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426. The purely personal utility attaching to an increment of income diminishes as the income grows at the same time the percentage taken in tax increases, at points determined by the Super-tax scale. It follows that, if the business man did not identify himself with his business but viewed matters from a merely personal angle, he would tend-even apart from taxation -to make less and less effort to increase his profits: this tendency would be reinforced by the increasing toll of tax.

In fact, owing to a great variety of motives, the wealthy business man does not view the making of effort and the taking of risk from a merely personal standpoint. No general rule can be laid down that he tends to slacken as his business grows. Similarly, it is not safe to assume that a tax of, say, 10s. at the margin of his income will have as great a deterrent effect as its face value suggests.

The

427. It was agreed by many representatives of business that the Income Tax had a serious effect in repressing large enterprise. Great emphasis was laid on the decreased remuneration for risk. Thus the Federation of British Industries pointed out that "risk of loss is inseparable from the early stages of new enterprises and of new developments of old enterprises, and in actual practice this risk is almost invariably borne by a single individual, or at most by a small group of individuals.” Federation spoke of "the present lack" of the spirit of adventure and attributed it in part to existing taxation, although allotting a large share of the responsibility" to more general causes (E. in C., 56-58). Lord Hunsdon, again, stated that "the prosperity of this country has been made by adventuring money in new enterprise, and the present system of graduated taxation not only checks the accumulation of capital, but has to a great extent stopped new enterprise and will, I think, stop it more completely as time goes on, for in any risk that is taken the Government now take a very large share of the profits and leave the whole loss to the adventurer" (E. in C., 5).

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428. Opinions in a contrary sense were expressed by other witnesses. "I cannot myself conceive," said Lord Bradbury, "that merely taking away half of a man's profits makes him any the less keen on earning profits; indeed to some extent I think it might make him more keen, because, having only half left, he is naturally much more anxious to make money. A man may say: Well, as I have to part with one-third of my profit, it is not really worth making profits at all,' but I doubt if in practice he acts on the declaration." (Q. 9192.) Again, the view taken by most of the economists was that the present scale has no very serious effect on work and enterprise. Mr. Layton cited the economic theory that "on the whole a tax on income ought not to affect economic action for the reason that prices and the amount of production are determined by the cost

* Lord Bradbury regarded the Income Tax as damaging to the entrepreneur, in so far as there were flaws in it making it "not a real tax on actual profits."

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of output at the margin where no profit is made, that the Income Tax is a tax on the surplus, and that production will continue under competition to the point where profit stops." "But," he added, this theory has to be qualified in important respects. It is not quite certain that people act so exactly according to the laws of economic theory, or that competition works quite in that way. It is suggested, and I think there is something in it, that people are actuated by an idea of a conventional rate of profit-what they think is the proper rate of profit. One is always being told that people will not do this, that, or the other, because taxation is now such that the net profit is much lower than it used to be, and it is not worth it; in other words, there is some relation between a certain rate of profit and the effort that people think is worth making, or the risk that they think it is worth undertaking, and so forth." (Q. 2543.) Mr. Layton's conclusion on this point was that "the heavy direct taxation of profits may have had some small effect in checking business, through reducing the net profit of given enterprises below a conventional standard" (E. in C. 19). He thought it might be true that the taking of big risks was affected, although there were opposite motives in operation. (Q. 2568-9.)

429. The question as regards saving is in one respect less controversial than that as regards enterprise. Allowance must be made for temperamental reactions to high taxation, which may perhaps be more often in the direction of extravagance than of extra economy. But it remains true that the saving of the wealthy business man is to a considerable extent automatic, and therefore not subject to psychological influences. In spite of the heavy taxation there is still a large flow of capital demanding employment: correspondingly there is still a large, though reduced, automatic stimulus to enterprise. Of course the money may be used in different ways. Mr. McKenna was of opinion that, paradoxically, the business man will sometimes put his money into other people's risky investments rather than take a risk in his own business, with the attendant trouble and anxiety (Q. 2016-7). This appears to be possible, for the risk of a blind venture or gamble sometimes holds out greater attractions than a dangerous game of skill; and, of course, the advantage of spreading risks has always to be considered.

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430. The difficulty in a matter of this kind, where there is room for a wide variety of personal impressions, is to get anything like conclusive evidence. A view expressed by Professor Cannan that personally he did not believe that the existing scale has any important effect in causing people to slack, or to retire from work early, or to consume more " furnished a text on which we asked the Board of Inland Revenue whether they could furnish any statistics, showing the proportion of the earned to the unearned income of Super-tax payers with taxation at the pre-war and the post-war level; we also asked whether it

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would be possible to classify the particulars according to age

groups.

431. In response to this request the Board furnished tables for the years 1913-14 and 1922-23, based in each case on a large sample of incomes exceeding £10,000. The tables are given in Appendix XV. The figures do not in any way indicate that the increase of taxation has had a material influence either on the proportions of earned income, or on the relative number of individuals part of whose income is earned.

With regard to classification by age, the Board were able to give figures for 1922-23, but not for a pre-war year. The 1922-23 figures are in themselves interesting. On the sample taken they show that, of the total number of taxpayers with incomes exceeding £10,000 and partly earned, almost 23 per cent. were 66 years of age and over.

432. In the absence of similar data for a pre-war year, Mr. Coates (E. in C., 28) suggested an illuminating comparison with the 1921 Census figures of age distribution in the employing and professional classes as a whole. These figures cover incomes of every size, and the number of small incomes subject to a light rate of tax must therefore preponderate in the totals. The 1921 Census shows that of 587,300 males aged 45 or over in the classes mentioned, 87,900 or 15 per cent. are aged 65 or over. As compared with this, the table relating to incomes above £10,000 shows that of 5,280 aged 46 or over, 1,407 or almost 27 per cent. were aged 66 or over.

