033 220,214 42,046 52,148 707,234 1918-19 ... 337,030 162,220 285,028 52,440 52,303 889.021 1919-20 ... 425,892 283,023 290,045 59,782 280,829 1,339,571 1920-21 ... ♦463,500 348,650 1223,000 63,150 320,000 1,418,300 * The figures for 1920-21 are taken from the Estimates. The remainder are based on statistics contained in the Statistical Abstract and Financial Statements. t Includes estimated receipts from Corporation Profits Tax, £3,000,000. The receipts outlined above did not meet the needs of the State during the war period. The following table will bring out clearly the extent- to which the Government relied upon loans : — TABLE II. COMPARISON OF ANNUAL REVENUE WITH LOANS. Year. Total Revenue. £ (In Millions Borrowing Net. £ Sterling.) Total Receipts. £ Percentage of Total Receipis obtained from (a) (b) Revenue. Borrowin: 1914-15 ... ... 227 410 .... 637 .... .. 35'6 64-4 1915-16 ... ... 337 1,167 .... .. 1.504 .... .. 224 77'6 1916-17 ... ... 573 1,629 .... .. 2,202 .... .. 260 74 1917-18 ..., ... 707 , 1,985 .... .. 2,692 .... .. 26*3 73-7 1918-19 ... ... 889 , 1,682 .... .. 2,571 .... .. 346 65-4 1919-20 ... ... 1,340 323 .... .. 1,663 .... .. 80-6 19-4 It will be observed that during the years of the war the national expenditure was met by raising between two-thirds and three-quarters of the money required for Government purposes by means of loans. National Expenditure. During the last six years the largest items of expenditure have been those arising out of the war. It is, of course, true that other forms of expenditure have increased, but they bear a small proportion to the burdens imposed by the war. This may be illustrated by reference to some of the national services. In 1913-14 the State expenditure on education was £19,450,000; in 1919-20 it had risen to £38,841,000, whilst it stands at £56,081,000 in the Estimates for the current financial year. Old age pensions, Labour Exchanges, and Insurance in 1913-14 cost in the aggregate £19,666,000. In 1919-20 the expenditure on old age pensions was £17,892,000, and on Employment Exchanges and Insurance £12,228,000, the figures in the Estimates for 1920-21 being £25,969,000 and £34,265,000 respectively. During the current year, out of every £100 expended by the State, £5 will be devoted to education, £2 5s. to old age pensions, and £10 13s. to war pensions. On the other hand, interest on the National Debt will swallow £30 out of every £100 national expenditure, whilst the maintenance of the Army, Navy, and Air Force will account for £20 out of every £100 national expenditure. It would appear that the Government intends that these ratios shall hold in the future. The Chancellor of the Exchequer allocates the national expenditure in what he calls a " normal " year as follows : — TABLE III. NATIONAL EXPENDITURE IN A NORMAL YEAR. Consolidated Fund Charges (debt interest, £ per cent. £ sinking fund, road improvement fund, and other consolidated fund charges — mainly contributions in aid of local taxation) 372,900,000 Fighting Forces (Navy, Army, and Air Force) 135,000,000 Civil Services (see below) 305,000,000 Revenue Services (Customs and Excise and Inland Revenue ; Post Office) 68,000,000 Total Expenditure (including h per cent. sinking fund) .". 880,900,000 Balauce for further debt redemption 148,100,000 £1,029,000,000 The Civil Services include amongst other items the following: — TABLE IV. ITEMS OF EXPENDITURE IN THE "CIVIL SERVICES." War Pensions and Allowances to Disabled Members of £ the Fighting Forces and other Dependents 120,000,000 Old Age Pensions 28,000,000 Grants for — Education 70,000,000 Agriculture 1,500,000 Unemployment and Health Insurance 17,500,000 Housing Subsidies 15,000,000 It will be observed that in a " normal " year the Chancellor of the Exchequer will require over £1,000,000,000, and that the only provision made for the reduction of the National Debt is a sinking- fund (| per cent.), amounting to £32,500,000 per year, and a possible surplus at the end of the year of £148,100,000, which may or may not exist. It will also be observed that in a " normal " year, and after a great " war to end war," more money will be devoted to the maintenance of the armed forces of the Crown than to old age pensions, grants for education, agriculture, unemployment and health insurance, and other health grants, and housing subsidies combined. The following table shows clearly the proportion of the national revenue which will be devoted in a "normal " year to different services : — TABLE V. PERCENTAGE OF NATIONAL REVENUE DEVOTED TO CERTAIN SERVICES IN A "NORMAL" YEAR. Per £100 of Revenue Consolidated Fund Charges £36"2 Balance for further Debt Reduction 14*4 Fighting Forces 13*1 War Pension s 11*7 Education 6'8 Old Age Pensions 2'7 Unemployment and Health Insurance and other Health Grants 17 Housing Subsidies 1*4 The first four items above will account for three-quarters of the national revenue in a " normal " year. In other words, 15s. out of every £ of the revenue is to be devoted to the payment of obligations incurred as a result of past wars and for the maintenance of the fighting forces in preparation for possible future wars. It appears from tie hypothetical Budget of a " normal " year that no drastic revision of this portion of the national expenditure is to take place. On the other hand, the State will be required to provide larger sums for education, fuller health service, and pensions for the incapacitated and the aged. The community is clearly face to face with the prospect in times of peace of a load of taxation even exceeding that which it bore in the closing stages of the war, as the Government does not contemplate taking steps towards the drastic reduction of the War Debt. There are three ways in which the burden can be eased, (l) Efforts might be made to reduce the National Debt; (2) economies in State expenditure might be effected; and (3) taxation might be readjusted in accordance with real ability to pay. In these three- directions we see the main lines of future action. With the possi- bilities of revenue from nationalised services we shall not deal in this Report, as we intend to consider the whole problem of nationalisation at a later stage of our inquiry. We now turn to the question of debt reduction. The National Debt. The outstanding fact with regard to Imperial finance is the size of the National Debt. At the outbreak of war,, the National Debt amounted to about £700,000,000 and the annual charge (including payments into the sinking fund of rather over £5,000,000) to £24,500,000 or about an eighth of the national revenue. At the end of the financial year 1919-1920, the Debt stood at £7,835,030,000, and the National Debt services at £332,034,000, or nearly a third of the total national revenue (excluding receipts by Civil Depart- ments). In 1914, the National Debt averaged about £15 per head of the population. In 1920 it averaged £170 per head of the population. In 1914 the annual levy to meet interest charges, etc., worked out at about half a-guinea per head of the population. In 1920 it amounted to well over £7 per head* It may be argued that there are assets to set against the National Debt in the shape of the obligations of the Allies and Dominions. On March 31st, 1920, these obligations amounted in all to £1,871,600,000. No less than five-sixths of this sum is due from Russia, France, and Italy. It is obvious that in any consideration of British Finance we cannot with confidence rely on the fulfilment of these obligations, and therefore our national policy cannot safely be based on the assumption that these debts will be paid. In other words, the country owes £7,835,000,000 and has only possible bad debts to set against this sum. Of the total Debt, £6,556,316,000 is internal debt, and £1,278,714,000 external debt. The internal debt on March 31st, 1920, included a floating debt of £1,263,583,000. This enormous burden is the result of Government policy. In the early days of the war, the Government was reluctant to face the need for heavy additions to taxation and resorted to the fatally easy policy of borrowing, which was the main cause of the inflated prices, gross profiteering, and the heavy rate of interest which now has to be faced on borrowed capital. Even in the financial year ending March 31st, 1915, i.e., during the first months of the war, £410,000,000 was borrowed, whilst the total revenue from other sources was only £227,000,000. In other words, the Government borrowed nearly twice as much as it raised from normal sources. In 1915-1916 the addition to the national revenue over what was raised in the previous year was only £110,000,000, whilst loans amounted to £1,167,000,000; three and a-half times as much money was raised in that year by borrowing as by the ordinary revenue machinery of the country. * Cma. 780. 9 Had the Government had the courage to impose in the earlier stages of the war the rates of taxation it levied in the later stages, it would not have been necessary to resort to borrowing until the end of the war. The result would have been that serious inflation would have been avoided, prices would not have risen to the same extent, and the community would not to-day be staggering under a load of debt equivalent to something over a half of the aggregate wealth in the hands of individuals in this country. The Government also unnecessarily burdened the country as a result of the rates of interest offered for loans. The first War Loan was issued at £95, and the rate of interest was 3| per cent. Seven months later, when its second loan was floated, the Government offered as much as 4| per cent, interest, adding a further annual interest of 16s. 4d. on every £100 raised. Early in 1917 a 5 pep cent, loan was issued at £95, the real rate of interest thus being equivalent to 5| per cent. The result of this policy is to be seen in the high rate of interest now established, and in the total sum neces- sary to meet the annual interest charges on the war debts. The Reduction of the National Debt. We regard it as important that the State should without delay reduce the National Debt by as large an amount as possible. The taxpayer is faced with the alternatives of a slow reduction of Debt, coupled with the continuance for a long term of years of heavy taxation to meet the sinking fund and interest on the loan outstanding, and a bold attempt to extinguish speedily a substantial proportion c< the total Debt. It seems to us desirable, and, indeed, essential that the nation should at the earliest possible moment extricate itself from the load of dead debt by which it is now burdened. If every year something over £300,000,000 is to be raised by taxation for the purpose of meeting interest charges and providing even a small sinking fund for the redemption of debt, both the present and the coming generation of taxpayers will be saddled with an annual tribute amounting to about £33 per family of five persons. But this by no means fully expresses the burden of the National Debt on the community.* As prices fall in the future the burden of the debt will grow heavier. The loans were raised in money at a time when prices were high. Interest will continue to be paid and redemption of the principal will take place when prices are lower. * It is important to emphasise the fact that the Debt does constitute a burden on the community as a whole. The internal Debt involves a series of payments by taxpayers to holders of War Loan. If eaah individual's tax payments for this purpose exactly equalled his interest receipts on his War Loan the Debt would be no burden, since each individual's payments and receipts would cancel out. But, in fact, the poorer classes in the community pay considerably more in taxation than they receive in interest. Conversely the richer classes receive considerably more than they pay. The net result is that the internal Debt involves a tribute from the poorer to the richer people, and by thus aggravating the existing inequality of incomes, constitutes a burden on the community. The external Debt constitutes a burden of a more obvious kind, since it involves large payments by British taxpayers to persons living outside the country. 10 These payments will be made in money, which clearly will be worth more than the money which was originally borrowed. The taxpayer will be required to provide this money of greater purchasing power and the effort will be greater. People in the boot and shoe industry, for example, whether employers or workers, if prices are, say, a half of those ruling when the loans were raised, will need to produce twice as many boots and shoes to pay the same amount of money required for the National Debt Services as they did when the loan was floated. If for the sake of argument we assume that ten years from now prices will be half what they are now, the labour of the people will be producing for the payment of interest and sinking fund charges, not £400,000,000, but, expressed in terms of values ruling now, £800,000,000, or, to put it another way, if the total debt in sterling is then £6,000,000,000,' it will as regards its purchasing power be equivalent to £12,000,000,000 now. A person who contributed £1,000 to one or other of the Government's loans during the war and is now in receipt of, say, £55 interest per year, will, if prices fall to half those prevailing at present, still continue to receive £55 a year and this sum will purchase as much as £110 at the present time. Moreover, when he was repaid his capital sum by the Govern- ment, he would receive £1,000, the purchasing power of which would be equivalent to £2,000 with prices at the existing level. This money of a higher purchasing power for the payment of interest and capital must be provided by the general body of taxpayers. In other words, assuming, as we reasonably may, that prices will fall, the continuance of the war debt will involve the people of this country in 'an increasing and not a diminishing burden, and the productive impidation will need to work correspondingly harder for the purpose of providing the interest receivers with currency far superior to that which they originally lent to the State. We submit that such a state of affairs would be an intolerable injustice to which organised Labour at least cannot calmly submit. This great injustice will, however, be perpetuated unless early steps are taken to reduce substantially the heavy debt which now burdens the community. Further, not only prices, but the rate of interest on gilt-edged securities, is likely to fall in the future. This will result in a rise in the market value of unredeemed war loan, and will make redemption more expensive. This is a further reason for the rapid reduction of the Debt. Certain arguments are adduced against the rapid reduction of the debt. It is urged that posterity should bear its due share of the burden of the Great War. In point of fact, however, by far the greater proportion of the cost of the war has already been met by the people of this country. The real cost of the war consisted in the maintenance and equipment of the armed forces of the Crown and Auxiliary Services and the provision of war materials of all kinds, in the loss occasioned by the reorganisation of industry and the withdrawal of labour from peace-time pursuits to war 11 employment, in the destruction