In our

92 A belief that taxation actually reduces the aggregate volume of purchasing power plays a large part, we think, in creating the fears that are commonly expressed that the existing level of taxation is an important cause of unemployment. opinion, these fears are greatly exaggerated. Since taxation (whether it takes 5 per cent., 10 per cent., 20 per cent. or 100 per cent. of the taxpayer's income) neither destroys any part of the national money income nor seriously delays the rate at which this is actually spent, (the State normally pays out what it receives from the taxes at least as rapidly as private persons spend their incomes), it cannot be said to cause unemployment by reducing the amount of purchasing power actually available at any one moment for expenditure upon the goods and services which workers are employed to produce.

Direct Taxation and Prices.

93. The contention that direct taxation raises prices is in general confined to the Income and Super-taxes, to the exclusion of the death duties. It is argued that producers aim at obtaining a given net return on their capital and efforts, and that, if this return is reduced by increased direct taxation, they will put up prices to recoup themselves for the difference. On this view, the tendency of direct taxation is always to operate in this way; and the level of taxation is now such that the resulting effect on prices may be said to be definitely injurious.

94. We are unable to accept this doctrine. We are of opinion that it is only in very exceptional cases that manufacturers and merchants are able to pass their Income Tax on to consumers through the prices of the goods that they sell. On this subject we are in substantial agreement with our colleagues. For the sake of completeness, however, we recapitulate briefly here the main reasons which have led us to this conclusion.

95. Fundamentally, it appears to us that all businesses try to charge prices which, in conjunction with their total sales, will yield a maximum profit upon their capital. This is true of all conditions, from a complete monopoly, in which one firm has power to maintain prices at whatever level it may choose, to a keenly competitive industry, in which any firm that charges more than the ruling prices loses business to its competitors. In so far as merchants and manufacturers are already getting the best profit that they can, they cannot get a better by putting up their prices. It follows that an attempt to recoup themselves for Income Tax by increased prices will defeat its own ends and will only be carried out under a misapprehension.

96. Further, as regards that part of trade which is still in the hands of private concerns, it must be borne in mind that individual firms are liable to Income and Super-tax at widely differing rates. If these taxes are normally passed into prices, the necessary addition to prices would vary widely in the case

of different firms, and the small private merchant who pays only a very low tax would enjoy a differential advantage over his larger and richer competitor and over the joint stock company. We are unable, however, to find any evidence that small private firms do underbid their competitors in this way.

97. Finally, we are at a loss to see how a general increase of all prices consequent upon increased Income Tax can be sustained, unless the volume of the currency is also increased to meet this. We accept the theory that the general level of prices can only change if there is a change in the volume of money and bank deposits, or in the rate at which these circulate, or if there is a change in the volume of production. We can see no reason whatever to suppose that increased Income Tax will lead to an increase in the amount either of legal tender or of bank deposits, while, if, as is widely believed, a high Income Tax is depressing to trade, it will retard rather than accelerate the velocity at which money circulates.

98. The only remaining way in which increased Income Tax could raise the general level of prices would be by causing a reduction in the volume of production proportionate to the increase in the price level. In this event, however, manufacturers and merchants would lose in reduced sales all that they had hoped to gain in increased prices.

99. Our conclusions on this head are, therefore, that direct taxation does not normally enter into prices. It follows that the existing level of such taxation cannot be cited as a direct cause either of high prices in this country or of the difficulties which British manufacturers may experience in quoting prices as low as those of their foreign competitors.

Direct Taxation and the Output of Work.

100. In the second place, it has been repeatedly urged before us that income taxation and death duties on the present scale destroy the incentive to work. The taxpayer does not regard the net return which he can obtain by his efforts as a sufficient inducement to work as long or as intensively as he otherwise would. Other witnesses, on the other hand, have contended that the effect of taxation is exactly the opposite of this, and that higher taxation stimulates harder work, in order to prevent an unwelcome reduction in the taxpayers' standard of living. We have found little attempt to reconcile these two conflicting views, witnesses usually contenting themselves with stressing the one argument and minimising the other.

101. We think it reasonable to suppose that taxation operates differently in the case of different taxpayers, acting as an incentive to work in the case of those who are particularly concerned to maintain a certain definite standard of living, and as a discouragement to others, who can maintain what they regard as

a normal standard without exerting their energies to the full. We should be at a loss to say whether on balance existing direct taxation increases or reduces the taxpayers' aggregate output of productive work.

102. We think, however, that the influence of direct taxation upon the output of work in either direction is insignificant, and that witnesses who have attached much weight to it have not, perhaps, fully appreciated the conditions which recent changes in industrial organisation have created. For, in the first place, the great mass of the national output of productive work comes from those whose incomes and property are either wholly, or almost wholly, below the level at which liability to direct taxation begins. It can, therefore, only be within a comparatively small area that liability to direct taxation can either stimulate or discourage productive effort.

103. Second, even within this limited area, we are of opinion that the influence of direct taxation upon the output of work must have diminished greatly in recent years, and can now have but little importance. The arguments which we have outlined above assume that, in the normal case, the direct taxpayer is free to increase or diminish his output of work and his earned income at will. In the statements that have been put before us, illustrations were drawn from the medical, legal or such other professions as are usually remunerated by fees, in which this freedom undoubtedly exists.

