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 aois
 
 UNIVERSITY of CALIFORNIA 
 
 AT 
 
 LOS ANGELES 
 
 LIBRARY
 
 WEALTH & TAXABLE CAPACITY
 
 First published - - April 1922 
 Reprinted - - - December 1922
 
 WEALTH AND 
 TAXABLE CAPACITY 
 
 BEING THE NEWMARCH LECTURES FOR 1920-1 
 
 ON CURRENT STATISTICAL PROBLEMS 
 
 IN WEALTH AND INDUSTRY 
 
 BY 
 
 SIR JOSIAH STAMP 
 
 K.B.E., D.Sc. 
 
 
 
 
 LONDON: P. S. KING & SON, LTD. 
 
 ORCHARD HOUSE, WESTMINSTER. 
 
 1922 
 
 . 1 2 6 u ^ ;^
 
 
 
 ^(c> 1^ 
 
 PREFACE. 
 
 J The Newmarch Lectures for 1920-1 were given at 
 ^ University College in February, 1921, upon " Current 
 y^ Statistical Problems in Wealth and Industry." 
 They received a publicity in the Press that led to 
 numerous requests for full publication, and I feared 
 from this widespread interest that there might have 
 been some misapprehension on the part of the public 
 as to the character and purpose of the lectures. 
 They were intended to be a detached examination 
 
 V of the chief statistical data available in the con- 
 sideration of problems of wealth and industry, and 
 an exposition of some principles involved in arriving 
 
 "^N at those details. 
 
 Newspaper readers seemed to scent a new supply 
 of powder and shot for current social polemics. In 
 this respect many may have been disappointed. It 
 ^ is with some misgivings that the lectures are now 
 given the permanence of book form, for while the 
 principles have, so to speak, some enduring quality, 
 and it is urgent that they should be better under- 
 
 V stood, the grounds for more popular interest seem 
 ^ to lie in the illustrations of those principles expressed 
 
 in current values, which are necessarily quite 
 ephemeral. 
 
 At a time when the national income is probably 
 decreasing every month (in its monetary expression) 
 at the rate of 100 million £ per annum, any illustra-
 
 PREFACE 
 
 tion based on current values is out of date before the 
 printer's ink is dry, and indeed, however correct it 
 may have been as a rate at a given moment of time, 
 it may never have been correct at all over a period 
 of time to which it relates. It might have been 
 better, therefore, if the illustrative figures could 
 have been drawn from a period of more stable values. 
 The risk of being quoted without context or reserva- 
 tions has, however, been faced, and readers are asked, 
 upon the early arrival of a time when some of the 
 estimates must be manifestly inapplicable to changed 
 conditions, and have no lasting value, to bear these 
 reservations in mind. It may well be some years 
 before a condition of stable values is reached. There 
 is much, therefore, to be said, if such considerations 
 as these are to be published at all, against holding 
 them back until more permanent illustrations of 
 principle can be given. 
 
 This attempt to outline some of the elementary 
 principles involved in the valuation of National 
 capital and income and the determination of their 
 distribution and their relation to prices, taxation and 
 public debt, necessarily suffers from the defects of 
 lecture form. It is, therefore, with much diffidence 
 and a sense of their shortcomings that the lectures 
 are now embodied in book form. 
 
 So far as the field of wages is concerned, it is pre- 
 eminently Dr. Bowley's own, and I here acknowledge 
 my full obligations to him for my numerous citations 
 from his work. 
 
 J. C. S. 
 December, 1921.
 
 PREFACE TO THE SECOND EDITION. 
 
 The kindly reception accorded to this book has been 
 gratifjdng, and the few criticisms have been such as 
 to call for little comment. I should like, however, 
 to take this opportunity of saying that nothing in 
 the Chapter on Taxable Capacity should be taken as 
 suggesting the view that the precise limits are really 
 susceptible of exact measurement by such arithmetical 
 methods, but that, as such attempts are actually 
 being made by others, I have endeavoured to indicate 
 some of the principles and precautions which must 
 be observed if they are to have any approach to 
 correctness of degree, and if the results are to be 
 inaccurate only to the extent of errors in the statistical 
 assumptions. 
 
 J. C. S. 
 August, 1922.
 
 CONTENTS 
 
 CHAPTER I 
 The National Capital i 
 
 CHAPTER II 
 The National I>jcome 39 
 
 CHAPTER III 
 The Distribution of Income and Capital ... 77 
 
 CHAPTER IV 
 The Limits of Taxable Capacity 108 
 
 CHAPTER V 
 
 The Effect of Changing Price Levels upon 
 
 Profits and Wages 138 
 
 CHAPTER VI 
 
 The Effect of Changing Price Levels on the 
 
 Burden of the Public Debt 169
 
 CHAPTER I. 
 
 THE MEASUREMENT OF NATIONAL CAPITAL 
 
 (i) Introduction: Essential Data to he considered. 
 
 Any student of current financial and commercial 
 problems will realise that in the discussion of 
 them there are certain boundaries or limits 
 which condition the possible treatment of the 
 subject. We have been, for example, recently 
 made familiar with the idea that there is a limit 
 to taxable capacity. These points represent, 
 so to speak, physical facts which we may 
 deplore but cannot escape, and all our political 
 strategy and economic practice has to be con- 
 formed to them just as military or other action 
 must be limited by geography and topography. 
 Now, although these facts exist, our precise 
 measurement of them is often very faulty, and 
 what is more important still, our appreciation 
 of the exact meaning of our measurements, 
 when we have made them, is also very slipshod ; 
 we ignore real differences of meaning and apply 
 various unlike things to the same problem as
 
 2 WEALTH & TAXABLE CAPACITY 
 
 though we had already carefully defined them. 
 These essential data of modern discussions 
 include the amount of the national wealth. 
 This, in itself, covers three or four distinct 
 ideas, such as the amount of taxable wealth 
 in the hands of, first, individuals and col- 
 lections of individuals, or, secondly, the State, 
 and, thirdly, the amount that would fall under 
 particular schemes of taxation, " chopping " 
 off sections of wealth at a particular moment of 
 time ; while there are such other concepts as 
 " inventory wealth " and " Hving capital " 
 which have a use for particular purposes. Then 
 we have the national income, which also is 
 capable of several distinct conceptions, and 
 may, or may not, include those classes of income 
 which are not the subject of money payments, 
 or which are not customarily treated as income. 
 Then follows the way in which the above- 
 mentioned wealth or income is divided up 
 amongst individuals ; that is, the proportion 
 of it which goes to certain sections of our 
 population ; the amount of income which is not 
 consumed but is saved ; the amount of it 
 which is made at home, and that which arises 
 from abroad ; the division of wealth into differ- 
 ent categories of ownership, such as the owners 
 of capital, the owners of muscle, and the owners 
 of brain. Then we have the facts about these 
 proportions or measurements, not merely as 
 static problems at a particular moment of time,
 
 THE NATIONAL CAPITAL 3 
 
 but such dynamic problems as the rate at 
 which they may be altering, and the direction 
 of any change. 
 
 Further determinable points are now to be 
 found in the requirements of the State for 
 purposes of the National Debt, and, perhaps, 
 also in the amount of individual income or 
 wealth which is available for State purposes 
 without reducing the individual to a state of 
 starvation or of universal ca' canny — in other 
 words, what we now call " the limit of taxable 
 capacity." Other limits of an inexorable char- 
 acter are to be found in the effect of changes of 
 price upon incomes and wealth in relation to 
 tax burdens. 
 
 (2) The Spirit and Purpose of the Enquiry. 
 
 Now people would very much rather discuss 
 principles and propaganda, and proposed tactics 
 for social legislation, than do the trying 
 work of examining the statistical data upon 
 which nearly all such discussions are based. 
 These data are tossed about as things given, 
 requiring no further examination, or of which 
 the examination is complete ; whereas until we 
 have thoroughly examined them and know the 
 limits of error in amount to which they may 
 be subject, and their precise character for any 
 particular problem, we are hardly entitled to 
 embark upon the discussion at all.
 
 4 WEALTH & TAXABLE CAPACITY 
 
 I have been impressed with the great necessity 
 for a better pubHc recognition of the methods 
 and principles involved in getting at these 
 essential data, and of what they really mean. 
 I am, therefore, frankly devoting these lectures 
 to such an examination, and if I may so call it, 
 a popularisation of the purely statistical in- 
 vestigations involved. I think it, for example, 
 highly important that there should be a wider 
 knowledge of the various ways in which the 
 national wealth can be computed — the limits 
 of error, the uses to which the valuations may 
 be put, and the modifications required, accord- 
 ing to the several uses to which they are devoted. 
 I think it essential that we should have a better 
 knowledge of the unescapeable facts about the 
 division of income, and the amounts available 
 for particular purposes. If, therefore, I do not 
 attempt solutions for our great public pro- 
 blems to-day, and you are inclined to accuse me 
 of not being practical on that account, my answer 
 would be that I am trying to be practical in a 
 higher sense, in that I want to understand the 
 real limits to knowledge and discussion, which 
 are a preliminary to these things. As Professor 
 Pigou says in his great book recently published, 
 " When a man sets out upon any course of 
 enquiry the object of his search may be either 
 light or fruit, either knowledge for its own sake, 
 or knowledge for the sake of the good things 
 to which it leads." I do not pretend that the
 
 THE NATIONAL CAPITAL 5 
 
 facts which we are proposing to examine have 
 any interest apart from their apphcation, but 
 it is a feature of prime scientific importance 
 that we should examine them in the dry light 
 of statistical precision before we proceed to 
 cloud our judgment by application to specific 
 problems in which, try as we will, we must be 
 influenced by prepossession and prejudice. 
 We should be like the man who would not admit 
 that two plus two made four until he was told 
 what use was going to be made of the admission. 
 The statistician who begins with his thesis for 
 social betterment, and then produces his figures 
 to support it, may be perfectly honest, but he 
 is always under the suspicion of having been 
 unduly influenced by the goal at which he is 
 aiming. 
 
 (3) The National Wealth — the Questions 
 to he Answered. 
 
 The first cardinal feature for determination 
 is the National Wealth : 
 
 (i) What is its amount and to what degree 
 of accuracy ? (2) How is it computed ? 
 (3) What does the result mean when we have got 
 it ? (4) What precautions have we to take in 
 appl5dng it ? (5) Are there different figures 
 for different appHcations or purposes ? (6) What 
 are those purposes ? 
 
 While there is a very considerable literature 
 upon this particular subject — running into some
 
 6 WEALTH & TAXABLE CAPACITY 
 
 scores of works — it is extraordinary how the 
 less responsible efforts, often mere partisan 
 guesses, gain a footing and keep currency with 
 serious and reasoned estimates. Tliis arises 
 partly from the fact that the partisan who is 
 out to prove his point is nearly always best 
 pleased by an extreme figure, and so we find 
 that current estimates of the wealth of the 
 United Kingdom (in 1914) used in polemical 
 literature range from 10,000 to 24,000 millions 
 £ sterling. 
 
 (4) The Use of such Estimates. 
 
 The uses to which Estimates of National 
 Wealth and Income may be put are many and 
 various. They include : — 
 
 (i) Tests of " progress " by way of comparisons 
 between different years, to show the accumulation of 
 capital ; tests of the distribution of wealth, according to 
 the form or embodiment which wealth takes ; of the 
 effects of changes in the rate of interest, or in the value 
 of money. 
 
 (2) Tests of the relative " prosperity " or resources of 
 different nations or communities, either as a whole or per 
 head of the population, and in relation to their national 
 debts. 
 
 (3) Comparisons of income with capital and property. 
 {4) Considerations of the distribution of wealth 
 
 according to individual fortunes, and changes in that 
 distribution. 
 
 (5) Consideration of the applicability and yield of 
 schemes of taxation, e.g., the capital levy. 
 
 (6) Questions relating to War indemnities.
 
 THE NATIONAL CAPITAL 7 
 
 It is in connection rather with the second, 
 fifth and sixth classes above that the pubHc 
 mind is most exercised at the present moment, 
 and a great deal of careful, as well as careless, 
 work has quite recently been done in this field 
 of statistics.'^ 
 
 It is, perhaps, hardly necessary to say that 
 the capital wealth or incomes at any given 
 moment is not a sole test of ability to bear 
 indemnities — it is only a partial measure, for 
 the potential wealth in ungotten minerals and 
 resources, as well as the character of commerce 
 and distribution of income, are important factors 
 in the problem. It may, however, be pointed 
 out at once that present values are on a very 
 different scale from those which are being dis- 
 cussed, and the true money measure of present 
 wealth can only be guessed at for some time yet. 
 
 As I shall show presently, still the best, and, 
 indeed, the only way, to estimate present wealth 
 is to start with the pre-war figures and make 
 what modifications and adjustments the 
 changed circumstances indicate as desirable. 
 Moreover, the pre-war figure is in itself full of 
 importance for comparison and general interest. 
 
 (5) What is meant by National Wealth ? 
 
 The wealth of a country may mean either the 
 value of the objects found within its boundaries, 
 or the wealth of the inhabitants, including their 
 
 • Vide Statistical Journal, May, 1919. 
 
 B
 
 8 V/EALTH & TAXABLE CAPACITY 
 
 foreign possessions, and excluding wealth within 
 the country held by people abroad. The con- 
 fusion between these two ideas has played 
 havoc with discussions on such subjects as the 
 " Taxable Capacity of Ireland." It is the 
 latter sense — the wealth of the inhabitants — 
 that is mainly under consideration. That 
 aspect is foremost when questions of taxation 
 are prominent, but there are matters, such as 
 the inalienable wealth of a country in a 
 geographical sense (for warlike purposes) for 
 which the former is important. A colony 
 capitalised from the home country may be 
 poor judged by the wealth of its inhabitants, 
 but rich in its resources and the actual yield 
 within its borders. 
 
 (6) Kinds of OnDnership. 
 
 Wealth in private hands is not easy to define 
 exactly, for there are various shades of owner- 
 ship : 
 
 {a) Absolute personal disposition of the whole value. 
 
 {b) Trust interests. 
 
 (c) Collective ownership with only potential specific 
 allocation to individuals, such as the reserves of a company, 
 which may be of higher value than the aggregation 
 of the market value of individual interests therein (as 
 tested by the Stock Exchange difference in prices of 
 the shares with, and without, such reserves.) 
 
 {d) Collective ownership, without the possibility of 
 individual allocation, social private wealth, such as 
 churches, clubs, etc.
 
 THE NATIONAL CAPITAL 9 
 
 Similarly, communal wealth is not all of the 
 same degree of " dispersion " in value. 
 
 [a) City and local property like waterworks, buildings 
 and trams, having a " value " determinable by deliberate 
 comparison with privately owned objects. 
 
 {b) National property, varying from a museum to a 
 navy. 
 
 The closeness with which a " market value " 
 can be assigned varies with the class of wealth 
 for, if there is no possibility of a market, one 
 naturally tends towards the adoption of the 
 cost of production or reproduction. Moreover, 
 some of the comparisons of national wealth of 
 different countries are sHghtly impaired by the 
 extent to which the methods employed give 
 different recognition of each class. 
 
 Until recent questions of taxable capacity, 
 and the yield of capital levies arose, we under- 
 stood national wealth to mean the full wealth 
 of our inhabitants, derived from sources at 
 home and abroad, and also the amount of capital 
 here owned by people abroad, which was not 
 striking, so that earher writers never troubled 
 much to exclude it. 
 
 (7) Methods of Computing Wealth. 
 
 There are five distinct methods of computing 
 national wealth in vogue, but different countries 
 do not rely on them equally, nor are they always 
 able to employ them all. 
 
 They are : 
 
 (i)^Based on data arising through taxation of income 
 — notably the United Kingdom.
 
 10 WEALTH & TAXABLE CAPACITY 
 
 (2) Based on data arising through the annual taxation 
 of Capital — notably United States. 
 
 (3) Based on data arising through taxation of Capital at 
 irregular periods-Death Duties.-Notably Italy and France. 
 
 (4) The inventory — an aggregation of various forms 
 of wealth built up from various sources, insurance, etc, 
 — Notably France and Germany. 
 
 (5) The Census. — Notably Australia. 
 
 We rely chiefly upon the first, but we fortify 
 it considerably by the third, and check large 
 sections of it by the fourth. 
 
 (8) Recent Estimates. 
 
 The most recent detailed estimates of 
 capital are those given by Mr. Crammond 
 before the Royal Statistical Society in 19 14, 
 £16,472,000,000, and my own in "British Incomes 
 and Property " (published in 1916), for 1914, 
 of £i4,3i9,ooo,ooo±£i,867,ooo,ooo. The latter 
 was re-examined in 1918 in the " Economic 
 Journal," in connection with the proposals for 
 a capital levy which had brought forth a crop 
 of " estimates " widely divergent. The former 
 was repeated by Mr. Crammond recently with- 
 out re-examination. 
 
 The estimates by Sir Bernard Mallet and 
 Mr. Strutt given to the Statistical Society in 
 1915, based on the "multiplier," led apparently 
 to a considerabl}^ lower figure than my estimate, 
 but the difference has now been fairly recon- 
 ciled.* 
 
 ♦ Economic Journal, 1918.
 
 THE NATIONAL CAPITAL ii 
 
 At the risk of wearying you, I propose to 
 take you, in some little detail, through the main 
 workings for the estimate, briefly indicating 
 the kind of checks upon it, by going over 
 Mr. Crammond's and my own side by side. 
 This will serve two purposes. First, I have 
 undertaken to give you some idea how these 
 things are worked. Secondly, I wish to make 
 the statement once again that Mr. Crammond's 
 estimate contains demonstrable errors in its 
 make up and does not " fit " with the main 
 auxiliary checks we possess. 
 
 In passing, we shall get a glimpse of some of 
 the chief statistical difficulties confronting us. 
 
 (9) Estimates by the Capitalisation Method. 
 
 The Income Tax provides us with some first- 
 hand statistics of values and profits in useful 
 categories, much more useful for our purpose 
 than merely knowing the number of people 
 with incomes of certain amounts. The statistics 
 for each class were given until recent years in 
 the annual reports of the Commissioners of 
 Inland Revenue. 
 
 The following table sets out the details of 
 the two Estimates side by side, and also the 
 extent to which Mr. Crammond's figures exceed 
 my own :
 
 £'ooo omitted. 
 
 
 E.G. 
 
 J.C.S. 
 
 Deviations. 
 
 Sch. A. 
 
 
 
 + 
 
 — 
 
 Lands 
 
 1-305 
 
 1. 155 
 
 150 
 
 — 
 
 Houses 
 
 3.357 
 
 3.330 
 
 27 
 
 — 
 
 Other Profits 
 
 32 
 
 22 
 
 10 
 
 
 Sch. B. 
 
 
 
 
 
 Farmers' Profits ... 
 
 140 
 
 340 
 
 "• 
 
 200 
 
 Sch. C. 
 
 
 ■ 
 
 
 
 Public funds, less 
 
 
 
 
 
 Home Funds. 
 
 
 
 
 
 Government and 
 
 
 
 
 
 Local Property .. 
 
 I-45I 
 
 1.548 
 
 " 
 
 97 
 
 Sch. D. 
 
 
 
 
 
 Quarries, Mines 
 
 
 
 
 
 and Ironworks 
 
 92 
 
 216 
 
 — 
 
 124 
 
 Gasworks, Water- 
 
 
 
 
 
 works, Canals, 
 
 
 
 
 
 Docks fishing, 
 
 
 
 
 
 etc 
 
 444 
 
 460 
 
 — 
 
 16 
 
 Railways ... 
 
 1.152 
 
 ^,143 
 
 9 
 
 ~" 
 
 Railways out of 
 
 
 
 
 
 the U.K. 
 
 560 
 
 655 
 
 — 
 
 95 
 
 Foreign & Colonial 
 
 
 
 
 
 Securities and 
 
 
 
 
 
 Coupons... 
 
 1,017 
 
 1,004 
 
 T3 
 
 — 
 
 Other Profits and 
 
 
 
 
 
 Interest 
 
 233 
 
 276 
 
 — 
 
 43 
 
 
 9,783 
 
 10,149 
 
 209 
 
 575 
 
 Trades and busi- 
 
 
 
 
 
 nesses including 
 
 
 
 
 
 for income evad- 
 
 
 
 
 
 ing assessment .. 
 
 3.789 
 
 2,770 
 
 1.CI9 
 
 - 
 
 Income accruing 
 
 
 
 
 
 abroad and not 
 
 
 
 
 
 remitted 
 
 900 
 
 400 
 
 500 
 
 - 
 
 Income of non-tax 
 
 
 
 
 
 paying classes 
 
 
 
 
 
 derived from 
 
 
 
 
 " 
 
 capital 
 
 1,000 
 
 200 
 
 800 
 
 - 
 
 Furniture, etc. 
 
 1,000 
 
 800 
 
 200 
 
 — 
 
 
 16,472 
 
 14.319 
 
 2,728 
 
 575 
 
 + 2,153
 
 THE NATIONAL CAPITAL 13 
 
 {a) Classified Sources of Income. 
 
 Mr. Crammond took 25 years' purchase of 
 the gross Sch. A. Assessment on Lands, whereas 
 it was demonstrable that the average value 
 was not more than 21 years' purchase, although 
 25 years was possibly applicable to the net 
 assessment . 
 
 He had not taken sufficient notice of the 
 change in the rate of interest since Giffen's 
 time, of the actual sales taking place in the 
 market, and of the average valuations adopted 
 for Estate Duty purposes for rented property. 
 From the resultant difference of about 210 
 millions, I allowed for certain special features 
 in Scotland and for an under assessment in 
 Ireland, and for the special value of building 
 lands, serving to reduce the difference — which 
 became 150 millions. 
 
 In the case of houses and premises generally, 
 Mr. Crammond took 15 years for the gross 
 assessment. I took 14 years for the gross 
 assessment, after making certain adjustments, 
 and 17.4 upon the net, adopting the mean 
 result. 
 
 The difference for the year taken by Mr. 
 Crammond would have been over 200 millions 
 between us, but as I worked upon a later year 
 with an additional rental of 9 million £ it was 
 greatly reduced, and stands at 27 million £ only.
 
 14 WEALTH & TAXABLE CAPACITY 
 
 In the small item of other profits, I made a 
 careful analysis of the nature of the income and 
 adopted 21 years, whereas Mr. Crammond kept 
 to an old precedent with 25 years. 
 
 In the case of farmers, Mr. Crammond adopted 
 the Sch. B. assessment at 8 years' purchase, but 
 as this assessment was notoriously below the 
 profits being made at the time (being just prior 
 to the date when the basis was altered from 
 one- third to the full rent, as the rough equivalent 
 of profits), I preferred to ignore the altogether 
 useless tax figures, and to review the various 
 estimates of agricultural capital made by 
 agricultural writers, and the accumulation of 
 evidence before the Royal Commission on agri- 
 culture, checked by more recent ideas as to 
 the average amount per acre. In taking 340 
 million against his 140 million, I added 200 
 millions to his figures. 
 
 In dealing with Schedule C. or the interest 
 upon Government Stocks, Mr. Crammond fol- 
 lowed Giffen's method by deducting the 
 Consols, and so not allowing the amount of 
 the national debt to swell the total of the 
 national wealth. I followed a course which 
 comes to the same net result, viz., capitalising 
 the whole interest which is the wealth of indi- 
 viduals, but deducting the amount of the 
 National Debt from the value of Government 
 and local property. The gross amount of this 
 property I put at about 1,100 millions against
 
 THE NATIONAL CAPITAL 15 
 
 Mr. Crammond's 750 millions, but taking the 
 two items together, I have only 97 millions in 
 excess of his figures. In getting the value for 
 Government and local property, I reduced the 
 figures taken by Giffen, Money and others, 
 by eliminating what had been included twice 
 over by previous writers, viz., the value of 
 waterworks, gasworks, trams, etc., the profits 
 of which as trading undertakings are included 
 in the other classified statements of profit for 
 taxation purposes. 
 
 Mr. Crammond's estimate was 92J millions for 
 quarries, mines and ironworks, whereas I gave 
 179 for mines only and 37 for ironworks, so 
 that I exceeded him by 124 millions. A glance 
 at the evidence given before the Coal Com- 
 mission and the details of balance sheets and 
 Excess Profits Duty capital show that my 
 figures were very closely justified. Mr. Cram- 
 mond's are demonstrably too low, upon a 
 tonnage basis. The difference is due partly 
 to the fact that the profits of the years taken 
 by him were rather lower, but mainly to the 
 fact that he took 4 years' purchase, and I 
 adopted 9J years after closer enquiry. 
 
 In the case of Gasworks, Waterworks, Canals, 
 Docks, fishings, etc., and railways, the difference 
 is due solely to the difference of years. 
 
 For other profits and interest, and for foreign 
 securities, I made a somewhat closer examina- 
 tion, and there are shght differences in the
 
 i6 WEALTH & TAXABLE CAPACITY 
 
 multipliers adopted, but the net alteration is 
 quite small. 
 
 (b) General Business Profits. 
 
 My total estimate up to this point exceeds 
 Mr. Crammond's by 366 million £, and it is at 
 this stage they diverge more seriously. Mr. 
 Crammond adheres to Giffen's old classification, 
 " Other public companies " which he takes at 
 15 years' purchase, and " trades and profes- 
 sions " which are also taken at 15 years, treating 
 one-fifth of the profits as capable of capitalisa- 
 tion. To the profits of trades and professions, 
 he adds one-fifth for omission or evasion. His 
 resultant total for businesses is, therefore, 3,787 
 millions. 
 
 Sir Leo Chiozza- Money's method in " Riches 
 and Poverty " was to take the whole class of 
 profits " Businesses otherwise detailed," and to 
 treat one-half as capable of capitalisation at 
 10 per cent. For the year 1912 taken on 
 Mr. Crammond's estimate, Money's method 
 would give 2,109 millions, a difference of 1,679 
 millions. If the companies formed half of the 
 whole trade profits, Crammond's method would 
 be equal to the average of 3 and 15 years' 
 purchase or 9 years over all — as a matter of 
 fact, as the companies are a growing proportion, 
 the actual rate adopted is higher. Money's is 
 equivalent to 5 years' purchase over all. The 
 mat ter is so important that those interested should
 
 THE NATIONAL CAPITAL 17 
 
 read the substance of my own enquiry into it, 
 showing the reason why I adopted an inter- 
 mediate course.* It is quite clear from an 
 examination of ordinary stock investment 
 values in the years 191 1 to 1913, that the 
 average company business was not worth more 
 than II years' purchase of net profits. 
 
 I first purged the assessment total of its 
 overcharges and reductions, the inclusion of 
 salaries and especially the allowance for " wear 
 and tear." The latter was generally alleged to 
 be insufficient, and therefore, if anything, my 
 capitalisation would on that account be too 
 high. But no effort had been made by others 
 to get a proper basis figure upon which to 
 work. I then added for evasion 17 millions in 
 place of Mr. Crammond's quite excessive item 
 of 44 J miUions. The mean of the two methods 
 gave me 2,770 millions or just over 1,000 millions 
 less than Mr. Crammond's estimate. It must not 
 be forgotten in comparing the number of years' 
 purchase adopted in capitalising profits assessed 
 to Income Tax Schedule D with the rate of 
 interest on Stock Exchange investments, that 
 the most secure part of the profits, that repre- 
 sented by real property, owned and occupied 
 for business, has been deducted and assessed 
 
 * British Incomes and Property. Chapter XI. {a) There was a 
 great change in the character of Company profits between 1 895 and 
 191 4. {b) Registration as joint stock companies gave profits an 
 unreal status in capitalisation compared with private ownership.
 
 i8 WEALTH & TAXABLE CAPACITY 
 
 under Sch. A and the number of years' purchase 
 appHcable to the remainder is therefore lower 
 than it would otherwise be, whereas the 
 profit known to the Stock Exchange, except 
 where there were debentures, includes this 
 stabler element. The record of " paid up " 
 Capital of Companies, some 2,700 millions, is, 
 of course, little test of the true market value 
 that we are seeking. We have to deduct the 
 companies in liquidation, and a very large 
 sum for duplication of capital by interholdings, 
 then the value of real property owned, and also 
 all the colliery and other companies that have 
 been dealt with elsewhere separately. Again, 
 much share capital covers holdings in Consols 
 and foreign securities, also separately capital- 
 ised. The total share capital comparable with 
 the figures we are considering is therefore quite 
 indeterminate, but it is very much less, and then 
 we must add, per contra, the declared or secret 
 reserves, and deduct a sum for share capital 
 which covers goodwill no longer existent. The 
 statistics of share capital clearly cannot be 
 brought in aid to confirm or refute the estimates. 
 I have shown that the method of the Census of 
 Production in estimating the capital in manufac- 
 turing industries covered by the Census, gave 
 results which agree closely with those yielded 
 by my method of capitalising the profits.* 
 
 * Vide Economic Journal, 1918. Also Professor Bowley's 
 Division of the Product of Industry.
 
 THE NATIONAL CAPITAL 19 
 
 There are no other subsidiary checks for this 
 section taken by itself, except the results of 
 business valuations for the purpose of Estate 
 Duty. Those who inchne to put a high multi- 
 plier to the total figures of assessed profits must 
 remember that over the large field of the smaller 
 businesses, the bulk of the profit represents 
 earnings of management, which are personal 
 and not readily capitalised, while only a small 
 part is interest on capital. 
 
 Moreover, a certain amount of trading loss 
 may not be reflected in the figures, while the 
 profits make no allowance for " wasting asset " 
 elements. 
 
 Mr. Crammond has an item of 44J millions 
 of income for trades and professions evading 
 income tax, which was pure guess work based 
 on the ideas of thirty years previously, when 
 evasion was a very different matter from what 
 it became in 19 14. My figure to correspond 
 was a closely and anxiously examined one, viz., 
 17 million ^. Mr. Crammond's capitalisation 
 gave 133 million £ on this account, and the total 
 difference between us for the capitalisation of 
 business profits is 1,222 million £. 
 
 The next item is the capital belonging to 
 non-income tax paying classes, which he puts 
 at 1,000 milhons against my 200 milhons, 
 because he had wrongly supposed that, being 
 exempt from income tax, nothing was included
 
 20 WEALTH & TAXABLE CAPACITY 
 
 on that account in the Income Tax Statistics. 
 My comment in " British Incomes and Property" 
 was as follows : — 
 
 " It must be clearly understood that this 
 item does not really refer to the savings of the 
 exempt classes. These savings are in savings 
 banks, and provident societies, all of which 
 make investments, or in building societies 
 which have a gross income from real property, 
 and there is hardly any channel of savings 
 which has not been fully represented in the 
 gross income tax assessments already capitalised. 
 Sixty millions of exempt income has already 
 been accounted for at various rates, from fifteen 
 years' purchase upwards, or, say, over i,ooo 
 millions. What remains is the capital value 
 of the stock in trade, implements, and utensils, 
 etc., of small shop-keepers, and workers like 
 blacksmiths, etc. Anyone familiar with the 
 prices at which small businesses are taken over 
 will hardly quarrel with an average capital of 
 £200 for the shops and £100 for workshops. 
 If we take the table on page 63 of the "Statistical 
 Journal," 1910, giving the British Association 
 Committee's estimate of the amount and dis- 
 tribution of income (other than v/ages) below 
 the exemption limit, Vv^e shall find that working 
 capital of this description is confined mainly 
 to classes 25 to 28, 30 and 31. On the most 
 liberal estimate of average capital for the 
 numbers given there, it is difficult to account
 
 THE NATIONAL CAPITAL 21 
 
 for more than £200,000,000. Approaching the 
 matter in another way, we have in England and 
 Wales about 534,000 shops and licensed houses, 
 of which, speaking generally, those over £40 
 only will contain income tax payers, leaving 
 370,000 under £40. Adding for Scotland and 
 Ireland, we may thus account for £80,000,000. 
 Then 400,000 cases of workshops, etc., at an 
 average of £100 and a million Vv'orkers with 
 tools, etc., of an average va.lue of £10, bring the 
 total to £130,000,000. There may also be some 
 forms of investment which escape the gross 
 income tax assessment, but, altogether, 
 £200,000,000 is a sufficient estimate." 
 