of human life, and in the maintenance of the disabled and the bereaved. Some of these effects fall in some degree upon posterity. The dislocation of industry and the provision of pensions, for example, will in any case lay a burden on the rising generation of taxpayers. The present generation has paid the greater part of the cost of the war, we insist, by means of taxation, the depreciation of capital values, and high prices; and the ungenerous proposal that the future should bear part of our burden means, in essence, that through the continuance of an interest-bearing debt, the" future will pay for the war again, perhaps even several times. It is also argued that the economic effects of a policy of drastic reduction would be disastrous. It is alleged that the result would be financial stringency, unemployment, and an impaired national credit. Opponents of debt reduction assume that the raising of a large fund to be applied to extinguishing a part of the National Debt would leave industry impoverished and without the necessary working capital. But this assumption is without substance. The capital of the country consists, in the main, not of money, but of the land, mines, buildings, railways, machinery, and stock, which are the instruments of production, and these would not be diminished by any paper transaction. The internal debt on March 31st, 1920, amounted to £6,556,000,000. That is to say, the Government owed various individuals in the country this sum of money. If by some means the taxpaying section of the com- munity raised this huge amount and handed it over to the individuals who had subscribed to Government loans, these persons would have this money available for investment and use. In so far as people were compelled, in order to pay their contribution to the extinction of the debt, to economise on socially useless expenditure, and the proceeds were devoted to repaying the loan made by people who on repayment would utilise the money for productive purposes, the net effect would be to increase the amount of capital available for industry. It is, of course, conceivable that the reverse process might take place, wealth being taken from industry and paid over to those who would merely expend it unproductively. Broadly speaking, however, we do not think that the effect of raising revenue for the repayment of a large part of the National Debt would diminish the mobile capital available for investment, and the fixed capital already employed in industry would remain. Wealth would change hands, but its total volume would not be affected, and the amount applied to production might actually be increased. It is difficult to understand the argument that the adoption of a plan for drastically reducing the National Debt would have a prejudicial effect on the national credit. We hold, on the contrary, that the reverse would be the case. The credit of a country which has the courage and ability to cut itself free from a heavy burden of debt must clearly stand higher than that of one which continues to stagger under a load of debt. Moreover, the credit of a country is in some degree measured by its prosperity, and in our view, it will 12 be distinctly advantageous to the economic well-being of the country to pay off a substantial part of the National Debt whilst the value of money relative to goods and services is low and the rate of interest high, so as to be able to devote to production in the near future at a lower rate of interest money of a much higher value, which would otherwise be devoted to the payment of interest and principal on the Debt. The arguments against a rapid reduction of the War Debt appear to us of little weight, as compared with the enormous importance of diminishing to as great an extent as possible the crushing burden of unproductive taxation. We think that an immediate policy of DRASTIC DEBT REDUCTION IS CALLED FOR IN THE NATIONAL INTEREST. Before setting forth the method which we recommend to attain this end we may turn to a consideration of alternative plans which have been proposed : — A Forced Loan. It has been suggested that the debt might be reduced by means of a forced levy, collected annually for a period of, say, 25 years, and bearing a low rate of interest, e.g., 2i per cent. In order to illustrate the possibilities of this method we may refer to a definite scheme which has been put forward.* It is proposed that " the levy should be imposed as a tax and collected through the machinery of the income tax from unearned income." Something over £200,000,000 might be collected in the first year. " This figure would grow from year to year with the growth of capital. By itself this amount without increase is sufficient in 25 years to save £2,500,000,000 in interest, which could be used to pay off debt, and it would leave at the end of 25 years £5,000,000,0000 (2£ per cent.) bonds outstanding falling due in series in the next 25 years." It is urged that this method would reduce the National Debt considerably — Taking the National Debt at 7,500 millions. The Interest Charge on same 375 „ An Annual Levy on the 2| per cent, basis of 200 „ Would save every year in Interest 5 „ Totalling in 25 years at 5 per cent 2,500 „ The position would then be — National Debt 5,000 „ ^— Interest 125 „ and it would be possible at once to remit in taxation £50,000,000, abolish the levy, repay solid blocks of debt amounting to £200,000,000 a year for the next 25 years, coupled each year with a remission of £5,000,000 in taxation, debt and interest being then extinguished. We have no doubt that this scheme is administratively practicable, and that it would be more acceptable to a large number of the well-to-do than a levy without interest. It would, of course, do something to reduce the Debt and the annual burden of interest. But it does not, in our judgment, meet the real need. It does nothing to make a sweeping reduction of the War Debt whilst prices and * The quotations which follow are taken from " The State Debt and the National Capital." (Methuen & Co.). 13 the rate of interest are still high. The case for redeeming a substantial proportion of the National Debt at an early date in order to avoid the actually growing burden of maintaining the payment of interest and of repaying the principal is over- whelming, and we think that a forced loan would only mitigate to a small extent the real evil. To reduce the National Debt by a third over a period of 25 years, or even by a half, barely touches the fringe of the problem. If we suppose that the Debt were reduced to half its present dimensions during the next quarter of a-century and that at the end of that period prices were half the present prices, the real debt (i.e., the debt in terms of goods and services) would be as large as it is to-day. It w is our firm and considered opinion that the national interest demands a policy of a more thorough kind than that of a forced loan. A Levy on War Wealth. It has been suggested to us that death duties, progressively steepened at every transmission of inherited wealth until the point of forfeiture is reached, would provide a means of enabling the Government to reduce the National Debt. Though we favour the development of the death duties along these lines, we do not regard this proposal as one which would in the near future yield substantial sums for the redemption of the War Debt. The suggested levy on war wealth, however, would produce a relatively large sum for this purpose. There is without doubt a widespread view that individuals who profited from the war should return some proportion of their gains to the public purse. The national sense of justice was out- raged by the double spectacle of the destruction of life during the war and the accumulation of fortunes, and it is not surprising that there should be a demand for the surrender of a part of the wealth of those to whom the war brought profit. It is, however, quite impossible to distinguish between increases of wealth arising directly out of the opportunities provided by the war and increases of wealth due more especially to other causes. Supporters of the levy on war . wealth realise that their policy in practice means a levy on the increases which have taken place in the volume of privately owned wealth since the beginning of the war, whether due to war conditions or not. In other words, the proposed levy accepts the idea of impounding for debt reduction, wealth of all kinds, whether it be derived from war profits, increased individual exertion, or what not. But instead of making a levy upon all accumulated wealth, it is proposed merely to raise special revenue by making a levy on the increase in accumulated wealth which took place during the war period. According to the estimate of Sir J.C. Stamp, the aggregate net increase of value in the hands of individuals during the war was £5,300,000,000. The Board of Inland Revenue, on the other hand, 14 arrive at a figure of about £4,000,000,000,. representing " the estimated aggregate increases of value appertaining to those indi- viduals whose capital wealth has increased in value during the war, diminished by the fall in value of the capital of those whose capital wealth has decreased." * For the purposes of a levy on war wealth, the Board of Inland Revenue estimate " the increase of wealth which (subject, of course, to any exemption given to persons of small wealth, and subject to any successful evasion) would come within the scope of the proposed duty " at £4, 180,000,000. t The total post-war wealth of individuals, as estimated by the Board of Inland Revenue, is £13,046,000,000. The proposal to impose a levy on war wealth is, in effect, a proposal to make a levy on less than one-third of the aggregate individual wealth of the country. Two hundred and eighty millionaires would pay the levy on £200,000,000 (their total increase of wealth) instead of upon £590,000,000 (their aggregate wealth); 3,340 persons with fortunes of over £250,000 and under £1,000,000 sterling would pay the levy on £507,000,000 instead of upon £1,404,000,000. Once it is recognised that a levy on war wealth (i.e., on wealth which has increased as a direct result of the war) is impracticable and that the levy would necessarily be levied on all increases of wealth, however occasioned, it seems to us difficult to justify a limita- tion of the levy to increases in wealth. We see no reason why the total volume of accumulated wealth should not be subject to a levy. We realise, of course, that such a levy would be imposed upon the wealth of individuals who are worse off than they were before the war, provided that their aggregate wealth was in excess .of the amount laid down as the level of exemption. But in these cases, notwithstanding financial losses incurred during the war, there is still ability to pay a levy, and such losses ought not to exempt people from a levy any more than the loss of a relative on war service. The principle ivhich we accept is, that the Debt is a national burden which should be lightened by contributions levied upon individual possessors of wealth in accordance with their ability to pay. The scheme for a levy on war wealth appears to us to \±e tinctured with an intention to mulct a new class of rich people and to protect other classes of rich people, whose accumulated possessions are the result of operations differing only in degree and not in kind from those pursued by the war profiteer. It may also be pointed out in argument against a levy on war wealth that the lapse of time will render it increasingly difficult to carry out. Assessment will become more difficult; possessors of war wealth will die; war fortunes will disappear, and enthusiasm for the taxation of war wealth will gradually evaporate. We think, on the whole, that the levy on war wealth should be rejected in favour of a larger scheme. * Memorandum submitted by the Board of Inland Revenue to the Select Committee of the House of Commons on Increases of Wealth (War) Cmd. 594, p. 17. + Ibid. p. 18. 15 A Levy on Accumulated Wealth. In the foregoing paragraphs we have given a general indication of our policy for the reduction of the National Debt. We are strongly of the opinion that, for the purpose of redeeming a substantial pro- portion of the National Debt, there should be imposed a graduated levy on all forms of accumulated wealth. We have already dealt with some of the arguments adduced against a rapid reduction of debt by a special effort of this kind. There are, however, other reasons brought against this proposal. Sir Josiah Stamp, in his evidence before the Committee, emphasised the psychological aspect of taxation. To be successful a tax must be " reasonably acceptable." If a tax is subjected to organised opposition it may be rendered unworkable, as we have seen in the case of the taxes on land values. Whilst we fully realise the cogency of this argument and the uninstructed opposition of a large number of people to the proposal for a levy on accumulated wealth, we feel that possessors of wealth cannot on full consideration escape the conclusion that relief from the staggering burden of the War Bebt is a national necessity. The alternatives may be simply stated. The choice is between an effort to extinguish a large proportion of the Debt now (at thef cost perhaps of some sacrifice) and the annual payment of interest in money which if and when prices fall, will appreciate in value, and with the prospect of the subsequent repayment of the Debt in money worth far more than the money which was originally borrowed. Even if there be a sinking fund of the amount suggested by Mr. Chamberlain in his Budget for a " normal " year, the situation will not be appreciably affected. The burden of the National Debt Services will increase and not diminish. Every fall in the level of prices will add to the annual burden of interest and debt redemption, whilst the difficulty of the latter will be still further increased by every fall in the rate of interest. Such, broadly, are the alternatives. We have no doubt whatever as to the proper course of action. The first alternative is clearly the one which ought to be followed. The second is one which is full of peril. It will be a drag upon industry. What is even more serious is that the heavy taxation needed for meeting interest on the Debt and the payments into the sinking fund will be used to defeat expenditure devoted to socially valuable and industrially productive ends. Nationally and locally the services to which we attach great importance will suffer. The people of this country are no longer so submissive that they will willingly accept the post- ponement of social and educational developments on the ground that the National Debt Services absorb too large a proportion of the Government revenue to permit of expenditure in other directions. The absorption of the revenue in unproductive payments will create a growing discontent, or rather it will increase the pre- vailing dissatisfaction and add one more illustration of the apparent inability of the existing organisation of society to cope with the 1G problems it has itself created. These probable reactions must be taken into account in deciding on the financial policy to be pursued. In other words, the well-to-do taxpayer has to choose between cancellation of the Debt and a growing " real " burden of taxation accompanied by serious popular discontent. We think that reason- able men and women will, on consideration, prefer the first alternative. Sir J. C. Stamp, in his evidence, raised other objections to a levy on accumulated wealth. He emphasised the difficulties of valuation. In his view, it is " impossible to fit the actual facts by a processi of valuation." From the standpoint of valuation a levy on war wealth is superior to a levy on accumulated wealth. The former involves two assessments of wealth at two different dates and consequently errors arising out of the assessment of, for example, life interests, tend to cancel out. In the case of the latter, only one valuation is involved, and an error may be a serious matter. It is urged that the valuation of forms of wealth, such as life interests, is likely to be unjust to individuals. Sir J. C. Stamp holds that a tax depending mainly upon the process of valuation is one which should be relegated to " the second class of taxing expedients." In the case of most forms of wealth serious difficulties would not arise. As for others, we admit that there may be difficulties in the way of accurate valuation. We think, however, if the method and machinery of the Death Duties were employed that serious injustices would be avoided. We would point out that some of our present taxes create hardships and inflict injustices, and that under any but an ideal scheme these will inevitably occur. In other words, if after everything is done to avoid injustices, injustices in isolated cases do occur, the position will be no different from that which already obtains under our existing tax system. The argument against the levy on accumulated wealth on these grounds is one of wider application and involves the whole of our present system of raising revenue. It cannot, therefore, be adduced as a special argument against the proposed levy. It has often been urged that at least part of the opposition to a levy on wealth arises from a fear that once the expedient is tried, it may be repeated in the future, particularly by a Labour Government. We attach no importance whatever to this argument. We cannot conceive any circumstances apart from another great war which would necessi- tate recourse to this method of raising revenue. For all the normal needs of the State, the ordinary system of taxation provides a sufficiently elastic source of revenue. The suggestion that if a levy on accumu- lated wealth be adopted now it may be used again in the future appears to us more improbable than that if it be not adopted now it may be adopted in the future. Moreover, it is absurd to suppose that the public discussion which has taken place during the past few years on the desirability of a levy on accumulated wealth will be forgotten if the proposal is not adopted, and that it would not be applied in the future if circumstances warranted its adoption. 17 It is asserted that a levy would inflict serious injustice on individuals. It is said that it would hit both people who have become wealthier and people who have been less successful, and that it does not take into account individual circumstances. We have already pointed out that all forms of taxation, in varying degrees, it is true, are open to the same objection. Two people with the same incomes, although one has become richer and the other poorer, pay the same amount in income tax. Taxes on food take no account of individual circumstances. Indeed, the tax on tea, for example, falls with greater severity on the poor who consume lower-priced tea, than on the rich who buy tea of a better quality. We cannot agree that there is any injustice in requiring an equal contribution from two people who are now equally well-to-do, because one happens to be wealthier than he used to be and the other poorer than he used to be. Nor do we believe that individual circumstances need be ignored in a scheme for a levy on accumulated wealth. It would at least be possible to exempt those people whose resources were too small to enable them to pay a levy without hardship, whilst a graduated levy would press less heavily on people but slightly above the exemption level than upon people of considerable wealth. Though we do not profess to believe that a levy such as we have in mind would achieve perfect justice, we reiterate our view that it would not give rise to more serious injustices than occur under the present system of taxation. We have given careful consideration to the various arguments brought against the proposal to impose a levy on accumulated wealth, and, whilst we do not pretend that the proposal is free from diffi-i culties, we do not think it is impracticable. We are of the opinion that the advantages of a large reduction in the National Debt far outweigh the possible disadvantages. In taking this view we are supported by several witnesses who gave evidence before the Com- mittee. Mr. Hugh Dalton, Mr. A. Emil Davies, Mr. J. A. Hobson, Mr. F. W. Pethick Lawrence, Professor A. C. Pigou, Mr. Sidney Webb, are whole-hearted advocates of the policy of the levy. Sir J. C. Stamp is not opposed to the policy absolutely. His attitude towards it is that it is "a second-rate kind of taxation " and should only *be applied in desperate circumstances. If he were convinced that the situation was so serious as to necessitate a large reduction of the War Debt, then recourse to the levy would be justified. Our point of difference with Sir Josiah Stamp is as to the urgency of the need for this policy. We do not understand him to urge that the proposal is unworkable. Indeed, we have no doubt that had he remained at the Board of Inland Revenue, and had the principle of a levy been accepted by the State, he would have found it possible to elaborate the administration in a way which would have resulted in a practicable scheme, and one, moreover, which would not be open to objection on the grounds of grave injustice. Sir J. C. Stamp made it clear that he is ".for or against " any tax not absolutely, but relatively. His attitude, therefore, is not one of unqualified opposition. 18 We believe that there is a majority of opinion amongst British economists in favour of a levy such as we propose. We are aware that, though there are some prominent business men favourable to this policy, the business community, generally speaking, appears to be adverse, largely, in our opinion, because it has not clearly visualised the alternatives. The Proposal of the Committee. In any scheme for imposing a levy on accumulated wealth, certain conditions should be fulfilled : — 1. In the first place, it should be based upon real ability to pay. In practice, this means that there should be a reasonable minimum of exemption from payment and that the levy should be graduated. 2. The levy should be imposed in such a way as to cause the minimum of inconvenience to individuals, and should have regard to its effects on industry. 3. As the purpose of the levy is to raise quickly a large sum to be applied to the liquidation of the Debt, payment of the levy by instal- ments (which may be necessary in some cases) should be reduced to a minimum, and inducements should be offered to individuals to pay the levy immediately in War Loan stock, Exchequer and Treasury bonds, etc. 4. No portion of the proceeds of the levy should be devoted to any purpose whatever but the reduction of the principal of the National Debt, except that dividends from shares received by the Government in payment of the levy might be devoted to the payment of interest on the Debt. In making our proposals, we have borne these considerations in mind. Before proceeding to detailed suggestions, however, it is necessary to state our views as to the general character of the levy. Such a levy on wealth falls outside the normal system of taxation. It is an extraordinary payment to meet extraordinary obligations. It is an attempt to extinguish by a special effort a mountain of debt which is the result of a war — an abnormal expenditure which the normal peace-time system of raising revenue is not designed to meet. (a) The General Character of the Levy. The term •■• capital levy " has been applied to such a device as we have in mind. It is, however, an unfortunate term, which inaccurately describes the sources from which the payment would be made. We think that the levy should be made on all individual wealth, of what- ever kind and however obtained. It should be a levy on the accumulated possessions of individuals, whether earned or unearned, and whether in the form of land, houses, factories, machinery, foreign securities, pictures, jewellery, furniture, or what not. Our view is that for a levy of the kind we propose ability to pay must be based on the aggregate resources of individuals. 19 It has been suggested that the levy should be payable by corporate bodies. As regards companies and business firms, the individual shareholders or partners should be assessed on their individual holdings. As regards corporate bodies not engaged in trading for profit — e.g., co-operative societies, universities, and colleges, etc. — we do not think that they should be required to pay the levy, any more than income tax. It is necessary to determine what proportion of the total Debt could be extinguished by the proceeds of a levy. We believe it should not be impracticable to liquidate the whole of the National Debt. It is to be remembered that £6,556,000,000 of the debt is internal debt, and that, therefore, its extinction is simply a matter of transference of wealth, within the country, from one set of individuals to another. We all collectively owe this debt to a proportion of our number. It is, of course, otherwise with the external debt, amounting to rather less than £1,300,000,000, which we owe collectively to certain foreigners. As we shall show later in this report, it is important that the portion of the National Debt held abroad should be repaid as soon as possible. A levy which made possible the repayment of the whole of the National Debt would purge the country of many social evils. It would bring sound health to the community by checking unhealthy luxury and diminishing the unjustifiable disparities of wealth which to-day exist in society. But we cannot blind ourselves to the fact that the vested property interests will persist in taking a short and narrow view of the national well-being, and consequently, whilst not receding from our considered opinion that the repayment of the whole of the National Debt is practicable and desirable in the national interest, we propose as a practical measure, which should meet with . wide support, that the levy should be devised to raise at least £4,000,000,000. In this case, it is clear that the burden of interest and sinking fund on the remainder of the Debt should rest upon the propertied classes. (b) The Exemption Level. No good purpose would be served by fixing the level of exemption at a low figure. We suggest that persons whose aggregate posses- sions FROM ALL SOURCES ARE WORTH LESS THAN £5,000 SHOULD be exempted from payment of the levy. The total yield obtainable for those whose accumulated wealth was below this amount would be relatively small and, on balance, not worth collection, whilst the establishment of a minimum of £5,000 would simplify the task of the Board of Inland Revenue enormously, by restricting the number of people liable to pay. The work of the Inland Revenue authorities would not only be greatly reduced, but the cost and irritation of valuing the property of a large number of people of small means (many of whom would be doubtful border-line cases) would be avoided. The minimum suggested would avoid hardship to elderly people and invalids living on savings or small unearned incomes, and others not paying income tax, and the levy, by bringing some relief from 20 taxation would improve the economic position of that section of the community who have suffered from the effects of high prices without enjoying comparable increases in income. (c) Graduation. It is, of course, clear that a levy on accumulated wealth must be GRADUATED. A flat rate levy would press far more heavily on those near the exemption limit than upon persons of considerable means. The graduated tax is a well established part of our revenue system, and has been applied to the main forms of direct taxation. We have not thought it necessary to work out in detail a graduated scale of pay- ment. We believe, however, that a scale varying from 1 per cent, on total possessions above the exemption level of £5,000, up to 50 per cent, on the largest fortunes, could be made to yield £4,000,000,000. It should be pointed out that at the lower end of the scale the levy would not be 1 per cent, on the whole of an, individual's possessions, but only 1 per cent, of the portion above £5,000. A person whose total resources were £6,000 would, therefore, contribute £10. (d) Valuation. As speed is of the essence of the scheme, it is important that the valuation should be conducted on lines which will avoid undue delay. Our proposal is that individuals liable to the levy should be required to make a personal and detailed declaration of their taxable property and its value. Stock Exchange securities, including War Loan, should be valued at their average market price over a specified period previous to the introduction of the Bill imposing a levy. Land and buildings might be valued, in order to save time, on the basis of the income obtained from them capitalised at a fixed number of years' purchase. Again, in order to save time, furniture and jewelry might be taken provisionally at 5 per cent, of the value of all other taxable property and cash in hand and on current account at banks at 1 per cent.* Alternatively, furniture and jewelry might be assessed at the sum for which they are actually insured by the owner, to be proved by production of the policy, whilst cash on current or deposit account could be proved by a banker's certificate. Individuals might then be provisionally assessed on their own valuations, and inducements offered, as suggested below, for prompt payment of the levy on this assessment. The Inland Revenue authorities could then examine the valuations, make any necessary corrections upwards or downwards, and adjust the individual con- tributions accordingly, either requiring additional payments to be made or making refunds as the case might be. Heavy pecuniary penalties should be inflicted in cases of gross and deliberate under- valuation by individuals. * This provision is taken from the Italian Government's draft scheme for a capital levy. 21 (e) Form of Payment. We think that payment of the levy should be allowed in any of the following forms : — (a) Cash (including, of course, cheque on a current account). (b) British Government securities. (c) Other trustee securities or non-trustee securities readily realisable on the Stock Exchange, as scheduled in the Bill making provision for the imposition of the levy. In case (a) the money received would be used for purchasing Government securities on the Stock Exchange or paying them off as they fell due for repayment.