Mr. Coates pointed out that, in the Super-tax table, the tendency for age and wealth to be associated no doubt introduces some bias towards the highest age-group. But, when every allowance has been made for this and other considerations, we agree that the comparison lends no support to the view that the weight of post-war taxation tends to deter the wealthy man from continuing in business after reaching an age at which he might well retire.

433. A priori, it might be expected that the post-war rates of Income Tax and Super-tax would act as a powerful deterrent to enterprise on a large scale. But, apart from statistical evidence, there would be reason to suspect that this anticipation might be wrong. The post-war rates of tax appear formidable, but the fact that they can be and are borne is in itself sufficient proof that the effect of income taxation has been exaggerated in the past; history suggests that there is a natural tendency to over-estimate it. For example, the following extract from a speech made in Report stage of Ways and Means on the 14th May, 1914, is typical of a point of view which was widely taken. in the years just before the War:-"We are at the present moment in a time of profound peace, to all outward appearances, and we all hope that it will continue, but here we are with an Income Tax at the nominal rate of 1s. 4d. in the £, and in

some cases more.

These enormous direct taxes are far higher, I believe, than they have ever been in this country before-taking the death duties and the Income Tax together (H. of C. Deb., Vol. LXII, col. 1340).

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Further, as we have intimated (para. 424), the Income Tax may depress the outlook of the trader, even if it impels him to increased effort. Obviously, so far as it has had this double effect, it is likely in a period of bad trade to bear the blame for results which are in fact due to much more general causes.

In any case it would be difficult, in face of the statistical evidence referred to above, to maintain the view that as a whole the enterprise of the wealthy business man is very seriously damaged.

434. The evidence, however, must not be pressed too far. We believe that some real injury is done, and we think it likely that there is a rather deterrent effect on the export trader, "since,' as Mr. McKenna said, "the net profit earned may be insufficient to compensate for the trouble and risk of foreign business (Ev., p. 133; E. in C., Ans. 10). It is possible, too, that the taking of very large risks of any kind may be considerably affected. It has to be remembered, however, that the very speculative class of enterprise, e.g., gold mining, is normally undertaken by the public company and not by the private concern. The private individual who starts a risky venture frequently disposes of it after the initial stage, leaving the risks of operation to be borne by the general shareholding public.

The risks normally taken by the wealthy individual should, therefore, not be over-stated. On the other hand, the part played by him in the initiation of risky enterprise must have due recognition. We think that witnesses who drew attention to this particular aspect were justified; it is probable that here the high rates of tax have inflicted some degree of definite harm. The area over which the harm can have been done would appear to be restricted, but, on the other hand, no estimate can be formed of the loss which a community may suffer from the missing of even a few big speculative opportunities. It may, or may not, be important; it must remain an unknown factor.

(v) Transfer of Residence Abroad and allied effects. 435. Before summing up certain of the main effects of the Income Tax, we may briefly glance at the loss of private business due to the transfer of residence, &c. In general, the same considerations apply as in the case of public companies, and we may refer to our discussion in paragraphs 405-8. We have seen that, of 128 cases of transfer abroad noted by the Board of Inland Revenue since 1916, 42 relate to private companies and 13 to individual traders and partnerships; of the £4,653,000 aggregate Income Tax assessments on the 128 concerns for the last year for which they were liable, £571,000 represent assessinents on these 55 private concerns.

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436. The assessment figures in themselves are not very large, but the enterprise of merchants doing pioneer work abroad remains, as it has always been, of special importance to the trade of this country. The merchanting or other business in private ownership is more handicapped by taxation than the public company, so far as there is liability to Super-tax (sometimes including foreign surtaxes) as well as to Income Tax (cf. para. 407). Special attention was drawn to the burden of Supertax on the merchant by Mr. Tredwen, representing the London Chamber of Commerce (E. in C., 10-14). Lord Forres, who emphasised the loss of new business (cf. para. 407), discussed the whole subject in the perspective of double taxation, and it is in this setting that the present situation takes on its more important aspect. We were considerably impressed by his evidence; in relation to the private business it appears to us to carry especial weight:

IV. SUMMARY OF MAIN CONCLUSIONS.

437. Having analysed the effect of the Income Tax on the individual, the public joint stock company and the private business in turn, we may now summarise our main conclusions. We will do so under four heads :

(i) The price level.

(ii) The standing of living; purchasing power.
(iii) Saving.

(iv) Enterprise.

438. The price level.-We have seen that, with unimportant exceptions, the Income Tax is not passed directly into the price of goods and services. Whether prices are indirectly affected is another question, depending on the total effect of the tax on saving and enterprise. Saving and enterprise are undoubtedly diminished to some extent as a result of the physical transfer, under progressive taxation, from the larger to the smaller income; they are further diminished on account of the psychological reactions set up by the inroad which the tax makes into the pure interest yield and into the reward for work and risk. So far as the Income Tax, operating in these ways, has any tendency to reduce the volume of production, it must also have a tendency to increase prices. Mr. Coates has shown in Part VII of his paper on the Incidence of the Income Tax (Appendix XI) the difficulty of tracing any influence of the rate of Income Tax on prices through the medium of the rate of interest. We are satisfied that, when the application of the tax revenue is taken into account, the higher level of post-war income taxation has not had anything approaching a commensurate effect on the level of prices. It appears to us that over the whole field its influence on prices has been of little relative importance, and that it has not, in this

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