 Under the heading " movable propeity," etc., 
 not yielding income (furniture, etc.), he has 
 1,000 million £ against my figure of 800 
 milhon £. This is admittedly most difficult, 
 but everyone who has examined the matter 
 critically, in the light of Estate Duty valuations 
 (which would not have given a higher figure 
 than 200 millions), and what is common know- 
 ledge as to the general ratio of furniture values 
 to rental values, gives results of the lower order. 
 Finally, under the heading of Income from 
 Investments Abroad or from shipping, banking 
 and mercantile services not brought home, 
 Mr. Crammond pats £60,000,000, v/hich he 
 capitalises at 15 years, giving a capital of 900 
 milhon £. My estimate was 400 milhon £ as 
 at that date. He followed Giffen's earlier
 
 22 WEALTH & TAXABLE CAPACITY 
 
 work, and as that was full of misconceptions 
 as to the nature of the Income Tax figures, 
 which I have fully shown in " British Incomes," 
 he naturally repeated the error. Hardly any 
 writers have dealt with these foreign income 
 figures without falling into serious technical 
 error. My estimate of 20 millions income was 
 supported by the Chancellor of the Exchequer's 
 estimate of the duty to be derived from the 
 alteration in law which made such income liable 
 to tax, and nothing that has taken place since 
 has shown it to be inadequate. Moreover, if 
 this figure is included with the foreign income 
 shown, the capitalisation I give accords better 
 with the capital abroad independently ascer- 
 tained by Sir George Paish than any other. 
 
 Under these last four headings my valuation 
 is 4,170 million £, against Mr. Crammond's 
 6,689 rnillion £, — a difference of 2,519 million £. 
 
 Unnecessary Conflicts of Statement lead to 
 
 Confusion. 
 
 Mr. Crammond's estimate was originally 
 given with practically no supporting evidence, 
 or reasoned discussion, and some of his errors 
 were pointed out at the time by me. He 
 acknowledged the criticism as very valuable, 
 and said he was " glad to accept the corrections." 
 As Sir Alfred Soward and Mr. Willan say in their 
 recent book, " Dr. Stamp adversely criticised the
 
 THE NATIONAL CAPITAL 23 
 
 estimate, and the author seemingly did not 
 defend it. Mr. Crammond, however, in 1918, 
 reproduced his figure." It must be added that 
 despite renewed criticism of it in May, 1919, 
 before the Royal Statistical Society, when he 
 was accused of not making himself sufficiently 
 acquainted with the character of the original 
 data, Mr. Crammond has continued to give his 
 old estimate without any comment (beyond a 
 disparagement of other estimates) unsupported 
 by evidence. He repeated it in his address on 
 British Finance Policy given to the Institute 
 of Bankers, 28th June, 192 1. This course, 
 naturally, leads to confusion. 
 
 The most recent example that has come to 
 my notice is Mr. Snowden's book "Labour and 
 National Finance." When he comes to consider 
 how much it would be possible to raise by 
 means of a capital levy, he says " that estimates 
 of the total capital vary very considerably." 
 He refers to my estimate in September, 1918, 
 of the pre-war amount that would have been 
 available for a general levy — 11,000 million £, 
 and my tentative estimate of the war increase 
 of 5,250 miUion £, making 16,250 million £ 
 available for a capital levy. He then says 
 " Mr. Crammond, in a paper read before the 
 Institute of Bankers, June 7th, 1920, estimated 
 the national wealth at the present time as 
 24,000 million £. He arrived at this figure by 
 taking his own estimate of the pre-war national
 
 24 WEALTH & TAXABLE CAPACITY 
 
 wealth at 16,500 million £, which he said would 
 represent, in post-war money, 27,500 million £. 
 Mr. Crammond's figure agrees precisely with 
 the estimate made by Mr. Sydney Arnold, 
 namely, that for the purpose of the capital levy the 
 taxable wealth of the country will amount to 
 24,000 million £. Mr. Pethick Lawrence has based 
 his estimate of the yield of a capital levy on 
 the assumption that the taxable capital of the 
 country is about 15,000 million £. The wide 
 disparity between the lower and higher of these 
 various estimates is probably explained by the 
 inclusion in Mr. Crammond's and Mr. Arnold's 
 estimates of the v/ar-loans as an addition to 
 the capital of the country." " The war-loans," 
 Mr. Snowden goes on to say, " do not represent 
 any addition to the real capital, but it appears 
 to be sound to regard these sums as available 
 for the purpose of a capital levy." He then 
 proceeds to accept Mr. Crammond's estimate 
 and, with an average rate of tax of 14 per cent, 
 to get 3,000 million £ as the yield of tax. 
 
 It need hardly be said that this loose way of 
 handling the matter gets us no nearer to the 
 real truth, and rather confuses the pubHc. 
 Although Mr. Snowden has had important 
 details in front of him, he has not in 
 any way grasped the immense difference 
 between estimates of the National Wealth 
 taken collectively, and an aggregation of indi. 
 vidual fortunes, a difference which extends far
 
 THE NATIONAL CAPITAL 25 
 
 beyond the question of the National Debt. 
 The passage serves to show, moreover, that 
 unsystematic and uncritical estimates such as 
 those given by Mr. Crammond, may circulate, 
 and be used on terms, equal — or often, 
 indeed, superior — to estimates into which much 
 careful thought and criticism has been put, 
 and to which every known test has been applied. 
 It is, first, totally wrong to imagine that the 
 national wealth as a whole comes under any 
 proposed levy, and, secondly, quite wrong to 
 treat the War Loan as though it were wholly 
 an addition to the wealth for this purpose. It 
 is true that it is no addition at all to 
 the real wealth of the country, but, on 
 the other hand, it is equally true that 
 only to a hmited extent is it recognisable 
 upon the wealth returns of individuals. The 
 matter was very carefully gone into in the 
 Board of Inland Revenue memorandum,* and 
 it is surprising how small a section of this 
 wealth can be regarded as " coming out " upon 
 individual returns. Mr. Crammond's method 
 of multiplying up an unchecked pre-war 
 estimate by a general fall in currency values, 
 with no reference whatever to the change in the 
 actual market values of securities, and the rate 
 of interest, is too loose and too rough to be 
 treated seriously as a statistical estim.ate at all. 
 
 • Vide Report and Evidence : Select Committee on Increase of 
 Wealth (War).
 
 26 WEALTH & TAXABLE CAPACITY 
 
 Against each detailed estimate I have given 
 a figure for the " range of doubt " which 
 expresses the hmits within which the true 
 figure must certainly be found. Thus " gas- 
 works 182 ±18 " means that the value must 
 certainly lie between 164 and 200 million £. 
 Now, in my aggregate, I have given the aggre- 
 gate range of error as 1,867 niillions, which is 
 the figure that would result if all the detailed 
 estimates were wrong in the same direction 
 to the full extent. Everyone acquainted with 
 statistics or probabilities will know that this 
 is an extremely unlikely, indeed, almost im- 
 possible event, so that we may adopt a 
 common principle, and, after squaring each of 
 the details, take the square root of their 
 aggregate, which gives a range of possible error 
 of 860 millions. The upper limit of my estimate 
 is, therefore, 15,179 millions, and it can safely 
 be said that any pre-war estimate exceeding 
 15,000 millions will put its author into grave 
 difficulties, if he is to reconcile it with all the 
 existing data, and satisfy all possible tests. 
 
 Now, how this National valuation is con- 
 tradicted or confirmed by the other methods — 
 by what is known as the multiplier and the other 
 checks we have upon parts of it, — will be seen 
 to some extent later, when we have to bring 
 out some questions of distribution, which are 
 bound up with the points I have made already 
 as to the way in which property is owned.* 
 
 ♦ Vide page 8
 
 THE NATIONAL CAPITAL 27 
 
 The Valuation To-day. 
 
 The next question is : Hoin) do we pass to the 
 valuation at the present day ? 
 
 Apart from the difficult question of how 
 property may be owned, we have three different 
 possible conceptions of the valuation. First, 
 we could arrive at the valuation to-day by 
 taking the accepted valuation of some previous 
 year as, for example, 1914, and adding to it 
 the value of all additional physical wealth at 
 its cost price, deducting, of course, any physical 
 wealth that disappears or is destroyed, accord- 
 ing to the figure at which it stood in our original 
 valuation. This is the same thing as adding 
 to the original valuation the amount of the 
 capital savings out of current income, as the 
 net amounts actually saved each year. This in- 
 volves no reconsideration of original values in 
 the light of changing money conditions, and 
 cannot be treated as satisfactory for any 
 ordinary purpose. Even before the recent great 
 change in money values it was never the case 
 that the difference between two valuations, say, 
 ten or fifteen years apart, would equal the 
 aggregate amount of net savings for the inter- 
 vening years. That difference might be either 
 more or less than the savings, according to the 
 movement of money values, and the rate of 
 interest. Thus it is dangerous to suppose that 
 the valuation by Giffen of 10,037 millions in
 
 28 WEALTH & TAXABLE CAPACITY 
 
 1885, and that of 10,663 millions £ in 1895, 
 reflected an annual amount of saving of only 
 60 millions, the difference in ten years being 
 600 millions. The savings were offset by the 
 changes in existing values, just as the whole 
 current profits of a business might be used up 
 if we made depreciation allowances for the 
 changing value of its Balance Sheet assets 
 brought about through the rate of interest. 
 
 Under a second method we might revalue all 
 the physical assets as at a single moment of 
 time. This is a little paradoxical, because all 
 valuation involves the assessment of a flow of 
 income over a period, and, therefore, valuation 
 at a moment of time may seem to be a con- 
 tradiction in terms. What is really involved 
 is a question of degree leading into the third 
 kind of valuation which, although ostensibly at 
 a given moment of time, endeavours to take 
 the more stable view, and to present a figure 
 which would be approximately true if judged 
 also at a single moment of time at some little 
 distance. This point is of very material im- 
 portance at a time like the present, with rapidly 
 changing values. If we were to seize by an 
 instantaneous photograph, the market prices 
 of shares, etc., as at the 30th June, 1920, and 
 to secure a similar picture to-day (Feb., 192 1), 
 we should see a very material difference, and we 
 should have to make up our minds which is to 
 be regarded as the estimate of national wealth 
 for the year 1920.
 
 THE NATIONAL CAPITAL 29 
 
 Technical Difficulties in the Present 
 Valuation. 
 
 There are special difficulties at the present 
 time in the determination of the national 
 capital — they are of two kinds : (i) in the 
 material to be used ; and (2) in the principles 
 involved. 
 
 Taking those affecting material : 
 
 First. The taxation data available have 
 been reduced during the war, and some of the 
 classifications previously useful have dis- 
 appeared, at any rate, for a time. 
 
 Second. The statistics are always two years 
 " behind," and in some senses five. Assessments 
 themselves, for any given year, relate to the 
 actual results of three preceding years (or five 
 in some instances). So the assessment for the 
 year ending 5th April, 1920, may be on the 
 profits of the three years from ist July, 1916, 
 1917, and 1918 respectively. These figures are 
 the latest available, and they are, as may be 
 seen, hardly emerging from purely war years, 
 heavily charged with special war profits, and 
 no use whatever as a basis for a firm capitalisa- 
 tion for the future. 
 
 Third. For some time to come the assess- 
 ments to profits will still be reduced by the 
 amount of Excess Profits Duty assessed. If 
 these are really a burden upon profits, then, of
 
 30 WEALTH & TAXABLE CAPACITY 
 
 course, it is only necessary to add the duty to 
 get a result which represents profits without 
 the duty, but if as so many urge, the burden 
 is passed on, and profits are maintained, then 
 removing the duty should have no effect on 
 the profit. In the case of removal, it might have 
 no effect upon the rate of profit, but might lead 
 to wider trade and a large aggregate profit at 
 the same rate. But with this burden about, 
 as we think, to disappear, it would be bold to 
 forecast the amount of future net profit which 
 can form the basis of capitalisation. 
 
 Fourth. The assessed value of property is 
 now on a valuation lo years old, owing to the 
 war having interfered with the regular reassess- 
 ment. This may be remedied before very 
 long. But, in any case, it relates to that field 
 of the enquiry in which there is least un- 
 certainty. 
 
 Fifth. The auxiliary tests are not available. 
 We have had no Census of Production and no 
 capital valuation of land for lo years. The 
 changes in the Death Duty Statistics are very 
 slow in making themselves felt, or in giving 
 such a basis of years that will warrant any 
 close inferences. The multiplier depends upon 
 mortality statistics which have been quite 
 upset by the war. 
 
 Even such " inventory " methods as the 
 capital put into businesses, mines, railways, 
 etc. are of no value now, since the capital
 
 THE NATIONAL CAPITAL 31 
 
 sunk is no such criterion of future worth as it 
 may be when gold values have been relatively 
 stable for a long time. Judging cotton mills 
 at "so much a spindle," and shipping at "so 
 much a ton," is a perilous proceeding when 
 such values are changing daily. 
 
 Difficulties in Principle. 
 
 But more important still are the questions of 
 principle involved. 
 
 The points of principle that arise at the 
 present time bring out various difficulties owing 
 to a temporary " hold up " in the normal flow of 
 economic forces. Are we to value houses upon 
 their value as investments to the recipient of 
 rents, or upon the totally different figures which 
 we should get if we took the extraordinary 
 pressure of scarcity values created by an 
 enormous demand focussed upon a very small 
 point of effective supply ? In the case of 
 commodities which, in the economic phrase, 
 have a "highly inelastic demand," the change 
 in price is often out of all proportion to the 
 decrease in supply. A very few motor-cars 
 short of the requirements of the people who 
 are keen on cars, may serve to keep the price 
 very high. On the whole, therefore, it would 
 appear advisable to ignore purely " scarcity " 
 values of things that are saleable commodities,
 
 32 WEALTH & TAXABLE CAPACITY 
 
 and to cling as closely as possible to investment 
 values over a long period. But investment 
 values in the case of houses are artificially low, 
 because, even with a considerable supply, the 
 cost of the production of houses is very much 
 higher than of old, and rents left normally to 
 themselves without legal restriction, would rise 
 very much in the same ratio as other prices. 
 Thus the capital value of such rents, even with 
 the same multiplier or number of years' purchase, 
 would be pro tanto higher. Of course the multi- 
 pher is actually less. Property generally forms 
 so considerable a section of national wealth 
 that the difference between these two views is 
 material when we come to attack the figures. 
 
 Secondly, what I have said about valuation 
 at a moment of time, may be illustrated by the 
 very high prices of ships during the war. The 
 profits to be derived from the ownership of a 
 ship were so enormous for the immediate 
 future that the capital value at any given 
 moment represented not merely the anticipated 
 average income over future years, but also the 
 anticipation of a huge and abnormal sum to be 
 received in the immediate future. Thus a ship 
 fetching £400,000 might do so because it was 
 anticipated that it would make £200,000 in the 
 next twelve months whereas its normal value 
 would have been £200,000 for an anticipated 
 yield of anything from £15— £20,000 per annum. 
 Now do we really intend to laix up what I call
 
 THE NATIONAL CAPITAL 33 
 
 a " stable national capital " with a passing 
 monetary receipt in the nature of income ? 
 
 Thirdly, take those classes of goods which 
 provide an income of enjoyment or use rather 
 than of money, such as jewellery and fui'niture, 
 Are we to assess them at the present shop 
 value of their equivalents, or to keep them at 
 the figure that they originally cost us ? Here, 
 again, an indeterminate and intermediate course 
 seems to be the wiser for adoption to any one 
 who is seeking some element of stability in his 
 valuation. Furniture is essentially a thing 
 which may rise to great heights of price through 
 an immediate shortage of supply combined with 
 a limited, but intense demand. 
 
 Fourthly, the valuation of businesses at a 
 time when the future of taxation is so uncertain, 
 and its burden so great, presents special points 
 of difficulty. Is one to capitalise the present 
 earnings accruing to the owner of the business, 
 or the earnings which one imagines will accrue 
 to him after the repeal of a special duty ? 
 
 Fifthly. It has been the practice to consider 
 national property on conservative lines, viz., 
 its estimated cost written down substantially 
 for obsolescence and depreciation, but to-day 
 we are faced with the fact that the cost of 
 reproduction would be totally different. 
 
 You will see that apart from the question of 
 temporary shortage, or a fluctuating point of 
 monetary values, we are faced with the question
 
 34 WEALTH & TAXABLE CAPACITY 
 
 of whether we shall go " the whole hog " in our 
 revaluations, taking a new and assumed stable 
 level of currency of an altogether different 
 kind from that hitherto adopted. If we do 
 not do this there is a mixture of different cur- 
 rency values, which is rather damaging to any 
 inferences we may wish to draw. It is better to 
 take one's valuation on a uniform currency 
 basis, and then to issue the frankest warnings 
 against interpreting the difference between two 
 valuations at different levels as indicative of 
 equivalent change of physical assets. It is 
 quite obvious that it would be possible to get 
 an enormous apparent increase of wealth when 
 the actual objects of enjoyment might be 
 identical, by the simple process of multiplying 
 the currency by the printing press. 
 
 The False Increase in Capital Values. 
 
 Some superficial critics alleged that this was 
 what the Board of Inland Revenue did in their 
 memoranda on the " Increases of War Wealth," 
 whereas it was perfectly clear to anybody 
 studying the matter carefully that they were 
 fully alive to the peculiar character of the 
 increases during the war, for they made 
 repeated reference to increased value " as ex- 
 pressed in money.'' I should like to refer to the 
 evidence that I gave before the Committee 
 myself on this point on the following hues : —
 
 THE NATIONAL CAPITAL 35 
 
 Much criticism centres round the principle 
 of the War Wealth Levy. We are told that at 
 first it was " out to get the profiteers," then 
 we found that it was attacking a wider range, 
 namely, the people who were better off than 
 before the war, and then, lastly, that it was 
 still wider, namely, the people who were not 
 really better off, but only nominally better off. 
 These are precisely the three stages through 
 which the Excess Profits Duty passed. At 
 first, it was a principle to get hold of the people 
 who made profits out of the War ; then when 
 this was found impossible, the absolute principle 
 was freely asserted as the basis, viz., " when so 
 many people are worse off during the war it 
 is only right that those who are better off should 
 pay." But it was soon realised that with the 
 depreciation of the currency the retention of 
 the pre-war standard, and a fraction of the 
 excess amounting to fifteen per cent., left a 
 man still worse off in real income than he was 
 formerly, and the principle was re-stated, as 
 relative, viz., " We are, of course, all worse off, 
 but some are less so than others, and those 
 must bear the brunt of the burden." In writing 
 of the origin of Excess Profits Taxation in other 
 countries, I have shown that hardly anywhere 
 did the " war profit " idea survive the stage of 
 being a mere impetus to action. 
 
 "No one will accuse me, I think, of having 
 written with any prejudice in favour of taxation
 
 36 WEALTH & TAXABLE CAPACITY 
 
 by reference to capital // fairly 
 
 substantial general allowances are made; we 
 may he said to he left with a proposal to tax, 
 in the main, only the third section due to 
 currency depreciation. This is alleged to he 
 very reprehensihle and indefensible in prin- 
 ciple. But is it so clear that it cannot he a 
 just basis in a special emergency ? It might 
 conceivably happen that, owing to a sudden 
 currency expansion, without any trading excess 
 profits having been made or any other kind of 
 accretions to capital, the whole nominal value 
 of existing wealth should be doubled. But it 
 would only be doubled as a whole — taken on 
 individual assets it might be very uneven in its 
 action (for capital values), and, although col- 
 lectively, people were just as wealthy as 
 before, taken individually, they would have 
 changed their relative positions seriously, 
 and some would be much better off than 
 others by the change. Is there any serious 
 objection to such an application of taxa- 
 tion as would pay some regard to this 
 fortuitous change of relationships, and do 
 something towards a restoration of the 
 status quo ? This is very much what is 
 proposed in effect, and the proposal is hardly 
 so ridiculous or invalid in principle as some 
 of your witnesses seem to urge. It is dis- 
 tinctly more equitable than a Capital Levy 
 in this regard."
 
 THE NATIONAL CAPITAL 37 
 
 The Valuation of Individual Wealth To-day. 
 
 Now the method pursued for present purposes 
 of a levy has generally been to get not the 
 figure comparable with the national wealth, 
 but the total individual wealth. StiU, the lines 
 are approximately the same, leaving out certain 
 categories. The official return estimated for 
 individuals, as at 30th June, 1919, some 4,000 
 millions increase — this included items which 
 would be similar if included in a full National 
 estimate, i.e., lands and buildings 430 millions, 
 farmers' capital 290, movable property 450 
 millions, decreases of 1,075 for individual 
 holdings in Railways and foreign securities, etc. 
 There was very little increase except that 
 created through war loans, which, though they 
 may be added to wealth for individual purposes, 
 are taken off for the nation's wealth, as a debt 
 on its property. 
 
 But, at the present time, there are at work 
 various economic factors causing great dis- 
 turbances in capital values ; these disturbances 
 work in different directions in different cases, 
 and they do not necessarily affect income in 
 the same direction or in the same degree. 
 Persons who have in the past invested all their 
 wealth in fixed-interest-bearing securities (such 
 as foreign Government loans or debentures of 
 public companies), find that the capital repre- 
 sented by their securities has greatly decreased 
 
 -»- ;-^
 
 38 WEALTH & TAXABLE CAPACITY 
 
 in value. The income, however, remains con- 
 stant and gives no indication of the amount 
 (or even of the existence) of the capital decrease. 
 Again, other persons who have invested their 
 wealth in house property find in many instances 
 a very substantial increase in the value of their 
 capital, but the income derived from it (after 
 making the necessary allowance for the increased 
 cost of repairs) is in many cases smaller than 
 before the war. The decline in the actual 
 income gives no indication of the increase in 
 the capital value ; indeed, it seems to suggest 
 the reverse. 
 
 One could fairly assume that left alone, 
 property rents could be double their old level, 
 but this double income would be capitalised on 
 a lower basis owing to the rise in interest and 
 in the net result the capital value is probably 
 not more than 1,200 millions greater. 
 
 While I prefer to give no estimate of capital 
 wealth at the present time for the reasons 
 stated, I should like to add that, in my 
 judgment, it cannot exceed ig to 20,000 million £, 
 and is probably much less. 
 
 The aggregate of individual wealth has moved 
 from 11,000 millions in 1914 to about 15,000 
 millions at June 1920. Of course, these are 
 merely expressed in money values — the increase 
 in real or intrinsic values is certainly almost 
 negligible.
 
 CHAPTER II 
 
 THE MEASUREMENT OF THE NATIONAL INCOME. 
 
 At the outset I must remind you of what I 
 have said aheady upon the main purpose of 
 these lectures, in order that you may not get 
 restless because I stop short of the application 
 of my results to the practical problems of the 
 day. Instead of starting with the data in these 
 controversies as already given, I am con- 
 sidering the data themselves without regard 
 to their subsequent application, to indicate 
 how they are obtained, the extent of their 
 reUability, what they really mean, and the 
 uses to which they can be properly put. 
 
 We have already considered the National 
 Wealth under, at any rate, one of its aspects, 
 namely, its aggregate before the war and at 
 the present time, and we have now to consider 
 the National Income. This is a much less 
 difficult and abstract conception in many 
 ways, as it does not depend upon difficult 
 questions of valuation, but can be measured 
 by direct arithmetical methods over a fixed 
 
 39
 
 40 WEALTH & TAXABLE CAPACITY 
 
 period of time, viz., one year, with which we 
 are all familiar. Nevertheless, it has difficulties 
 of its own in principle, and it has some of the 
 same difficulties in regard to material at the 
 present time as were considered in the last 
 section. Many of the figures upon which we 
 have to rely at present are heavily charged with 
 war conditions, and some of the most important 
 fixed points cannot be, at the moment, clearly 
 discerned owing to the fog of war, and the 
 rapid change in prices and profits. 
 
 Ideas of National Income. 
 
 We have, first of all, to settle what we really 
 mean by the term " National Income," because 
 different people attach to it different ideas. 
 I define it to be the aggregate money expression 
 of those goods produced, and services performed,* 
 by the inhabitants of the country in a year 
 which are, as a fact, generally exchanged for 
 money. Everything that is produced in the 
 course of the year, every service rendered, every 
 fresh utility brought about, is part of the 
 national income. Thus it includes the benefit 
 derived from the advice of a physician, and the 
 pleasure got from hearing a professional singer. 
 Sir Leo Chiozza Money remarks : — " It is some- 
 times argued that if the national dividend were 
 better distributed part of it would disappear, 
 since it consists of the valuation of services 
 
 * Subject to certain reservations — vide p. 49 ei $eq.
 
 THE NATIONAL INCOME 41 
 
 rendered to the well-to-do."* I have frequently 
 contended that our method tends to exaggerate 
 the value of services amongst the rich : 
 
 "It is obvious that if a ring of people like 
 to call their services any given ' value,' there is 
 no real obstacle A., the great surgeon, performs 
 an operation for B., the prima donna ; B. goes 
 to sing at a social function for C, the leading 
 barrister ; C. takes a brief for A. in a lawsuit. 
 Each one is in the habit of selling the particular 
 service to the community at £100, but on this 
 occasion each sends in a bill for £1,000, which 
 is paid, and up goes the national income by 
 £2,700 above its true figure upon any reasonable 
 exchange basis. ..." 
 
 " Exchanges are going on between people 
 upon one plane for services at a valuation 
 belonging to that plane, and never brought 
 into comparison v/ith values on a lower plane. 
 If there were equal redistribution, that plane 
 of values would not exist. ... If, however, we 
 had a redistribution of existing capital wealth, 
 socialistically, many services would alter in 
 value ; no physician would get differential fees 
 for identical services. But it is a mistake to 
 suppose that the only change would be a 
 reduction of certain values, and, therefore, a 
 reduction in the aggregate. Certain services 
 would rise in value because of the wider 
 
 * T)ie Nation's Wealth : p. 114 et seq.
 
 42 WEALTH & TAXABLE CAPACITY 
 
 effective demand. No one can say what the 
 new equilibrium would be — it is an insoluble 
 problem, because only ' broken arcs ' of the 
 demand and supply curves are known to us. 
 
 "It is, however, as well to remember that we 
 cannot divide up the aggregate and re-arrange 
 it to the same total, like a box of bricks. It 
 is rather more like the cells of an organism. 
 At the same time it is clearly possible to 
 exaggerate the importance of this point, and 
 the figures we have are sufficiently stable and 
 homogeneous in component exchange values 
 for all ordinary purposes."* 
 
 The National "Heap." 
 
 I am most anxious that the conception of 
 national income should be a living and real 
 one to you all, and not merely a mass of figures, 
 so, before we leave this, may I put to you a 
 homely and simple and, therefore, perhaps, 
 inexact illustration, which may serve to make 
 the matter more graphic. To many of you 
 the idea will be fairly familiar, to others, 
 perhaps, not so, but if you will really seize it, 
 it will be one key for many other mysteries 
 of production and exchange, and particularly 
 of currency and the payment of war indebted- 
 ness. Will you suppose, that aU the services 
 and goods that are produced by us as a com- 
 
 * British Incomes : p. 419.
 
 THE NATIONAL INCOME 43 
 
 munity in a year are all piled in the centre of 
 this room in a great miscellaneous heap. 
 Every one of you, in the work that you do, is 
 putting that work there. It includes the boots 
 and the clothes that are made, the loaves that 
 are baked, the sheep that are reared, the 
 sermons that are preached, the songs that are 
 sung, the physician's advice, the pilot's skill, 
 the banker's knowledge, the business man's 
 services of organisation, the crossing sweeper's 
 service, indeed, everything that can be given 
 by us whereby we have a claim upon the work 
 of our fellow-men who are contributing to the 
 heap, including the services of those who have 
 helped to make the heap larger than it would 
 or could be if we started afresh without the 
 assistance of piled-up capital goods saved from 
 the heaps of former years. Let it be supposed 
 that we have no such thing as money, but that 
 for each contribution we have made to the heap 
 there is given to us a " labour or services ticket " 
 with a claim to draw something out of the heap 
 in return — if you like, for the moment, equiva- 
 lent in its labour or equivalent in its skill, or its 
 sacrifice, to what we have put in. The people 
 who have refrained from an earlier consumption 
 on the faith of their title to later consumption 
 somewhat larger in extent, also have their 
 title to the heap. Now the total of tickets 
 giving titles to the heap will exactly equal the 
 mass in the heap, and when we have all drawn
 
 44 WEALTH & TAXABLE CAPACITY 
 
 out what we want of other people's products 
 and handed in our tickets, the heap will have 
 vanished. It is true that when we present our 
 tickets, we shall, perhaps, in our demands for 
 a particular thing that is in the heap, exceed 
 the actual supply ; in other cases, we may ask 
 less. There may be fewer loaves put upon it 
 than we want, and, perhaps, more servants and 
 third-rate music-hall songs than there is a 
 demand for, but these are questions of bad 
 anticipation of demand, and we must rule 
 them out for the moment. The point is now, 
 that we cannot, as a whole, get more out of 
 the heap than we have put into it. If we each 
 secretly make up our minds one night to put a 
 little less on and say nothing about it to anyone 
 else, we shall all be amazed to see how the heap 
 shrinks in its mass. On the other hand, if all 
 tackle their job in the spirit of Sunny Jim, there 
 will be a magic magnification before us. 
 
 A Scotch congregation, anxious to do honour 
 to a beloved parson and show him some mark 
 of their appreciation of his devoted services, 
 sought the most suitable expression for their 
 feelings. After anxious consultations it was 
 decided to present him with a barrel of whisky. 
 As the readiest means of compassing the gift, 
 it was agreed that contributions should be 
 collected in kind, and accordingly an empty 
 barrel was obtained and, at a time and place 
 arranged, the individuals of the flock brought
 
 THE NATIONAL INCOME 45 
 
 their offerings in vessels of different kinds and 
 duly poured them into the open bunghole, 
 after which the cask was sealed in preparation 
 for the ceremonial of presentation. This great 
 day arrived, with the pomp and panoply of 
 sheriffs, dominies, and ofhcials, and the minister 
 and his family prominent. A most pleasing 
 feature to all was, of course, the necessity for a 
 general sampling of the present, and it was a 
 solemn moment when the senior elder turned the 
 tap. But, lo ! there flowed forth — pure water ! 
 
 When the brilliant idea occurs secretly to 
 each one alike that the niggardly character of 
 his little contribution will be lost in the general 
 fund of honest work, there is likely to be a 
 surprising result ! 
 
 Now, what happened in the war ? Suddenly, 
 a very large number of contributors to the heap 
 had to leave off putting things upon it, and to 
 go elsewhere to fight. They had still to be 
 fed and clothed, and so the heap had to be 
 kept up in spite of their absence, as they were 
 still drawing subsistence from it. It is a fact 
 that in paying for the war everything had to 
 come out of that heap unless it could be bor- 
 rowed from other countries. First of all the 
 quantities of life's necessaries in it had to be 
 maintained, and then the character of it had 
 to be vastly altered to include all kinds of 
 armaments and war materials, and the burden 
 of doing this fell upon a comparatively small
 
 46 WEALTH & TAXABLE CAPACITY 
 
 fraction of the producers. The war could not 
 be paid for and fought out of the heaps of future 
 years, all the talk about making posterity pay 
 for the war notwithstanding. Everything had 
 to come out of current production. All that was 
 available for war was the difference between 
 what people put on the heap and what they 
 took off it. We had, in consequence, the 
 campaign to take off as little as possible — 
 Economy and Rationing. Then came the cam- 
 paign to put on as much as possible — overtime, 
 and lady workers emerging from their own 
 homes and leaving little private or domestic 
 heaps — contributions to the public heap by hun- 
 dreds of wives and young ladies who had never 
 done anjrthing more than make fancy antima- 
 cassars. I am afraid that in a few cases some 
 of the latter forgot that the object was to make 
 the heap bigger, and as fast as they put services 
 on it had what they call a " good time," taking 
 from the heap all sorts of things which they had 
 never had before, in the way of furs, restaurant 
 dinners, and expensive amusements. Never- 
 theless, the principle of addition was clear. 
 