* Such securities, when purchased, would be destroyed and thus cancelled. In case (b) the securities would be destroyed and cancelled as received. This, of course, would be the simplest method of all. In case (c) the securities would be handed to the National Debt Commissioners, who would gradually sell them on the Stock Exchange as favourable opportunities presented themselves, and use the pro- ceeds of their sale to buy Government securities, which would then be destroyed and cancelled. During the period between receipt and sale, the National Debt Commissioners would receive interest on these securities to set off against the interest payable on uncancelled debt. Securities received in payment under either case (b) or (c) would be valued as in assessments for the levy, i.e., at their average market value over a specified period previous to the introduction of the Bill providing for the levy. The speedy repayment of debt being the object to be attained by the levy, a discount of, say, 10 per cent, should be allowed to all taxpayers paying their levy in full, either on their own provisional valuation or on the corrected valuation of the Inland Revenue, within a year of the passing of the Bill. Further, in order to encourage payment in Government securities for reasons of administrative convenience, and in order to make quite clear to the public that the levy does not involve " repudiation " of the debt, in the sense of discrimination against those who hold Govern- ment securities, as compared with those who hold other forms of property, a further discount of, say, 5 per cent, should be given to all taxpayers handing over Government securities in payment of the levy within a month (or some other stated period) of the passing of the Bill. * Any attempt to buy up large quantities of War Loan stock would result in a rapid rise in the price of war stock, possibly above par, and repayment would become costly. Moreover, if the price were to rise a good deal, holders would not avail themselves of the option to pay the levy in War Loan stock at the pre-levy price, even with the added inducement of the proposed discount. If our scheme suggested the liquidation of the whole Debt, this difficulty would be serious. It is proposed, however, that about half the Debt should be extinguished, and as nearly half falls due for repayment within the next few years, the difficulty will not arise. 22 . The ordinary period allowed for payment might be three years, at least one-third of the levy being payable each year. It should be assumed that normally persons liable to pay will fulfil their obligations in three years or less, and a prolonged period of payment should be allowed only on proof of inability to pay within the prescribed period. Some genuine cases will, of course, arise in which payment within so short a period would involve the taxpayer in serious financial difficulties, e.g., cases where the bulk of his property con- sisted of capital invested in his own business. To meet such cases a special appeal tribunal should be created, which should have power, on convincing evidence being submitted, to extend the period of payment over more than three years and to arrange an appropriate scheme of instalments. Interest should be charged on sums outstanding after the three years allowed in normal circum- stances for the full payment of the levy. In cases where payment by instalments was approved the position of the Government would be that of a person holding a mortgage upon a borrower's estate. (f) How the Proceeds should be "used. We have not the requisite information to enable us to forecast in any detail the total sum which would be raised by the levy, but we think that the Government should aim to obtain a net yield of £4,000,000,000. The gross yield would need to be rather larger than this sum in order to allow for the discounts suggested above. Dividends on securities held by the Exchequer might be applied to the payment of interest on the debt. It must be borne in mind that the total sum to be raised would not accrue immediately, but we have no doubt that a considerable proportion of the yield would be forth- coming during the first year after the passage of the Act enforcing the levy. The bulk of the levy would be paid within three years of its imposition. We think that the sum outstanding after three years would be far less than is often assumed. We do not agree that in practice the levy would become little more than an additional income tax payable over a long period of years. On the fraction of the levy being paid by instalments interest would be paid which could be devoted to the payment of the annual interest on the uncancelled Debt. To that extent the tax-paying public would be relieved of the burden of interest on that portion of the Debt, which would ultimately be extinguished when the total levy had been raised. Where the levy was paid in Government securities it would, of course, result in the direct cancellation of those securities. Pay- ments made in cash or cheque and the proceeds of sales of securities by the National Debt Commissioners should be first devoted to the repayment of ways and means advances and to the repayment of Treasury bills as they fall due. In this way the floating debt would be extinguished. After the repayment of the floating debt the next priority should be given to the repayment of the external debt, which is owed chiefly 23 to the United States Government and to individual Americans. The cancellation of this portion of the National Debt and of the floating debt would go far towards eliminating the evils we described in our. first Interim Report.* It would strike both at inflation and ultimately at the adverse foreign exchanges. The extinction of the foreign debt would also relieve the producers of this country from the necessity of exporting goods and services without any return. The remainder of the yield of the levy would be devoted, as it was paid, to the cancellation of the remainder of the internal debt. We have felt it desirable to dwell upon a levy on accumulated wealth as, so. far as taxation is concerned, we regard this as the most important item in any programme for dealing with the cost of living. It would reduce the amount of taxation to be raised for the National Debt Services. It would also result in correcting the adverse American exchange and thereby reduce the prices of produce from the United States. Moreover, we believe that the effect of a levy upon industry would be salutary rather than otherwise. The more it com- pelled retrenchment of expenditure on luxuries for the repayment of debt to persons who put the proceeds to productive uses, the better it would be for the community; whilst we cannot overlook the important fact that the levy would benefit the young and active business men of to-day as against the older and richer business men who profited out of the war. It would, we believe, encourage enterprise as effectively as the Excess Profits Duty has retarded it, and thereby aid production. So far from hampering trade, as has been alleged, it would, in our view, be a stimulus to effort. Both the direct and the indirect results of a levy would prove to be considerable and far-reaching, and we can only conclude that opposition to the proposal is based upon inade- quate consideration or prejudice and selfish interests. The Revision of Taxation. Whilst we attach special importance to the adoption of a graduated levy on accumulated wealth, we do not think that this in itself is sufficient. It is necessary that the normal system of national taxation should be revised with a view to redistributing the burden more nearly in accordance with ability to pay. We are, of course, aware that the development of the national revenue system has been in the direction of graduated taxation, and towards an expansion of direct taxation. There is, however, ample scope for further readjustments. In an ideal community, every citizen would make a fair contribution to the national revenue in accordance with his or her ability to pay. Our social organisation, however, is imperfect. There is a section of the people whose resources are insufficient to maintain them effectively, who yet are taxed to meet the needs of the State, whilst at the other end of the scale there is another section whose payments of taxes do not seriously disturb their mode of life. Taxation is an item in the cost of living; it is that portion of an individual's resources which is expended collectively. As regards the great majority of the *" Interim Report on Money and Prices." Price 9d. 24 population, their means provide little more — and in very many cases less — than is needed to meet reasonable current expenditure, and any taxation is a serious burden. Further, the amount of taxation borne by the mass of the people is obscured, because of the indirect taxes which form part of the price paid by the consumer of dutiable commodities. (a) Indirect Taxation. The indirect taxes levied on the consumer may be grouped under four heads : Food, tobacco, drink, and entertainments. Tea, cocoa, coffee, chicory, sugar, and dried fruits are all subject to taxation. Beer wines, spirits, cider, and table waters are also taxed. There are taxes on tobacco, snuff, matches, and mechanical lighters. An enter- tainments tax was first introduced during the war. In addition to taxes on the four groups mentioned above, there are also duties on imported clocks, watches, and musical instruments, and on patent medicines, all of which fall ultimately on the consumer. We shall, however, confine our attention to the four main groups of indirect taxes. The following table shows the receipts from these taxes from 1913 to 1914 onwards: — TABLE VI. SHOWING RECEIPTS FROM INDIRECT TAXES ON FOOD , DRINK, TOBACCO, AND ENTERTAINMENTS. (000's omitted.) Food. Drink. Tobacco. Entertainments. £ £ £ £ 1914 ... 10,903 43,268 18,263 — 1915 ... 12,967 46,460 19,272 — 1916 ... 24,658 65,185 25,743 — 1917 ... 35,417 55,216 28,371 3,001 1918 ... 31,119 34,392 34,527 4,988 1919 ... 47,681 53.938 48,315 7,513 1920 ... 63,992 135,141 64,271 10,485 *1921 ... 53,300 209,870 66,100 11,000 NOTE.— Each group includes the items specified above. * Estimate yield. It may be pointed out that during the later years of the war the receipts from duties on drink fell owing to restricted consumption^ though the rates of taxation were increased. The large sums contained in the table above must be reduced to terms of the burden on the family if we are to appreciate their full weight. It is obvious that the calculation of averages yields but the roughest approximation to the truth, but the figures we submit below are nevertheless not devoid of real value. We have assumed that the population during the past six years was the same as the 25 population in 1914,* and we have worked out the burden of indirect taxes in terms of an average family of five persons. The Govern- ment's Estimates are used for the current year : — TABLE VII. INDIRECT TAXES ON CERTAIN GROUPS OF COMMODITIES FOR FAMILY OF FIVE PERSONS. 1919-20. 1920-21. Indirect Taxes on per week. per week. s. d. s. d. Food 2 8 2 3 Tobacco 2 8J 2 9 tDrink 5 7£ 8 9 Entertainments 5J 5J Total of above 11 5 14 2£ In families, members of which do not indulge in either tobacco or alcoholic drinks, the weekly burden of indirect taxation will be lower. In families with more than five members the figure will stand higher. It will, of course, be argued by those who wish to retain a large volume of indirect taxation that as regards tobacco, alcohol, and entertainments, it is within the power of the individual to relieve himself of such taxation. Whilst this is perfectly true, we do not see that the State is entitled to forbid to the poorer section of the com- munity the satisfaction of personal tastes, which the well-to-do can afford to indulge without entrenching upon other more necessary expenditure. We do not wish to enter into a discussion of the moral aspects of the question; we may, however, express the view that the community would benefit enormously by a smaller expenditure on alcoholic liquors. Whilst we regard the ideal system of taxation as one obtaining its revenue from certain productive services and from direct taxes, we do not think that consumers of tobacco and alcohol should be relieved from taxation on consumption. So far as the taxes on alcoholic drink are concerned, we make no recommendation. The liquor trade is to be the subject of legislation as a result of which the whole question of liquor taxation may need consideration. As regards tobacco, which, whilst it is not a necessary of life, has passed from the stage of being a mere luxury, we would point out that the present rates of taxation are in excess of. those imposed by other States. We feel that the taxes on tobacco should be reduced by half, more especially if there is no remission of liquor taxes. The entertainments tax, which yields about 1 per cent, of the total national revenue, ought, in our opinion, * The estimated population of the country in 1914 was 46,089,000 persons ; the assumption is made that the loss of life due to the war and the operation of the normal death rate during the war have been counterbalanced by births during this period. t This includes taxes on beer, wines, and spirits. For beer alone the figures are 3.0 and 4.8 per week respectively. 26 to be abolished. It is but little better than the 19th century " tax on knowledge." We do not think that theatres, cinemas, and concerts always exert the kind of influence which we should desire, but in the drama, in music, and — as its technique and possibilities become better understood — in the cinema we see agencies which ought to be encouraged rather than discouraged by means of taxation. We should prefer to see the State subsidising art, music, and the drama rather than relieving the well-tcv-do of an additional £11,000,000 of direct taxation by taxing the enjoyments of the mass of the people. A more important question is that of the indirect taxation of food. We are strongly of the opinion that all taxes on foodstuffs should be abolished. Taxes of this kind are specially pernicious. Not only does the household pay taxes on its direct consumption of dutiable articles, such as tea and sugar, but it pays taxes on sugar and dried fruits as ingredients in other articles of food. It is not clear that the consuming public bears only the taxation levied by the Government on these commodities. It is, we believe, more than likely that on the relatively small quantities of some of these articles which it consumes, the public pays a tribute to the dealers trading in them. But this is not the chief evil of indirect taxes on food. They are to I)e condemned because they violate the principle of ability to pay. So far as the working-class taxpayer is concerned, they only bear a relation to the number of mouths to be filled, and such taxes may therefore be levied in inverse proportion to the ability to pay. Food taxes, indeed, are almost always regressive. That is to say, they fall with greater severity on the poor than on those in more fortunate circumstances. The poorer a household is, the greater the proportion of its income which will, generally speaking, be spent on food; consequently, the larger the proportion of that income which will be -devoted to the payment of indirect taxes. The regressive character of the food taxes may be brought out clearly by reference to the tea duty. This is not an ad valorem duty,- which varies with the price and quality of the commodity. It is levied at a flat rate. The duty amounts to Is. per pound, but this year a rebate of 2d. per pound was introduced on all tea grown within the British Empire. Since 90 per cent, of the tea consumed in this country is grown in the Empire, we may take the tea duty as being lOd. per pound. Where tea is bought at 2s. 6d. per pound, the tax amounts to a third of the purchase price, whereas those who buy more expensive tea, pay a smaller proportion of the price as duty, the duty amounting only to a sixth of the purchase price in the case of tea costing 5s. per pound. As, broadly speaking, the quality of the tea consumed in a household depends upon its material circumstances, it is obvious that the tea duty, being the same for all consumers, is a tax on poverty. We have no hesitation in expressing the view that the food taxes are indefensible and ought to be abolished. 