104. In the large and growing field of salaried enterprise, however, both work and remuneration (and frequently also the age of retirement) are fixed, and the taxpayer cannot earn more by working harder or longer to compensate for his increased taxation; nor can he reduce his liability to pay taxes by diminishing his output of work, unless he gives up his employment altogether. With the growth of joint stock enterprise it appears to us that the case of the taxpayer who can and does adjust his output of work in accordance with his liability for taxation is so exceptional that it cannot now have any serious effect upon the total national output of productive work.

105. In this connection we think it worth pointing out that, according to the Census figures of 1921, persons described as employers or as working on their own account did not amount to more than approximately 1 in 10 of the occupied population over 12 years of age. Even this proportion would, of course, include a number whose liability to direct taxation was either nil or very small, so that the proportion of the total working population whose output of work is actually affected by the level of direct taxation must be appreciably less than this.

106. Finally, we wish to call attention to the results of an interesting investigation submitted to the Committee by Mr. W. H. Coates on the basis of Inland Revenue statistics. The object of the investigation was to ascertain whether, under the

to find

any

stress of recent increases in taxation, there was any tendency for wealthy taxpayers to retire earlier in life from active enterprice. Mr. Coates' conclusion was that, after making every allowance, it was "difficult statistical support for 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." (Ev. p. 640; E. in C., 28.)

107. Our conclusion under this head is, therefore, that direct taxation neither stimulates nor discourages the output of work in any important degree.

Direct Taxation and the Quantity of Saving.

108. It has been put to us that direct taxation destroys both the incentive and the power to save, and that its effect in these directions is sufficiently great to be seriously detrimental to the expansion of industry and employment.

(i) The Incentive to Save.

109. This evidence as to the effect of taxation on the incentive to save, like that dealing with the incentive to work, has been countered by evidence of an exactly opposite character from other witnesses. These witnesses have argued that increased direct taxation strengthens the incentive to save, since it makes a greater accumulation necessary to provide any given net income or capital sum for the future of the taxpayer and his family. In this case also we have been able to obtain little evidence based on a scientific attempt to estimate the quantitative effect of these conflicting influences upon the investing classes generally.

110. Our conclusions, therefore, can only be based upon what appears to us to be a reasonable view of the motives by which saving is most commonly prompted.

111. We think that the most widespread motive of individual saving among all classes who make permanent savings of appreciable amount is the desire to provide for contingencies, for old age and for dependants; or, in a more limited number of cases, to enjoy the satisfactions attaching to a higher standard of living or a greater reputation for wealth. In addition, a considerable class (which includes, but is not confined to, those who are wealthy enough to find the possibilities of enjoyable consumption more limited than their incomes) act mainly on the principle of maintaining a given or gradually rising standard of present consumption, and accumulating (often for use in expanding their own businesses) whatever margin of their income remains.

Among the very poor any saving is usually for a rainy day or for a special occasion and is not permanent in character, the money put by being spent when the day comes.

112. Direct taxation reduces the net return obtainable from a

given investment. But it only destroys the incentive to save, if the strength of this incentive varies directly with the return obtainable from saving and investing a given sum. If, however, our analysis of the chief motives which induce saving is correct, this is not usually the case. Persons who are making provision for contingencies, or for their dependants, usually aim at achieving a certain sum, or enough to secure a certain minimum income; to them, accordingly, the incentive is actually greater when the return is less. Such persons find indeed that the effectiveness of a given effort on their part to provide for the future is reduced by taxation. But it is difficult to believe that they will in consequence relax their own efforts so as still further to reduce their provision for themselves and their families, as though no bread were better than half a loaf.

113. Again, the motives* of those, who, on the other hand, act on the principle of maintaining a given present standard of living and accumulating the balance of their incomes have obviously no connection with the amount of yield which their savings give.

114. A further point seems to us worth notice. Supposing that the considerations which we have put forward above are not in all cases applicable, and that the incentive to save on the part of some investors does vary directly with the prospective net return obtainable, we think that it is clear that such exceptions can only be found among persons of relatively moderate means upon whom the claims of present consumption are very pressing. Only in the case of the "marginal " investor, can it be argued that variations in the return obtainable influence the strength of the inducement to save.

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115. The marginal" investor, however, is not found among the recipients of large incomes. A net return which may conceivably be the minimum required to maintain the savings of a small investor affords a handsome surplus to the well-to-do, whose accumulations involve little effort and are not, therefore, dependent upon the stimulus of so great a return. Existing progressive taxation, however, affects but little the return which a small investor enjoys from a given investment, while it makes an appreciable reduction in the net yield which the recipient of a large income will obtain from a similar investment of like amount. It follows that the influence of taxation upon the yield of investments is only important in the case of those classes whose incentive to save is least likely to be affected by consideration of this yield. We think that this circumstance also strengthens the conclusion which we have formed that existing taxation is not a serious deterrent to saving.

We should perhaps emphasise that, throughout this section, we are discussing only the incentives as distinct from the capacity to save.