 Now the actual work of extracting from the 
 heap the materials for waging the war, had to be 
 done by the State, but, by hypothesis, all the con- 
 tributors to the heap had tickets for what they 
 had put on, and, therefore, had the right to 
 clear it right out. The State, which was, of 
 course, our " collective will," came along and
 
 THE NATIONAL INCOME 47 
 
 took from our tickets a certain proportion, 
 according to its own plan, which gave it a title 
 to the heap, and lessened our own title. This was 
 taxation. But the State found that in this 
 way it could not get enough, and so it had a 
 second way and came to us and said, " If you 
 will give up to us voluntarily, some more of 
 your tickets, we promise, when the war is won, 
 to give you a special and exclusive title to an 
 extra bit off future heaps." This, we called 
 Borrowing and War Loans. Still the fund for 
 the State was not enough. What remained to 
 be done ? We can picture now that the State 
 by stealth in the night printed a number of 
 tickets for which no corresponding goods had 
 been put upon the heap — if you like, twice as 
 many tickets — and then when these came into 
 the market with all the others clamouring for 
 their share of the heap, it was very soon clear 
 that there were twice as many tickets as goods, 
 and in the scramble for the diminishing heap, 
 people quite gladly gave two tickets to secure 
 an article where one would have previously 
 sufficed. Then by the time the whole 
 heap was cleared and all the tickets had 
 changed hands, the equivalent of every 
 unit of the heap was practically twice in 
 tickets what it had been before. The goods 
 and the tickets, instead of cancelling out at their 
 unit values cancelled out only if two tickets 
 were offered in place of one. This third method
 
 48 WEALTH & TAXABLE CAPACITY 
 
 is what we know as " inflating the currency," 
 and I have given you very crudely the quantity 
 theory of money. Now the State inflates the 
 currency whenever it uses more purchasing 
 power than it has withdrawn by taxation, or 
 borrowing, from the people. It can deflate only 
 by the opposite method, namely, withdrawing 
 from the people more purchasing power than it 
 uses. Thus, with all these tickets in circulation, 
 the Government might each year, by taxation, 
 draw a large number fr-om the purchasers, but 
 when it came to claiming upon the heap for its 
 own purposes, use only a few of them and 
 destroy the rest. Then the number of tickets 
 per unit of goods would become lower than two, 
 and the process would be continued until the 
 original number of tickets were available. 
 
 Now these tickets are what we refer to as 
 "money," and in " money " I include not only 
 currency notes, but also banking forms of credit. 
 By thinking of all this stream of production 
 in this way, apart from its value in terms of 
 money, you will be able to refer most of the 
 difficult questions relating to national income 
 to a more sensible test than by dealing with it 
 in your mind in the abstract. In my third 
 lecture I shall talk about the distribution of 
 this heap amongst the different purchasers and 
 people who give service. I am now only con- 
 cerned with the measure, in tickets, of its size. 
 We must have a common denominator ; we
 
 THE NATIONAL INCOME 49 
 
 cannot add weights and lengths and sizes. 
 Books may be heavy, but we cannot add them 
 to coal ; sermons and lectures may be long, 
 but we cannot add them to dress lengths ; 
 songs and concerts can be nice, but we cannot 
 add them to vanilla ices ! This common de- 
 nominator must be our currency, but you will 
 see that the same sized heap can quite easily 
 be expressed by an aggregate of units very 
 widely different from each other according to 
 the number of " tickets " in existence. 
 
 There are several matters relating to the 
 
 computation of national income which are 
 
 matters of principle, formerly negligible, but 
 now of great importance. 
 
 The Household Services of Wives. 
 
 First. It has never been the practice to set 
 any value upon the household services rendered 
 by wives to their husbands and homes. If one 
 were evaluating the total worth of all human 
 effort in money — whether such effort were in 
 fact or in custom habitually exchanged for 
 money — no doubt it would be necessary to 
 make an addition under this head. vSo, equally, 
 would it be necessary to evaluate all the services 
 rendered by individuals in their leisure time to 
 themselves where those services have a com- 
 mercial value. For example, the task of putting
 
 50 WEALTH & TAXABLE CAPACITY 
 
 down linoleum and hanging pictures would be 
 an addition to one's income at the rate which 
 that service would cost if paid for in the ordinary 
 way. But, after all, in these matters one must 
 have some sense of teleology. We can allow 
 as a deduction from income expenses incurred 
 in getting that income, but not the various 
 ways of spending the income itself upon the 
 essentials of life. Therefore, we do not allow 
 as a deduction from income the cost of boots, 
 clothing or food. Similarly, we should not 
 allow the cost of keeping a home, because these 
 are not business expenses. Our instinct is 
 sound, therefore, in calculating the net amount 
 of money that passes over the threshold of the 
 home, but ignoring everything that is done 
 within that home itself in the way of services. 
 It is true that the payment to a domestic 
 servant, while it constitutes an addition to the 
 National Income, is no deduction from the 
 income of the employer ; in this sense, therefore, 
 we have only a question of degree, and the 
 point at which we have hitherto stopped may 
 be regarded as illogical. In " British Incomes 
 and Property " I stated : — 
 
 " We omit the immense productive services of wives 
 in household duties, of amateur gardeners, of all who 
 spend any effort, outside their main business of money- 
 income or earning, in performing services or making 
 things. If I get the services of a shoeblack, I add two- 
 pence to the national income, but if I black my own
 
 THE NATIONAL INCOME 51 
 
 shoes and he gives me some tangible article or service, 
 the monej^ measure is the same as before, but the national 
 wealth is greater. We are often told we must not reckon 
 things twice, and this warning certainly covers all pay- 
 ments made to earn and to keep income intact. If a 
 man pays a housekeeper £1 a week for her services out 
 of his income of £200 a year, they figure together in the 
 national income at ;f252, but if he marries her and 
 continues his payment of £1, the national income shrinks 
 by £52. It is imperative that this limitation of the 
 income tax statistics as a representation of the ' national 
 dividend ' be borne in mind." 
 
 Now, SO long as this convention was thoroughly 
 understood, I think it was hitherto a reasonable 
 one, the evaluation of wives' services being so 
 difficult where not actually subject to a monetary 
 test ; but a great strain was thrown upon it 
 during the war. Obviously, if a million 
 women performed services in industry worth 
 £100,000,000 a year, and a million wives 
 stopped at home, we have an addition of 
 £100,000,000 to the national income ; but if 
 these ladies changed places, the million wives 
 going out to work and earning £100,000,000, 
 while the million women became domestic 
 servants and housekeepers in the homes of 
 the wives instead of being out-workers, and 
 are also paid £100,000,000, we get an addition 
 of £200,000,000 to the national income. If 
 there is an important change in social practice 
 over a long period, this principle might be also 
 of importance, but on the whole I think we are
 
 52 WEALTH & TAXABLE CAPACITY 
 
 reverting gradually to a stable condition of 
 social practice, and that the balance of ad- 
 vantage is to ignore the difficulties raised by 
 this conventional treatment. 
 
 Co-operative Incomes. 
 
 Second, The extension of co-operative trad- 
 ing tends to diminish the national income as 
 we express it, where the actual services and 
 commodities produced and enjoyed are un- 
 diminished. This arises from the fact that in 
 our conception of income at present, we do not 
 include services which have a strong element of 
 " mutuality." Anyone interested in this aspect 
 should read carefully the reports of the Royal 
 Commission on the Income Tax. 
 
 Public Services and Taxation. 
 
 Third. Any tendency to have services per- 
 formed by officials paid entirely out of the 
 proceeds of taxation, instead of out of the 
 proceeds of fees and trading charges, tends to 
 swell the amount of the national income. For 
 example, take the services of the telephone for 
 business purposes, ignoring its private use. If 
 this is paid for by fees, they are deducted as a 
 business expense, and do not form a part of 
 profits. But if we were to put the telephone 
 service as a national charge paid for out of the
 
 THE NATIONAL INCOME 53 
 
 income tax, we should at once transfer it from 
 the class of expense incurred in getting one's 
 income into expenses or ways of spending one's 
 income. Income Tax is not a deduction in 
 computing one's income. The amount of profits 
 assessable and the income received would, 
 pro tanto, be increased, and the whole of the 
 telephone service and salaries would form an 
 addition to, or duplication, of national income. 
 The same applies to any municipal services 
 which assist people to get their incomes, and 
 which can be charged as business expenses, 
 but which are transferred to the rates now 
 generally paid by householders. Such rates 
 are not a deduction for assessing income. 
 Therefore, a tramway service, or a telephone 
 service, or an electricity service, or a market 
 service, used for business purposes, and subsi- 
 dised out of the rates owing to working de- 
 ficiencies, represents something thrown out of 
 the category of business expenses into the 
 category of personal expenses, and tends to 
 swell the national income wrongly. On balance, 
 no doubt, the profit in relief of rates is greater 
 than the deficiencies. 
 
 The Payment of Interest on the National Debt. 
 
 Fourth. The foregoing may not seem of 
 much importance, but when we come to consider 
 the present position of taxation in relation to
 
 54 WEALTH & TAXABLE CAPACITY 
 
 the payment ol interest on debt, we shall see that 
 the same principle is very significant. Every- 
 one who owns less than the average holding of 
 War Loan is, on balance, paying interest to 
 his fellows for their net balance of loans to him. 
 Everyone who on balance holds more War Loan 
 than the average, is receiving interest on money 
 he has lent his fellows. Now, in ordinary life, 
 such transactions would represent an addition 
 to the incomes of those receiving interest, and a 
 deduction from the incomes of those paying 
 interest. If A. lends B. £i,ooo at 5 per cent., 
 A's income includes £50 of interest, but B.'s 
 income is diminished by a charge of £50 for 
 interest. But in the actual way we are now 
 doing it, the individuals owing the interest do 
 not pay it qua interest — they pay it qua taxa- 
 tion, into a common pool out of which the 
 interest is paid. These payments qud taxation 
 are not allowed as deductions by our con- 
 ventional method of computing national income. 
 We take credit for all the pluses, but do not 
 debit the minuses. The £350,000,000 of 
 interest paid by one set of inhabitants to the 
 other, would, if paid as " balance of interest " 
 transactions, have no effect upon the nominal 
 national income, but under our method of 
 paying it out of taxation, we at once increase 
 the national income, and " the bigger the debt 
 the bigger the income." 
 
 This, therefore, raises the question acutely
 
 THE NATIONAL INCOME 55 
 
 whether we have a logical definition of income 
 if we ignore payments for taxes to the extent 
 that we have done in the past. Should we not 
 take out all those payments of taxes which are 
 spent, not upon the objects for which we live, 
 in the normal understanding of " hfe," but for 
 such an exceptional object as the war, it being 
 found that such payments come in to be counted 
 again as income elsewhere ? You will remember 
 that in the case of National Capital this is 
 practically what we did. Having counted the 
 debt as income to the holders, we took it from 
 the collective property of the State and indi- 
 viduals remaining. The question now arises 
 whether some such operation should not be 
 performed in computing the national income. 
 
 The Difference between Excess Profit Duty and 
 
 Income Tax. 
 
 Fifth. The preceding question is made all 
 the more acute when we consider the difference 
 in treatment between Excess Profits Duty and 
 Income Tax. For the E.P.D. is a business 
 expense and is deducted before the incomes are 
 computed upon which income tax is paid. 
 Unless we can agree that Excess Profits Duty 
 and Income Tax are, so to speak, convertible 
 terms, and should be treated in the same way 
 — which means that we should add the whole
 
 56 WEALTH & TAXABLE CAPACITY 
 
 of the E.P. Duty to the existing figures of 
 National Income, or deduct both E.P. Duty 
 and Income Tax and so alter our practice in 
 regard to the latter — we get a really ridiculous 
 position. Suppose that out of a gross income 
 of £1,000,000,000 the State took £200,000,000 
 for E.P. Duty and £240,000,000 as Income Tax, 
 the State would take in all £440,000,000 of 
 revenue, leaving individuals with £560,000,000, 
 but the National Income would stand at 
 £800,000,000. Now, let the State say " We 
 still wish to take a revenue of £440,000,000, 
 but we will abohsh the E.P. Duty." It then 
 has to raise £440,000,000 upon an assessment 
 of £1,000,000,000, which is a rate of just under 
 9s. in the £. This leaves the relative positions 
 of the State and individuals as before, but the 
 National Income becomes £1,000,000,000. Any 
 " loading " of the income tax (or rates on 
 households, which are a kind of local income 
 tax) to meet charges hitherto borne out of other 
 kinds of taxes, at once automatically alters the 
 computation of National income. 
 
 The Treatment of Pensions. 
 
 Does not this again lead to the view that, 
 with the enormous extent of present expendi- 
 ture, and the present temporary way of meeting 
 it, we must revise our methods and deduct from
 
 THE NATIONAL INCOME 57 
 
 the gross income, plus Excess Profits Duty, a 
 sum equal to the amount of income paid to 
 individuals as interest which is payable out of 
 taxation ? This amounts to a frank recognition 
 of a distinction between the payment {via 
 taxation) by individuals of interest to others, 
 and the payments for taxation, which are spent 
 in the ordinary way upon the consumable " bene- 
 fits " of life, such as the Navy, the Army, the 
 Police and education rates, and other current ser- 
 vices which we enjoy. If we decide to do this 
 what ought to be done about pensions ? I do not 
 mean ordinary Civil Service pensions, because 
 these may be said to be equivalent to salaries, 
 and the pension system is only an alternative 
 to paying a higher salary to those rendering 
 existing services and leaving them subsequently 
 to look after their own superannuation allow- 
 ance — such pensions must be taken as equiva- 
 lent (plus the salaries) to the cost of present 
 services. But pensions for services definitely in 
 the past, having no present counterpart, 
 stand on a different footing. In this case we 
 have an analogy to the interest which is being 
 paid in respect of entirely past services, and if 
 the pensions are brought into the aggregate of 
 national income, we ought to take the cost of 
 them from the incomes of the income tax- 
 payers. If this is not done, it will be seen that 
 the more pensioners we have the richer we are, 
 and our figures become meaningless.
 
 58 WEALTH & TAXABLE CAPACITY 
 
 How is National Income Estimated in Different 
 
 Countries ? 
 
 There are three main methods : — 
 (i) Statistics of Income Taxation. The value 
 of this method depends on the completeness and 
 efficiency of the tax in question. It is, for 
 example, very different if England is compared 
 with Italy. " Taxation at the Source " ob- 
 viously gives more complete figures, requiring 
 less supplementing from other sources. 
 
 The extent to which this method covers the 
 field depends upon the exemption limit, or the 
 point at which the tax starts. The Prussian 
 limit of £47 per annum enabled the method to 
 be applied to cover the bulk of the population, 
 but the British limit of £160 did not account 
 for as much as one-half of the total income, or 
 more than one-eighth of the people. The 
 American exemption, still higher, left an even 
 greater proportion to be dealt with by other 
 means. But with all its defects, this method 
 is the only really satisfactory one for dealing 
 with the income of the wealthier section of the 
 community. 
 
 (2) The Occupational Census Method. — This 
 method is used for dealing with the wage- 
 earning classes and smaller incomes where the 
 income tax statistics do not apply. These 
 classes have Uttle income beyond their earnings, 
 and the average earnings of each class are
 
 THE NATIONAL INCOME 59 
 
 deteimined as closely as may be, and applied 
 to the number of earners in each class or 
 occupation as given by the Census. The whole 
 value of this method depends, of course, on the 
 accuracy of the Census, and still more upon the 
 care with which wage statistics are prepared 
 and handled. The lower half of the British 
 estimate is determined in this way with very 
 satisfactory material. The same method is 
 adopted for France, but, by the application of 
 averaged earnings, the result is obtained on 
 rougher lines. In France, moreover, the method 
 was applied to businesses and professions in the 
 absence of income tax statistics. 
 
 (3) " Net Output " or Census of Production 
 Method. — If the total value of work done or 
 goods produced in a year is determined and the 
 values of the raw materials used are deducted 
 the " added value " may be taken to be the 
 fund which forms the people's income. In the 
 British Census of Production, 1907, the " Net 
 Output " was the gross output (selling value) 
 less the cost of materials used. " It expresses 
 completely and without duplication the total 
 amount by which the value (at works) of the 
 products of the industry taken as a whole, 
 exceeded the cost (at works) of the materials 
 purchased from outside, i.e., it represents the 
 value added to the materials in the course of 
 manufacture." It corresponds, approximately, 
 to the balance of a trading account. It
 
 6o WEALTH & TAXABLE CAPACITY 
 
 constitutes for any industiy tbxe fund from 
 which wages, salaries, rent, royalties and sundry 
 expenses have to be defrayed, the balance being 
 profit (or loss). Mr. Flux showed that the results 
 of the 1907 Census were consistent with the 
 estimates of British National Income obtained 
 in other waj^s. Giffen in 1903 made an estimate 
 by aggregating the value of goods consumed. 
 This method has hitherto been the chief one 
 for the determination of the incomes of the 
 United States. 
 
 In addition we have : — 
 
 Interest on Capital. — In a few cases estimates 
 are partly made up, or are checked, by a com- 
 putation of the average yield upon different 
 classes of capital according to the amount of such 
 capital determined in other ways. 
 
 The Income " Census." — This method has 
 been adopted in Australia for 1914-15 at the 
 same time as the Wealth Census for ascertain- 
 ing National Capital. 
 
 The Estimate for the United Kingdom. 
 
 Now for the United Kingdom, we have to 
 take the matter in three sections : — 
 
 {a) The Income brought under review for 
 Income Tax, including that investment income 
 actually reaching exempt people. 
 
 {h) Wage earners not liable to Income Tax. 
 
 (c) Non-wage earners not liable to Income Tax 
 (e.g., small shopkeepers).
 
 THE NATIONAL INCOME 6r 
 
 The Section Liable to Income Tax. 
 
 With regard to the first section, taking the 
 year 1914-15, we start with the figure of 985.2 
 millions, being taxable income with an exemp- 
 tion limit of £160, and after allowing for repairs 
 to property, etc., and depreciation of machinery. 
 This figure will be found in the supplementary 
 tables to " British Incomes and Property." 
 
 First as to what it represents. A large part 
 of it relates to the profits of businesses assessed 
 on the average of the three years 1911, 1912 and 
 19 13. These were three of the best years of 
 industry, and were succeeeded, prior to the 
 outbreak of war, by some slight decline, the 
 true extent of which, if the war had not inter- 
 vened, we do not know, but the actual profits 
 of the year 19 14, at the rate for the year before 
 the war, can be said to have approximated 
 closely to this figure. They should not have 
 deviated from it by more than a very small 
 percentage. 
 
 My total estimate of the allowance which has 
 to be made in order to reduce legal profits for 
 this purpose to the commercial profits for that 
 year, was £30,000,000. There are a great 
 number of ways in which people imagine that 
 the two things are different, but these, on closer 
 examination, are found not to affect the statis- 
 tics in the long run. Fourteen of these headings 
 were carefiiUy examined and their true effects
 
 62 WEALTH & TAXABLE CAPACITY 
 
 shown, and out of them only seven had really 
 any valid effect. They were 
 
 For true losses, to which full effect was not 
 given by the statistics of assessment... ... £16,000,000 
 
 The capital contained in annuities... ... 3,000,000 
 
 The expenses of limited companies ... 1,000,000 
 An annual allowance for costs of pit-sink- 
 ing in coal mines ... ... 2,000,000 
 
 The obsolescence of buildings and 
 
 machinery ... 5,000,000 
 
 The depreciation of fixtures and fittings ... 500,000 
 Expenses of Brewers' tied houses which (at 
 that time) were not allowed as an expense ... 2,000,000 
 
 (Say) £30,000,000 
 
 All the other kinds of alleged differences are 
 ruled out for three classes of reasons : — 
 
 (i) Reasons relating to the actual character and method 
 of making allowances, e.g., Bad Debts. 
 
 (2) The particularist fallacy ; what may be true of 
 some or all the parts separately, is not necessarily true 
 of the aggregate. 
 
 (3) The fact that differences of treatment in point of 
 time are not at the same stage in every case, and that in 
 the aggregate the differences disappear. 
 
 The total is reduced by £^30,000,000, but we 
 add to it £17,000,000 for evasion and another 
 £20,000,000 for income abroad not remitted 
 home. This was brought into legal charge in 
 1914, but it would be unwise to say that the 
 legal change had had its effect upon the assess- 
 ments at so early a date. Consequently, I
 
 THE NATIONAL INCOME 63 
 
 made a complete addition for it, and the total 
 of 985 millions thus becomes 992 milUons, to 
 which I should add 30 millions for the under- 
 assessment of farmers in 1914, making £1,022 
 million in all. 
 
 Professor Bowley, in his lecture on " The 
 Changes in the Distribution of the National 
 Income," gets for this section a total of 1,040 
 millions, but he starts with an estimate of 
 1,000 million and makes no allowance for some 
 of the special features to which I have referred 
 above. 
 
 (( 
 
 Intermediate Incomes." 
 
 When we come to the intermediate incomes, 
 the only recent investigation was that by the 
 British Association Committee of 1910, which 
 estimated that there were 4,053 thousand persons 
 in the United Kingdom with incomes not 
 assessed to income tax, who were not generally 
 classed as wage earners, and that their aggregate 
 income was 335 miUions with an average of £84. 
 Dr. Bowley, who was very largely responsible 
 for the Committee's work, brought the figure 
 down to the year 1913 as 4,310 thousand persons 
 with an aggregate income of 364 millions, and 
 an average income of £84! . 
 
 The British Association estimate proceeded 
 on the lines of taking thirty-one Census occupa- 
 tion groups for which the numbers are known,
 
 64 WEALTH & TAXABLE CAPACITY 
 
 and assigning to each group an average income 
 with a certain range of possible error. The 
 information as to incomes for the Civil Service, 
 Local Government, the Army and Navy, Clergy, 
 elementary teachers, banks and railway servants, 
 was fairly exact. A good estimate was made 
 by sampling and by questionnaires for clerks 
 and shop assistants. Small farmers were dealt 
 with by way of a reference to the rental values 
 of the farms. For the other classes, careful 
 estimates were made of the probable propor- 
 tions falling within the income tax sphere, and 
 of the average earnings of the remainder. In 
 the aggregate, the range of possible error, or 
 " modulus," as the Committee called it, was 
 not taken as the sum of the m.oduh, but by 
 adding squares and taking the square root of 
 the sum. The result was £284,700,000 i 
 29,400,000 — a range of just over 10 per cent. 
 This sum was supplemented by the income from 
 investments and property belonging to this 
 class. 
 
 The Wage Earners. 
 
 The national Wages Bill has been estimated 
 from time to time by Professor Bowley in great 
 detail. One of his methods is to take the 
 results of the Board of Trade enquiry (the last 
 volume of which came out in 1912) as a basis. 
 
 The returns from employers were voluntary,
 
 THE NATIONAL INCOxME 65 
 
 but sufficient information was received from 
 the great majority of trades where the work is 
 done in factories or large workshops, to lead to 
 results accurately representing the average 
 earnings. He sa^^s " There is little risk of 
 error in the statement that the average of the 
 week's earnings in ordinary industry in the 
 Autumn of 1911 was £1 9s. for men (over 20), 
 los. 6d. for lads and boys, and £1 6s. 3d. for all 
 males. (How archaic all these figures seem 
 already !) In default of other information these 
 averages can be applied, with suitable modifica- 
 tions, to other occupations. By this method a 
 table is obtained with average weekly wages 
 under the broad heads of industry, such as 
 textiles, clothing, etc., for both males and 
 females under 20 years, and over 20 years 
 respectively. 
 
 As an independent computation, the annual 
 average wages bill of the businesses was divided 
 by the average number employed in a full week. 
 These figures, owing to average illness, and 
 unemployment, are 7 per cent, less than the 
 weekly averages. These figures are then linked 
 up with the occupational census with proper 
 allowances for retired workers and casual 
 workers — data for which are derived from the 
 Labour Department statistics, Friendly 
 Societies, etc. The average annual earnings of 
 males occupied in industries worked out at 
 £57 4s. in 191 1, this average being raised by the
 
 66 WEALTH & TAXABLE CAPACITY 
 
 inclusion of coal mining, and lowered by 
 agriculture. Each industry was obtained sepa- 
 rately and the total for ii million occupied 
 male wage earners brought up to 631 million £, 
 including payments in kind to agricultural 
 workers. Similarly, there was 151 milHon £ for 
 women, with a margin of error greater than in 
 the case of men, but the total concerned was 
 smaller. The 782 million £ resulting was a trifle 
 below other estimates by Sir Leo Chiozza Money, 
 Sir Thos. Whittaker, and the Fabian Society. 
 
 The amount and risk of error in the total is 
 comparatively small by this method, as the 
 items do not all err in excess or defect, but there 
 are some minuses against some pluses. I 
 should like to interject here that the total 
 number of manual wage earners and, secondly, 
 of the intermediate class, including shop 
 assistants and those assessed to income tax, 
 excluding wage earners, were got at piecemeal 
 in other ways and found to square with the total 
 occupied population. 
 
 As regards the intermediate section, there are 
 certain auxiliary checks, such as the known 
 values of the shops and business premises 
 occupied by these classes, or the acreage of 
 small farms, which considerably assist in deter- 
 mining the accuracy. 
 
 The third section overlapped sHghtly with 
 the income tax assessments, but in 19 13 only 
 to a limited extent, viz., about 50,000 persons.
 
 THE NATIONAL INCOME 67 
 
 Excluding shop assistants, and allowing for an 
 increase in numbers and rates of wages, 
 Dr. Bowley estimated 770 millions in 1913 as 
 the earnings of 15,200,000 wage earners. This 
 duly allows for unemployment, sickness, 
 holidays and irregular work. Dr. Bowley, 
 when estimating the changes in the National 
 Wage Bill from time to time, has found it 
 more accurate to work from a particular year 
 by the application of factors for changes in 
 rates and numbers to get the figures for other 
 years, than to make direct estimates for such 
 years. He takes the year 1906 as the basis of 
 the measurement of change, because in that year 
 special information was collected by the Board 
 of Trade, which they studied together with the 
 Census of Production in the following year. 
 
 The Aggregate Pre-War Estimate. 
 
 In aggregating these three sections the first 
 one is the figure of 1,022 million £ for the 
 income tax section, 365 million £ for the inter- 
 mediate section, and 762 million £ for the 
 wages section (excluding those charged to 
 income tax) or a total of 2,149 million £. We 
 have to add the " unearned " income of those 
 with incomes under £160, old age pensions, and 
 certain other small items, amounting altogether 
 to a little over 100 million £. It should be 
 remembered that this figure includes a certain
 
 68 WEALTH & TAXABLE CAPACITY 
 
 amount of income or yield which does not go 
 to individuals, but to collective bodies such as 
 charities, to the reserves of public companies, 
 and so on. Very careful and detailed con- 
 sideration has to be given to the question of 
 how much should be deducted if we are to get 
 the individual figures, for where we desire to 
 have an aggregate of individual tax-paying 
 capacity, the difference is important. (This 
 matter will be dealt with in discussing the 
 distribution of income, but the warning is given 
 here, as it is so frequently overlooked.) It will 
 be seen that this estimate of the national income 
 before the war of, say, 2,250 millions, is 
 considerably less than the 2,400 millions 
 given by some writers, who, possibly, hov/ever, 
 intend to allow for renewals and depreciations, 
 out of this higher total. As long ago as fifty 
 years there was a " rule of thumb " method of 
 getting at the national income by doubling the 
 amount assessed for income tax. This was 
 rough and ready, but it is remarkable how near 
 the truth it has remained. You will see that 
 in our calculation it is a trifle less than one- 
 half. The rule has been appUed somewhat 
 regardless of adjustments such as I have made 
 to get " pure income," and also of changes in the 
 level of exemption from £150 to £160, but this 
 latter change has served to keep the rule some- 
 where near the truth, for if the exemption 
 limit had remained at ^^150, a larger number of
 
 THE NATIONAL INCOME 69 
 
 wage earners would have been included in the 
 tax returns, and the national income would 
 not have been quite equal to twice the income tax 
 figure, before the deductions for repairs, etc. 
 
 You will agree that if the national income is 
 the money expression of the value of national 
 produce after allowing for that part of the 
 produce applied to repairs and renewals, there 
 would be an alternative way of discovering the 
 total value of produce for exchange and con- 
 sumption. This would consist of valuing the 
 total production and deducting therefrom the 
 value of raw materials purchased from abroad, 
 etc., with our existing working capital. The 
 difference would represent the net additional 
 value created and available to be used as 
 income. This very method has been used in 
 the report on the Census of Production in 1907, 
 where the national income is estimated by the 
 addition to the values of goods produced of 
 services and net imports, to give an approximate 
 net profit. The computation was as follows : — 
 
 INCOME, 1907. I millions. 
 
 Gross output of industry, mining and agriculture 
 excluding duplication, but including imported 
 materials to value of ;^38o millions . . . . 1370 
 
 Carriage, merchanting and retailing of home-goods 430 
 Duties on home-goods . . . . . . . . 50 
 
 Imports ready for consumption, valued at ports . . 220 
 Duties on carriage, merchanting and retailing of 
 
 imports . . . . . . . , . . . . 140 
 
 2210
 
 70 WEALTH & TAXABLE CAPACITY 
 
 Brought forward 2210 
 Subtract exports . . . . . . . . . . 465 
 
 Total value to purchasers of material goods avail- '' 
 able for consumption, maintenance of capital or 
 saving . . . . , . . . . . . . . 1745 
 
 Subtract maintenance of plant, etc. {£17^ millions) 
 and of consumers' stock (£15 millions) . . 190 
 
 Remainder, available for consumption or saving . . 1555 
 Add value of personal services and occupation of 
 
 houses . . . . . . . . . . . . 375 
 
 Add new investments abroad . . . . . . 100 
 
 Total Income . . . . ;f203o 
 
 While this is admittedly rough, it indicates 
 that the other method cannot be very wide of 
 the truth, and I should think we are perfectly 
 safe in saying that it cannot be wrong by as 
 much as 10 per cent., i.e., the national income 
 before the war could not have been more than 
 £2,450,000,000, nor less than £2,050,000,000, 
 and almost certainly lay between 2,200 and 2,300 
 million £. 
 
 THE NATIONAL INCOME TO-DAY. 
 
 At this date (February, 192 1) we have no 
 very clear idea as to the actual number of people 
 engaged in industry, though, of course, we know 
 how many come within insured classes under the 
 extended schemes. Still less do we know the
 
 THE NATIONAL INCOME 71 
 
 numbers in the separate industries, and any 
 information we have as to the increase in piece- 
 work rates or time rates is difficult to apply, 
 because these fundamental facts are missing at 
 present. The Census result will help to re- 
 solve many doubts, as it will give us a new 
 and more secure basis on which to work. The 
 lowering of the exemption limit to £1^0 at a 
 time when there has been a general increase 
 of wages has brought a very large number into 
 this class of official statistics. Formerly, the 
 Income Tax statistics were almost clear of 
 weekly wage-earners, but now some four million 
 at least come within the figures. Let us look 
 at the matter very broadly, assuming, what is 
 very nearly true, that there is no information 
 about total wages. Even if we had the task 
 of disentangling the Income Tax figures, it is 
 not easy to determine the overlapping. The 
 most important statistical return yet given — 
 to which reference will be made again — is that 
 rendered to the Royal Commission on Income 
 Tax and included in the Appendix, p. 90, where 
 the total taxable income of the Income Tax- 
 payers for year to March, 1919, is given as 2,072 
 million £.* To a considerable extent the figure 
 is conditioned by the profits of the years 1915, 
 1916 and 19 17, which were the average for the 
 
 * The later figures published in the Report of the Commissioners 
 of Inland Revenue have been substituted for those given to the 
 Royal Commission.
 