27 Based on the estimates of the current financial year, our proposals with regard to indirect taxes may be summarised as follows : — TABLE VIII. YIELD OF INDIKECT TAXES PKOPOSED TO BE REMITTED OR REDUCED. (000's omitted.) £ Abolition of Food Taxes 53,300 Abolition of Entertainment Tax 11,000 Reduction of Tobacco Duty by 50 per cent 33,050 Total 97,350 NOTE. — If the tobacco duty were reduced by half the consumption would probably increase, and the amount received in taxation would be more than half the present yield. This sum, if required (for, as we point out later, there are possi- bilities of reducing the necessary national revenue), should be trans- ferred to direct taxes, and therefore to the better-to-do sections of the community. This would assist towards the development of a system of taxation founded on ability to pay. The relief to the average family of five resulting from the changes proposed above would amount to 4s. Ofd. per week. This would still leave, in indirect taxation on drink and tobacco, a burden of 10s. l|d. per week per family of five persons. It will be noticed that there is no truth in the criticism that such a reduction would exempt the wage-earning class from all contribu- tion towards the nation's expenses. The wage-earning class would still be contributing, in drink and tobacco taxes, at least 150 million sterling, which is probably equal to an income tax of Is. 6d. in the £ on their gross money incomes. (b) Excess Profits Duty. There is no need to examine in any detail the excess profits duty. It was a war-time expedient introduced by the Government to carry out the pledge given to Labour to limit war profits. It has undoubtedly served a useful purpose; but we do not regard it as an expedient which should be permanently incorporated in the system of taxation. The defects of the Excess Profits Duty are well known. The greatest evil, in our judgment, is that the Government has allowed manufacturers and merchants and the business community generally to extort what profits they could from the consumer by taking advantage of rising prices and rising markets and of the large unsatisfied demand for products of all kinds, and by means of the duty has shared in the spoils. In other words, the Government has reverted to the old practice of throwing the burden of the war upon the people irrespective of their capacity to pay. The inevitable result of this device is that the receipts of the Exchequer from the Excess Profits Duty represent but a part of the price paid by the general body of the public. The business world has expressed its unqualified objection to the duty. But it prefers the Excess Profits Duty to a tax on wealth. 28 That view, in our belief, is a mistaken one. The Excess Profits Duty has resulted in extravagance, inefficiency, and the decline of initiative, whilst it has proved to be unjust as between firm and firm. If, however, this duty were abolished it is obvious that the Chancellor of the Exchequer would need to raise a considerable sum from other sources. To this end proposals have been made for a tax on business profits. (c) A Tax on Business Profits. In his last Budget the Chancellor introduced a corporation tax. The suggestion to adopt a business profits tax is in a sense an extension of the same principle, for, though the tax would be payable by one-man businesses, it would also be paid by businesses conducted by partners or companies. We should say here that if some such tax were accepted we should be opposed to its application to consumers' co-operative societies. These bodies are organisations for the mutual benefit of the members, and are, therefore, in no way analogous to business firms, whose primary object is to make profit by the production or sale of commodities for the use of others. We are, however, unfavourable to the taxation of business firms. Except for the munitions levy, Excess Profits Duty, and Corporation Tax, which introduced a new principle, our tax system has been based on the taxation of individuals, theoretically according to their ability to pay. The taxation of the individual lies at the foundation of our fiscal system, and we cannot but think that the establishment of a tax upon associated groups of individuals in business embodies a less satisfactory principle. There appears to be no necessity for a device of this kind. The income tax falls upon individuals (in enjoyment of incomes above the level of exemption) and is capable of expansion. It is suggested that the business profits tax should be based on the actual profits of businesses in relation to the amount of capital employed in them. There would be possibilities of evasion which might, no doubt, be minimised by giving the Income Tax Commissioners larger powers — powers which we think should in any case be granted to them. But there are more serious objections to the proposed tax on profits. In the first place, whilst it is a simple matter to ascertain the value of an individual's holding of shares in a firm, it is not so simple to determine the real present value of the capital employed in a business unit, whether it be owned by an individual or a company. Moreover, the tax as suggested, is intended only to apply to business profits. It would not apply to professional incomes. It is, indeed, difficult to see how it could be so applied. The tax on professional people could not be based upon their capital, which is negligible. It would need to be based on their capacity, which is incommensurable. Yet we cannot view with unconcern the exclusion from the scheme of lawyers, accountants, journalists, and other professional men, nor of agents, dealers, and others, who would either be excluded or taxed on ani absurdly small capital. The business profits tax is primarily taxation of manufacturing industry and the distributive trades. We have 29 no desire to relieve industry from its legitimate share of taxation, but we do not desire to relieve other gainful occupations from taxation, levied on some forms of economic activity. We return to our view that the income tax and super-tax should form the basis of our system of direct taxation. These taxes bear upon all individuals with incomes above the exemption level, however their incomes are obtained, though there is rightly a differentiation between earned and unearned income. {d) The Income Tax. The income tax, originally a temporary expedient to meet war expenditure, has become an integral and important part of our machinery of taxation. It has come to occupy, together with the super-tax, which is, in effect, an additional income tax on large incomes, a prominent position amongst the various sources of the Imperial Revenue, and rightly so. It is, more than any other tax, one which requires people to pay according to their ability. We are not satisfied that at the present time it is so graduated that in its incidence it falls upon all who pay it with equal severity. But by means of exemptions, abatements of various kinds, and the imposition of the super-tax, we are approaching towards a just system of graduation. We think, however, that allowances for dependents should be more generous, for it is by this means that individual taxpayers whose incomes are largely absorbed in family expenditure, may secure adequate relief. We are of opinion also that the present level of exemption should be raised. But, perhaps, the most urgently needed reform is to bring within the scope of the income tax sources of income which are at present untapped. We think that the Income Tax Commissioners should be given wider powers of ascertaining income in order to ensure that all sources of income at present liable to assessment do not escape. There is no doubt that improved administration has diminished oppor- tunities of evasion, but it was admitted in evidence before the Royal Commission on Income Tax that evasion still exists, and every effort should be made to secure the payment of income tax on all incomes legally liable to payment of it. Certain forms of profit, however, are not required to contribute to the revenue. The Royal Commission on Income Tax, for example, recommended that " any profit made on a transaction recognisable as a business transaction — that is, a transaction in which the subject matter was acquired with a view to profit-making — should be brought within the scope of the income tax, and should not be treated as an accretion of capital simply because the transaction lies outside the range of the taxpayer's ordinary business, or because the oppor- tunities of making such profit are not likely in the nature of things to occur regularly or at short intervals."* With this recom- mendation we are in hearty agreement. * Report of the Royal Commission on the Income Tax. Cmd. 615. 30 If a textile manufacturer makes profit by the sale of shares in a rubber company or a tea plantation, or by the sale of land, the results of these transactions, not being in the course of his business as a manufacturer, are not subject to income tax. Considerable profits are, in fact, made in this way every year. They ought clearly to be assessed for income tax purposes as part of the income for the year of the person receiving them. The richer people are the more likely they are to make profits of this kind. The possession of capital, beyond business needs, enables the fortunate owners to profit without being subject to taxation, and we cannot doubt that the extension of the income tax on the lines suggested would yield a considerable annual sum to the Imperial revenue. Again, in agreement with the Royal Commission on Income Tax,, we consider that " profit arising by way of remuneration or con- sideration for services rendered or to be rendered should be made liable in all cases, and employers and other persons should be required to make a return of any such payments."* This proposal, if adopted, would also add to the receipts from the income tax. Then also, as the Royal Commission suggest, " an attempt should be made to charge income tax on the true remuneration of employ- ment, including subsidiary benefits arising out of the employment, although these, may not be capable of being turned into money. "t We think, further, that farmers and agriculturists should be required to pay their full quota of income tax. Moreover, it is the practice of business companies to put a portion of their profits to reserve instead of distributing them to share- holders. Later, these profits are distributed, not as dividends, but as new shares. Though they should figure in the income tax returns of those who receive them, we believe that in practice they rarely do. It is safe to say that if during the last few years all the profits made in industry had been subject to income tax instead of the proportion of them, which was distributed as dividends, the Exchequer would have received from income tax each year sums far in excess of those actually received. We understand also that companies frequently issue new shares to their shareholders very much below their market value, and such new shares (or the right to apply for them) can be sold and the profit encashed. Gains obtained in this way do not count for either income tax or super-tax, and, as a result, share- holders add considerably to their incomes without paying corre- sponding taxation. We think that the Income Tax Commissioners should be given the necessary powers to prevent evasion of payment of income tax by the non-disclosure of receipts from bonus shares, and that such shares, when distributed below their true market price, should be taxed at their full value. By steeper graduation and by the inclusion for purposes of taxation gains now untaxed we believe 'that the burden of taxation on the bulk * Report of the Royal Coirynission on the Income Tax, Cmd. 615. p. 20. t Report of the Royal Commission on the Income Tax, Cmd. 615, p. 22. 31 of people with incomes not in excess of legitimate needs could be reduced. The revenue now received from those indirect taxes, which we have suggested should be abolished or reduced — and more if necessary — could, in our opinion, be raised by the reform of the income tax. ■' , (e) Death Duties. During the current financial year it is estimated that the revenue will benefit to the extent of £45,000,000 by the proceeds of the Death Duties.* This sum represents a portion — about 10 per cent.