 72 WEALTH & TAXABLE CAPACITY 
 
 assessment — the first two were taxable partly at 
 50 per cent., but for the most part at 60 per 
 cent., and the last at 80 per cent, on the excess 
 for Excess Profits Dut}^ 
 
 Now, if the revenue had been obtained by 
 Income Tax instead of Excess Profits Duty, 
 the assessed profits would have been higher by 
 the amount of the Excess Profits Duty, assessed 
 on the average of these three years, unless, 
 indeed, we assume that it was merely added to 
 profits, and not a tax on profits at all. Then 
 the amount of Income Tax evasion was becoming 
 very considerable indeed, far greater than before 
 the war, and between the two, I think the total 
 profits assessable to Income Tax, excluding 
 Excess Profits Duty, could not have been far 
 short of 2,400 million £. Now the Income Tax 
 was supposed at one time to "divide" the 
 national income into approximately two halves, 
 but that was with exemption at £160. From 
 the return 373 milHon £ belonged to the class 
 between £130 and £160, and so the amount 
 belonging to the classes over ;fi6o would be 
 2,030 milHon £, and if the pre-war ratio between 
 taxable income and total income still held good, 
 the total, after taking away the Excess Profits 
 Duty payments as not actual income, would 
 be some 3,950 to 4,050 million £. But, of 
 course, when quite a large part of the population 
 has, so to speak, marched past the fixed £160 
 mark, this cannot be a good test, otherwise
 
 THE NATIONAL INCOME 73 
 
 when decreases in money values had pushed all 
 but one man beyond the £160 mark, we should 
 be assuming that that one man had an income 
 equal to all the tax payers. So a little closer 
 approach is suggested. 
 
 We know that before the war the " top " 
 1,240,000 of the population between them had 
 1,022 million £ assessed. What do the top 
 1,240,000 receive in 1918 according to this new 
 table ? 
 
 From a total of . . . . . . 5,747,000 we may 
 
 take the three classes up to ;^25o . . 4,490,000 
 
 leaving . . . . . . . . 1,257,000 
 
 and deduct as standing at ;(250 
 
 another . . . . . . . . 13,000 
 
 We have left , . . . . . 1,244,000 
 
 people whose total income is . . . . ;f2,400 million. 
 
 less the amount appropriate to the 
 
 classes deducted above . . . . 724 
 
 or, 1,676 million £. 
 
 Now assuming the distrihition of income has 
 remained fairly steady — an assumption to be 
 examined presently — it can be said that the 
 national income has increased in the same 
 proportion as this top section. In this case the 
 total, after deduction of Excess Profits Duty 
 paid, would be in the neighbourhood of 3,650 
 million £, which was probably much nearer 
 the truth.
 
 74 WEALTH & TAXABLE CAPACITY 
 
 After these rough approaches, let us try 
 a still closer method, and rely on the official 
 statistics we have as far as they take us, that is 
 for 5,747,000 taxpayers, carrying us deep down 
 into the weekly-wage earning class to include 
 those who are best off amongst them. We have 
 to estimate for the remaindey of the inhabitants 
 only. How many workers were there in 1920 
 to correspond with the 20,700,000 before the 
 war ? We remember that we had enormous 
 war losses, and a considerable section of the 
 population has been withdrawn from industry 
 by death and disablement. We also know 
 that the volume of production in 1920 was 
 still far below the good trade years 1912 and 
 1913, but, of course, we can put this down 
 to a lower average output per person. Against 
 these evidences of reduced numbers we 
 can urge the natural increase of the population, 
 the cessation of emigration, the fact that the 
 tide of new female labour set up during the war, 
 has by no means fully receded, and the still 
 more obvious evidence of the intense pressure 
 upon our existing housing accommodation. 
 vSome may fairly conclude that the number of 
 incomes is not less than the old figured of 
 20,700,000, and may well be greater. Let us 
 assume for the moment it is the same — what is 
 the average income of the 14,903,000 ? 
 
 If we plot out the facts on a Pareto line — and 
 there is no good reason for distrusting its
 
 THE NATIONAL INCOME 75 
 
 indications altogether— the 20,700,000th wage 
 would fall at £83 — and the average income of 
 the class " £8^ to £130 " would be almost £93, 
 giving an aggregate for this whole class of 
 £1,430,000,000, and a National Income of about 
 3,500 to 3,600 million £. Now I am disposed 
 to think the Pareto index would be rather 
 higher, except for a very poor section not 
 receiving wages, and that the average wage 
 will be nearly £100, making the total 3,600 to 
 3,700 million £ for 1918-19. 
 
 As regards the movement of profits since 
 1918-19, the total Income Tax assessment for 
 1919-20 was in the neighbourhood of 2,200 
 millions and probably some 100 millions of the 
 difference applied to weekly wages, so that I 
 feel that we may put the National Income 
 conjecturally (computed on the old principles) 
 at 3,900 milUon £. Now this may easily be 
 200 or 300 millions out, but my feeling is that 
 it is certainly not less than 3,700 millions and 
 may possibly, though it is not likely, be over 
 4,100 million £, although estimates made b}^ way 
 of guesses at the present compared with pre-war 
 production raised by the index number of prices 
 lead to higher results. 
 
 Sir Leo Chiozza Money gave an estimate of 
 3,610 million £ to the Royal Commission on 
 Income Tax for 1920, arrived at by a direct 
 estimate of wage earners' incomes, and in which 
 he included 350 million £ for Excess Profits Duty,
 
 76 WEALTH & TAXABLE CAPACITY 
 
 so that he was somewhat lower than my figures. 
 I criticised some of the items and the principles 
 adopted, but did not dissent materially from the 
 final result. Allowing the Excess Profits Duty 
 as a deduction at the end is roughly equiva- 
 lent to the principle for which I have contended, 
 viz., to reckon the full income as assessable, but 
 to allow a deduction for so much of the taxes 
 paid as would be utilised for war loan interest 
 and brought again into the incomes assessed.
 
 CHAPTER III 
 
 THE DISTRIBUTION OF CAPITAL AND INCOME. 
 
 We have now to consider how wealth is held 
 by different proportions of the population, and 
 how this holding is changing. 
 
 It is only of recent years that we have been 
 able to form reasonably accurate ideas upon the 
 subject, but now, thanks to the super-tax and 
 the system of abatements that have obtained 
 in the last few years, we can divide the total 
 assessed income into groups which fit all the 
 data so exactly that one can, for ordinary 
 purposes, quite afford to ignore any possible 
 margin of error. 
 
 Scientific Spirit Essential. 
 
 My usual preface is, I am afraid, particularly 
 necessary on this occasion. You will realise 
 that, in asking what we know statistically on 
 this subject, we are getting much nearer than 
 we have so far ventured to the real problems 
 and polemics of the day. Some will be eager 
 
 77
 
 78 WEALTH & TAXABLE CAPACITY 
 
 to draw what, according to their pohtical and 
 social leaning, they consider to be inevitable 
 conclusions, and to use them in support of 
 their ideas for improving the world, or pre- 
 venting it being destroyed. I have no concern 
 here with that part of the matter, as the task 
 of examining the facts in as colourless and as 
 dispassionate a way as possible and without the 
 inevitable leanings that come from pre-conceived 
 though honest policies, is a task quite enough 
 to fill the place and time of a Newmarch 
 Lecturer, and better in keeping with his 
 academic surroundings. 
 
 Tests of Distribution. 
 
 Time need not be greatly taken up with the 
 question of methods of testing or expressing 
 changes in distribution. All the simpler statis- 
 tical terms have their drawbacks. The handy 
 " average " is not much to lean upon — the 
 average rises when the whole mass of money 
 income rises, without any relative changes in 
 the parts or proportions. The average may 
 remain the same even though there are im- 
 portant changes in distribution over a period. 
 For example, there may be an extra income of 
 £100,000 balanced by 1,000 incomes which 
 have been reduced by £100 each — and this 
 would give no change in the average. Again 
 the mode is useless, and the distribution does 
 not follow the " normal law of error," like a
 
 DISTRIBUTION 79 
 
 natural or biological series — lha,t is wuh a 
 curve like a cocked hat or sugar loaf — but is 
 asymmetrical to a degree. The median or 
 middle person of the series tells us little, 
 though if we combine it with the upper and 
 lower quartiles we get a much better notion 
 of the facts. Thus, if we say roughly that the 
 person occupying- a place along the scale one 
 quarter up the series has an income such 
 and such a fraction of the income of the 
 middle person of the series, and that the per- 
 son three-fourths of the way up has an income 
 so many times the middle one, we can get a 
 fair test of the distribution at one time com- 
 pared with another, because it is a good 
 measure of the slope, like Pareto's line. A 
 view that, I believe, is shared by Dr. Bowle}^ 
 is that a good way to measure social changes 
 over a period of time is to fix on the upper 
 decile (i.e., the man who stands one-tenth of 
 the way down the series) and examine the 
 conditions always at that point. Before the 
 war the upper decile was just on the border line 
 of being liable to income tax. I think to-day 
 too, with the revised limits of exemption for 
 " man and wife," he is in about the same 
 position. But for present purposes we shall 
 keep mainly to percentages, i.e., that such 
 a percentage of the total number receives such a 
 percentage of the total income, and this method, 
 I hope, will satisfy you all.
 
 8o WEALTH & TAXABLE CAPACITY 
 
 Pareto's Line 
 
 I should explain that in the Pareto test we 
 take statistics of the number of incomes above 
 certain amounts something in this way. On a 
 squared sheet we plot the high incomes up at 
 the top left hand, showing on a level with the 
 vertical scale at £100,000 the number of incomes 
 above that figure ; then on a level with £10,000 
 the total number above that, and so to the 
 smaller incomes and much larger number of 
 persons. When these points are joined they will 
 be found in a Pareto distribution to lie practi- 
 cally on a straight line. The details plotted are 
 not the actual numbers, but the logarithms of 
 the numbers. If we plot the actual numbers 
 we get a curve, but taking the logarithms of 
 the numbers gives virtually a straight line, 
 which enables us to fill up any particular gap 
 or ascertain intermediate points. If you look 
 at this Pareto line, the dotted line illustrates 
 the straight line and the black line the actual 
 statistics of incomes as given in the returns to 
 the Royal Commission on Income Tax, and you 
 will see it exhibits a tendency to fall off when 
 it gets towards impossible or " inhumanly " 
 high incomes. The little differences between 
 the actual and the straight lines may be either 
 technical or genuine deviations from the true 
 Pareto line ; we do not know. It is introduced 
 here to show you one of the simpler ways of
 
 DISTRIBUTION 
 
 8i 
 
 w 
 
 S 
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 »— I 
 
 b 
 O 
 
 C/3 
 
 W 
 CQ 
 
 b 
 O 
 
 Vi 
 
 S 
 H 
 
 < 
 O 
 O 
 
 ^ CO <N 
 
 Logarithms of Amounts of Incomes.
 
 82 WEALTH & TAXABLE CAPACITY 
 
 testing distribution. The direction of the line 
 is expressed by a certain figure called " alpha," 
 which is, so to speak, an index. A common 
 figure for " alpha " is 1.6 or 1.7. One can test 
 the slope of the whole distribution at different 
 periods of time for different countries in this 
 way. 
 
 Pareto as a Practical Guide. 
 
 I may interject, as an interesting re- 
 miniscence, that in 1913, when the super-tax 
 statistics were first published, following upon 
 the introduction of that tax, they gave us for 
 the first time an official statement about total 
 incomes over a certain range. I was eager to 
 apply the Pareto rule or formula that I had 
 seen used for other countries to know how it 
 compared with other figures. I annoyed my 
 colleagues at the Revenue in charge of this 
 administration very much by telling them that 
 they had " missed " over a 1,000 payers in the 
 lowest class, £5,000 to /io,ooo, and they thought 
 I should be much more usefully employed in 
 telling them who they were ! However, they 
 promptly went and found them, and now you 
 will find that the £5,000 fraternity " toe " the 
 Pareto line quite nicely. As a matter of fact, you 
 frequently find that the Pareto test with any 
 such set of income statistics drops off a little 
 at the bottom. When I got to the £5,000 
 point I thought it ought to have been on the
 
 DISTRIBUTION 83 
 
 line, but it was not. So on the theory that in 
 fact it really was there, I gave the number of 
 missing incomes. You will find this failure to 
 come up to the correct or logical number at 
 the lowest scale is quite a common feature of 
 tax systems with an exemption hmit, for 
 reasons which will be clear to anyone with 
 administrative experience. 
 
 The distribution between income classes has 
 always been a most difficult computation, only 
 to be made with great study and care. When 
 the abatements ran up to incomes of £700 per 
 annum and the super-tax was imposed, we were 
 put in possession of details covering a large 
 part of the field of distribution, but leaving 
 the incomes between £700 and £5,000 as 
 unknown factors. However, by such mathe- 
 matical devices for interpolation as Pareto's 
 formula, it was quite possible to fill up the 
 gap, although certain difficulties arose which 
 were finally found to be due to the fact that 
 the aggregation of individual returns will never 
 equal the whole income arrived at by direct 
 assessment at the source. There was always 
 too much assessed income to be distributed 
 over the scale, so that if there were allotted to 
 the super tax area merely what was assessed 
 to super tax, and to the incomes up to £700, 
 what appeared on the individual returns for 
 those cases, the result was to get so much for 
 the intervening section that the distribution
 
 84 WEALTH & TAXABLE CAPACITY 
 
 bulged badly, and in a way that mathematical 
 instinct told one must be wrong. It was 
 necessary, in any case, to make a substantial 
 deduction for income that could not go to 
 individuals, such as that flowing to clubs, 
 charitable institutions, municipalities, co-oper- 
 ative societies, etc. This " non-personal " 
 income was the subject of much discussion, 
 and for some time recently 50 or 60 millions 
 was allowed. But of late years, it has been 
 recognised that even this deduction did not 
 get over the difficulty. The total yielded by 
 taxation at the source must always be in sharp 
 contrast to the total of individuals' returns. 
 Thus if a company makes £100,000 and puts 
 £20,000 to reserve permanently, and pays 
 £80,000 in dividends, the £100,000 appears in 
 the Income Tax total, but indiiddual returns 
 will never show the sums put to reserve at 
 all (except so far as they may some day come 
 out in equalising dividends) and some con- 
 siderable fraction of the dividends will be 
 omitted by individuals in their statements of 
 total income, for which there is relatively much 
 greater opportunity for evasion. Such evasion 
 does not avail for Income Tax, but it might, per- 
 haps, under the old regime, in some cases, have 
 secured larger abatements. It does affect super 
 tax in the large cases, and this is where most 
 of the missing income might be. But it always 
 makes bad statistics.
 
 DISTRIBUTION 85 
 
 I remember Dr. Bowley made an ingenious 
 attempt to get over the difficulty. He took 
 the super tax statistics as determining the 
 Pareto line and then continued the line down- 
 wards, where it ought to be met by a similar 
 line coming from the abatements. But, instead 
 of that, the lines come parallel. Then follows 
 a kind of " Hunt the Slipper." If you went 
 to the Income Tax statistics and enquired 
 " Where are these people who seem to be 
 missing ?" the people at the top said, " You will 
 find the income at the lower end," and when 
 you went down to the people at the bottom 
 they alleged that it was up at the top. Writers 
 using these statistics generally conveniently 
 push this part of the missing assessed income 
 to the end where they would like it to be for 
 the purpose of their argument. We can now 
 get over the difficulty by deducting from the 
 total assessed income a proper sum for income 
 that for one reason or another does not get 
 stated on individual income returns. 
 
 When all is said, however, the distribution 
 secured by these devices is tolerably near the 
 truth. It is checked in turn by taking the 
 House Duty statistics, and fitting taxpayers 
 into houses, on the assumption that certain 
 rentals are usually associated with incomes 
 of a certain size, according to common know- 
 ledge. This method was adopted by Sir 
 Leo Chiozza Money originally in " Riches and
 
 86 WEALTH & TAXABLE CAPACITY 
 
 poverty " very successfully for his main lines 
 of argument. 
 
 Putting the taxpayers into their houses is a 
 fascinating statistical game reminiscent of 
 " pigs-in-clover," or the Daily Mail puzzle, 
 and many perils await the unwary investigator. 
 
 The Official Table of Distribution. 
 
 When the Royal Commission on the Income 
 Tax met, the Board of Inland Revenue were 
 induced to put forward a complete distribution 
 for the first time, of the whole assessed income 
 for 1919, amounting to 2,073 millions. Here 
 they deduct 230 million £ as other income, viz., 
 non-personal income and incomes accruing to 
 non-residents, i.e., increasing company reserves 
 accounting for the bulk, interest on invested 
 funds of insurance companies, profits and 
 dividends going to residents out of the United 
 Kingdom, with other items for clubs, etc. 
 They stated that this whole sum was subject 
 to a considerable margin of error. The whole 
 estimate is the most reliable possible index 
 to distribution of annual income that we 
 can expect, as it had to be reconciled with the 
 numbers of abatements, the numbers of super 
 tax payers in each class, the yield of super tax, 
 and the total yield of income tax, together with 
 the income charged at different rates below the 
 full 6s. in the £. Any estimate that can satisfy 
 all these demands cannot be far from the truth.
 
 DISTRIBUTION 87 
 
 Constancy of Distribution. 
 
 In 1914 some 8 per cent, of the total income 
 of the country belonged to a very small fraction, 
 less than one-tenth of one per cent, of the 
 receivers of incomes. The next 22 per cent, in 
 amount went to i per cent, of the number of 
 incomes, and the next 15 per cent, of amount 
 of incomes to 4I per cent, of the people receiving 
 incomes. This amounts to 45 per cent, of the 
 incomes going to about 5 J percent, of the people 
 with separate incomes. Now the money levels 
 of the incomes may alter, but these proportions 
 have remained approximately constant. What 
 I may call the " slope " of distribution has not 
 materially altered, and, although all classes 
 may have become better off, they have kept 
 their relative positions and proportions with 
 remarkable stability so far as we can test. I 
 have explained the significance of the Pareto 
 index — it is not a perfect measure of distribution, 
 but it is simple, and serves for this purpose. 
 We have had from 1842 till recent years, a 
 classified tabulation of assessments on profits 
 and salaries to which I have applied this test, 
 and found no evidence of any permanent 
 material shifting in the proportions. We have 
 also had at various intervals, classifications of 
 house values — for example, the houses of £50 
 in rental value increased in thirty years in about 
 the same proportion as the population, and
 
 88 WEALTH & TAXABLE CAPACITY 
 
 those of £80 rather less. Although the rich 
 have become richer in one sense, I have not 
 been able to find clear signs of increasing con- 
 centration of the total wealth in their hands. 
 
 It is clear that there is great inequality of 
 distribution, but I agree with Dr. Bowley 
 when he stated " The constancy of so many 
 of the proportions and rates of movement found 
 in the investigation seems to point to a fixed 
 system of causation, and has an appearance of 
 inevitableness," 
 
 When we look at the distribution in all the 
 civilised countries that we know, and we 
 find this peculiar characteristic distribution 
 exhibited by the graph with slight differences, 
 one wonders whether it is in the nature of the 
 universe that it should be so, and our minds 
 go back to the middle ages when the com- 
 munity seemed to consist of very rich barons 
 and a lot of wealthless serfs, and we wonder 
 whether the present kind of distribution could 
 have obtained in that age. 
 
 In Dr. Bowley's study, which was based 
 upon the data I have already referred to, he 
 concluded " the broad results of this investiga- 
 tion are to show that the national dividend 
 increased more rapidly than the population 
 in the generation before the war, so that 
 average incomes were quite one-third greater 
 in 1913 than in 1880 ; the increase was gained 
 principally before 1900, since when it barely
 
 DISTRIBUTION 89 
 
 kept pace with the diminishing vahie of money. 
 The increase was shared with remarkable 
 equahty among the various economic classes. 
 Property obtained a diminishing share of 
 the home product, but an unchanged share of 
 the whole income when income from abroad is 
 included. 
 
 "The only marked alteration that has been 
 found is the increase of the intermediate class 
 that contains persons with small salaries, profits, 
 or earnings in other forms than wages. These 
 include clerks and others in retail and wholesale 
 distributive trade, and the j^ounger or less 
 successful persons in teaching and other pro- 
 fessions. 
 
 "Manual labourers have been a diminishing 
 proportion of the population. More of the 
 whole effort of the population has turned to 
 direction, distribution and exchange, and 
 relatively less to production. This has been- 
 rendered possible, it may reasonably be pre- 
 sumed, by the increasing services of capital to 
 production, and probably also by the increased 
 intelligence of labour." 
 
 A Comparison over an Interval of 120 Years. 
 
 I should like to refer now to a comparison 
 over a much longer period of time. 
 
 It is a remarkable fact that we have no such 
 official return for 120 years, i.e., since the time
 
 90 WEALTH & TAXABLE CAPACITY 
 
 when the first Income Tax was introduced. 
 For 1 80 1 a classification was given showing all 
 the incomes assessed, from £60 a year to £5,000 
 a year, and the amount over £5,000 ; or 75 
 millions in all.* There is no doubt that this 
 total assessment was far below the true mark, 
 because as soon as the " income-tax-at-the- 
 source " system was introduced, the yield of 
 the tax showed an immense leap. It is, there- 
 fore, not much of a guide to aggregate income — 
 probably in the lower levels of income many 
 thousands did not come within the assessment 
 at all. But for those who were too conspicuous 
 to be missed, even on a brand new system in 
 its first year of operation, there is nothing to 
 indicate that evasion or under-statement was 
 relatively greater at one stage of income than 
 at another, and if there was x per cent, of 
 evasion all the way down, the relative sizes of 
 the classes would not be very different from 
 what they would have shown if the full incomes 
 had been assessed. 
 
 Although one may be able to allege, as I did, 
 on my first inspection of the super tax statistics, 
 that a certain class was deficient, it only 
 means that that particular class is deficient 
 in relation to the rest. The whole line may 
 be deficient throughout. If evasion is anything 
 like constant throughout the whole line — and 
 
 ♦ Vide British Incomes : p. 514.
 
 DISTRIBUTION 91 
 
 there is no reason in the ordinary way to sup- 
 pose it is not — then j^ou do not really substan- 
 tially alter the slope by getting the true aggregate 
 figures. 
 
 We shall at once ask the question: How has 
 distribution changed for the people with in- 
 comes above the taxable limit ? It is an 
 interesting question and the answer is very 
 interesting too. For special technical reasons 
 I do not go below £200 a year, and I can put 
 the two distributions side by side in large 
 classes, 1801 against 1920, and express the 
 parallel in percentages of the total income over 
 £200 and £500 respectively. Of the total 
 number of people wdth incomes over £200 per 
 annum in 180 1, the £200 to £500 class were 
 61.5 per cent., now 71.3 per cent. ; the £500 to 
 £1,000 class were 21.3 per cent., now 15.8 per 
 cent. ; the £1,000 to £2,000 class 10.3 per cent., 
 now 7.8 per cent. ; the 2,000 to 5,000 class 
 were 5.3 per cent., now 3.7 per cent. ; the 
 over £5,000 class were then 1.4 per cent., now 
 1.3 per cent. ; in this sense there are now 
 relatively fewer rich peop' e, for each class, save the 
 lowest, is now a smaller percentage than before. 
 But this result is entirely due to the present 
 preponderance of the £200 to £500 class. 
 Perhaps it is to-day easier to bring in these 
 people to assessment than it used to be in 1801, 
 and the numbers then may have been exception- 
 ally defective. Let us assume that condition, and
 
 92 WEALTH & TAXABLE CAPACITY 
 
 deal only with the total number having incomes 
 of over £500 per annum. Then we get a 
 remarkably close parallel. 
 
 The ;^5oo to £1,000 class were . . 56% now 55.2% 
 
 The £1,000 to £2,000 ,, „ . . 26 3% ,, 27.3% 
 
 The £2,000 to £5,000 „ „ . . 13.9% „ 13.0% 
 
 The over £5,000 ,, ,, . . 3.8% ,, 4.5% 
 
 This indicates that the people with over £500 
 a year are distributed in income classes practi- 
 cally the same now as they were then. But if 
 we look at the amounts of income in the classes, 
 the results are rather different, for there is 
 relatively a larger sum in the hands of the " over 
 £5,000 " class, than there was then. Taking, 
 first, the total incomes of all with over £200 
 a year. The £200 — £500 class had 24 per cent, 
 then, 29 per cent, now ; the £500 — £1,000 class 
 had 18.6 per cent, then, now 15.8 per cent. ; 
 the £1,000 to £2,000 class had 17.7 per cent, 
 then, and 15.4 per cent, now ; the £2,000 — 
 £5,000 had 20.3 per cent, then, and 15.4 per 
 cent now ; the " over £5,000 " class had 
 19-5 per cent, then, and 24.2 per cent. now. 
 You get the curious result that the three inter- 
 mediate classes held a far greater proportion 
 then than now, but the "under £500" and the 
 " over £5,000 " classes held much less. So far 
 as the " under £500 " class is concerned, this 
 may again have been a peculiarity of assess- 
 ment, that is, relatively greater evasion in that 
 class. So I will again analyse only the total
 
 DISTRIBUTION 93 
 
 income in the classes /500 and upwards. The 
 ;f500 to £1,000 class had 24.4 per cent, and 
 now 22.3 per cent. ; the £1,000 — £2,000 class 
 was 23.2 per cent., now 21.8 per cent. ; the 
 £2,000 — £5,000 was 26.7 per cent, now 21.8 
 per cent. ; the " over £5,000 class " was 25.7 
 per cent., now 34.1 per cent. This result is 
 consistent with the following theoretical solu- 
 tion : The total nominal income has increased 
 much more than the total population — the 
 increase has surged upwards through all the 
 fixed classes, so that there is a smaller popu- 
 lation in the ranks of the poorest, with a 
 nominal income ol say under £80 a year, and many 
 more in the over £5,000 class, but the slope of 
 distribution, i.e., the relation between one section 
 or class and another, has hardly altered. Let us 
 examine this in the light of the total numbers 
 and sums assessed. The population subjected 
 to the tax law has increased not quite five 
 times, but the people with incomes over £200 
 have increased on these tables 25 times, and 
 their income 24 times ; even if we suppose the 
 old tables were only half the truth, there is an 
 increase in numbers and income of 12^^ times, 
 or 2i times the rate of the increase in population. 
 If we take those over £500, the numbers are 
 19 times, and the income 22 times as great, 
 and halving these again, for precaution, we 
 have, roughly, an increase at twice the rate of 
 increase of the population.
 
 94 WEALTH & TAXABLE CAPACITY 
 
 The General Improvement in V/ealih. 
 
 Mulhall's old estimate of the national income 
 for 1800 was 230 millions, which, in my judg- 
 ment, is on the high side. Let us compare that 
 with an estimate, similarly on the high side, 
 of 2,300 millions before the war. Again you 
 get a tenfold increase, compared with fivefold 
 in population, or twice as great. I think this 
 result is as nearly true as one can gather, 
 But the point I now want to make is that the 
 evidence goes to show this increase has been 
 evenly shared by all classes of the population. 
 
 Now, let us look at the level of prices in 1801. 
 The index number of prices for 1801, compared 
 with 19 13 was, roughly, as 235 to 115, or, say, 
 twice as great. That is the order of magnitude 
 of the change. These old index numbers are 
 only comparable by such large multipliers as 
 two or three times ; one cannot go into decimals 
 upon them. There you have clear evidence 
 from the line of statistics and research that the 
 proportion of 235 to 115, or, say, two to one, 
 is the relation of the prices in 1801 to those of 
 1913. When we combine these two factors, 
 we reach as a broad result a statement that I 
 have often made, but that has frequently caused 
 surprise, viz., " that the ordinary person of 
 to-day is four times as well off in real com- 
 modities as the person in the corresponding 
 stage in the scale in the beginning of the
 
 DISTRIBUTION 95 
 
 igth century. The bulk of this advance was 
 secured in the first part of the century. 
 
 This has a somewhat important bearing, 
 which I will not go into now, on the relativity 
 of the whole idea of the standard of life ; the 
 " living wage " is relative to the age in which 
 one lives, and the general distribution of wealth, 
 and it is obviously relative also country by 
 country. 
 
 I may say that I have tested the slope of 
 income distribution by reference to the magni- 
 tude of Income Tax assessments in classes,* and 
 of house rentals in classes at various points 
 during the century, and have found no material 
 difference, though there have been little shifts 
 each wa}^ from time to time. 
 
 Post-War Distribution. 
 
 For 1919 I compute that about one twelfth 
 of the gross total income was received by about 
 one 480th of the people, and one-half by 
 approximately one-ninth to one-tenth of the 
 people. But taxation greatly alters these pro- 
 portions. 
 
 Pooling the Surphcs Income. 
 
 It is important to consider what the division 
 of the income would mean if a levelling down 
 took place, if, for example, all the incomes in 
 
 * For the difference between this test and the classification of 
 incomes, vide British Incomes, pp. 238-256.
 
 96 WEALTH & TAXABLE CAPACITY 
 
 excess rf £250 per annum were pooled over the 
 whole population. The immediate division is 
 capable of some rough statistical determination, 
 but the division in following years is much 
 more difficult. The difficulties are quite 
 apart from the incomes that would " dry 
 up " — larger earned incomes which the 
 earner \vould not continue to strive for if 
 he had to take a less reward. There are a good 
 many sources of income or profit which only 
 yield their present income, because of the 
 existence of the " better off " classes, e.g., large 
 houses would fall seriously in value because 
 of less effective demand, and taxi-cabs 
 would be less abundant : Taking, first, an 
 equal division at present : after allowing for the 
 taxation borne by this section, and assuming 
 the public services to be maintained and also 
 that the same relative proportion of national 
 income is set aside for capital extensions, 
 increased production, etc., as before the war, 
 the igig income divisible would not exceed 
 150 millions, which would not give each family 
 more than £1^ a year rise, or, say, 5s. a week. 
 I do not think the figure can be more than 
 this, but it may quite possibly be less. Im- 
 mediately following the division for the follow- 
 ing j^ear, I will assume that the people rendering 
 personal services to the rich find employment 
 in meeting the demands set up by the increased 
 purchasing power of those who have received
 
 DISTRIBUTION 97 
 
 these additional sums. But we have to estimate 
 for the shrinkage in the large earned incomes, 
 in large residential property values, and for 
 the demands on the general public set up by 
 the shrinkage in the local rates reckoned 
 thereon, and the actual reduced money expres- 
 sions of services rendered to the well-to-do 
 (assumed to be still rendered to them in their 
 reduced circumstances). This task is getting 
 away from statistics to guesswork, but I think 
 we cannot be exaggerating if 100 millions is 
 deducted in respect of these shrinkages for the 
 first year or two. In these circumstances, the 
 increment to the ordinary family might be £5 
 a year or a little less. 
 
 A rough approach to the subject as for 1919-20 
 would be : — 
 
 Millions £ 
 Taxable income for Income Tax, plus an amount for 
 
 evasion, assumed to be 1919-20 . . . . 2,300 
 
 Deduct — 
 Included for corporations, charities, etc., say . . 150 
 
 2,150 
 
 Deduct — 
 For the classes up to £250 per annum . . . . 740 
 
 1.410 
 Deduct — 
 Taxes now to be paid out of this income ; 
 Income Tax, Super Tax, etc. (but not E.P.D.) . . 500 
 
 910
 
 98 WEALTH & TAXABLE CAPACITY 
 
 Brought forward 910 
 Leave thus 1,240,000 people with £250 level out 
 
 of this . . . . . . . . . . . . =310 
 
 600 
 
 Less Savings required on a pre-war proportion and 
 hitherto made by these classes as a minimum* 
 
 From 350 to 450 
 
 From 250 to 150 
 
 For io| million families this would give an amount 
 from (under) £24 to £14 a year as a maximum and 
 possibly much less. 
 
 *[The Savings in the pre-war period were 
 £■^$0 to 400 millions. On the present scale 
 of money this would equal at least . . 750 
 
 But some may prefer to write it down to. . 600 
 
 It can be urther reduced by repayment of 
 debt made out of E.P.D. or taxes reserved 
 above, and savings by classes other than 
 Income Tax payers . . . . . , 300 to 250 
 
 450 350] 
 
 We, therefore, get something of the order of 
 5s. a week to be added to each family, or, 
 perhaps, a little more. Personally, I do not 
 think there would be any more. Probably a 
 little less would be divisible even in the first 
 approach to the subject, and subsequently it 
 would probably diminish. 
 
 Some of you may have read that the effect 
 of spreading the Alps with all their majestic
 
 DISTRIBUTION 99 
 
 mass and volume over the whole of Europe 
 would be to affect the level of Europe by a 
 few inches only. Similarly the effect of spread- 
 ing such a mass as the Himalayas over Asia, 
 would be to raise the plains very slightly. 
 
 Mr. W. H. Mallock, dealing with the question 
 of the effect of a distribution of capital recently, 
 has contended that after the recipients have 
 assumed their new duties as savers, the worker 
 would have only an addition of £4. to his spend- 
 ing resources per annum. But, as Mr. Mallock 
 is generally regarded as a strong partisan, I 
 would prefer to quote in support of my own 
 conclusions, the results of Professor Bowley's 
 recent analysis from a different angle — that of 
 average income : " Only £200 to £250 millions 
 remain, which, on the extremest reckoning, 
 can have been spent out of home-produced 
 income by the rich or moderately well-off on 
 anything of the nature of luxury. This sum 
 would have little more than sufficed to bring 
 the wages of adult men and women up to the 
 minimum of 35s. 3d. weekly for a man and 20s. 
 for a woman, which Mr. Rowntree in ' The 
 Human Needs of Tabour ' estimates as rea- 
 sonable. 
 
 " In fact, the spendable wealth of the nation 
 derived from home industry has been grossly 
 exaggerated by loose reasoning. Before the 
 war the home income would not have yielded 
 more than £230 gross annually per family of
 
 100 WEALTH & TAXABLE CAPACITY 
 
 five, or £170 net after all rates and taxes were 
 paid and an adequate sum invested in home 
 industries. The average family is not, however, 
 five, as is frequently assumed, but about 4^ 
 persons, the number of households is not 
 9,000,000, as just taken, but about 10,000,000, 
 and the average net income of a family would 
 have been £153 from home-product, or £162, 
 if income from abroad is included. If this sum 
 is compared with pre-war wages, it must be 
 remembered that there are, on an average, 
 nearly two earners to a family. 
 
 "An equal distribution of pooled income would 
 make enormous differences to prices, but it 
 does not seem necessary to attempt any 
 estimate here. 
 
 ' ' When it is reahsed that the whole income of 
 the nation was only sufficient for reasonable 
 needs if equally divided, luxurious expenditure 
 is seen to be more unjustifiable even than has 
 commonly been supposed, and the problems of 
 obtaining a distribution that is more reasonable 
 and of reducing poverty appear more difficult, 
 though none the less urgent." 
 
 How is our Capital Wealth Held ? 
 
 Information upon this subject is mainly 
 derived from the Estate Duty Statistics, with 
 the mysterious statistical puzzle known as the 
 " multiplier/' which has been the subject of
 
 DISTRIBUTION loi 
 
 much useful study of late years. The latest 
 information on this was given by the Board of 
 Inland Revenue in their memoranda on the 
 Taxation of War Wealth. The wealth in the 
 hands of individuals that would ' ' come out ' ' on 
 individual returns, was accepted at my figure 
 of £ii,ooo milhons, as in 1914. The Board 
 estimated a net increase in this class of 4,000 
 million £, which was 5,525 milhon £ for items 
 of increase, less 1,525 million £ the aggregate 
 of individual items of decrease.* But the in- 
 creases were not all in the hands of one group, 
 and decreases in the hands of another — there 
 were many people who had enjoyed an increase 
 in one part of their capital, and had a decrease 
 in another (such as their preference holdings). 
 Out of the aggregate decreases of 1,525 million 
 £ they estimated 500 million £ belonged to 
 persons who had decreases as a whole, the 
 remainder belonging to people who had a net 
 increase in their total estates. So they had to 
 classify an increase for the latter class of 4,500 
 million £, or 4,180 milhon £ after deducting the 
 value of furniture and residences. They gave 
 a table, based on Estate Duty Statistics and 
 Super Tax samples, which accounted for this 
 
 * This referred to the state of affairs as at June, 1919, and was 
 materially less than the estimate I made, during the war, of the 
 probable increase after the end of the war at a date unknown. But 
 at this date (December, 1921) a large part of the increase has dis- 
 appeared through altered values.
 
 102 WEALTH & TAXABLE CAPACITY 
 
 4,180 million £ increase, and for a total post-war 
 amount of 13,046 million ■£. If the remaining 
 2,000 million £ (approximate) belonging to the 
 " new poor " were spread on the same line of 
 distribution we should have : — 
 
 Million £. 
 
 
 
 
 FotUme in £. 
 
 4555 
 
 
 
 
 under 5000 
 
 1217 
 
 held 
 
 by 
 
 169040 
 
 to 10,000 
 
 2202 
 
 
 
 138460 
 
 „ 25,000 
 
 1731 
 
 
 
 48810 
 
 „ 50,000 
 
 1432 
 
 
 
 20570 
 
 „ 100,000 
 
 1615 
 
 
 
 11200 
 
 „ 250,000 
 
 1020 
 
 
 
 2971 
 
 „ 500,000 
 
 405 
 
 
 
 653 
 
 „ 750,000 
 
 195 
 
 
 
 230 
 
 „ 100,000 
 
 681 
 
 
 
 322 
 
 . over 1,000,000 
 
 . . _ -__ Ml 
 
 • r 
 
 f i_ • 
 
 1 ^ ^ '11 • 
 
 /• • 1 T 1 1 
 
 15053 million £ of which 10,500 million £ is held by 
 392,256 persons. 
 
 Thus we get two-thirds of the wealth held 
 by just under 400,000 people, and the top one- 
 third by 36,000 people. I think it is difficult 
 to derive much reliable information as to 
 whether the tendency is for individual fortunes 
 to become increasingly great, that is for the pro- 
 portion of v/ealth held by a fixed percentage of the 
 whole population to become greater. The statis- 
 tics have to be looked at over a considerable 
 period, and they are affected by legal changes. 
 The rates of mortality for the different age 
 groups change slowly and affect the " multi-
 
 DISTRIBUTION 103 
 
 plier," so that it is difficult to establish a 
 statistical proof of a kind sufficiently rigid for 
 so important an assertion. 
 
 One must remember that the rates of 
 taxation now on the high incomes for death 
 duties and income tax and super tax are so 
 great that they are all the time exercising a 
 profound modifying influence upon distribution 
 of wealth. 
 
 How are the Different Factors of Production 
 
 Rewarded ? 
 
 Let us look briefly at what we know as to 
 the way our national income is distributed in 
 rewarding the different factors of production. 
 Dr. Bowley made a recent examination follow- 
 ing upon the two assertions, viz., the statement 
 by Mr. and Mrs. Sidney Webb, that the manual 
 working class obtained for their need only one- 
 third of the produce of each year's work, and Sir 
 Hugh Bell's opinion that 75 per cent, of the 
 total sale value of commodities produced went 
 to pay the persons engaged in producing them. 
 You will notice the two assertions are not quite 
 the same thing. Many of the factors vital in 
 Dr. Bowley's examination were figures provided 
 by my own research, made quite independently 
 of this question, and, indeed, he had for the 
 most part to use proportions and details drawn 
 for other purposes, but now combined and 
 
 H
 
 104 WEALTH & TAXABLE CAPACITY 
 
 analysed for this particular enquiry. I have 
 been over every item of the calculations care- 
 fully, and can find no flaw in them, with only 
 one or two points of opinion on which I should 
 have had a slightly different view, these being 
 immaterial in the main result. 
 
 We reach the following division of the net 
 output of manufacturing industries, covered 
 by the Census in 1907 : — 
 
 Million £. Percentages. 
 
 Wages 344 58"| 
 
 Salaries under ;^i6o . . 24 4 )► 68 
 
 Salaries over £160 . . 36 6j 
 Rents, Royalties, Interest 
 
 and Profits . . . . 188 ... 32 
 
 592 100 
 
 We can obtain Sir Hugh Bell's 75 per cent, 
 only if we count £40,000,000 of the profits, etc., 
 as payments to employers for their share of 
 production, which would be a not unreasonable 
 method, for a sum comparable with this would 
 pay their salaries if their businesses were turned 
 into private companies, and they were employed 
 as managers. Dealing with the possibility of 
 a transfer from the salaries over £160 to the 
 other classes, Dr. Bowley says : " It is very 
 unlikely that the administrative and clerical 
 staff is redundant in profit-making industries, 
 and that the numbers could be diminished
 
 DISTRIBUTION 105 
 
 without loss to the output. If we suppose 
 that the excess of every salary over £160 was 
 transferred to wages, these would be raised only 
 
 5 per cent., and if only the higher salaries were 
 attacked the average increase of wages would 
 be negligible." 
 
 In the case of railways for 191 1, which have 
 hardly a total "product," 48 per cent, of the net 
 receipts went to workers, and for coal mines, 
 wages and salaries got 78 per cent. Dr. Bowley 
 said : "In the whole group of industries for 
 which we have adequate information, taken all 
 together, excluding railways, it is found that 
 58 per cent, of the net product (after all other 
 expenses and depreciation are met) goes to the 
 manual workers, 4 per cent, in small salaries, 
 
 6 per cent, in salaries over £160 ; in all 68 per 
 cent, goes to those employed. 32 per cent, 
 is left for royalties, rents, interests and profits, 
 advertisement, etc., and this is reduced to 23 
 per cent, if we count out royalties (as not being 
 the result of the efforts of the employed) and 
 allow 4 per cent, for the necessary repayment 
 of our interest on capital invested. How far 
 this 23 per cent, or £133,000,000, together with 
 a relatively small sum (probably well under 
 £10,000,000) for the salaries of managers of 
 companies, is an excessive or unnecessary 
 remuneration for the organisation of in- 
 dustry employing 6,000,000 wage-earners and 
 £1,200,000,000 capital and producing
 
 io6 WEALTH & TAXABLE CAPACITY 
 
 5^340,000,000 wages, is a question that may 
 properly be debated ; it is this sum that 
 formed the only possible source of increased 
 earnings in this group with industries con- 
 ducted as before the war and production at 
 its then level. In fact, while in some industries 
 a considerable advance may have been practic- 
 able, in the majority no such increase as would 
 make possible the standards of living now 
 urgently desired, and promised in the election 
 addresses of all the political parties, could have 
 been obtained without wrecking the industry, 
 whether by stopping the source of further 
 investment or closing down firms whose profits 
 were low. This statement in its general terms 
 cannot, it is thought, be reasonably denied by 
 anyone who has studied the facts." 
 
 Distrihution of Rewards smce the War. 
 
 As regards the post-war period, he said : 
 " There is, at any rate, no proof that, reckoned 
 at the prices of 1913, the national output 
 when peace has been established, will be 
 greater than before the war, even if there is 
 no slackening of effort." Indications rather 
 are that it is a trifle less at the present time. 
 Dr. Bowley concludes by saying : " This analysis 
 has failed in part of its purpose, if it has not 
 shown that the problem of securing the wages, 
 which people rather optimistically believe to
 
 DISTRIBUTION 107 
 
 be immediately and permanently possible, is, 
 to a great extent, independent of the question 
 of national or individual ownership, unless it 
 is seriously believed that production would in- 
 crease greatly if the State were sole employer. 
 The wealth of the country, however divided, 
 was insufficient before the war for a general 
 high standard ; there is nothing as yet to 
 show that it will be greater in the future. Hence 
 the most important task — more important im- 
 mediately than the improvement of the division 
 of the product — incumbent on employers and 
 workmen alike, is to increase the national 
 product, and that without sacrificing leisure 
 and the amenities of life." The period of the 
 war, including the year 1919, presents great 
 difficulties in any attempt to arrive at similar 
 results. I may say, however, that for the year 
 1919 my own observation over a considerable 
 range of accounts and business is that out of 
 the total sum going in wages, salaries, rent and 
 profits, some 60 per cent, went in wages, 
 20 per cent, in salaries of all amounts, and not 
 quite 20 per cent, remained for profits (subject 
 to Income Tax), rents, royalties and interest, 
 and I, therefore, incline to the view that the 
 last item, at any rate, until the repeal of the 
 Excess Profits Dut}^ has lost some ground 
 since the Census of Production results of 1907.* 
 
 * These results are substantially repeated for 1920.
 
 CHAPTER IV 
 
 THE LIMITS OF TAXABLE CAPACITY 
 
 It will readily be realised that the three 
 previous subjects with which we have dealt, 
 viz., the amount of the National Capital, the 
 National Income, and the way in which they 
 are distributed, are essential preliminaries to 
 any consideration of taxable capacity. Apart 
 altogether from the question of figures and 
 amounts, there has been no public exploration 
 of the figures involved in measuring such 
 capacity, or, at any rate, it has been so spas- 
 modic and fragmentary as to be of little value. 
 It is only possible on this occasion for the 
 matter to be dealt with in its broadest aspect, 
 and I propose to consider rather the principles 
 involved than any mass of figures. Then, 
 when we have agreed upon the factors to be 
 taken into account, we can each attach to them 
 the arithmetical significance we prefer in our 
 estimates of present conditions, or our forecasts 
 for the future. In any case, I recommend you 
 to externalise your thought on the subject in the 
 
 io8
 
 LIMITS OF TAXABLE CAPACITY 109 
 
 manner I have previously illustrated, i.e., by 
 thinking of the question, as far as possible, 
 as one of national production in a great " heap " 
 to which we can all contribute, and from which 
 we have to draw our subsistence. Only by 
 taking these objective views can we prevent 
 ourselves getting suffocated by words and 
 figures. 
 
 General Ideas. 
 
 The idea of taxable capacity, or a limit to it, 
 is one that has arisen quite recently in con- 
 nection with : 
 
 (i) Government policy for the repayment of 
 debt and other current expenditure, with the 
 large budgets it entails, and 
 
 (2) the extent to which Germany can be 
 made to pay for the war. 
 
 The term, was, however, used a great deal 
 25 years ago in discussing the alleged over- 
 taxation of Ireland. 
 
 The taxable capacity of Ireland, as compared 
 with England, and the relative amounts they 
 were contributing to the Exchequer were then 
 exceedingly live topics, and the Royal Com- 
 mission on Financial Relations considered them 
 at great length. 
 
 Some idea of the development there has 
 been during this time in ideas relating to 
 taxation can be obtained by reading the
 
 no WEALTH & TAXABLE CAPACITY 
 
 discussions which then took place. I referred 
 to it in the Newmarch lectures last year in the 
 following terms : — 
 
 Conflict with other Jurisdictions. 
 
 The great dilemma before State administra- 
 tion throughout the world at this time, in 
 various forms goes right down to fundamental 
 principles. It may be described as the conflict 
 between " situs " and " ownership " as the 
 basis of liability to taxation, or, to take the 
 terms now becoming familiar, between " Origin " 
 and " Residence."* 
 
 Twenty-five years ago when the taxable 
 capacity of Ireland was being investigated and 
 vigorously discussed, this difficulty ran through- 
 out the matter, but was never really laid bare.f 
 What is the taxable capacity of a country ? 
 Is it what the residents in that country can 
 afford to pay, or is it what the income produced 
 in that country can justify ? Suppose that all 
 the property in Ireland belonged to English- 
 men resident m England, and all the properly 
 in England to Irishmen resident in Ireland, 
 would the taxable capacity of Ireland be greater 
 or less than that of England ? Are we con- 
 sidering the taxable capacity of a people or 
 not ? We are back to the old contention that 
 
 * 1920 Comm. Evidence, 9573, etc. (S) ; Appendix, " Report of 
 Sub-Committee on Double Taxation,'' p. 171. 
 f British Incomes and Property, pp. 367-9 (vS).
 
 LIMITS OF TAXABLE CAPACITY iii 
 
 taxes are paid by persons and not things. If 
 you want to see how deep-rooted is the instinct 
 to tax on two principles, imagine the feehng of 
 an Irish Government imposing a separate 
 Income Tax. Would they refrain from taxing 
 a property in Sligo merely because the income 
 from it went abroad ? One imagines that they 
 would feel it was specially chargeable. But 
 suppose that 'a millionaire settles down in Sligo 
 who draws all his income from England, would 
 they decide to exempt him ? Certainly not. 
 It is very difficult for States to make up their 
 minds which principle to adopt, and most of 
 them end in taxing under both principles, 
 hence the great problem of double taxation, 
 which exists not merely as between this country 
 and the Dominions,* but also as between the 
 large and the small jurisdiction wherever federal 
 government is found, and where co-equal juris- 
 dictions exist within one economic sphere. 
 
 The United Kingdom was first in the field, 
 and taxed on the principles of residence, origin, 
 control, and every other pretext it could invent, 
 on the Donnybrook Fair principle, " see a head, 
 hit it." Now that the Dominions have heavy 
 taxes of their own, we are faced with the 
 problem of principle. Some of the Dominions 
 charge on both principles of origin and residence, 
 but others confine themselves to income arising 
 
 * On the whole subject vide 1920 Comm. Evidence and Report.
 
 112 WEALTH & TAXABLE CAPACITY 
 
 within their borders. France has been quite 
 modest in her new Income Tax and has not 
 charged income arising out of France. 
 
 Basis and Definition. 
 
 Elaborate attempts were made by the Com- 
 mission to examine the relative power of the 
 two countries by various tests, and also their 
 consuming power. In the same way it is 
 possible to deal with the total productive 
 capacity of Germany, and to allege that such 
 and such a proportion of it represents surplus 
 that could be spared. It must be clear to you, 
 however, that in so far as produce goes out to 
 people beyond the state in question, it goes 
 out to them for proper commercial considera- 
 tion given, and these are not the people whom 
 we desire to tax. They may be Itahan or 
 Dutch investors in German securities or 
 property — they are not in fact the State itself. 
 It is what is left to the inhabitants, together 
 with what they derive from outside their 
 borders — in short, the aggregate income of its 
 inhabitants — that is the ultimate test. Who 
 could think of ignoring Britain's invest- 
 ments abroad when determining her capa- 
 city ? But, however useful a statement 
 of aggregate production may be in getting 
 to the answer to this sum, it is not in itself the 
 answer. Everything depends upon the number 
 of inhabitants, and it is obvious that i,ooo
 
 LIMITS OF TAXABLE CAPACITY 113 
 
 millions aggregate for a population of one 
 million gives a taxable capacity quite different 
 from what it would be if the population were 
 5 millions. We come back, therefore, to the 
 question of aggregate income less the aggregate 
 subsistence level as the first approach to the 
 subject. So, therefore, the amount of Germany's 
 resources is not so much the question, as the 
 number of people who can divide them, and I 
 ought to add also that a very material factor 
 is the way in which the wealth is distributed. 
 There will be a different taxable capacity if all 
 the incomes are on one level or of an average 
 amount, than if there is a steep graduation in 
 distribution. If there are ten thousand persons 
 at a level of £100 subsistence, and one person 
 with a million £, there would be a larger taxable 
 capacity than if the same aggregate of 2 millions 
 were equally divided amongst 10,001 persons. 
 This fact follows from the law of diminishing 
 utility, upon which progressive taxation is based. 
 
 The Relativity of Taxable Capacity. 
 
 This question of taxable capacity is neces- 
 sarily relative — relative not merely to our 
 production, but also to how much we desire 
 to save, and how little we are prepared to 
 consume. If we put the saving at nothing, 
 and are prepared to live on the barest sub- 
 sistence, it is obvious we can stand a bigger
 
 IT4 WEALTH & TAXABLE CAPACITY 
 
 budget than if we consider our pre-war position 
 a privileged one to which we have a right before 
 we can be regarded as " affording " anything 
 for taxes. 
 
 Taxable capacity is measured by the difference 
 between two quantities — the total quantity of 
 production, and the total quantity of con- 
 sumption. It is seen quite clearly that if the 
 latter is diminished the taxable fund increases, 
 and so attention is fixed upon this function, 
 and it is asked : " What is the smallest sum 
 upon which we can lead a reasonable exist- 
 ence ? " A large number are seen to live 
 perforce at a certain level, and it is postulated 
 that the remainder could also live at that level 
 quite as well. Multiply the number of people 
 by this level and so get the national subsistence 
 level. Deduct this from the number you first 
 thought of (that is, the national production) 
 and, he}^ presto ! you have the taxable capacity ! 
 This is rather the attitude of some towards the 
 question of the proper degree of progression in 
 taxation. It leaves them cold if you refer to 
 the fact that a certain wealthy employer has 
 to pay away half of his income in income tax 
 and super-tax — £20,000 reduced to £10,000. 
 They say : " Don't talk to us of what we take, 
 see what he's got left. Most poor devils have 
 to be content on a mere fraction of it." As 
 Mr. Philip Snowden frequently says in effect in 
 his books : " / always look at what we leave
 
 LIMITS OF TAXABLE CAPACITY 115 
 
 him." But taxation is not merely a stationary 
 or static problem, the cutting up of an exist- 
 ing cake — it is a moving and dynamic 
 problem. We have to ask not only how little 
 we can leave him with, but also, how much 
 reduction will he stand before he slackens in 
 work and abstinence ? How long will he come 
 up smihng to be taxed in this way ? 
 
 The Effect of High Taxation on Production 
 
 and Saving. 
 
 Thus it is little use thinking of the consump- 
 tion level only — we have to keep our eye on the 
 production side too, and watch the effects of 
 our action there. It may well be that as the 
 consumption level is reduced by taxation, some 
 temperaments will be tenacious of the old 
 standard of comfort, and work harder than 
 before to maintain the consumption level ; in 
 this case a lax will make total production 
 greater than before. Thus, a day teacher, find- 
 ing his £350 reduced to £320 by taxation, may 
 not want to break up his existing scale of 
 expenditure, and he will give up some evening 
 leisure and take evening classes to make it 
 good. Taxation here creates its own fund of 
 added utilities. But if the taxes are made 
 very heavy, he will observe that the £50 he 
 might have received for extra work is only 
 £30 net, and he will not then be incited to 
 effort. Similarly the desire to save may be
 
 ii6 WEALTH & TAXABLE CAPACITY 
 
 quite discouraged by the low net yield after 
 bearing a tax, and no attempt to save is then 
 made. Then capital is less and production does 
 not grow as it might — he may even dissipate 
 the savings already made. Progressive taxa- 
 tion tends not merely to equalise incomes after 
 they are made — it also tends to sterilise ability 
 and ambition. For example, £400 a year for a 
 special medical appointment may be very 
 attractive to a medical man with £1,000 a year. 
 Another man earning £3,000 a year through 
 extra hard work and ability may be only just 
 tempted to take it — the marginal utility of 
 money is less to him, but the community is 
 best served by his taking it, as he is the better 
 man. Now, introduce progressive taxation. The 
 £1,000 man gets, say, £900 a year, and the 
 appointment is worth £350 to him ; the £3,000 
 man gets £2,000 net, and the appointment, on 
 taxation, is worth only £200. He exclaims : 
 " Not worth while for the effort ! " and the less 
 able man gets it. Thus " marginal utility " 
 operates twice over and in the same direction. 
 
 Successive Limits to Productive Taxation. 
 
 Now let us go back to production. If we 
 make a reduction on the consumption level 
 equal to 100 points by taxation, and so diminish 
 willingness that production falls 20 points, we 
 have reduced the taxable quantum by £20 and
 
 LIMITS OF TAXABLE CAPACITY 117 
 
 have reached one kind of Hmit of taxable 
 capacity, though we may be still far from the 
 physical subsistence level. For to secure the 
 required revenue of 100 we have to impose a 
 higher rate next time. We have reached 
 the point of psychological reaction, which is 
 far more important than the actual subsistence 
 level. But there is another kind of limit — the 
 point at which the revenue shows an actual 
 diminution on an increase in rates of tax. 
 Note the difference. Suppose the total 
 income is 1,000 millions, and we draw out 
 2s. in the £ or 100 millions, and leave 900 
 millions. Now let the rate be 4s., diminishing 
 incentive so that the total gross income is 850 
 millions — our revenue, at 4s., is 170 millions. 
 We have reduced the consumption level re- 
 maining from 900 to 680, i.e., by more than 
 the total revenue, but we still have an absolute 
 increase in revenue from 100 to 170. Now, let 
 us increase the tax to 5s., the gross income 
 drops, say, to 600 million £, and the tax is 
 150 millions. We have now not only a drop 
 in the total production through the tax, but 
 also an absolute drop in the revenue, and we 
 have passed a second limit of taxable capacity. 
 
 The Pre-War " Standard of Living " Fetish. 
 
 In applying these ideas, most of us tacitly 
 assume a kind of pre-war level of comfort and
 
 ii8 WEALTH & TAXABLE CAPACITY 
 
 subsistence, and regard a serious encroachment 
 thereon as beyond our Hmit. But in the totally 
 different problem of what Germany can afford 
 to pay, we think mainly of her standard of 
 production as fixed, and how low we can fix 
 the subsistence level to give a maximum fund 
 on which to draw. But she has her psychological 
 limit too, and only actual slavery and individual 
 taskmasters can get production from her people 
 if no part of the increased production can revert 
 to the producers, and if they can never rise over 
 subsistence levels for many years. 
 
 I propose to put for your consideration 
 the several reasons why the limit of taxable 
 capacity is not an absolute or fixed figure : — 
 
 (i) It depends upon what the taxation is to 
 be used for. 
 
 (2) It depends upon the spirit and national 
 psychology of the people taxed, which may be 
 influenced by patriotism or sentiment. 
 
 (3) It depends partly on the way the taxation 
 is raised, both as to the methods adopted and 
 the rate at which the increase is laid on. 
 
 (4) It depends on the distribution of wealth. 
 
 (5) Its rate of increase is greater than the rate 
 of increase in wealth, and it shrinks more 
 rapidly than the wealth diminishes.
 
 LIMITS OF TAXABLE CAPACITY 119 
 
 The Application of Reve?tue. 
 
 The first point is probably the most important. 
 There is undoubtedly a different measure of 
 taxable capacity according to how the pro- 
 ceeds of the taxation are applied. It is 
 impossible to say, without reference to this 
 application, that a certain figure represents the 
 limit of capacity. Thus we may apply taxation 
 (i) to the reduction of debt within the country, 
 (2) to the payment of interest on debt within 
 the country, (3) to the payment of interest to 
 people out of the country and (4) to the re- 
 payment of debt out of the country. Or we 
 may apply it to investments which add to the 
 productive powers of the country in other ways, 
 in varying degree, such as capital extensions 
 on post offices, telephones, and labour exchanges. 
 We may apply it also to expenditure, which is 
 practically unproductive, although in the last 
 resort it may be necessary from a national point 
 of view. As, however, we are dealing with the 
 question of whether we deplete the total 
 quantity of goods available for consumption 
 below the necessary level, we must count 
 expenditure on mihtary and naval objects as 
 being in a class by itself for unproductiveness. 
 
 Application to Internal Debt Interest. 
 
 First, it might well be that £500,000,000 
 would be the maximum that could be obtained
 
 120 WEALTH & TAXABLE CAPACITY 
 
 if it were applied under the third head, payment 
 of foreign interest, but it would not necessarily 
 be the maximum applied under the other heads. 
 Let us suppose that the nation's productive 
 capacity is measured by a sum of £1,200,000,000, 
 and the State has then contracted a War Loan 
 on which it has to pay an interest of 
 £300,000,000. This interest itself becomes tax- 
 able income in the hands of the recipients, 
 so that the total taxable income now is 
 £1,500,000,000, and, ignoring any other public 
 necessities, the State has to raise £300,000,000 
 on this, which it would do by an income tax 
 at 4s. in the £. Now the recipients of the 
 interest pay £60,000,000 tax on their own 
 £300,000,000, leaving £240,000,000 to be raised 
 out of the original £1,200,000,000 of productive 
 capacity. The net effect is that the producers 
 get £240,000,000 less to enjoy out of their 
 £1,200,000,000. But the £240,000,000 is not 
 annihilated, in so far as the producers are them- 
 selves recipients of interest for past services 
 and abstinence. The goods taken away from 
 them in taxation b}^ the State are returned to 
 them. There is a shift over from the producers 
 as taxpayers to themselves as receivers of interest 
 of £240,000,000 out of £1,200,000,000. The net 
 consumption of goods for the whole people is 
 the same for their enjoyment and efficiency. 
 Of course, it does not come back to them in 
 exactly the same proportions, but it is quite in
 
 LIMITS OF TAXABLE CAPACITY 121 
 
 a different case from what it would be if the 
 goods had been thrown into the sea. It is 
 only a charge upon the total national " heap " 
 in so far as there may be a few idlers, who 
 would otherwise have had to be putting on to 
 the " heap " in order to have their title to live 
 out of it, or, at any rate, to work harder, and 
 who are now kept in idleness by drawing out 
 of the " heap." But, certainly the bulk of the 
 subtraction from the heap goes back to the 
 producers in different proportions according to 
 their past efforts and service. 
 
 Now, suppose that the interest charge is 
 doubled, and becomes 600 million £. The effect 
 would be to give £1,200,000,000 plus 
 £6oo,ooo,ooo=£i, 800,000,000 of taxable income, 
 at a rate of 6s. 8d. in the £, so that the 
 £1,200,000,000 would be reduced by the 
 £400,000,000 which gets shifted round. You 
 will see that the problem is not one of abstrac- 
 tion from production so much as the redistribu- 
 tion of proceeds, which is far less severe on 
 taxable capacity than abstraction. It falls, 
 however, heavily on a new producer who has 
 neither had War Loan himself, nor inherited it, 
 and such a tax is a deterrent to new effort. 
 Its immediate effect is small, but its dynamic 
 effect may be great. Therefore, this limit to 
 taxable capacity is not so much a hmit to its 
 static capacity, but a dynamic limit to its future 
 producing power.
 
 122 WEALTH & TAXABLE CAPACITY 
 
 Application to External Uses, or Non-productive 
 
 Uses. 
 
 Next, let us take expenditure on a foreign 
 debt, or, say, military expenditure. The latter 
 keeps men away from helping to increase 
 production and the size of the " heap." They 
 would otherwise have put on the heap as much 
 as they drew off. Now they put nothing 
 on, and the sum abstracted is something 
 which either reduces general consumption, en- 
 joyment and possible efficiency, or else it 
 reduces the saving power for the future, in its 
 net effect. 
 
 Application to Debt Repayment at Home. 
 
 We pass now to taxation for repayment 
 of debt, and here I must ask you on this 
 occasion, to omit the effects of deflation upon 
 production. This taxation is a transfer of 
 saving power. The State takes money away 
 from B. which B. might otherwise have put 
 into his business, or invested in a company. 
 The State then proceeds to redeem the debt 
 held by A. Then A. finds himself with new 
 money to invest, and he puts it either into 
 B.'s business or into the company that B. had 
 his eye upon. This transfer of saving power 
 may even increase saving if the producers are 
 induced to keep their consumption lower than 
 it might have been, and also, of course, if the
 
 LIMITS OF TAXABLE CAPACITY 123 
 
 recipients, when the debt is paid off, do not 
 spend the capital as though it were income. 
 The latter is a very rare event, and usually 
 drastic taxation for the repayment of debt, 
 at any rate speaking statically in the year in 
 which it is done, increases the total saved 
 capital of the country. Of course, if it is so 
 heavy as to depress future effort, it has the 
 dynamic effect of reducing production. You 
 will see that there is not necessarily any net 
 loss or real reservation out of the year's product 
 for consumption. Obviously the whole saved 
 fund might be taken in debt redemption if 
 there were absolutely fluid conditions of transfer. 
 When we are considering, therefore, whether 
 the voluntary savings fund of the nation is 
 kept intact after taking away the taxes, we can 
 deduct from that savings fund the greater part 
 of the amount which is being provided by taxes 
 for debt redemption. 
 