— of the value of the possessions out of which these taxes are paid. Here, it appears to us, is a large source of State revenue which has not been fully tapped. We can appreciate the desire of individuals to make provision for old age and for their children. We cannot, however, regard as socially advantageous the inheritance of large possessions by individuals remotely connected, whether through distant relationship or the mere lapse of time, with those who first accumulated such possessions. To deprive a comparative stranger or a person still unborn of a substantial proportion, or even the whole, of the possessions to which they would otherwise become entitled under the will of a deceased person inflicts no injustice on anyone so far as we can see. From the point of view of society as a whole, the transference of large fortunes held by private individuals to others who may have had no share whatever in amassing them is capable of neither economic nor social justification. We do not intend to deal in any detail with the broader aspects of inherited wealth. But we must point out the obvious injustice of allowing a heavy burden of taxation to fall upon the manual, clerical, and professional workers of this country, whilst allowing inheritors of large possessions to retain for their private use a large proportion of their inheritance. We suggest that, in addition to steepening the Death Duties, the Government should increase the duty at each successive transference of inherited wealth to the point of ultimate extinction. For example, if a person bequeaths a fortune on which the Death Duty is 20 per cent., this fortune (whether bequeathed to an individual or to several) should, when it is next transferred (or when any portion of it is transferred) pay a duty at the rate of, say, 40 per cent. When the whole or any portion of it is again transferred to other hands, the duty "should be, say, 60 per cent. At each transference the duty would increase until ultimately the whole of the residue would pass into the hands of the State. These progressive taxes would not apply to that portion of a person's fortune which was not inherited. The Death Duty payable on that part of a person's possessions which he had himself amassed would be that payable for a first transfer of wealth. We are aware that the imposition of progressive duties on inheritances, such as we have in mind, presents certain * We would point out here the iniquity of the provision that Victory Bonds, issued at £85 and now purchasable at £73 per £100, are accepted in payment of these duties at their face value of £100 each. 32 administrative difficulties, but we do not think that they are insuperable. Taxation and the Cost of Living. The whole of the foregoing proposals are directed towards a redistribution of the national financial burdens, so as to ease the lot of those sections of the community who can least afford to have added to the difficulties of the high cost of living a weight of taxation beyond their real ability to pay. Our proposals would reduce the load of indirect taxation, increase direct taxation upon the higher rates of income, whilst remitting a portion of that which falls upon those who possess smaller incomes, and sweep away either the whole or a substantial part of the National Debt. The effect of these proposals would extend beyond the realm of taxation. They would, we hold strongly, encourage enterprise, and by diminishing luxury, would direct labour and capital into socially-productive industries. We admit that the rich individually would become poorer, but the nation as a whole would become more truly prosperous. Government Retrenchment. We have already referred to the view of the Chancellor of the Exchequer, that the national expenditure will in a " normal " year range round £1,000,000,000. The question arises as to how far this expenditure is to be deemed essential. In an earlier section of this report we showed that three quarters of the national revenue will in future, unless a more far-sighted policy is adopted, be devoted to expenditure incurred as a result of past wars or in preparation for future wars. We have already stated at length our view as to the necessity for a large reduction of the War Debt. Such a measure must be the first real step toivards national economy. As regards the continuing expen- diture arising out of the war — mainly the payment of pensions — we do not think that national sentiment would tolerate any attempt at retrenchment. The solemn pledge which was given during the war on countless platforms that the disabled and bereaved should be cared for must be fulfilled in a generous spirit. The total expendi- ture on pensions will, of course, diminish as years go by, until a generation hence, it will entirely cease. In the meantime, the revenue must meet the charges incurred under this head ungrudgingly. The third item of war expenditure is the maintenance of the Navy, Army, and Air Force. It appears to us a sad mockery, after the repeated declarations that from 1914 to 1918 we were waging a " war to end war," and that the high purpose of the world struggle was to " make the world safe for democracy," that the British Government contemplates an annual expenditure of £135,000,000 on the armed forces of the Crown. There is, we are convinced, only one way of obtaining reasonable security against war in the future — through a process of general disarmament. We cannot forget that Britain and France, in effect, 33 determined the terms of peace. It would have been possible, had the representatives of these two Powers kept their eyes on the ideal ends for which they believed the war to have been fought, to have effectively established the principle of universal disarmament. The peoples of the world have been betrayed by those who spoke in their name, and this country is face to face with an unproductive annual expenditure of £135,000,000, or even more. This expenditure, we would point out, will not be stationary. It will tend to increase. The military and naval Budgets of various countries will breed rivalry, rivalry will almost inevitably result in a repetition of the " race for armaments," and Armageddon will again be visible on the horizon. The second line of attack upon our inflated national expenditure is, therefore, to be found in an international agreement for universal disarmament. Here is an item on which retrenchment of expenditure is possible and desirable, for if there is one thing more than another which this country, in common with others, cannot afford it is war and warlike preparations. There is considerable agitation for a reduction of expenditure in other directions, largely promoted by organisations which command no working-class support. We are not opposed to the curtailment 01 unnecessary expenditure, but we would point out that the most rigid economy on the Civil Services cannot yield a sum comparable with the savings obtainable from the reduction of the National Debt and of the "war services. There are, however, possibilities of retrench- ment in the expenditure on Civil Departments of Stale, as the reports of the Committee on National Expenditure abundantly show, and such retrenchment ought to be made. The glaring cases of waste and incompetence to which these reports draw attention are an indication of slackness of control and administration on the part of the Government. Nevertheless, we feel bound to say that there is a limit to the curtailment of expenditure on the Civil Services. A drastic reduction of expenditure is to be found only in a restriction of expenditure, which we should regard as necessary. In the first place, we should deplore any attempt to save the taxes at the expense of the efficiency of the Civil Services. The Civil Service is certain to become more and not less important in the future. We see no prospect of any permanent decrease in the aggregate staffs of Government Departments; on the contrary, the number of Civil Servants will tend rather to increase, even though we allow for the disbandment of moribund Departments and sections of Departments. Moreover, we cannot for one moment consent to the view which is being insistently put forward at the present time that the State should curtail expenditure on certain essential services. The Government has capitulated already on the matter of education to the " economisers," and educational developments are now being postponed. We cannot express our disapproval of this disastrous "*' economy " in too strong terms. We feel that more, and not less, 34 money should be devoted to education. The Government's housing schemes, again, are to be revised and reduced. There is a short- sighted agitation against the State embarking upon new develop- ments of the public health service. In these three directions we are frankly of opinion that there should be more generous State expenditure for two reasons: — \ • Firstly, such expenditure, in our judgment, is really productive. Until every item of wasteful and unproductive expense is eliminated from the Budget we are entitled to demand that the normal expansion of expenditure on these services should be allowed to continue unhampered. Those who would cripple services which make for true national efficiency and well-being, whilst permitting the existence of a colossal War Debt and an expenditure of £135,000,000 or more per year on the fighting forces, represent a point of view which we altogether fail to understand, and which we regard as being against the national interest. Secondly, we believe that democracy is coming to its own. The workers of this country are responsible for great popular movements which are exerting an increasing influence on national policy; they are now an important force in the community. At such a time the restriction of services which will render them more effective is, from our point of view, unthinkable. We desire to see a healthy and educated people. We regard this as the most important need of our time, and we cannot therefore subscribe to any financial policy which would deprive the people of full educational opportunities and the opportunities of a healthy life. Our attitude with regard to retrenchment may be summarised in a few words. We are of the opinion that the reduction of the National Debt and of expendi- ture on the armed forces of the Crown are the chief means of retrenchment. Wasteful expenditure in other directions by the State ought to be sternly eliminated ; but there ought to be more generous expenditure on services, such as education, housing, and public health. which lie at the foundation of national well-being. Tariffs. Before leaving the question of national finance, we must refer to one other question — the problem of tariffs. The imposition of tariffs has N been urged as a means of raising revenue for national purposes. Their use has also been advocated on the ground that only in this way can certain important industries continue to exist and provide employment for the workers. The problem has been narrowed down for the time being to the protection of " key " industries and the prevention of dumping. (a) Key Industries. These questions are intimately connected both with wages and, the cost of living, and they cannot, therefore, be ignored. As 35 regards the problem of " key " industries, we are met at the outset with the difficulty of definition. We might be pardoned for supposing that most people regard themselves as being engaged in " key " industries. But even if we limit the use of the term to those industries on which national safety and the economic system are dependent, the application of the phrase to concrete facts still leaves us in some difficulty. We admit, however, that it would be possible to set out a list of trades which under present circumstances could be legitimately regarded as " key " industries. Circumstances change, however, and the " key " industries of to-day may be relatively minor industries to-morrow. The industrial system is always in process of transformation, and we cannot forecast the relative importance of various industries in the scheme of our economic organisation a quarter of a century hence. At the present time, the manufacture of dyes is conceived by some to be a key industry. Its continued existence in this country is deemed to be essential in the interests of national security, owing to the place which the products of the industry occupy in the manu- facture of explosives. On the industrial side its wares are a necessary raw material for a number of other industries. We have already expressed our view regarding preparations for " the next war." We may, however, point out that even if we are to envisage the outbreak of wars in the future, and even if the League of Nations does nothing to restrict the development of chemical warfare, there can be no certainty that future wars will be conducted by the same means as the last war. As regards its fundamental character, the last great war differed more widely from the Crimean War than the latter differed from the Wars of the Roses. The fact that warfare is to-day largely dependent on the chemist and high explosives is no indication that the next great war will employ the same methods. It may be a physicists' war. It is true it might begin as a chemists' war, but methods would change. And when it was ended there would be a clamour for the organisation of industry in such a way as to produce men capable of providing the technique and equipment of future wars. What, however, we wish particularly to emphasise is not this tragic spectacle so much as the danger of the hypothesis that from the point of view of national safety, the dye industry will in the future be as important as it is to-day. An economic system in the modern world must be organised first and foremost on the assumption that peace will be the normal con- dition of affairs. Wars are uncertain interludes. It is foolish and criminal to allow the possibility of war to dominate our lives in times of peace and to determine the character of the industrial system. The proposal to protect the dye industry is, in effect, a proposal to give it a prominence in the industrial system, which its intrinsic importance in the sphere of production does not warrant. If it be argued that from the industrial point of view a developed British dye-manufacturing industry is essential, and that, failing .assistance, a young and growing industry will perish, we are faced 36 by a different kind of attack. In the first place, we are confronted by the argument for the. protection of " infant industries." Whilst the reasons for giving assistance to such industries are undoubtedly strong and convincing, we cannot close our eyes to the fact that once protection is received it becomes a matter of the greatest difficulty to withdraw it after the industry is in a thriving condition; and if it were withdrawn, it is conjectural whether the industry would continue to survive, for it is to be remembered that the industries of other countries may become progressively more efficient and formidable competitors to home industries. If, however, pro- tection is not withdrawn from an industry when it passes beyond the feebleness of " infancy," full-blooded protection becomes a national policy, and its extension to other industries cannot in justice be refused. We have no doubt that, in general, the protection of home manu- factured products by means of an import duty on foreign goods raises the price to the consumer. Quality for quality, there can at any given time be only one market price, and that the highest which the seller can obtain. The foreign importer's price of the " key " commodity must, in some cases, cover at least a substantial part of the import duty. The home producer will charge a price very little, if anything, below the foreign price, and the consumer will, in fact, pay the whole or a portion of the duty of the " key " article, a part of which will pass into the hands of the State Exchequer, whilst the remainder will pass into the pockets of the manufacturers as a subsidy to enable them to meet foreign competition. We do not think that any protective device will ensure that " key " industries become either efficient or self-supporting. It has been suggested as an alternative that such industries should be directly subsidised by the State. This has the great advantage over an import duty in that the public knows how much it is contributing to the maintenance of a " key " industry, and we should prefer this method to any other fiscal expedient. But if the State is granting financial aid to an industry, it is an obvious corollary that there must be Government supervision, the publication of accurate and detailed costings and other relevant information bearing upon the industry, and the limitation of profits. The subsidy would be granted, because by the most efficient management possible the industry could not secure an adequate return on the capital invested. If every legitimate effort were not being made to reduce costs, and if considerable profits were made, the case for the subsidy would disappear. We are not whole-heartedly in favour of the method of subsidising " key " industries. Our opinion is that where there are industries so essential to the national well-being that claims are made for special treatment, those industries ought not to be conducted by profit- making concerns at all. Such " key " industries are too fundamental and important to be left to the mercy of private adventure and they should be public enterprises. 