 At this point, lest you should think I am 
 beating the air with a discussion of barren 
 principles, let us refer to a statement which 
 has been the practical foundation of much that 
 has been said on this question recently. 
 
 In a speech by Mr. McKenna at the Annual 
 Dinner of the National Union of Manufacturers 
 on June i4ch, 1920, he made the following 
 observations according to the newspaper 
 report : " They would not expect him to 
 give an exact calculation of our maximum
 
 124 WEALTH & TAXABLE CAPACITY 
 
 taxable capacity. He could do no more than 
 lay before them certain figures which might 
 act as guide posts in the enquiry. In the year 
 1913-14 the Government expenditure amounted 
 to about 200 milHons, and the estimated 
 savings of the community amounted to about 
 400 millions. Thus in that year the total 
 national income exceeded the national ex- 
 penditure, other than the expenditure by the 
 Government, by 600 millions. The surplus of 
 production over consumption would also be 
 the same, but, measured in money, it would 
 amount to a very different figure. The pre-war 
 value of the £ sterling was about 2j times as 
 great as its present value, and the surplus of 
 600 millions in 1914 would mean a surplus of 
 1,400 millions to-day. Thus, on the same basis 
 of individual consumption, and on the same 
 basis of production as in 1913-14 the total 
 surplus we could possibly have to spend on 
 government would be 1,400 millions, leaving 
 nothing whatever for further accumulation of 
 capital for the development of our trade and 
 manufactures. 
 
 " Grave Over-Taxation.'' 
 
 ' ' He did not think he was over-stating the case 
 when he placed our present output at 80 per cent. 
 of the output in 1913-14. (Cries of " Too 
 high.") For his part, he believed that an
 
 LIMITS OF TAXABLE CAPACITY 125 
 
 examination would show that a Budget of 
 1,000 miUions was as much as the nation could 
 possibly carry at the present time, and that 
 even this figure would not leave a sufficient 
 margin for the increase of capital necessary for 
 the recuperation and development of industry. 
 "On the present basis of taxation the revenue 
 this year was estimated at 1,116 millions. 
 Some of the taxes, however, were not productive 
 for the whole year. In a full year the revenue 
 was estimated at 1,238 millions. The figures 
 he gave did not include anything for the sale 
 of commodities, but were the figures of ordinary 
 revenue. If it were true, as he believed, that 
 the nation could not afford to pay in taxation 
 more than 1,000 millions, the conclusion to 
 which he was driven was that we were being 
 gravely overtaxed." (Cheers.) Now, doubtless, 
 Mr. McKenna was fully alive to the considera- 
 tions I have been urging, but it would 
 be quite unfair to expect, in an after-dinner 
 statement, on a hot evening in June, any 
 exact review of all the issues involved. Others 
 have seized upon his general conclusion that 
 1,000 millions was a definitely computed limit, 
 and this has gained currency as a kind of axiom 
 in a way that he would not have desired. Six 
 weeks later, for example, the " Statist " im- 
 proved upon his analysis by adding " The 
 taxation burden would not be less than 1,200 
 millions, leaving only a small margin of 200
 
 126 WEALTH & TAXABLE CAPACITY 
 
 millions, or less than one half of the pre-war 
 amount to provide for depreciation in industrial 
 capital, the continuation of new industrial 
 enterprises, and the performance of various 
 functions necessary to the economic vitality of 
 the nation. With the increase in money values 
 this 200 millions would have had the purchasing 
 power of 85 millions before the war, thus making 
 the total available for industrial purposes merely 
 one-fifth of the pre-war amount." 
 
 So it is seen that a responsible organ adopts 
 this method of approach, and in a recent 
 criticism arrives at this conclusion. 
 
 Let us now set out this development of Mr. 
 McKenna's line of argument, together with the 
 points I have suggested : — 
 
 First Statement. 
 
 Pre-War Budget 200 millions. 
 
 „ Savings ... ... 400 „ 
 
 Surplus of production over 
 
 consumption ... ... 600 ,, 
 
 Present level of 23 times this 
 
 would be ... ... ... 1400 ,, 
 
 Taxation burden is ... ... 1200 ,, 
 
 Leaves a balance of ... 200 millions to provide 
 
 for savings and depreciation in industrial capital and new 
 enterprises. This has a purchasing power of 85 millions 
 before the War, and so equals one-tifth of pre-war savings. 
 If production has slackened the situation is even 
 worse.
 
 LIMITS OF TAXABLE CAPACITY 127 
 
 As revised. 
 Upon the principles I have set out :— 
 
 Surplus, as above 
 
 Now equals 
 
 Taxation (gross) ... 1200 
 
 Take off the debt in- 
 terest that is shifted 
 round, and not con- 
 sumed ... ... 350 
 
 Effective taxation 
 
 Leaves a fund of 
 But some 200 millions are 
 alread}' provided out ot taxes, 
 which can be used for repay- 
 ment of debt making in all 
 for savings 
 
 600 millions. 
 1400 
 
 850 
 
 550 ,, towards savings 
 
 750 millions. 
 
 Now the amount wanted is 400 milUons 
 multipHed by 2^ = 933, We have found 750 
 milUons towards this, or four-fifths of the pre-war 
 savings power, instead of one-fifth, as shown by 
 the "Statist's" development of Mr. McKenna's 
 views, always provided production is main- 
 tained. 
 
 The Level of Hardship. 
 
 The second main point that I wish to make 
 is that taxable capacity will be different accord- 
 ing to the level at which we define a real hardship 
 to begin. Now the point at which men become 
 grumblers and slackers, or the extent to which
 
 128 WEALTH & TAXABLE CAPACITY 
 
 their efforts respond rapidly to limits in reward, 
 are national characteristics, and one cannot 
 assess them statistically. As I have indicated 
 in the last lecture, the standard of life is by no 
 means an absolute thing — it is relative to the 
 age in which we live, and both poverty and 
 riches are relative to the average standard of 
 things existing. Moreover, it is not absolute, 
 for you see that different civilised nations can 
 have different levels. At the same time, I 
 think there is little doubt that what we in 
 England were thinking of as a reasonable 
 standard, or a living wage for workmen of 
 average ability, was a higher thing than the 
 same idea in Germany, or in France, but 
 probably not so high as in the United States 
 prior to the War. Further, the point at which 
 reaction sets in of a serious character, is not one 
 that we can exactly determine, but neither can 
 we afford to neglect it. It is conceivable that 
 a strong civic sense, or a national call for 
 patriotic effort, might afford a new standard of 
 self-denial. 
 
 Now the level to which a country might reduce 
 itself if we were exacting indemnities or the 
 repayment of loans, would be unconsciously 
 self-determined, but we might regard it as not 
 sufficiently drastic, and by bringing pressure to 
 bear, such as military occupation, or financial 
 supervision, we might force it to something 
 lower, getting the same production from the
 
 LIMITS OF TAXABLE CAPACITY 129 
 
 people. The difference would represent some- 
 thing that by pressure we had secured, but it 
 would cost us money to do this, and we have to 
 ask whether this would pay for itself, and the 
 game be worth the candle. 
 
 Methods of Taxation. 
 
 Then the third point I should like to make is 
 that the limit of taxable capacity may also 
 fluctuate to some extent, according to the 
 different ways in which taxation is raised. 
 There are limits to the amount that can be got 
 along one broad line, and here one comes up 
 against the question of psychology very strongly. 
 While we may, for convenience, reduce all the 
 different kinds of taxes to one common de- 
 nominator of a tax on income, the fact remains 
 that the hardship created by imposing it as 
 such a single tax on income, would be felt to 
 a greater extent than if the poor tax payer is 
 hit in different ways, under different guises, 
 partly through indirect taxes and partly by 
 death duties yielding an exactly similar amount. 
 So when one tax is settled at a level at 
 which people are beginning to feel it acutely, 
 it pays not to add to that tax, but to try another 
 kind, and it is here that the value of postponed 
 taxation, like death duties, which come between 
 the living and the dead, may be most clearly 
 exhibited.
 
 130 WEALTH & TAXABLE CAPACITY 
 
 By a judicious mixture of methods one can 
 get a larger sum out of the community (with a 
 given amount of " pain ") than by following any 
 one special line. The field of death duties offers 
 possibilities at the present moment greater than 
 additions to the already high direct taxation. 
 
 The mind and aspirations of man are very 
 limited in their outlook in point of time. Beyond 
 a man's own wife and dependents, perhaps, for 
 30 or 40 years ahead, he does not bother to 
 look. If he did trouble, then he would object 
 to spending money on leasehold property that 
 is going to pass out of the possession of his 
 descendants. If he did trouble, then reversions 
 would have a greater value at a distance of 
 time equal to 40 years .han they actually have 
 now, when their worth practically fades away. 
 
 But, to the State there is no such limit of 
 life and thought. It can afford to take the 
 longer view, and between these two there is 
 scope for the State insuring itself a revenue by 
 processes which will not appeal to the taxpayer 
 as confiscation. I will not pursue this point 
 beyond a general statement that taxable 
 capacity is, to some extent, modifiable by 
 relation to the system of taxes adopted. 
 
 You will realise, of course, that taxation by 
 death duties gives greater taxable capacity in 
 a stationary sense, and no destruction of capital 
 whatever is necessary — there may be a mere 
 transference. The only thing we have to worry
 
 LIMITS OF TAXABLE CAPACITY 131 
 
 about is its dynamic effect upon saving and 
 enterprise. Of course, the capital levy, if it 
 could really be guaranteed against repetition, 
 would shift round the existing ownership of 
 capital and remove debt, and might have no 
 dynamic depressing effects upon the future. 
 
 Another important point is that, if you are 
 going to depress the standard of living, and 
 increase taxable capacity, you can get down to 
 a much lower stage by doing it gradually, than 
 by attempting it all at once. Nothing can be 
 more obvious than this when you consider the 
 way in which, in the year 19 10, we were 
 deploring the appalling weight of taxes and the 
 absolutely suicidal policy of adding 3d. to the 
 income tax, and encroaching on our reserves of 
 war taxation. You have only to read the 
 hysterics and homerics of those days to realise 
 that education and compulsion will do a great 
 deal. Just so, a certain dose of a drug will 
 kill if taken right away, whereas by starting 
 off with a small quantity one can ultimately 
 work up to a much greater amount than this 
 fatal dose, through the effects of "tolerance" 
 by the human body, without fatal results. 
 
 The Effect of Extending Taxable Capacity. 
 
 As we have been thinking of this matter 
 from the point of view of a surplus of production 
 over consumption, we will continue that line
 
 132 WEALTH & TAXABLE CAPACITY 
 
 of thought further. When people have to 
 economise they can cut down laces and frills, 
 concerts and pictures, before such necessaries 
 as bread, meat, clothing, shelter. Hence, as 
 there is forcibly extracted from the national 
 heap the surplus for state needs, the residue for 
 consumption tends to contain a greater pro- 
 portionate amount of essential goods, and a 
 small proportion of luxury services. Thus the 
 heavy taxation of the rich means that butlers, 
 chauffeurs, and valets would be discharged to 
 go into the production of primary necessities, 
 etc. It means also that the smaller surplus 
 money to be spent by the masses on pure 
 pleasure would mean fewer cinema actors, 
 professional footballers, and the like. The 
 character of the " heap " would begin to change 
 with, of course, much economic upheaval. 
 Similarly the very disproportionate amount of 
 our total labour engaged in distributing and 
 marketing, with all its duplication and over- 
 lapping, may be forced by heavy taxation to 
 adjust itself into an economic organisation 
 with a more economical transmission of power 
 and with prevention of waste. In most of our 
 thoughts about our own taxable limit, we 
 tacitly assume for ourselves both an unaltered 
 organisation of existing production and a pre-war 
 standard of comfort and savings, but for the Ger- 
 mans a narrower level of subsistence. While this 
 may be strictly just, we have to ask whether
 
 LIMITS OF TAXABLE CAPACITY 133 
 
 it may not lead to our failing to search for, and 
 to find, means of increasing our net production 
 per head, such means including the problem of 
 distribution. May not the German nation, 
 reduced to a bare subsistence, provided its 
 spirit is not entirely gone, gradually searching 
 after a modicum of luxury, learn to economise 
 in effort, find short cuts, reduce oncost, and 
 so produce its subsistence with diminishing 
 total effort ? If the German becomes servile, 
 and actually content with a bare existence, we 
 may not get enough production for indemnities 
 to be paid. If he works hard to repay, we may 
 find stern necessity has put him ultimately 
 ahead of us in organisation and method. If 
 the advantage that we have derived by having 
 our own surplus of production over consump- 
 tion amplified by his contribution, has been 
 consumed and not saved in capital goods for 
 production, we shall start level at the end of 
 the reparation period as to the mass of pro- 
 ductive power, but he will have all the advantages 
 of the improved methods forced by necessity. 
 If we do not consume the indemnity, but save 
 the appropriated surplus, we shall match that 
 advantage by an alternative advantage of 
 greater invested producing power. It will be 
 almost a contest between the advantage of 
 the objective aids to production we shall have 
 received and saved, against the subjective habits 
 and organisation for the economic good the 
 German will have developed.
 
 134 WEALTH & TAXABLE CAPACITY 
 
 The Present Capacity in Theory. 
 
 Some concrete notion as to my idea of our 
 present taxable capacity may be expected. 
 I do not think it quite fair to start on the 
 assumption that we must consume exactly 
 what we did before the War, and have no larger 
 surplus than we then had. I am going to 
 assume that we might have saved lOO millions 
 more, and that we could have spared 50 millions 
 more in taxes, without having a really unhappy 
 and down-trodden existence, or without dis- 
 locating the economic organisation too much. 
 
 Then the surplus of production over con- 
 sumption would have been (in milUons) : — 
 
 Millions, 
 Taxation 200+ 50 250 
 
 Savings 400+ 100 500 
 
 750 
 
 This, out of 2,250 million £, would have 
 represented practically 33 per cent, of the 
 total income. 
 
 At twice the level of values this surplus is 
 represented at 1,500 millions. But we shall not 
 collapse if only half the pre-war rate of saving is 
 assumed, and if the balance goes to pure 
 taxation. Let us say the saving is even now 
 £500 millions. I will presume that three-fifths of 
 this can be done via debt redemption. We 
 then have : —
 
 LIMITS OF TAXABLE CAPACITY 135 
 
 Aggregate surplus (present values) 
 Less : 
 
 £ Millions. 
 1,500 
 
 Individual savings 
 
 Savings, via debt redemption 
 
 ... 200 
 ... 300 
 
 500 
 
 Available for taxation as surplus 
 
 1,000 
 
 Let the normal taxation eat up the actual 
 
 surplus 1,000 
 
 Add taxation which does not absorb surplus : 
 Interest charge changing hands 350, deduct- 
 ing a proportion for the due effect on 
 production by individuals, say 100 ... ... 250 
 
 Add : Debt redemption, money changing 
 
 hands 300 
 
 Nominal Budget 
 
 £1.550 
 
 A ssumpiions. 
 
 {a) Pre-war production attained. 
 
 {b) Pre-war consumption curtailed 10 per cent. 
 
 (c) Pre-war rate of savings halved. 
 
 (d) No losses brought about by rapidly falling prices. 
 Conclusion. 
 
 We could just stand a budget of 1,250 million £, plus 
 300 million £ debt redemption— 1,550 milHon £ in all.* 
 
 This is equal to an Expenditure Budget of 900 million £ 
 without interest on debt or redemption, to include all 
 increases in the local rates. 
 
 • Note. — It should be noted that although this conclusion has 
 been quoted as if it were applicable to present conditions, the 
 arithmetical assumptions on which it rests do not represent present 
 conditions. The result must be modified by the extent to which 
 actual conditions differ from those postulated. 
 
 K
 
 136 WEALTH & TAXABLE CAPACITY 
 Practical Limits to the Theory^. 
 
 These figures are, so to speak, ideal, especially 
 because they stand against a hypothetical set 
 of figures as to national production. It will 
 be difiicult surely, to suggest that, even when 
 the strike is over, our present production is 
 more than 80 per cent, or 85 per cent, of the 
 pre-war figure. This factor, after all, is vital 
 to any calculation, and an assumption must 
 be made as to the actual present facts (May, 
 1921). • If pre-war income (not quite the same 
 thing) was £2,200 millions, and personal con- 
 sumption £1,600 millions, the present repre- 
 sentation of these figures in pre-war terms 
 might be f put at 1,760 to 1,870 million £ and 
 1,440 million £ respectively, the consumption 
 being cut down 10 per cent. This gives a 
 margin of 320 to 430 milHon £. If our present 
 price level is 125 per cent, above pre-war figures, 
 then for 192 1-2 this becomes a margin of 
 720 to 960 million £, as the aggregate surplus. 
 Allowing a mere 50 millions from this 
 for ordinary savings, and treating 100 
 millions (per the Budget speech) as being 
 applied to debt, we get a surplus for 
 taxation of 570 million £ to 810 million £. 
 Now, out of the total Interest charge I will 
 take 200 million £ as not being a real abstraction 
 
 * The passages following were added in remarks before the 
 Political Economy Club after the Budget of 1921.
 
 LIMITS OF TAXABLE CAPACITY 137 
 
 from surplus, and the debt redemption of 
 £100,000,000 I treat also as an addition to the 
 savings, making total savings a paltry 150 
 million £, or less than a sixth of the pre-war 
 amount. We thus get the trial Budget, on the 
 Chancellor's present lines to a limit of 870 
 million £, to £1,110 million £ (according to 
 whether production is 80 or 85 per cent, of 
 pre-war amounts), while the actual Budget 
 is 964 million £ (excluding non-tax re- 
 venue) plus 80 millions increase in rates, or a 
 total of 1,044 million £. You will see, there- 
 fore, that it is a very tight fit, and if production 
 is down below 80 per cent, on pre-war volumes, 
 it is no fit at all. At the best it means a very 
 small accretion to capital, and a standard of 
 living reduced below the pre-war level in real 
 value. 
 
 Moreover, if values are declining, the Budget 
 is affected to a more than proportionate extent, 
 because the capacity to meet the assessments 
 based on higher values is so seriously impaired. 
 
 My conclusion is, therefore, that if production 
 can be maintained and prices do not decline, 
 the Budget is just within our powers for 1921-2, 
 but that 1922-3 will tell a different tale unless 
 things rapidly improve in production. Even 
 192 1 depends upon matters going no vt^orse 
 than they are at present. In any case, taxation 
 must be severely felt, and not \ery much 
 addition to National Wealth is possible.
 
 CHAPTER V. 
 
 THE EFFECT OF CHANGING PRICE LEVELS UPON 
 PROFITS AND WAGES. 
 
 There are three aspects from which we may 
 consider this subject. There is, first, what is 
 said about it in general economic teaching ; 
 then the Hght thrown upon it by statistical 
 research ; and, thirdly, what we may expect as 
 to the future from general economic reasoning. 
 
 The Effect of Changes in Currency upon Prices. 
 
 What has in the past been a purely general 
 and " long-distance " problem has, of course, 
 now become a short period and very acute one, 
 and it may well be that if we reason from the 
 one class of phenomena to the other we may 
 go seriously astray. It is, however, due to 
 past experience that we should question it 
 narrowly and see how far it supports reasonings 
 from first principles, and generalisation from 
 individual cases. 
 
 It is impossible to get far upon this subject 
 unless we try to form some idea of the way 
 
 138
 
 CHANGING PRICE LEVELS 139 
 
 changes in price level get into action, so to 
 speak, or, rather, how differences in purchasing 
 power translate themselves into differences in 
 price level. It is an extraordinarily difficult 
 thing to discern in action, because it is so silent 
 and impalpable, being the result of the thoughts 
 of so many people, which act in what we call 
 a " market," that it is hard to put one's finger 
 upon the change at any point. 
 
 The old type of change in price level, following 
 upon the change in the volume of the gold 
 stream, was not so difficult to discern if examined 
 quite broadly for its effects. We can well 
 imagine that the increasing abundance of the 
 gold supply — or the relative ease with which, 
 owing to new processes, it made a full return 
 upon the capital and labour expended in 
 extracting it — had an immediate influence upon 
 the exchange of goods surrounding the mines. 
 A real disparity between the capital and efforts 
 required to obtain gold, and those necessary to 
 produce other forms of commodities in the 
 neighbourhood, could not long stand unchal- 
 lenged, and equilibrium has come about natur- 
 ally, partly because the miners and mine- 
 owners have had a larger effective purchasing 
 power, and, therefore, a " stiff er " demand, 
 and also because the suppHers of their grocery 
 and clothing were obviously not going to be 
 content with a less command over purchasing 
 power in reward for their efforts than could be
 
 140 WEALTH & TAXABLE CAPACITY 
 
 obtained in the mines. Viewed in the abstract, 
 and with fairly obvious examples in practice, 
 there is, of course, a flow of labour and capital 
 from one class of industry into the other until 
 equilibrium is obtained. Hence we get a general 
 rise of prices in the commodities coming into 
 contact with the " gold stream " at its source. 
 
 Now, looking at past instances, if all the gold 
 remained in the vicinity of the mines, prices 
 would have gone very high indeed ; but, of 
 course, the high prices attracted imports from 
 abroad, and the gold went out to pay for them. 
 The new supply of gold in the exporting markets 
 began to take its effect there too, particularly if, 
 as in modern times, the gold supported a large 
 superstructure of proportionate credit. An 
 example of how this came about may be found 
 in the history of prices, and particularly the 
 effect of the stream of precious metals into 
 Europe in the early sixteenth century. It did 
 not have the effect of simultaneously raising 
 prices in all parts of Europe, but prices were 
 raised first where the gold and silver stream 
 came into contact with civiHsation, i.e., the 
 importing and navigating countries, and the 
 higher prices gradually found their way into 
 the more remote corners of the European 
 continent until the effect was very considerable 
 indeed. Jevons was able to predict with con- 
 siderable accuracy the effect upon Europe of a 
 serious fall in the value of gold, even to the
 
 CHANGING PRICE LEVELS 141 
 
 precedence that the increasing prices would 
 take in regard to effect upon raw materials, 
 foodstuffs, animals, and so on. 
 
 Differences in the Effects of Increased 
 Credits. 
 
 Our modern problem is one of the manufacture 
 of credit, like the discovery of a gold mine in 
 each of our back gardens, and as this starts 
 more or less in the middle of the whole economic 
 machine, it is much more difficult to say exactly 
 where it originates, or to trace its effects. 
 Supposing that each bank manager were to 
 decide that in the past he had been much too 
 cautious as regards the amount of assets which 
 he kept in reserve against his loans to traders — 
 that is to say, in the proportion of the deposits 
 made with him which he ought to keep back 
 ready to meet the calls of depositors. Then, 
 of course, people applying for advances on goods 
 and securities for expanding their trade, would 
 find it much easier to get them, and the effective 
 purchasing power through this credit would be 
 suddenly greatly enlarged, though it would be 
 more or less hidden in the breast of each merchant 
 and manufacturer. 
 
 At the same time you will, of course, presume 
 that there has been no increase in the quantity 
 of goods to be purchased, and in that subtle 
 way in which a market price is constituted, the
 
 142 WEALTH & TAXABLE CAPACITY 
 
 buyers in competition put up the prices, the 
 sellers feel the trend, and we find the wholesale 
 prices of imports and raw materials rising. 
 The third sort of inflation that we have to cope 
 with to-day arises without any alteration in 
 the actual ratio of advances made by the 
 Bankers. I will not stay to explain it here, 
 but when the Government borrows on " ways 
 and means " advances, the Banks ultimately 
 get a new basis of assets by their deposits with 
 the Bank of England, and without actually 
 altering the apparent ratios of ordinary Bank 
 reserves, industry may be enabled to exert a 
 larger nominal purchasing power. Here it is 
 as if we multiphed the reserves by a factor, and 
 thus gave ourselves the power, while still 
 preserving the old ratios intact, to give larger 
 loans. The use of currency notes is, of course, 
 consequential upon this, or what Professor 
 Nicholson calls " pulverising " the new credit 
 into little lumps for general and retail use, for 
 wages and the like. 
 
 Some have thought that credit and money 
 were identical in influence upon prices. Credit 
 is indeed purchasing power, and helps to raise 
 prices, but credit has not to the same extent 
 the power of Hquidation. As Professor Seligman 
 says : — " Credit, though it exerts by no means 
 the same amount of influence on prices that 
 money does, exerts the same kind of influence. 
 The reason that it does not exert the same
 
 CHANGING PRICE LEVELS 143 
 
 amoiiiiL of influence is that a portion of its ideal 
 efficacy as a substitute for money is lost," 
 through the necessity of immobilising the re- 
 serve ; "the extent of the reserve is a measure 
 of the incompleteness of the substitution, and 
 therefore, of the degree to which credit fails 
 to equal money in affecting price." Of course, 
 you can get an increase of price without any 
 change in this level of purchasing power by a 
 general rarity of commodities, and this was one 
 of the causes of high prices during the War. 
 One cannot account for an increase in the price 
 of an article merely because it is scarce — that 
 is, measuring its price in other articles. For 
 example, a pound of butter may be worth three 
 pounds of sugar, and the total quantities of 
 each may be reduced by 50 per cent., and yet 
 this relation of three to one may still hold, so 
 that the mere rarity of commodities as a whole 
 does not increase the price, except the price in 
 money, which has not been made equally rare. 
 It is most important to bear in mind this 
 distinction. Inflation comes about whenever 
 we get multiplication of purchasing power 
 without the corresponding multiplication of 
 goods. This does not originate, generally speak- 
 ing, in the hands of consumers, but in the hands 
 of traders. Therefore, the wholesale prices 
 usually rise first, and more than the retail 
 prices, and in a similar way they fall first. 
 A real distinction exists, but cannot be pursued
 
 144 WEALTH & TAXABLE CAPACITY 
 
 here, between expansion which works off its 
 own effects by a permanent increase of goods, 
 and other classes of credit multiphcation. 
 The fluctuations of the wholesale prices are 
 more violent, and trading profits consequently 
 rise before wages or professional incomes ; they 
 also tend to fall before wages or professional 
 incomes. The effect of a rise in prices gives 
 the maker of profits an even greater profit 
 than he could otherwise secure, because his 
 expenses, lagging behind, bear a smaller relation 
 to his total receipts. We should expect to 
 find, prima facie, therefore, that profits, being 
 an economic margin, increase to a much greater 
 extent than the immediate increase of prices, 
 until all the expenses, including the cost of 
 purchasing stock and paying wages, have in- 
 creased in proportion. Then at that stage the 
 increase in the actual profit made (not the rate 
 of profit on turnover) would tend to be propor- 
 tionate to the increase in prices. We know 
 this to be a fact from many separate instances, 
 and also that the converse holds good upon 
 a fall. But what do we know upon the matter 
 for the country as a whole ? 
 
 Statistical Research upon the Actual Effect 
 A Changing Price Level. 
 
 Speaking from the point of view of statistics, 
 we are on very difficult ground. On the question
 
 CHANGING PRICE LEVELS 145 
 
 of the effect of changing prices on profits, we 
 have singularly little real investigation, and I 
 am the more difftdent and hesitant about put- 
 ting forward what there is, because it rests, so 
 far as I know, upon my own researches, and, 
 therefore, I have not the advantage of an 
 independent check by other workers to enable 
 me to avoid the personal factor, which is just 
 as dangerous in statistics, as it is in experimental 
 physical science.* 
 
 We have various partial measures of trade 
 changes existing over a long period of years, 
 but it is difficult to get any aggregation of 
 profit made up on a sufficiently uniform plan 
 to correspond. If we select a given group of 
 businesses of which we know the profits, it is 
 almost impossible to get uniform details of 
 their total trade ; moreover, the group is 
 probably too small for us to be confident that 
 individual idiosyncrasies will have cancelled 
 each other, and it is not easy to keep a complete 
 series for a sufficient number of years to secure 
 that the cycles of trade shall be fully repre- 
 sented. In short, there are very formidable 
 difficulties in the way of making a proper 
 comparison between profits and trade statistics. 
 
 I have set out to examine the figures, and 
 then to ask what would be the increases if the 
 natural growth of population were taken into 
 
 * Several passages here are reproduced from the Journal of the 
 Royal Statistical Society, July, 191 8.
 
 146 WEALTH & TAXABLE CAPACITY 
 
 account, and how far was the increase in profits 
 due to a real increase in output of commodities, 
 as distinct from an increase due to higher prices 
 for the old quantity of goods. 
 
 If a given measure of trade has risen say, 
 from £ioo to £120, and we rejoice in a rise of 
 20 per cent., it may be that either 120 units 
 have been sold instead of 100, at a regular 
 price of £1, or that 100 units have been 
 sold at a price of £1 4s. each instead of £1, or 
 the result m.ay be a combination of both changed 
 quantity and changed price ; it ma}^ even be 
 that one factor has actually diminished, but 
 that its effect is more than offset by the increase 
 in the other. What is the actual or probable 
 change in profit that accompanies such a 
 change of 20 per cent., according to the cause 
 of the change ? Will a like change accompany 
 a second, or third ensuing rise of 20 per cent ? 
 Will the relations found to exist for increases 
 hold also for decreases, or what difference may 
 we expect ? 
 
 Now, I am not going to put you through the 
 lengthy disquisition that I gave the Royal 
 Statistical Society, because I there had to 
 discuss material rather minutely, and also 
 methods of getting fluctuations into an index 
 number, clear of the normal growth of popula- 
 tion. I applied, I believe, for the first time 
 in this country, the method of representing 
 the normal growth by a straight Une, which is
 
 CHANGING PRICE LEVELS 147 
 
 called the linear secular trend, and then I 
 measured the fluctuations or deviations from 
 that line. The line itself may not actually join 
 the figures at the two ends of the series ; indeed, 
 it may actually touch none of them, but it 
 represents the best straight line " fit " for the 
 points all taken together. {Vide figure 2). 
 
 When one is dealing with a long time-series, 
 there is absolutely no other satisfactory way. 
 I then compared the fluctuations of one series 
 showing profits with another showing prices, 
 and another showing volumes, and tried to 
 find how far the fluctuations were connected, 
 both as to the time they occurred and the 
 amount of the fluctuations, by scientific methods. 
 
 Fluctuations in Coal- Mining Profits. 
 
 Using the Pearson co-efficient of correlation, 
 I came to the following general results for coal 
 mining : Apart from the degree of deviation, 
 the correspondence of deviation in the case of 
 tonnage compared with profits is close — profits 
 have generally increased more than the average 
 where tonnage has increased more than the 
 average, and decreased similarly. But the 
 effect is, of course, mixed up with increases 
 and decreases in price. In the comparison of 
 price-changes with profit-changes the corres- 
 pondence is found by all tests to be very close 
 indeed. Where profits are reckoned as in- 
 cluding the almost stationary item of royalties,
 
 148 WEALTH & TAXABLE CAPACITY 
 
 then, for a change in price represented by one 
 point, profits changed something Hke 3 points. 
 A rise in prices had rather less effect in raising 
 profits than a fall in prices had in diminishing 
 them, and where the rise or fall was large the 
 change in profits tended to be greater in pro- 
 portion than it was for a small rise or fall. 
 Where a year of rising profits was followed by 
 another rise (or a year of fall followed by another 
 fall), the succeeding year tended to show a 
 diminished factor, i.e., the effect of the price 
 change in altering profits was not so great. 
 This I assume to be due to the rapidity with 
 which wages followed prices. When I excluded 
 royalties from my series of profits, I came to 
 the conclusion that price was four times as 
 powerful as output in causing fluctuations in 
 profits. But profits and prices in coal-mining 
 were not always indicative of changes in the 
 same direction in other industries. Thus I 
 found a very high negative correlation between 
 the profits of railways and the price of coal, 
 so that improved profits in coUieries meant 
 reduced profits in railways. I found the same 
 sort of negative correlation between gas profits 
 and coal prices. 
 
 Fluctuations in Other Trades. 
 
 When I examined Merchants' profits I found 
 that the fluctuations in total profits were almost
 
 CHANGING PRICE LEVELS 
 
 149 
 
 Coal Mining, 1888-1915. 
 1890 1895 1900 1905 1910 
 
 1915 
 
 200 
 
 Fig. 2.
 
 150 WEALTH & TAXABLE CAPACITY 
 
 entirely those due to the amount of sales, and 
 the results were unaffected by price changes. 
 
 In the case of cotton spinning the changes 
 were remarkably violent, the deviation of the 
 price from the trend of prices was very extreme, 
 averaging 14.4 per cent, on the average price, 
 but the deviation of profits from the average 
 profit was 154 per cent., or nearly 11 times as 
 great. 
 
 Then I made an elaborate calculation to get 
 the profits for the country as a whole, presenting 
 them in one series for 35 years, and I should 
 like any of you interested in the subject to look 
 closely at the graphs which I drew from 1880 
 to 1914, as they are by far the best way of 
 inspecting these results. My conclusions were 
 as follows : — 
 
 The fluctuation in profits has generally been 
 rather less in magnitude or range than the 
 fluctuation in statistics of " turnover," such as 
 banking or foreign trade statistics, which reflect 
 both quantities and prices, and it may be 
 taken roughly at two-thirds to three-fourths of 
 such short period changes in trade returns. 
 
 The influence of a change in price level on 
 profits as a whole is far less than is frequently 
 supposed by those who base their views upon 
 observations of the striking effect of price 
 changes in particular industries. 
 
 In times of rising prices, increases in profits 
 have been made over and above the amount
 
 CHANGING PRICE LEVELS 151 
 
 l88o~Si 
 
 1S90-01 
 
 J 900-0 1 
 
 1910-11 Percent, 
 
 + 10 
 
 ° 
 
 - 10 
 
 + 10 
 
 10 
 
 + 10 
 
 0} 
 
 - 10 
 
 18.S0-81 
 
 1 890-9 1 
 
 1910-11 
 
 1900-01 
 
 Fig. 3-* 
 For further details see Statistical Journal, 191S, p. 586, et. seq.
 
 152 WEALTH & TAXABLE CAPACITY 
 
 that would arise upon the increased output 
 that such prices induce, but the additional profit 
 is not usually much greater in proportion than 
 the rise in price, if the period taken is not less 
 than a year. There is no evidence as to the 
 effect of such changes measured over shorter 
 periods than a year. 
 
 Although the increased quantities evoked by 
 increased prices have followed quickly enough 
 to keep profits within such limits, the check has 
 not been permanent, and continually renewed 
 stimulus by the raising of the price level has 
 resulted in increases of profits much greater 
 than could have followed the ordinary increase 
 in output (due to increasing population) at a 
 constant price level. Similarly the drop in prices 
 from 1880 to 1895 kept profits down consider- 
 ably below what would have resulted from the 
 actual output at a constant price level, and in it- 
 self was instrumental in depressing that output. 
 
 Those who would like to look at the matter 
 on much broader lines, may be content with the 
 following totals of Assessed Profits under Sched- 
 ule D. (from " British Incomes and Property.") 
 
 A Broad Comparison of Three Periods in the 
 43 Years Prior to the War. 
 
 From 1872 and 1873 the Index number 
 dropped from no down to about 86 for 1879-80, 
 or, say, 24 points in ten years. It then dropped
 
 CHANGING PRICE LEVELS 153 
 
 from 86 to about 62 in 1896, or 24 points in 
 15 years. It then rose from 62 to 85 by 1914, 
 or 23 points in 18 years. Now, the comparable 
 series of profits, including, of course, the 
 changes due to the growth of industry and 
 population, went from 235 to 284 in a corres- 
 ponding period of years, or 49 points in 9 years, 
 say, 5.44 per annum. It then went from 284 
 by extremely slow stages to 349 in 1894, or an 
 increase of 65 points, or 4.33 points per annum. 
 From 1895 it rose from 366 to 687, an increase 
 of 321 in 20 years, or, say, 16 per annum. The 
 rise over the whole period averages just under 
 10 per annum. 
 
 Now, if we set these results side by side, we 
 get the following : — 
 
 Period. 
 
 1872-3 to 79-80 
 1879-80 ,, 1895-6 
 1894-5 „ 1914 
 
 Price 
 Change. 
 
 Profits 
 Change. 
 
 —2.4 
 
 1.6 
 
 + 1.3 
 
 + 544 
 +4-33 
 + 16.0 
 
 Difference 
 
 between the 
 
 annual change 
 
 and the increment 
 
 01" 10 per annum 
 
 over 42 years. 
 
 —4-56 
 —5-67. 
 
 +6.0. 
 
 This, perhaps, will be some indication of the 
 way in which the long slow dragging prices 
 through the 'eighties to the middle 'nineties 
 kept down the rate of profits, and the wonderful 
 spurt that followed the increased gold supplies, 
 when the cyanide process got fully into 
 operation in the middle 'nineties. It was about 
 1885- 1886 that a Royal Commission was
 
 154 WEALTH & TAXABLE CAPACITY 
 
 appointed to consider " Depression in Trade," 
 and it is not uninteresting to read, even in these 
 days, the evidence and findings of that Com- 
 mittee. 
 
 Changes in the Average Income of the 
 Income Tax Payer. 
 
 Now I should hke you to look at an interesting 
 comparison that I have made in another way. 
 We have already considered the general belief 
 that colossal incomes have increased under 
 modern capitalism, out of proportion to the 
 increase in the population, but I have shown 
 you that the number of persons enjoying an 
 income of modest dimensions, has also increased 
 so greatly that the slope of distribution has not 
 been greatly altered. These effects combined 
 would serve to account for the fact that the 
 average income of all the persons with over £i6o 
 per annum has not greatly increased, but the 
 number of persons with such incomes has 
 increased in a much greater ratio than the 
 population, viz., an increase in tax payers of 
 320 per cent., against a population increase of 
 59 per cent. We are concerned, however, 
 rather with the fluctuating fortunes of this 
 " average " taxpayer than with his position in 
 the whole population. When he gets his 
 nominal income, what is its real value, or 
 purchasing power ? I have divided the average
 
 CHANGING PRICE LEVELS 155 
 
 by the Sauerbeck " Statist " index number of 
 wholesale prices (for the three years immediately 
 preceding), and also by Mr. G. H. Wood's 
 retail index number (continued by the Board of 
 Trade retail index number) for the actual year 
 itself, and taken the mean of the results, in 
 order to get figures which shall be as firmly 
 based as possible and free from the accidents 
 of individual methods or series. (Each index 
 number has been taken on the series in 
 Mr. Joseph Kitchin's charts - as equated to 
 100 at the year 1900). The "real value" of 
 the average assessed income is given in Col. 5 
 of this Table, and it will be seen that its course 
 has been much freer from wide fluctuation than 
 the nominal average and the maximum range 
 of £200 has been lowered to £100. It would 
 appear that the widespread depression in trade 
 that had followed the decline in price levels 
 after 1872, had by 1881 affected the average 
 profit to a greater adverse extent than was 
 made good to the spender in the reduced prices 
 themselves, but that by 1894 business had 
 become more settled at the lower levels of 
 prices (before the 1896 turning point in gold 
 production began the new upward trend) and 
 the spender had the full benefit of the cheapness 
 of commodities. Since then, as a spender of 
 income he has lost the apparent advantage 
 that he has obtained as a maker of income. 
 I made a correction of the earlier figures to
 
 156 WEALTH & TAXABLE CAPACITY 
 
 allow for deficiencies in tax administration, &c. 
 By giving an increase of lo per cent, on the 
 figures 50 years ago, and diminishing the 
 addition by 2 per cent, per annum, the results 
 can be seen broadly in Figure 4. These results 
 are, I think, notable. The dotted line C. 
 represents the real value of the true average 
 
 Average 
 
 per 
 taxpayer 
 i 
 900 
 
 800 
 
 700 
 
 600 
 
 
 J. 
 
 
 
 A 
 
 ^J^ \ 
 
 
 iiA. 
 
 c 
 
 3 Ctw-feetev 
 
 
 
 fi 
 
 
 
 
 
 
 
 
 i860 
 
 1874 I88I 1894 (1900) 
 Fig. 4. 
 
 1909 1913 
 
 assessable income in each year observed. Apart 
 from the depression in 1.881 and the appreciation 
 in 1894, the line is almost level, and with regard 
 to the latter I would only remark that the 
 income tax law has throughout been such that 
 the fluctuations in the agricultural interests are 
 hardly represented at all, and if the true income 
 of farmers had been given its effect upon the 
 general average, the depression in that industry
 
 CHANGING PRICE LEVELS 157 
 
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 rtg.2 ^"n 000 M H H 
 
 « xS=: roTf<oinro<n 
 
 H m N m o -^ 
 
 y 7 r 7 r T T 
 
 ^ O -^ H Tj- CTi ro 
 
 •^ VO J>. 00 C^ O H 
 
 00 00 00 00 o> a^ 
 
 M H H H H *-i
 
 158 WEALTH & TAXABLE CAPACITY 
 
 in 1894 was so great that it would have reduced 
 the prominence of the average for that period. 
 This result should not be in any way confused 
 with the statements in Chapter IIL about 
 the general upward movement of all incomes 
 during the century. For it would be possible 
 for all incomes so to move upwards, that 
 while the bottom one is resting upon the 
 exemption limit, the average of all would be the 
 same as the average of all over £160, when only 
 half the people were above the level. It just 
 depends upon the spread of incomes above 
 that figure, and the above indicates merely 
 another aspect of fluctuation in money values. 
 
 Changes in Wages from 1880 to 1914. 
 
 The question of changes in wages is one which 
 is in difficulty almost equal to that of profits, 
 though the difficulties are very different in kind. 
 We have, however, the advantage that we are 
 not wholly dependent upon an exact aggregation, 
 but can work upon index numbers of changes, 
 without any serious liability to error. There is, 
 of course, a difference between the change in 
 the average per wage-earner, and the change in 
 the rates that we can discern in separate well 
 defined industries. 
 
 There has been an increase in the general 
 average through the movement from the lower 
 paid occupations to the better paid, such as
 
 CHANGING PRICE LEVELS 159 
 
 come about through the new entrants into 
 industry tending to move towards the industries 
 that are better paid. 
 
 Dr. Bowley, who is our greatest Uving 
 authority on wages, says that the increase 
 in the average earnings of the manual working 
 class as a body, is greater than that found in 
 separate industries. 
 
 The main source of our information is the 
 index number published in the abstract of 
 Labour Statistics, which is obtained from the 
 changes of time rates in several industries, 
 building, engineering, and agriculture, together 
 with piece wages, textiles, and mining. It is 
 defective in several ways, because total earnings 
 rarely change in proportion to changing piece 
 rates, and of course, does not tell us anything 
 about the differences in numbers in the different 
 industries, and it covers only a limited field of 
 industry. 
 
 Before the Royal Statistical Society, Mr. 
 Wood made some important investigations, in 
 which he weighted the average of the different 
 sets of wages, and also allowed for the more 
 rapid growth of the occupations that are 
 better paid. 
 
 Then Dr. Bowley has also given index 
 numbers, and from all these three we can form 
 a pretty close idea as to the movement of wages 
 over a long period. You can find this set oui 
 year by year from 1880 in Dr. Bowley 's essay
 
 i6o WEALTH & TAXABLE CAPACITY 
 
 on the " Change in the Distribution of Income." 
 The average wage per earner has increased in 
 the 33 years to the War at almost exactly the 
 same rate as the average of all incomes, and we 
 get the following table : : — 
 
 Cost of living. 
 Average of Wholesale (Mr. G. H. Real 
 Year. Wage- prices. Wood's Wages, 
 
 incomes. (Sauerbeck), method.) 
 
 expressed as percentages of their levels in 1880. 
 
 Col. 
 
 [. 
 
 Col. 3. 
 
 Col. 4. 
 
 Col. 5. 
 
 Col. 6. 
 
 1880 
 
 
 100 
 
 100 
 
 100 
 
 100 
 
 Average 
 
 188 1-5 
 
 lOI 
 
 91 
 
 96 
 
 105 
 
 
 1886-90 
 
 104 
 
 80 
 
 89 
 
 117 
 
 
 1891-5 
 
 no 
 
 76 
 
 88 
 
 125 
 
 
 1896-1900 
 
 115 
 
 74 
 
 87 
 
 132 
 
 
 1901-5 
 
 121 
 
 80 
 
 91 
 
 133 
 
 
 1906-10 
 
 126 
 
 87 
 
 94 
 
 134 
 
 1911 
 
 
 128 
 
 91 
 
 96 
 
 133 
 
 1912 
 
 
 132 
 
 97 
 
 100 
 
 132 
 
 1913 
 
 
 134 
 
 97 
 
 100 
 
 134 
 
 The rate of growth of wages has not been 
 miifonn. Sometimes wages gained a little on 
 other classes of incomes for a time, then lost 
 again. If the 33 3^ears are divided up to i8g8, 
 the first 18 years wages increased 13 per cent, 
 and the second 15 years 18 to 19 per cent. 
 This apparent greater annual growth in the 
 second period when set against the movement of
 
 CHANGING PRICE LEVELS i6i 
 
 the price level, gives a somewhat different 
 impression. 
 
 If you look at Sauerbeck's index number it will 
 be seen that there is a fall amounting altogether 
 to 25 per cent, in the first period, and then a 
 rise bringing it back to the original level. As 
 you know, however, the Sauerbeck number 
 relates to wholesale prices, and this, of course, 
 is only a secondary measure of retail prices, 
 and, therefore, only a third-rate measure of the 
 cost of living, which includes rent and other 
 direct payments. 
 
 Dr. Bowley says : " The figures are sufficient 
 to show that the average real incomes increased 
 much more than 16 per cent, in the first period, 
 and much less than 20 per cent, (if, indeed, 
 they increased at all) in the second period. 
 Mr. Wood's researches enable us, however, to 
 get a little closer to the question of the cost of 
 living, which considerably modifies the rise and 
 fall shown by the more violent fluctuations of 
 wholesale prices." 
 
 He goes on : "It is doubtful whether any 
 amount of research would improve on Mr. 
 Wood's approximation, although some of the 
 details are open to criticism. There is no 
 official series of retail prices, even of food, which 
 covers the period on a uniform system." If 
 these cost of living figures are apphed to the 
 index of wage incomes, we get, curiously enough, 
 the same total increase in the 33 years, but we
 
 i62 WEALTH & TAXABLE CAPACITY 
 
 establish the fact that it had all been achieved 
 by the middle 'nineties, and that there had been 
 hardly any improvement or variation in real 
 wages since 1898 up to the War. 
 
 Dr. Bowley comments " that there were 
 sHght ups and downs and variations in regu- 
 larity of employment, but the general movement 
 was so small that the precision of the estimates 
 was not sufficient to detect it. 
 
 " It was not uncommonly alleged immediately 
 before the War that real wages had fallen. 
 Although I do not accept the truth of this 
 statement as being demonstrable on the evi- 
 dence, if the average of all wages is in question, 
 yet it is undoubtedly true if we ignore the part 
 of the progress due to the numerical increase of 
 the better paid occupations." 
 
 He concludes : " That the majority of men 
 below mihtary age at the beginning of the 
 War, began their adult working Hfe after the 
 date of lowest prices, 1896, and throughout 
 their experience as householders they found 
 prices rising against them, and having chosen 
 their occupation, have not benefited by that 
 part of the increase in average wages which 
 is due to the shifting of the rising generation 
 to better paid work. Such men were naturally 
 not impressed by demonstrations by statis- 
 ticians, including myself, that they were better 
 off than their fathers had been."
 
 CHANGING PRICE LEVELS 163 
 
 The Effect of a Drop in Prices upon 
 Profits. 
 
 When we come to consider the important 
 question of the effect upon industry of a con- 
 siderable drop in prices, of course, nearly 
 everything depends upon the readiness with 
 which money wages accommodate themselves 
 to the changing level. Even if we assume that 
 they respond readily, there is still a great fear 
 of substantial losses through having to cut 
 prices upon accumulated stocks. The price 
 tends steadily towards the price appropriate to 
 the costs of the most recent contribution to 
 the fund, thus reducing the value of all the 
 less recent as and when sold. 
 
 Before the Commission on Financial Risks, it 
 was commonly alleged that just as traders 
 made an extra profit equal to the rise in prices 
 on stocks in hand, and the Government took 
 a large slice of it in Excess Profits Duty, so 
 they would make an equal loss on the fall in 
 prices, and the Government should, therefore, 
 bear it. Against this it was argued that by 
 careful buying there need be no loss upon the 
 decline but only a rather reduced profit. Let 
 us glance at the broad elements of this matter, 
 ignoring wages changes, which we will assume 
 to move in sympathy with reasonable rapidity, 
 or to be incorporated in the price of stock 
 bought.
 
 i64 WEALTH & TAXABLE CAPACITY 
 
 Let stock = Sales over 6 months. 
 
 Stock at beginning 
 Purchases 
 
 
 ist Period. 
 
 
 £ 
 
 1,000 at £i 
 
 = 1,000 
 
 1,000 at £i 
 
 = 1,000 
 
 £2,000 
 
 Stock at beginning 
 Purchases 
 
 Stock at beginning 
 Purchases 
 
 2nd Period. 
 
 1,000 at £i = 1,000 
 
 1,000 at £i los. = 1,500 
 
 £2,500 
 
 i.e., a rise of £500 on stock and 10% 
 
 3rd Period. 
 
 1,000 at £1 los. = 1,500 
 1,000 at £1 los. = 1,500 
 
 £3.000 
 i.e., same percentage on turnover ; 
 
 Stock at beginning 
 Purchases 
 
 4th Period. 
 
 1,000 at £1 los. = 1,500 
 1,000 at £1 
 
 = 1,000 
 
 Loss, £400. =f 2,500 
 
 i.e., the drop in price on whole
 
 CHANGING PRICE LEVELS 165 
 
 Profit 10% on purchases. 
 
 Stationary price. 
 
 £ 
 
 Sales 1,000 at £1 2s. = 1,100 
 
 Stock at end 1,000 at £1 (cost) =1,000 
 
 Profit, £100. ;^2,ioo 
 
 Rise of 50% in prices. 
 
 Sales 1,000 at ;f 1 13s. = 1,650 
 
 Stock at end 1,000 at ;fi los. (cost) 1,500 
 
 Profit, ;^65o. :^3.i5o 
 
 thereon in addition to normal profit. 
 
 Stationary prices at the higher level. 
 
 
 Sales 1,000 at ;^i 13s. 
 
 = 1,650 
 
 Stock at end 1,000 at £1 los. 
 
 (cost) 1,500 
 
 Profit, ;^i5o. 
 
 ;^3.I50 
 
 the profit rises 50% Hke prices. 
 
 
 Drop in prices to first level. 
 
 
 Sales 1,000 at £i2s. 
 
 = 1,100 
 
 Stock at end 1,000 at £1 
 
 = 1,000 
 
 ;f2,I00 
 
 stock, less the ordinary profit.
 
 i66 WEALTH & TAXABLE CAPACITY 
 
 Broadly speaking, it may be said that the 
 losses to be incurred by industry upon a rapid 
 drop in prices, are a function of the total stock 
 carried at any moment in all stages, from the 
 first producer to the retail shopkeeper, in 
 relation to the turnover in the period over 
 which the change takes place. As many people 
 are rather hazy as to the actual effects of a 
 change in prices upon stock in hand, I have 
 given some hypothetical examples which, of 
 course, are simplified to such an extent that 
 they are not true to the facts of life, but only 
 bring out the particular point we have in mind 
 to examine, I have assumed that, on the price 
 level being doubled, all features, including the 
 profit, will also be doubled, i.e., that the same 
 rate of profit as a percentage of turnover is main- 
 tained. If we think of profit along its economic 
 definition, as being a margin accruing to the 
 more favourably placed businesses compared 
 with those only just able to maintain production 
 at a given price, then there is no reason to 
 suppose that upon a magnification of all the 
 monetary elements of the situation, they should 
 not all be similarly affected. 
 
 From the tables it will be seen that if R. 
 equals the rate of profit, T. the turnover, 
 Pj and Pg the two levels of prices, and S. the 
 stock, then Profit == \ T.P^ + S. (P, - P,). 
 From this, if it is assumed that in a certain 
 period turnover or output is three times stock
 
 CHANGING PRICE LEVELS 167 
 
 in hand at any moment, we can get the relation 
 between ?„ - P^ or the drop in price to the 
 rate of profit on turnover and the stock. 
 
 If the amount of stock in industry before the 
 war was 1,200 milhon £, and that at the present 
 time is 2,800 milhon ■£, the return to a half-way 
 level would mean a reversion of the stock of 
 this quantity to 2,000 million £, i.e., there 
 would be a loss of 800 milhon £ on the stock*. 
 Unless this is to bring disaster in its train, it 
 must come about so gradually as to be absorbed 
 by a reduction and not a total cancellation of 
 ordinary profits. Thus, if the pre-war turnover 
 was 4,000 million £, and a corresponding figure 
 is now 8,000 million £, and if the old profits 
 were 400 million £ at 10 per cent., and the 
 present profits 800 million £ at the same rate, 
 a reduction of the rate of profit by one-fifth, 
 i.e., to 8 per cent., would be a provision of 160 
 million £ per annum towards this loss. It will 
 be seen, therefore, that the effect of such a 
 change in price level might be, so to speak, 
 absorbed by a moderate reduction of the 
 average rate of profit in some 7 or 8 years. 
 If the total quantity of business done, however, 
 increases considerably, this does not necessarily 
 mean that there need be so great a reduction 
 in the absolute amount of profit accruing to 
 industry, provided that the increased business 
 
 * These figures are quite hypothetical, as the true ones are 
 unknown, but the relations hold good for purposes of illustration. 
 
 M
 
 i68 WEALTH & TAXABLE CAPACITY 
 
 is done not upon a larger stock, but by a more 
 rapid circulation or turnover. 
 
 It is to be feared, however, that we have 
 started upon such a rapid reduction that the 
 economic ship of industry will not soon come 
 on to an even keel, and the gradual reduction, 
 which is the essence of the matter if the trans- 
 lation from one level of price to another is to 
 be achieved without disaster, is already hope- 
 lessly beyond attainment.
 
 CHAPTER VI 
 
 THE EFFECT OF CHANGING PRICE LEVELS ON 
 THE BURDEN OF THE PUBLIC DEBT. 
 
 General Principles. 
 
 In considering the subject of the effect of 
 changing price levels upon the burden of pubHc 
 debt and taxation, I intend again rather to 
 consider only the principles involved, with a 
 few illustrative figures, than to make an 
 elaborate calculation to arrive at some fixed 
 result. The whole apphcation of these princi- 
 ples lies in the future with its unknown movement 
 of prices, industry, and population, and, there- 
 fore, any attempts at final or accurate results 
 would be a waste of energy and quite devoid of 
 value. 
 
 Involved in these considerations are all the 
 matters which we have been discussing 
 hitherto, such as the Amount and Distribution 
 of National Capital and Income, the Limit of 
 Taxable Capacity and the Effect of Prices 
 upon Profits. The subject before us is one 
 that cannot be approached until after these 
 others have been examined and clarified. 
 
 169
 
 170 WEALTH & TAXABLE CAPACITY 
 
 Evils of a Shifting Standard. 
 
 The social disadvantages of a standard or 
 measure of deferred payments, which fluctuates 
 as violently as our standard has lately done in 
 its real value, must be clear to us all when we 
 look at the present welter of wage increases 
 and bonuses, and the necessity for rapid and 
 drastic alterations in what seemed to be such 
 stable and fixed conditions as railway fares, 
 doctors' fees, and penny postage. Nowhere is 
 this more obvious, and nowhere does it give 
 rise to greater apprehension, than in connection 
 with the burden of debt. For when prices are 
 high, the nation incurs a debt which has to be 
 repaid later according to a standard of value 
 which may obtain in the future, and the debt 
 also bears interest on that fluctuating standard, 
 so that the real value or human effort repre- 
 sented by the terms arranged, may change 
 violently. Either the nation is burdened be- 
 yond justification or the lenders are penalised. 
 There is no escape from the dilemma. 
 
 The Real Character of the Burden. 
 
 You will remember that in considering the 
 minimum of national subsistence, we put back 
 into the national "heap" that part of it which, 
 as interest paid by ourselves, was taken out 
 in the guise of taxation, and paid back to
 
 PRICES & THE PUBLIC DEBT 171 
 
 ourselves in the guise of interest, and con- 
 sidered that it was not a final abstraction from 
 the heap as it would certainly have been if it 
 had been taxes spent on war material. Indi- 
 viduals are not receiving it back in the pro- 
 portions they pay it, it is true, but there are 
 said to be 17 million holders of State Debt, 
 and I thought that it might be dealt with by 
 cross entries in our personal books to a very 
 considerable extent, and thus also fail to affect 
 our national minimum of subsistence adversely, 
 to the extent of, perhaps, 200 millions, out 
 of the whole 350 million £. The balance 
 was allowed to be a real abstraction, but I was 
 careful to point out the dynamic effect of such 
 taxation on the production of future heaps, 
 particularly because increasing their size was 
 to be a very important element in remedying 
 our ills. A man may be unaffected in 
 his efforts, so far as they at present exist, 
 by the payment to, and receipts from 
 State interest, but every new effort at saving 
 and every neie; responsibility will also come 
 under taxation of a drastic kind, and makes 
 the reward far less attractive. It, therefore, 
 dulls the keenness of his appetite for improve- 
 ment and also for abstinence to some extent. 
 Then, what is worse, there are continually 
 coming into the productive field numbers of men 
 who had no war savings and receive no interest. 
 Their new business enterprise or saving is
 
 172 WEALTH & TAXABLE CAPACITY 
 
 taxed to pay tribute for the past abstinence of 
 others. The prizes of successful enterprise 
 and risk-taking are seriously reduced, and the 
 dead hand of past debt stretches out over the 
 zeal of future generations. It is possible to 
 exaggerate the importance of this, for rewards 
 and returns are relative and not absolute. If a 
 generation is born into certain conditions, and 
 has known no better, it may acquiesce in these 
 more readily than we think, and accept them 
 as part of the natural order. But if taxes are 
 too steeply graded upon the rewards of ordinary 
 successful enterprise and originality, the nation 
 as a whole may lose far more than it gains. 
 It will be a bad day for the less efficient when 
 they unduly paralyse the rewards of the more 
 efficient, who, in benefiting themselves, also 
 contribute an unknown but none the less real 
 benefit to the whole nation. 
 
 The Changing True Weight of the Burden. 
 
 Suppose that the State has borrowed £ioo 
 from you in the sterling of the day, and under- 
 takes to repay you in five years' time. It 
 then proceeds to print £i notes until prices 
 are four times as high as they were ; so that 
 you find, upon getting back your £ioo, that it 
 is only worth to you a quarter of what it had 
 previously been. You have been robbed, so 
 to speak, of three-quarters of your rights.
 
 PRICES & THE PUBLIC DEBT 173 
 
 Such a wilful action as this might well be 
 stigmatized by the title " repudiation," just 
 as much as a definite refusal to repay ; and 
 there are some who suspect that this is what 
 is actually happening in some countries in 
 Europe to-day. If, however, the change in 
 values is not brought about wilfully, people 
 are less prone to give it such an ugly name, 
 but regard it as " the fortune of war." When 
 a nation avowedly sets out to cheat its creditors 
 in this way, it is, of course, running the risk of 
 ruining its whole economic organisation by 
 inflation and all the ills to which that action 
 leads. But what happens in the converse 
 case ? The nation wishes to follow the difficult 
 but praiseworthy path of gradual deflation, 
 the elimination of paper money, and the return 
 to a stable standard based upon the precious 
 metals. All history and economic reasoning 
 goes to show that this, if possible, is the proper 
 thing to do. A standard based on the fluctuat- 
 ing and fortuitous total amount of credit is 
 liable to be more open to abuse, but a definite 
 policy of getting back to gold can be under- 
 stood. Two great difficulties, however, face the 
 nation that wishes to follow the path of virtue. 
 First, as I showed last week, the declining price 
 level means a damper on business optimism. 
 Inflation is like a drug, and business men love 
 to work under its influence ; they feel they are 
 doing great things ; there is progress and
 
 174 WEALTH & TAXABLE CAPACITY 
 
 prosperity everywhere, and if it can be kept 
 within bounds there is no doubt that, Hke the 
 rum ration, it enables them to do surprising 
 deeds and to go " over the top." It needs 
 some courage to follow year in and year out 
 the definite path of deflation, just as it needs, 
 perhaps, more skill than we always possess to 
 keep it within reasonable bounds. The second 
 difficulty is that the nation sees its fixed charges 
 for interest and repayment of debt becoming a 
 larger and larger proportion of its total income 
 and resources. It borrowed from a man during 
 the War what was equivalent to a pair of boots, 
 and in ten years' time it finds it may have to 
 pay back what is the equivalent of 2 pairs of 
 boots. 
 
 This may be indeed no great hardship if the 
 total production has so increased that two 
 pairs of boots represent a smaller fraction of 
 that total than one pair was at the time when 
 the loan was made. 
 
 To revert to our figure of the national " heap." 
 If the heap remains approximately the same in 
 actual goods, but the money tokens by which 
 it is shared are fewer, the receivers of debt 
 interest and repayment are entitled to the 
 same money tokens, and, therefore, a larger 
 and larger share of the heap. Only by the 
 heap being made substantially larger as the 
 money value of individual items diminishes, 
 can the actual proportion of it in physical
 
 PRICES & THE PUBLIC DEBT 175 
 
 objects which are transferred to these recipients, 
 be prevented from increasing. 
 
 It is small wonder, then, that at the present 
 moment we have a growing body of opinion that 
 deflation is a wrong policy, and that we should 
 try to keep prices somewhere about the present 
 level. There are some who consider that we 
 should not allow any material deflation until 
 we have repaid a substantial part of the debt ; 
 they say, with much force : " Let us pay back 
 these lenders in the same kind of money that 
 they lent us, for, if we do not, the burden will 
 become intolerable." For example : a debt 
 charge of 350 million £ a year, or, say, 270 
 million £ net, represents, out of a net national 
 income of 3,500 million £ one-thirteenth part 
 (say, 7 J per cent.) of the real products and 
 services of the country. Now, when the 
 money value of these services and products 
 has been cut down to 2,700 million £, it 
 represents one-tenth, or 10 per cent., and 
 when that money value has got back to its 
 pre-war figure, it represents more like one- 
 seventh, or 12J per cent. It would seem to 
 be a desirable policy from this point of view 
 alone, that we should not allow deflation to 
 proceed faster than our redemption of debt, 
 in order that the annual interest charge should 
 not be an increasing proportion of the total 
 real production, but should either be a constant 
 proportion or a lessening proportion. Moreover,
 
 176 WEALTH & TAXABLE CAPACITY 
 
 if we deflate too rapidly prices drop so 
 quickly, and profits shrink so seriously in 
 consequence, that our difficulty in raising 
 sufficient taxation to make a substantial re- 
 duction of debt becomes greater. We are, 
 therefore, other things being equal, more likely 
 to be successful in making a substantial re- 
 payment and keeping the burden from becom- 
 ing greater if we do not deflate too rapidly. 
 Following this principle, by the time prices 
 drop so that the national income is 2,700 
 million £, the debt charge ought to be a net 
 figure of 208 millions only, which means that 
 we should have to repay something like 1,200 
 to 1,500 million £ of debt while prices are 
 dropping. 
 
 What does it really amount to when people 
 say " we should not pay people back more 
 than they have lent us ? " The money has not 
 been lent to us with prices at their present 
 level, and there is still room for considerable 
 reduction before we reach a point when we 
 consider giving them more than they have 
 given us. At present if we repaid we should 
 be giving them less. 
 