37 (b) Dumping. Special measures are often asked for to provide against the " dumping " of foreign goods on British markets. " Dumping," we would point out, may mean one of two things. It may refer to the importation of goods at prices below those charged by home producers, or it may mean the importation of goods at prices below those prevailing in the country of origin, or even below the cost of production. The claim to protection against " dumping " in the first sense is merely a demand for protection against foreign competition, and, if satisfied, would merely raise prices to the home consumer. As regards the second use of the term, the problem which is raised is one of some complexity. It is obvious that continuous " dumping " of goods in another country at prices below those ruling in the country of production is hardly possible, except in cases where the home consumer is being exploited by a trust. So long as a capitalist industry continues, so long will capitalists act on the principle of obtaining the maximum return. If that is to be obtained by selling part of their output at a high price and the remainder at a lower price they will endeavour to do so. The matter is one in part for organised Labour in the various manufacturing countries of the world. Their power should be used to prevent undue exploitation of home markets. To forbid the importation into a country of goods to be sold at less than their cost price is, in effect, to compel the consumer to pay a price higher than that which the competitive system is for the time being prepared to offer. On the other hand, to allow their importation is to act prejudicially towards the producers of the home-manufactured commodity. So far as the manufacturers themselves are concerned, it is one of their functions to take the risks of business, and one of the risks is the possibility of rivals stealing a march on them by cutting prices. We do not see that the manufacturer can expect to eat his cake and still have it. But the case of the wage-earners in an industry is different. It is not their function to undertake the risks of industry. They do not reap the gains. They are paid for their labour. If, however, their labour is not required their position becomes serious. Temporary unemployment may befall the workers in the event of " dumping." But the situation, it seems to us, is not to be met by penalising the consumer; it is rather to be met by adequate insurance against unemployment and by an improve- ment in the efficiency of our industries. A special case arises where foreign traders are able to import goods into this country at low prices because of the sweated wages received by the workers who produce them. There is no way short of ending a large portion of the world's foreign trade, of preventing competition between countries with varying standards of life. It is well to remember that only a portion of the products made by, say, foreign coloured labour, come into direct competition with British labour. We think there are great difficulties in the proposal to tax imported goods manufactured by labour which was paid at less than 38 the standard rate prevailing in the country in which the goods were made. We are of opinion that the problem is to be met partly by, the spread of Trade Unionism and concerted international Trade Union action, and partly by the extension of international Labour agreements and minimum wage laws. As to the general question of protection, we do not think it would secure greater continuity of employment and better wages for the workers. A tariff system would, however, prejudicially affect the consumer and raise the cost of living. We do not regard a Free Trade system as a solvent of the evils of the industrial system, but particularly at the present time the need for Free Trade intercourse is manifest. We are not suffering in this country — nor is any Continental country suffering — from an excess of imports. On the contrary, a reduction in the cost of living would be probable if importation into this and other countries were increased. It is obviously most undesirable at the present time to impose any artificial restrictions on international trade. The case, therefore, for the utmost possible freedom of trade is overwhelming. Local Taxation. We cannot in this report overlook the problem of local finance. There is at the present time a great outcry against rising rates. Notwithstanding the fact that Labour has been predominant on local bodies in only a fraction of the municipalities, it has been erroneously saddled with the responsibility for the increases which have taken, and are still taking, place in local rates. (a) The Present Position. The fact is that, broadly speaking, rates have risen considerably less than taxes, and that the increase is not so large as the rise which has taken place in the general level of prices. The total expenditure by local authorities met from rates, grants, and all other sources except loans, was £148,259,788 in 1914 and £194,360,000 in 1919, an increase of rather more than 30 per cent. The following table shows the position for these two years in more detail : — TABLE IX.* SHOWING RECEIPTS OF LOCAL AUTHORITIES FROM RATES AND GOVERNMENT GRANTS. Year ending Year ending March 31st, 1914. March 31st, 1919. Total receipts by local authorities from £ £ (a) Rates t 71,276,158 84,500,000 (6) Government grants 22,519,799 28,920,000 Average amount per pound of assessable values of receipts from s. d. s. d. (a) Rates 6 8f 2 1J (6) Government grants 7 8| 2 7$ Average amount per bead of estimated population of the receipts from £ s. d. s. d. (a) Rates 1 8 11 12 4 (b) Government grants 2 5 1 15 5 "The figures are taken from the Memorandum on the increase in tbe amount of local rates per pound of assessable value. Cmd. 1016. 1920. {Including poor rates, general district rates, separate borough rates, and highway rates, and all other rates for public local purposes, but not including water jates levied on consumers. 39 As the official memorandum from which these facts are taken point out, " The period from 1913-1914 to 1918-1919 was one in which the local authorities strove to reduce rates in order that the resources for carrying on the war might be increased. The effect of their efforts was, however, in large measure, counterbalanced by additions made consequent upon the increase in the* cost of living, the wages and salaries payable to the persons employed by them, and by additions to the prices of materials." * It will be observed, however, that the total amount obtained -by rates increased from £71,276,000 to £84,500,000 in the period under review, or only 19 per cent. The reasons operating to keep the percentage increase in the local rates so greatly below the percentage increases in the cost of living during the war are stated in the memorandum of the Ministry of Health. One important cause was " the temporary suspension of the normal activities of local authorities brought about by the absence on naval and military duties of large numbers of the men usually employed by them; to a large extent the work of some of these men (on, for example, the repair of highways and of public buildings) was allowed to fall into arrear. Another cause was the reduction of expenditure attributable to the temporary restrictions on the lighting of roads and streets. There was also a large reduction in the number of the destitute poor receiving relief; and the cost of the service of the local debt (interest and provision for repayment of principal) was temporarily almost unaffected by the rise in the cost of living. Moreover, some local authorities, rather than increase rates, reduced their working balances. And there was, too, for long a reluctance on the part of many authorities to commit themselves to increases of wages and salaries commensurate with the increase in the cost of living.. These causes operated in varying degree during the period of the war temporarily to mask, so far as the local rates were concerned, the fall in the purchasing power of money." After the cessation of hostilities local expenditure naturally increased more rapidly than during the war, when conditions became somewhat more normal, renewals and repairs were undertaken, and postponed developments of one kind or another were put into opera- tion. The following table gives average figures for six metropolitan boroughs and twelve county boroughs : — TABLE X. TOTAL AMOUNT PER POUND OF ASSESSABLE VALUE OF LOCAL RATES LEVIED (OR TO BE LEVIED) DURING THE YEAR ENDING, MARCH 31st. s. d. 1914 8 3 1919 9 8 1920..". 11 6 1921 16 9 So far as the 18 boroughs referred to are concerned, the rates have doubled since 1913-1914. If this increase is typical of other local * Cmd. 1016. Page 4. 40 authorities, then we may compare the present position with that before the war as follows: — TABLE XI. SHOWING INCREASE OF RATES IN ENGLAND AND WALES FROM 1914 to 1921. Average amount of local rates. Percentage increase Year ending Percentage increase since July, 1914, in the cost of living Per pound Per head 31st of assessable of estimated since 1914-15 in as estimated by March, value. s. d. population. £ s. d. amount of rates. Ministry of Labour. 1914... 6 81 1 18 11 — 1915... 6 10J 1 19 11 — 1919... 7 8J 2 5 1 13 Ill 1921... 13 8 4 13 103 151* (Estimated.) (Estimated.) (Estimated.) In an earlier section of this report we have calculated the burden of indirect national taxation in terms of the average weekly expendi- ture per family of five persons. As regards local taxation, the sum devoted on the average over the country as a whole by a household of five persons amounts to 8s. per week. This figure is, of course, but a rough approximation to the truth, as local rates vary considerably between different parts of the country. It is obvious, however, that though the rise in rates has not kept abreast of the rise in prices as a whole, the present burden of local taxation is increasing rapidly. We shall presently make proposals for dealing with the situation, but we would first draw attention to the difference in the character of local and national taxation. Whilst the national system of taxation is open to criticism on grounds of unfair incidence, it does not violate the principle of ability to pay in the way which local taxation does. Local rates tend to be regressive in character, falling with greater severity on the poor than on the well-to-do. They are taxes levied upon the occupiers of premises, and whilst it might have been true in earlier days that the size of a man's house was a fair indication of his material means and of his ability to pay, it is less true to-day. There has been on the part of a considerable section of the wage-earners a tendency to expend a larger proportion of the weekly income on rent. On the other hand, we have been told that the tendency amongst the well-to-do is to spend less on housing accommodation in order to keep a motor-car, or to satisfy their desire to travel. These two tendencies in conjunction result in converting local rates into taxes of a regressive character. The broad fact is that the poorer the inhabitants of a locality are, the greater the proportion of their income which is taken in rates. In general, the burden of local rates falls relatively more heavily on the poorer sections of the community than on the well-to-do. Another marked difference between national and local finance is to be found in the objects of expenditure. We have already analysed our national expenditure, and found that, according to the * Average for period April, 1920, to October, 1920, inclusive. The fignre for October is 176. 41 intentions of the Chancellor of the Exchequer, 15s. out of every pound of the national revenue will in a normal year be devoted to the payment of charges resulting from the last war and the maintenance of the armed forces of the Crown in readiness for possible future wars. It is true, of course, that local authorities have their debts on which interest must be paid. But these debts are almost invariably debts incurred for capital expenditure on such essentials as a water supply, or at the present time, on housing. A municipal loan is generally represented by substantial assets. The National Debt is the product of destruction. The chief expenditure of local authorities is upon education, the provision and maintenance of public highways, the removal and destruction of house refuse, the cleansing of roads and streets, the lighting of public highways, sewers and sewage disposal, hospitals for infectious diseases, public baths and wash- houses, public parks, public libraries, cemeteries, housing, and the relief of the poor. The resources of local bodies are, in a word, expended upon socially useful services essential to the well-being of the people. In England and Wales — the most populous part of the, British Isles — the aggregate receipts by local authorities from rates during the current year 1920-1921 will probably amount to about £150,000,000. This sum is but little, if at all, larger than that wasted by the Government upon its military and naval enterprises against Russia, and subsequent figures may show that the Government, before the expiration of the financial year, has expended a third or even a half of this sum upon the Mesopotamian expedition. The resources raised by local rates during 1920-1921 compare favourably with the estimated expenditure of £135,000,000 upon the Navy, Army, and Air Force. An outlay of an average sum of 8s. per week per family of five persons for local taxation purposes is undoubtedly a serious strain upon the mass of people. But we know of no similar amount of expenditure which yields a greater return. For 8s. a week the average household enjoys a multitude of services (to which we have become too much accustomed to realise their value) which it could under no conceivable circumstances enjoy except through the method of collective provision. We emphasise this aspect of the question because we wish to attach its true value to local expenditure. We are uncompromisingly opposed to those who mistake mere reduction of expenditure for economy. Economy consists in wise spending a& much as in wise saving. We do not wish to see any retrenchment upon education and other vital services. The true way of advance is along the line of a re-allocation of public expenditure — national and local — in accordance with the need for conserving and developing the health, capacity, energy, and public spirit of the people. The efforts of local authorities to care for the young, the sick, and the infirm, and to provide local amenities of various kinds should be encouraged. " The problem as we see it is not to cripple the resources of local authorities by a short-sighted policy of so-called " economy," but to redistribute the burden and to reform the system of local taxation in harmony with the principle of ability to pay. 42 We have no intention of engaging in a general discussion of the reform of local taxation, but we wish to indicate certain lines of approach. (b) Grants in Aid. It has been suggested that the charges for such services as education and public health should be placed wholly