 A Measure of the Real Values lent in 
 the War. 
 
 The following table shows the average index 
 number, and, roughly, the amounts borrowed 
 in each year : —
 
 PRICES & THE PUBLIC DEBT 177 
 
 Year. 
 
 Index. 
 
 Million I borrowed 
 
 I914 
 
 85 
 
 410 
 
 1915 
 
 108 
 
 I167 
 
 1916 
 
 .. 136 
 
 1629 
 
 1917 
 
 175 
 
 1985 
 
 1918 
 
 192 
 
 1682 
 
 1919 
 
 256 
 
 323 
 
 7196 
 
 There are 700 millions of pre-war debt, so 
 this is sufficiently near, I think, for our purpose. 
 Now, from this you can calculate the weighted 
 average index number for the whole borrowing 
 is 161, whereas the index number at the present 
 moment (February, 192 1) is over 200, showing 
 that we have to drop 40 points before we can 
 be said to be paying back at greater values 
 than we borrowed*. 
 
 The first repayments of war savings cer- 
 tificates are now falling due, and as the index 
 number in 1916 was 136, we appear to be 
 innocently guilty of " repudiation " to the 
 extent of some 6s. 6d. in the £. 
 
 The Burden of the Annual Charge. 
 
 Deflation makes a much greater difference 
 to income than to capital if it has the effect 
 of reducing the rate of interest. For this 
 
 * This position has virtually been reached. (December, 1921.)
 
 178 WEALTH & TAXABLE CAPACITY 
 
 reason it is much better to think of this problem 
 in terms of the annual debt charge and annual 
 redemption of debt, than of the total debt and 
 the total national capital. The national capital 
 does not come down by deflation as fast as the 
 national income, because many sections of it 
 increase in value, such, for example, as the 
 values of ground rents, debenture and preference 
 interest. Although the stream of profits be- 
 comes smaller, the rate of interest on deflation 
 also comes down, and the multiplier or number 
 of years' purchase goes up. Suppose the 
 " stream " is £200 a year, with interest at 8 per 
 cent., or 12J years' purchase, there is a capital of 
 £2,500 of which £500 debt would be one-fifth ; 
 but when the " stream " has dwindled to £100, 
 and the rate of interest is 5 per cent., or 20 
 years' purchase, there is a capital of £2,000. 
 The income is half, but the capital is four-fifths, 
 and the £500 debt represents one quarter of 
 the whole. You will see how misleading it is 
 to represent the burden of debt in terms of 
 capital rather than in terms of interest. 
 
 Deflationary Effects of Repayment of Debt 
 by Capital Levy. 
 
 The advocates of a capital levy put forward 
 the points to which I have referred about the 
 increase in value of money as a strong reason 
 for repaying as much as possible at the present
 
 PRICES & THE PUBLIC DEBT 179 
 
 moment, and not burdening the future with a 
 proportion of taxation increasing in relation to 
 its total efforts. Now, of course, this big 
 question raises many other considerations, such 
 as the feasibility of the tax, its effect upon 
 industry, the psychological influence in politics, 
 but I think we are bound to say that the 
 repayment aspect of the matter is, perhaps, 
 the strongest and most powerful feature in 
 favour of this course being taken. 
 
 However, even the drastic redemption of debt 
 brings about its own problem. Every repay- 
 ment of debt represents a considerable force, 
 making for deflation, in so far as debt is being 
 used as collateral security and forms a basis 
 of credit. You withdraw such basis and the 
 credit supported thereon shrinks with de- 
 flationary effects. It is possible, therefore, 
 that a large repayment by a capital levy might 
 have two sudden effects ; first, the deflation 
 would be so rapid as to dislocate business, and 
 thus destroy the stream of productivity prema- 
 turely ; and, second, the immediate burden of 
 the remainder of the debt might be greater 
 both as to interest and principal than it would 
 have been if deflation had taken place gradually. 
 In so far as the advocates of the capital levy 
 rely upon the plain question of the proportion 
 which the charge bears to the national income, 
 their ground seems to be perfectly sound. 
 They would say that if productivity expands,
 
 i8o WEALTH & TAXABLE CAPACITY 
 
 but the aggregate money value of income is 
 unaltered, the real payment which has to be 
 made in interest on the debt will have grown 
 in the same ratio as productivity. But pro- 
 ductivity may not grow so fast as money values 
 shrink. Professor Pigou made certain assump- 
 tions as follows : — Assumed income 3,000 mil- 
 lion ■£, including the income of War Loan 
 holders. Reduction in War debt will carry a 
 reduction equivalent to interest saved : — 
 
 (i) If no levy, the revenue required is 800 million £ 
 out of 3,000, or 27 per cent of national income. 
 
 (2) If half repaid, the revenue wanted is 560 million £ 
 out of 2,800 million £, or 20 per cent. 
 
 (3) If all wiped off, the revenue wanted is 320 million £ 
 out of 2,500 million £ or 12 per cent. 
 
 This ignores the effect of redemption upon 
 prices (deflation), which would operate to 
 increase the later percentages, and minimise 
 the differences, if the rest of the Budget is 
 assumed to be relatively constant. 
 
 Alternatives to Repayment by Capital Levy. 
 
 Those who do not like the prospects of an 
 inflationary pohcy or of a capital levy, have to 
 put forward their policy. Upon what do they 
 rely ? First, they rely upon a general increase 
 in the population, and therefore, of business, 
 which so increase the total national income 
 that, despite the increasing value of money, 
 the burden will not become greater. Relying
 
 PRICES & THE PUBLIC DEBT i8i 
 
 upon this alone, it is obvious that the com- 
 mercial activity and output of the country 
 must increase more rapidly than prices diminish, 
 Let us look at what happened after the Napole- 
 onic Wars : — 
 
 The Course of Events after the Napoleonic Wars. 
 
 After the Napoleonic wars the debt was some 
 850 million £, or about £52 per head of the 
 population. At that date the national wealth 
 was about £159 per head, so that the debt 
 was one-third of the national wealth. In 1914 
 it was less than 5 per cent, of the national 
 wealth. The fixed charge for the debt service 
 in 1 8 17 was about 8 per cent, of the national 
 income, and in 1914 a trifle over one per cent. 
 The price level went from 142 to 85. The 
 growth in population, wealth and earning power 
 made the debt of 1817, as years went on, an 
 unimportant burden. Of course, there were 
 additions during the period, of £73 millions for 
 the Crimean War, and 281 million £ in the 
 Boer War. When we are considering the 
 recovery that was made, we must remember 
 that the trade and commerce of this country 
 in the early Victorian era had such a prominence 
 as leading the world in the new order, with the 
 revolution in transport and credit systems — 
 really quite as important as the much vaunted 
 industrial revolution, and much more far- 
 reaching — that a wonderful spurt took place
 
 i82 WEALTH & TAXABLE CAPACITY 
 
 which we can hardly expect to be repeated in 
 the future. Past the " bloom of youth " in 
 our coal and iron resources, we may well hope 
 to plod along and make good progress, but we 
 can hardly expect a sensational leap to new 
 wealth and producing power. If the debt 
 charge was 8 per cent, of the income in 1817, 
 and it is now 10 per cent., is it reasonable to 
 look for such a markedly rapid release by the 
 mere spread of the burden over a wider popula- 
 tion ? 
 
 In 1864, 47 years later, the national income 
 had doubled, notwithstanding the drop in prices 
 from the index of 142 to 100, and in 11 years 
 more (1875) it had trebled with prices a little 
 lower ; in 16 years later (1891) it had quad- 
 rupled with a price level of 72, or just half the 
 1817-18 figure. The same national debt charge 
 that had stood at 8 per cent, of the income, if 
 untouched, would have been 4 per cent, in 
 47 years, 2|- per cent, in 58, and 2 per cent, 
 in 1891. 
 
 But what happened to the debt during this 
 time ? The funded debt was approximately : — 
 
 
 Million I 
 
 I8I7 
 
 880 
 
 1840 
 
 766 
 
 1842 
 
 773 
 
 1846 
 
 764 
 
 1848 
 
 774 
 
 1854 
 
 755
 
 PRICES & THE PUBLIC DEBT 183 
 
 So it will be seen that during the long fall 
 in prices from an index of 142 to one of 74, 
 in 37 years, it was a very hard struggle with the 
 capital debt, and not much was really paid off 
 in the ^ordinary sense of the word. It was 
 only the increasing wealth and population that 
 made it more bearable. 
 
 Leroy BeauHeu put the burden of the debt 
 at 9 per cent, of the income in 1815, 5J per cent, 
 in 1843, and 2\ per cent, in 1877. The follow- 
 ing shows the approximate " true " charge 
 per head* : — 
 
 
 Total 
 
 Per 
 
 
 Per 
 
 I 
 
 ndex ] 
 
 [ndex cha 
 
 Date. 
 
 Debt. 
 
 head . 
 
 Charge. 
 
 head. 
 
 
 No. 
 
 per head 
 
 1817 
 
 850 
 
 50 
 
 32 
 
 £1 17 
 
 
 
 142 
 
 260 
 
 1833 
 
 789I 
 
 32.19 
 
 28 
 
 I 3 
 
 
 
 91 
 
 252 
 
 1842 
 
 841 
 
 319 
 
 28 
 
 I 2 
 
 
 
 91 
 
 242 
 
 1854 
 
 803 
 
 29.6 
 
 28 
 
 I 
 
 
 
 102 
 
 196 
 
 1857 
 
 836 
 
 29.15 
 
 28.8 
 
 I 
 
 
 
 105 
 
 191 
 
 1867 
 
 801 
 
 26.10 
 
 26.1 
 
 17 
 
 
 
 100 
 
 170 
 
 1886 
 
 742 
 
 20.9 
 
 237 
 
 13 
 
 
 
 68 
 
 191 
 
 1895 
 
 659 
 
 16.13 
 
 25.0 
 
 13 
 
 
 
 62 
 
 210 
 
 1903 
 
 798 
 
 19.4 
 
 27.2 
 
 13 
 
 
 
 70 
 
 186 
 
 1914 
 
 707 
 
 157 
 
 24-5 
 
 10 
 
 
 
 85 
 
 118 
 
 1920 8078 175.12 332.0 7 16 o 248 629 
 
 Mr. Fisk computes that six years of war 
 added more debt than the preceding 226 years. 
 
 The magnitude of our total is, roughly, ten 
 times that of the last century. Shall we then 
 reduce our debt by only 450 millions in 37 years ? 
 
 *The first four cohimns are taken from Mr. Harvey Fisk's 
 English Public Finance," p. i66. 
 
 N
 
 i84 WEALTH & TAXABLE CAPACITY 
 
 The charge for the debt was equally slow in 
 its change : — 
 
 I8I7 
 
 32 millions. 
 
 1840 
 
 29J 
 
 ff 
 
 1844 
 
 30| 
 
 i> 
 
 1853 .. 
 
 28 
 
 9» 
 
 i860 
 
 29 
 
 >> 
 
 1870 
 
 27 
 
 >> 
 
 1880 
 
 28I 
 
 >> 
 
 1885 
 
 29^ 
 
 t> 
 
 I89I 
 
 25 
 
 ft 
 
 (nearly). 
 
 It was one long struggle between two great 
 movements, viz., the increase of population 
 against falling prices, in which the former 
 slowly won the day. 
 
 Relief of Burden by Reduction of Interest. 
 
 So much, then, for the first hope of ameHora- 
 tion, repayment of debt. 
 
 The second thing upon which we have to 
 rely is conversion of debt. As most of you 
 know, an opportunity for reducing the burden 
 upon the nation arises whenever a debt falls 
 due for repayment. Suppose that we are 
 paying 5 per cent, on a £100 Bond falling due 
 in 1928, we can in that year, if the rate of 
 interest has, as we anticipate, become lower 
 owing to general deflation in prices, borrow the 
 £100 from other people at the new rate of 
 interest, say, 4 per cent., repay the loan and
 
 PRICES & THE PUBLIC DEBT 185 
 
 go on thereafter with a debt charge reduced 
 accordingly. Of course, in the case of the long- 
 dated loans, the decline in the general rate of 
 interest will throw them automatically above 
 par, and unless we are prepared to make the 
 loan-holder suffer, we are helpless. To buy 
 his loan at above par in the market is as broad 
 as it is long, because we have to borrow a larger 
 sum than the original debt at the lower rate of 
 interest. But relief in the current charge may 
 be obtained by giving a larger nominal amount 
 of debt (when falling due for repayment) in 
 exchange for present rehef in interest. 
 
 Now our total indebtedness is fairly well 
 spread. We have falling due in the next 4 
 years (including our whole indebtedness to the 
 States) some 1,687 million £, equal to about 
 422 milhons per annum, or, without the United 
 States, about 205 millions per annum. In the 
 following five years there is about 1,907 millions 
 coming due, then there is a stretch of some 
 10 years during which repayments are negli- 
 gible. Then we have from 1942 to 1947 2,124 
 million £, and in i960 409 milhon £. This 
 seems to make up substantially the total 
 indebtedness. But the floating debt, though a 
 serious problem by reason of its size and the 
 inflation which it tends to bring about, is the 
 one which answers most readily to the reduction 
 in money values, because if we want to repay 
 it and have the power, we can do so at any
 
 1 86 WEALTH & TAXABLE CAPACITY 
 
 moment, and in so far as we want to continue 
 it we are able to do so at the reduced rate of 
 interest provided by the market. So far as 
 past history is of value in our present troubles, 
 it is interesting to note that during the 19th 
 century conversion gave very little relief. 
 
 fhe yield of 
 
 Consols. 
 
 was 4% 
 
 in 1817. 
 
 t> 
 
 M 
 
 34 
 
 .1 1833- 
 
 »» 
 
 II 
 
 3-0 
 
 „ 1882. 
 
 >» 
 
 11 
 
 2.8 
 
 .. 1889. 
 
 ft 
 
 11 
 
 2.7 
 
 1. 1894- 
 
 >> 
 
 11 
 
 2.4 
 
 1, 1897. 
 
 >} 
 
 11 
 
 30 
 
 1, 1909- 
 
 }> 
 
 >> 
 
 3-3 
 
 „ 1914- 
 
 >> 
 
 11 
 
 4.1 
 
 „ 1915- 
 
 i> 
 
 H 
 
 5-2 
 
 „ 1916. 
 
 >i 
 
 11 
 
 4-5 
 
 „ 1917- 
 
 The only refunding operation that made a 
 saving commensurate with the effort involved 
 was Goschen's in 1888 and 1889, when 565 
 milHon £ at 3 per cent, was refunded into 2| 
 Consols., at a saving of £1,411,000 a year, and 
 the rate in accordance with the terms arranged 
 became 2 J per cent, after 1903. Gladstone's 
 effort in 1853 came at an unfavourable time, 
 and similarly the 1884 operation saved only 
 £46,756 on £22,362,000 of debt. 
 
 The numerous and complicated Sinking Fund 
 provisions for sections of our present debt make 
 it clear that a good part of the debt must dis- 
 appear in the ordinary course.
 
 PRICES 6c THE PUBLIC DEBT 187 
 
 Foreign Comparisons. 
 
 It is now of interest to make some comparison 
 between our problem and others abroad. 
 
 The percentage of the total expenditure 
 required for debt service is about 29 for the 
 United Kingdom, against 15^ in the United 
 States, and 23^ in France. The only ones who 
 budget for an excess of revenue over expenditure 
 are ourselves and Czecho-Slovakia. Japan is 
 raising by taxation 78 per cent., the United 
 States 89.7 per cent., and Germany 53^ per 
 cent, of the total expenditure. 
 
 The figures used by the Financial Conference 
 in Brussels, based upon my calculations of 
 national wealth and income per head,* gave 
 the present Government Revenue per head as 
 a percentage of national income per head as 
 follows : — United States 9, United Kingdom 27, 
 France 18, and Germany 12, Italy 13, and 
 Japan 13. But the expenditure per head bore, 
 of course, a different percentage to income per 
 head : — U.S.A. 9, U.K. 22, France 40, Germany 
 23, Italy 30, Japan 17. 
 
 International statistics of debt are interesting 
 when expressed as a ratio to current revenue : 
 — France 10 years' purchase, Italy 7.5, Germany 
 7, U.K. 5i, U.S.A. 4.2. 
 
 * " The Wealth and Income of the Chief Powers." The 
 Brussels figures contain so many purely speculative elements that 
 they must be used with the greatest caution, as merely indicating 
 an order of magnitude and not actual facts.
 
 i88 WEALTH & TAXABLE CAPACITY 
 
 The burden of debt per head as a percentage 
 of average income is also important : — 
 
 United States ... 34 (22 if debt from abroad is 
 
 excluded). 
 United Kingdom ... 151 (116 do. 
 
 France ... ... 180 
 
 Germany 86 
 
 Italy 95 
 
 Hypothetical Prospect. 
 
 If we suppose that in 15 to 20 years we have 
 received : — 
 
 1,000 million £ in repayment from the Dominions and 
 
 Allies 
 1,000 ,, in indemnity 
 
 1,000 ,, by application of sinking funds, 
 
 we may then have a debt of less than 5,000 
 million £, representing, say, about 225 million 
 £ per annum for debt service. Let us assume 
 that re-borrowings on maturities for a debt of, 
 say, 2,000 million £, have reduced the interest 
 by 20 millions. The charge would then be 
 205 millions, and if the population has then 
 increased at not less than its old rate of growth 
 and is over 60 millions, we shall have a money 
 burden of about £3 8s. per head, instead of 
 £y i6s. per head. If prices have gone down by 
 50 per cent, of their increase over pre-war 
 times, this will represent a real burden of some-
 
 PRICES & THE PUBLIC DEBT 189 
 
 thing like £4 los. per head. But a greatly 
 increased production per head would do much 
 to improve the relief. Such figures as these are 
 not put forward as having in themselves any 
 intrinsic probability, but only as some indication 
 of the order of magnitude of the changes in- 
 volved. 
 
 New Schemes of Finance. 
 
 I have no intention of going far into this 
 field, which would demand a volume to itself. 
 But the debt seems hkely to be with us for so 
 long, that there may be something in that very 
 fact which gives room for principles that can 
 find a proper application only in age-long 
 conditions. 
 
 The State, unhke the individual, does not 
 die — it can take the long view. It can, there- 
 fore, finance by methods which would be 
 too far-reaching in the scope of time in- 
 volved for individual businesses. It might 
 even pay us to sell life annuities on terms more 
 favourable than precise actuarial prices. With 
 the capital sum debt would be immediately 
 redeemed — the annuity payment would slightly 
 exceed the old interest charge, but when it 
 ceased, the debt and its interest would certainly 
 be gone for good, whereas, in the ordinary 
 course, it still remains to be paid off, even 40 
 years hence. It would cease to be profitable
 
 igo WEALTH & TAXABLE CAPACITY 
 
 only if the difference between the annuity and 
 the interest over the Hfe period were more than 
 a sinking fund payment for the whole loan 
 period to provide the capital sum at the due 
 date of payment of the loan. 
 
 Possibly what is known at the Rignano plan 
 of death duty taxation might also be specially 
 adapted to take advantage of the gap between 
 the " time-horizon " of the individual and that 
 of the State. The taxation of inheritance pro- 
 gressively as the inheritance becomes more 
 removed from the original saver, would not 
 penalise the individual worker — it might make 
 him work the harder to know that nearly all 
 he himself produces and saves will pass intact 
 to his sons, whereas what he has inherited from 
 his grandfather will be heavily taxed. After 
 about 50 to 60 years very large sums would be 
 passing to the State which could be applied to 
 extinguish the debt. Thereafter, if one dare 
 look forward so long and speculate as to the 
 constitution of society at that date, the special 
 principle of taxation could be modified or 
 abolished and the rates of taxation at each 
 successive inheritance relaxed. 
 
 In conclusion, I should Hke to state that, 
 while I feel I have but imperfectly sketched some 
 of the principles of the mensuration of v^ealth 
 in its national aspects, I have been covering a
 
 PRICES & THE PUBLIC DEBT 191 
 
 field that has by no means been fully explored, 
 and I should be failing in my duty if I did not 
 make an appeal for workers in this field of 
 statistical study. It is true that the pursuit of 
 this kind of knowledge has little of the excite- 
 ments of those branches of investigation which 
 are attached to daily polemics, and the honours 
 to be gained in it may be meagre and not of 
 the most ostentatious kind, but work undertaken 
 with the true scientific spirit is never really 
 lost or unimportant, and in this sphere it may 
 very quickly be its own reward. There is a 
 growing need for data on these subjects, com- 
 piled without partisanship or bias,— free, so to 
 speak, from their practical applications,— to 
 which all those engaged in the toil of thought for 
 the national betterm.ent, may turn with gratitude.
 
 INDEX. 
 
 Agricultural Profits, Estimates, 
 
 M 
 Arnold, Sydney, 24 
 
 Bell, Sir Hugh, 103, 104 
 Bowley, Professor A., 18 note, 
 
 63. 67, 79- 85, 88, 99, 103, 104, 
 
 105, 159, 161. 
 Business Profits — 
 
 Excess Profits Duty, 29, 35, 
 
 55. 72. 75. 76. 107. 155 
 Value Estimates, 16 
 
 Capital Levy, 6, 23, 24, 36, 131, 
 
 178 
 Capital Values, False Increase 
 
 in. 34 
 
 Census of Occupations, Esti- 
 mates of Income, 58 
 
 Census of Production, 30, 107 
 Manufacturing Industries, 104 
 National Income Estimate, 
 
 59. 69 
 Chiozza Money, Sir Leo, 15, 16, 
 
 40, 66, 85, 
 Coal Mining Profits, 147, 149 
 Co-operative Incomes, 52 
 Crammond, Edgar, 10, 11, 12, 
 
 et seq. 
 Currency Changes, Efiect on 
 
 Prices, 138 
 Currency Inflation, 48 
 Currency Values, 34 
 
 Death Duties, Taxation by, 129, 
 130 
 
 Deflation and Inflation, 48, 172, 
 
 173 
 Distribution of Income, 77 et seq. 
 
 Comparison, 1801 and 1920,91 
 
 Constancy of, 87 
 
 Pooling of Surplus Income, 95, 
 et seq. 
 
 Post-War, 95 
 
 Statistics, 86, 91, 92 
 Dominions, Taxation Principles, 
 
 111 
 
 Evasions of Taxation, 19, 84, 90 
 Excess Profits Duty, 29, 35, 55. 
 
 72, 75, 76, 107, 155 
 Exemptions from Taxation, 19, 
 
 20 
 
 Fabian Society, 66 
 
 Fluctuating Values, 32, «/ seq. 
 
 Flux, A, 60 
 
 Financial Relations between 
 Great Britain and Ireland, 
 Royal Commission, 1895-96, 
 I 109 
 
 Financial Risks Committee, 163 
 ! Fisk, Harvey, 183 
 I Foreign Investments, Income 
 j Estimates, 21 
 
 France, Taxation Principles. 1 1 2 
 
 German War Indemnity, 109, 
 
 112, 113, 118 
 I Giffen, Sir R., 13, 14, 21, 27, 60 
 < Gold Supply and Price Levels, 
 
 139- 153 
 
 192
 
 INDEX. 
 
 193 
 
 " Heap " Illustration, 2, log, 132 
 Household Services of Wives, 
 
 Value of, 49 
 Houses — Premises : 
 
 Capital Value, 38 
 
 Income Tax Distribution, 85 
 
 Scarcity and Investment 
 Values, 31, 32 
 
 Value as source of Income, 13 
 
 Income see National Income — 
 Income Tax — 
 
 Classification, iSoi, 90 
 
 Estimation of National In- 
 come by, 58 
 
 Evasions, 19, 84, go 
 
 Excess Profits Duty and In- 
 come Tax Compared, 155 
 
 Present-day Figures, 71 
 
 Price Levels and Income Tax, 
 
 154, el seq. 
 
 Royal Commission, 1920, 52, 
 
 71. 75. 86 
 Statistics, \i, et seq. 
 United Kingdom Estimates, 
 60 
 Individual Wealth, Present Val- 
 uation, 37 
 Inflation and Deflation, 48, 172, 
 
 173 
 Inflation of Prices, 143 
 " Intermediate " Incomes, 63 
 " Inventory, Wealth," 2 
 Ireland, Taxable Capacity of, 
 
 109, no. III 
 
 Jevons, W. S., 139 
 Kitchen, Joseph, 135 
 
 Land — 
 
 Present-day Valuation, 30 
 Profits and Values, 13 
 
 Lawrence, Pethick, 24 
 
 Leroy, Beaulieu, 183 
 
 " Living Capital," 2 
 
 McKenna, Reginald, 123 
 
 Mallett, Sir Bernard, 10 
 Mallock, W. H., 99 
 Mines and Quarries — 
 
 Factors of Production, 105 
 
 Value Estimates, 15 
 Mulhall, 94 
 Municipal Undertakings, Value 
 
 Estimates, 15 
 
 National Debt, see Public Debt 
 National Income — 
 
 Distribution, see that title 
 Estimation in different Coun- 
 tries, 58 
 Factors of Production, 103 et 
 
 seq. 
 Increase in, 88, 89, 94 
 Interest Payments on Loans, 
 
 53 
 Meaning of, 40 
 Measurement of, 39 et seq. 
 " Non-Personal " Income, 84 
 Pensions, Treatment of, 56 
 Pooling of Surplus, 95 et seq. 
 Present-day Estimate, 70 
 Pre-War Estimate, 67 
 Services, Value of, 41, 49 et seq. 
 Taxable Income, 1919, 71 
 United Kingdom, Computa- 
 tion Methods, 60 et seq. 
 National Wealth — 
 
 Amount, Estimates of, 6, 10, 
 
 II, 12 
 Computation Methods, 9 
 Holdings of, 100 et seq. 
 Increased Earnings Condi- 
 tioned by War, 106 
 Individual Wealth, Valuation, 
 
 37 
 
 " Market Value," 9 
 
 Meaning of, 7 
 
 Present-day Valuations, 27, 
 
 29 et seq. 
 Ownership, Kinds of, 8 
 
 Paish, Sir George, 22 
 Pareto Line Index, 74, 79, 80, 
 I 85, 87
 
 194 
 
 INDEX. 
 
 Pensions and National Income, 
 
 56 
 
 Pigou, A. C, 4, 180 
 Prices — 
 
 Coalmining, Profits and Prices, 
 
 147. 149 
 
 Credits, Influence on Prices, 
 141, 142 
 
 Currency, Changes Affecting, 
 138 
 
 Income Tax and Price Levels, 
 154 ei seq. 
 
 Inflation of, 143 
 
 Profits and Prices, 145 et seq., 
 151, 152, 163 et seq. 
 
 Public Debt, Effect of Chang- 
 ing Price Levels, 169 
 
 Statistical Research, 144 et 
 seq. 
 
 Wages and Prices, 1880-1914, 
 158 
 Production — 
 
 Census of, see Census 
 
 Factors of, 103 et seq. 
 
 High Taxation, Effect on, 115 
 
 Non-Productive Uses, Taxa- 
 tion for, 122 
 
 Surplus, 12,1 et seq. 
 Progressive Taxation, Effects of, 
 
 116 
 Public Debt- 
 Borrowings, 1914-1919, 177 
 
 Burden per Head, 1817-1920, 
 183 
 
 Burden — Hypothetical Pros- 
 pect, 188 
 
 Capital Levy, Repayment by, 
 178 
 
 Consols, Yield, 1817-1917, 186 
 
 Foreign Comparisons, 187 
 
 Inflation and Deflation, 172 et 
 seq. 
 
 Interest Payments, 53 
 
 Napoleonic Wars, 181 
 
 Price Levels, Changing, 
 Effect on, 169 et seq. 
 
 Relief by Reduction of Inter- 
 est, 184 
 
 Shifting Standards, Evils of, 
 
 170 
 Statistics in Relation to, 6 
 Values and Profits, 14 
 Public Funds, Values and Pro- 
 fits, 14 
 Public Services, Taxation, 52 
 
 Railways — 
 
 Estimates of Values, 15 
 Factors of Production, 105 
 
 Rignano, 190 
 
 Rowntree, Seebohm, 99 
 
 Savings — 
 High Taxation, Effect on, 115 
 Provision for, 126, 127 
 
 Scarcity and Investment Values, 
 
 31. 32 
 Seligman, Professor, 142 
 Services — 
 
 " Consumable " Benefits, 57 
 
 Value of, 41, 49 
 Snowden, Philip, 23, 114 
 Soward, Sir Alfred, 22 
 Standard of Living, Pre-War, 
 
 117 
 Super Tax Statistics, 82, 90 
 
 Taxable Capacity — 
 
 Extension, Effects of, 131 
 Germany, 109, 112, 113, 118 
 Hardship Level, 127 
 Ireland, 109, no, in 
 Limits of, i, 3, 108, 116, 136, 
 
 137 
 Measurement, 114 
 " Origin and Residence " 
 
 Conflict, no 
 Present Conditions, 134 
 Relativity of, 113 
 Taxation — 
 
 Application of Revenues from, 
 
 119 et seq. 
 Capital Levy, 6, 23, 24, 36, 
 
 131. 178 
 Debt Redemption, 122, et seq.
 
 INDEX. 
 
 195 
 
 Evasions and Exemptions, 19, I 
 
 84, 90 
 Excess Profits Duty, 29, 35, 
 
 55. 72, 75. 76, 107, 155 
 Income Tax see that title 
 Internal Debt Interest, 119 
 Methods of, 129 
 Over taxation, 124 et seq. 
 Postponed, by Death Duties, 
 
 129, 130 
 Production, Savings Affected 
 
 by, 115 
 
 Super Tax, 82, 90 
 
 Total Taxable Income, 71, 
 120 
 
 War Wealth Taxation Com- 
 mittee, 25 note 
 
 Trade, Depression in, Royal 
 Commission 1885-86, 153 
 
 Trades and Professions, Income 
 Estimates, 19 
 
 Wages — 
 
 Increased, Rate of Growth, 
 
 158 et seq. 
 National Wages Bill, 64 et seq., 
 
 74 et seq. 
 Price Levels and Wages, 1880- 
 1914, 158, 163 
 War Indemnities in Relation to 
 
 National Wealth, 6, 7 
 War Loans — 
 Estimates, 24 
 
 " Heap " Illustration, 47, 121 
 Interest, Revenue Applied to, 
 iig et seq. 
 War Wealth- 
 Duty, see Excess Profits Duty 
 Holdings of, 10 1 
 Wealth, see National Wealth 
 Webb, Mr. and Mrs. Sidney, 103 
 Whittaker. Sir Thos.. 66 
 Willan, Mr., 22 
 Wood, G. H., 155, 159, 161 
 
 CHIEF REFERENCES. 
 
 BowLEY, Prof. A. L. : Change in the Distribution of Income, 1880- 
 
 I9I3- 
 
 Division of the Product of Industry. 
 
 Crammond, Edgar : Royal Statistical Society Journal, 1914. 
 
 FiSK, Harvey : English Public Finance. 
 
 Internationai, Financial Conference, Brussels, 1920. Report 
 
 IV. Public Finance. 
 Stamp, Sir Josiah : British Incomes and Property. 2nd edition, 
 1921. 
 
 Trade Fluctuations and Profits. Royal Statistical 
 
 Society Journal, 1918. 
 
 Wealth and Income of the Chief Powers, 1919. 
 
 Fundamental Principles of Taxation, 1921. 
 
 Estimate of Capital Wealth of the United Kingdom 
 
 in Private Hands, Economic Journal, 1918. 
 Census of Production Report, 1907. Cd. 7320. 
 Inland Revenue, 63rd Report of the Commissioners of the, 1921. 
 
 Cmd. 1083. 
 Income Tax, Royal Commission on the, 1920. Appendix. 
 
 Cmd. 615. 
 Increase of Wealth (War), Select Committee on. Report and 
 
 Evidence. 1920. P. 102.
 
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