on the national Exchequer. With this proposal, however, we cannot agree, for its adoption would destroy local initiative and local government, and convert our municipal and county authorities into subordinate bodies carrying out the instructions of Whitehall. This policy would result in a high degree of centralisation and a limitation of the powers of local authorities at a time when democratic opinion is looking forward to less centralisation and more devolution, and to the enlargement rather than the restriction of the powers of local bodies. The State at present makes contributions towards certain forms of local expenditure, and we think that the principle of grants in aid from the State should be developed and extended. In 1919, the last year for which there are official returns, local authorities in England and Wales raised by rates £84,500,000, whilst they received in the aggregate a sum of £28,920,000 from the Government grants, or the equivalent of a rate of 2s. 7^d. in the pound, the rates actually raised by the local authorities averaging 7s. 8jd. per pound of assessable value. Apparently this contribution has been, since 1919, more than doubled in amount, largely in increased assistance towards education, health, and roads. In the case of some forms of local expenditure the grant-in-aid offered by the State is on the " pound for pound " basis, i.e., 50 per cent, of the expenditure incurred. The total Government aid, how- ever, in 1919 was about a third of the amount raised by rates, or roughly a quarter of the expenditure of local authorities out of rates and taxes combined. A grant of 50 per cent, appears to achieve a certain rough justice, but there are services which obtain no financial aid at all from the State, and we are not convinced that a grant equivalent to 50 per cent, of the total expenditure incurred on a particular service is the maximum which the State could pay without encouraging laxity of expenditure by local authorities. We think that the State should come to the assistance of local authorities by aiding activities which are now carried on solely out of local funds and by increasing the present rates of grant. (c) The Equalisation of Local Rates. Variations in assessable value, differences in density of population and area as between one local authority and another result in widely differing burdens of local taxation for the maintenance of similar ser- vices of equal efficiency. It is obvious, for example, that the cost of educational provision is relatively larger in sparsely populated rural areas than in towns. It is equally obvious that education is a far heavier charge upon West Ham, with its large child population, 43 than upon Westminster. It is, moreover, manifest that Sheffield, whose assessable value per head is lower than that of Manchester, will need to impose a heavier rate than the latter city to expend an equal amount per head of population. Some method is needed for the purpose of roughly equalising the burden between area and area. The ordinary grant-in-aid does not meet the need. It requires to be supplemented by a special grant for assisting local authorities labouring under abnormal difficulties. Such a grant might be based upon the assessable value per head of population in each local area. A grant of this kind would vary inversely with the assessable value per head. Local authorities, with a low rateable value per head, would receive a higher rate of grant than those whose rateable value per head was relatively high. The grant should be calculated in terms of population, that is to say, a local authority whose assessable value was X/- per head of the population would receive a grant of Y/- per head of population. This principle has been adopted for the revised grants in aid of education. It should be adopted for all other grants in aid. If this were done it would be of great assistance in relieving the heavy burden of rates in the localities hampered by their poverty. (d) A Local Tax on Site Values. In the previous sections dealing with local taxation we have •expressed the view that there can be no relief through the curtailment of local expenditure. We have suggested that the burden might be more fairly distributed, and the ratepayer relieved by means of an increase and extension of State grants-in-aid for particular local services, and by the introduction of a graduated State grant varying inversely with the poverty of local authorities as expressed by the rateable value of their areas per head of population. But we think that local authorities require new sources of taxation. We have considered the proposal for a local income tax. It is clear that such a tax could not be levied locally, and that the only practi- cable method would be for the State to allocate to localities some agreed proportion of the receipts from the income tax based upon either the total amount of income tax paid by the residents in an area or upon its population. The latter, in our view, is the better alterna- tive, as localities would not be penalised by the absence of millionaires in their midst, or unduly favoured because of the number of wealthy residents. We do not consider, however, that the allocation to local authorities of a portion of the proceeds from income tax is a desirable method of providing local resources. The total receipts from the income tax (and therefore the proportion obtained by local authorities) depends upon the rate fixed by Parliament; and over this local authorities have no control. A reduction of the income tax consequent upon the cancellation of a part of the National Debt by means of a levy on wealth would deprive local authorities of resources on which they relied. Moreover, it is by no means certain that, if the State surrendered a portion of the 44 receipts from the income tax to local authorities for general purposes, State grants would grow. On the contrary, the tendency would be for them to be restricted. It does not follow that, if local authorities obtained as large a total sum from the income tax, local adminis- tration would gain in efficiency, or that the various services maintained by local authoritie's would reach an effective standard. On the whole, we prefer the system of grants-in-aid for special services, supplemented by an equalisation grant. In this way each service which the nation as a whole regards as worthy of State support in the interest of the community has a means of ensuring the attainment of a reasonable standard of efficiency. As a new means of revenue we are of opinion that local authorities should be empowered to levy a local tax on land values by assessing site values for rating purposes. The assessable value should be determined by quinquennial valuations of sites, as distinct from buildings and other improvements. It would be necessary in the first instance for the Government to provide each local rating authority with the full records of the valuation already made by the Land Valuation Department. The tax might be graduated and the scale of graduation (though not the actual rates levied) laid down by Parliament. It is interesting to know that the Manchester City Council has decided to seek statutory powers " to make provision for levying rates on 5 per cent, of the capital value of all land in the city whether used or not." It is said that the total value of the land available for such rating is £100,000,000, and, therefore, the Manchester City Council would add £5,0,00,000 to the assessable value of its locality, making a total assessable value of about £10,000,000. As rates in Manchester are now about 17s. in the pound the rates on the present rateable value would be halved, and the new rate on site value would be about 8s. 6d. in the pound, or about 5d. in the pound of capital land value in the city. (e) Municipal Banking and other Services. The growing capital expenditure in which local authorities are now inevitably involved renders necessary cheap credit. Long period loans and temporary overdrafts to meet current expenditure inflict an annual burden on the ratepayer. We believe that the development of municipal banking will do much to relieve the rate- payer of bearing interest charges by providing cheap credit. Again, we are of opinion that collective payment (through the rates) may provide cheaper services in some directions than can be obtained by individual purchase. We mention these questions here merely to indicate that they must be taken into consideration in connection with the subjects raised in this report. We intend, however, to deal in detail with the policy of municipalisation in a later report. 45 Conclusion. The conclusions which we have reached on the subject of taxation in relation to the cost of living may be summarised as follows : — 1. In a "normal" year, 15s. out of every £1 of the revenue will be devoted, if the present policy be continued, to the payment of obli= gations incurred as a result of the last great war, and for the main- tenance of the fighting forces in preparation for possible future wars. 2. In 1914, the National Debt averaged about £15 per head of the population. In 1920 it averaged about £170 per head of the population. In 1914 the annual levy to meet interest charges, etc., worked out at about half=a=guinea per head of the population. In 1920 it amounted to well over £7 per head. 3. The taxpayer is faced with the alternatives of a slow reduction of debt, coupled with the continuance for a long term of years of heavy taxation to meet the amount of interest on the loan outstanding, and a bold attempt to extinguish speedily a substantial proportion of the total debt. 4. Assuming, as we reasonably may, that both prices and the rate of interest will fall, the continuance of the war debt will involve the people of this country in an increasing and not a diminishing burden, and the productive population will need to work correspondingly harder for the purpose of providing the interest receivers with currency far superior to that which they originally lent to the State. 5. We do not think that the effect of raising revenue for the repay= ment of a large part of the National Debt would diminish the mobile capital available for investment, and the fixed capital already employed in industry would remain. Wealth would change hands, but its total volume would not be affected, and the amount applied to production might actually be increased. 6. We are strongly of opinion that, for the purpose of redeeming a substantial proportion of the National Debt, there should be imposed a graduated levy on all forms of accumulated wealth. 7. Whilst not receding from our considered opinion that the repay- ment of the whole of the National Debt is practicable and desirable in the national interest, we propose as a practical measure, which should meet with wide support, that the levy should be devised to raise at least £4,000,000,000. In this case it is clear that the burden of interest and sinking fund on the remainder of the debt should rest upon the propertied classes. 8« We suggest that persons whose aggregate possessions from all sources are valued at less than £5,000 should be exempted from payment of the levy. 46 9. A levy on accumulated wealth must be graduated. We believe that a scale varying from 1 per cent, on total possessions above the exemption level of £5,000, up to 50 per cent, on the largest fortunes, could be made to yield £4,000,000,000. 10. We make proposals in the body of the Report for the method of valuation, and for the forms in which payment of the levy by individuals should be allowed. 1 1 . The proceeds of the levy should be used as follows : — (a) Where the levy was paid in Government securities it would result in direct cancellation of those securities. (b) The proceeds derived from the payment of the levy in other forms would be devoted in the first place to the extinction of the floating debt. (c) The next priority should be given to the repayment of the external debt. (d) The remainder of the yield of the levy should be devoted, as it was paid, to the cancellation of the remainder of the internal debt. 12. We are strongly of the opinion that all taxes on foodstuffs should be abolished. The taxes on tobacco should be reduced by half, and the entertainments tax should be abolished, 13. We are opposed to the continuance of the Excess Profits Duty, and to the proposal to levy a special tax on business firms. We believe that the income tax and super tax should form the basis of our system of direct taxation. 14. As regards the income tax, we are of opinion that allowances for dependents should be more generous, and that the exemption level should be raised. Sources of income which are at present untapped should foe brought within the scope of the income, and we make suggestions in the Report to this end. 15. We look to the Death Duties as an important means of State revenue. In addition to steepening the duties, the Govern- ment should increase the duty at each successive transference of inherited wealth to the point of ultimate extinction. 16. Our attitude with regard to retrenchment may be summarised in a few words. We are of the opinion that the reduction of the National Debt and of expenditure on the armed forces of the Crown are the chief means of retrenchment. Wasteful expenditure in other directions by the State ought to be sternly eliminated, but there ought to be more generous expenditure on services, such as education and public health, which lie at the foundation of national well-being. 47 We wish to thank those witnesses, referred to in our first report, whose evidence given in the earlier stage of our inquiry has been of value in considering problems of taxation, or who have since given us their advice. We desire also to thank Mr. Hugh Dalton, M.A., Mr. A. Emil Davies, L.C.C., Mr. Alfred Hoare, M.A., Sir J. C. Stamp, D.Sc, and Mr. Sidney Webb, LL.B., who have appeared before the Committee to give evidence on questions raised in this report. Whilst we have been considering our policy on taxation, inquiries have been conducted into the actual rise which has taken place since 1914 in the cost of living, as well as into profiteering and trusts, and considerable progress has been made. Investigations into other aspects of our problem have been begun, and we have also acted on the instruction given by the Trades Union Congress at Portsmouth in September, to include in our policy " nationalisation, in so far as it may be immediately necessary " to secure a reduction in the cost of living. All these matters will'form the subject of a later report or reports. : ;it PARLIAMENTARY COMMITTEE, TRADES UNION CONGRESS JOINT COMMITTEE ON THE COST OF LIVING. The Committee has published the following : — INTERIM REPORT ON MONEY & PRICES (Price 9d. Post free, lOd.) WAGES & PRICES: A REPLY TO THE FEDERATION OF BRITISH INDUSTRIES (Price 2d. Post free, 3d.) To be obtained from the Secretary, Cost of Living Committee, 32, Eccleston Square, London, S.W. 1. PARLIAMENTARY COMMITTEE, TRADES UNION CONGRESS AND THE LABOUR PARTY. Joint Committee on Unemployment. " UNEMPLOYMENT : A LABOUR POLICY" (Price 3d. Post free, 4id.) To be obtained from the Secretary, the Labour Party, 33, Eccleston Square, London, S.W. 1. ■ Gaylord Bros. H Makers H Syracuse, N. Y '.. PAT. JAN. 21, 1908 458774 UNIVERSITY OF CALIFORNIA LIBRARY