Income Tax of just under 2s. 3d, yielding £380 millions, could be imposed without any increase in the proportion of the total national income taken in taxation. 66 We think that this point has escaped notice in the discussion of a Capital Levy on both sides, and that it is not unimportant. The individual taxpayer thinks of the burden of taxation upon himself chiefly as a matter of the rate charged upon his income or capital. He pays so much in the £, and is better or worse off according as this rate is diminished or increased. But in so far as it is reasonable to speak of taxation as a burden" on the nation as a whole, in measuring this burden the effect of raising a given sum in taxation must necessarily be related to the amount of the total real national income. After a Capital Levy the rates of taxation necessary to raise a given sum, say, £50 millions, must be higher than before; but expenditure of £50 millions absorbs exactly the same proportion of the total national income as formerly. It follows that, if our capacity for public expenditure is ultimately limited, as has been suggested, by the total national income, it is unaffected by the loss of money revenue from certain taxes consequent upon a Capital Levy. Indeed, were it reasonable to argue that our capacity for expenditure is reduced by reduction of the National Debt, it would be no less reasonable to argue that this capacity would be increased by an increase in the National Debt, and that the debt is positively advantageous, in so far as it increases the total money taxable income an obvious paradox. In the example given above, if debt interest had required £500 millions instead of only £300 millions, the total money income liable to taxation would have been £4,000 millions, and a tax of 2s. in the £ would have yielded £400 millions instead of £380 millions; but it would be generally admitted that, notwithstanding this, such an increase in debt interest would be very far from lessening the burden entailed by any proposed expenditure amounting to a given total. Though the net annual saving from a Capital Levy is thus necessarily less than the gross amount of interest on the debt redeemed by the levy, the importance of this difference between the gross and net figures is modified by the foregoing considerations. PART V. PROPOSED ALTERNATIVE MEANS OF DEBT REDUCTION. PROPOSED SUR-TAX ON INVESTMENT INCOMES. 235. We think it well also to consider alternative methods of raising funds for debt redemption from owners of accumulated wealth, which may be less liable to obstruction than is a Capital Levy. 236. The simplest method of doing this is to increase the present rates of Income and Super-tax on investment as distinct from earned incomes. This method raises no new problems of administration and requires no new machinery. Moreover, as was pointed out in evidence by Lord Bradbury," Economically, a permanent charge on the income derived from capital is indistinguishable from a share of the capital itself "(E. in C., 29). A charge upon investment income is, in fact, a Capital Levy in an alternative form. Since it necessarily spreads the repayment of debt over a longer period than would a Capital Levy, such a charge is to that extent inferior to a levy as a means of debt redemption; but it avoids certain of the difficulties attaching to so large and novel an experiment as a Capital Levy. 237. In this connection we are interested to notice that Lord Bradbury further expressed himself as in agreement with the advocates of a Capital Levy that the method by which the interest. and Sinking Fund on the debt is at present provided tends to discourage personal exertion and saving," and as favouring "alterations in the Income Tax, Super-tax and death duties under which that portion of them which is required to meet the debt-charge would become, even more completely than it is, a burden on rente generally, rather than an attempt to liquidate the debt itself by a levy on capital" (E. in C. 29). 238. An increase in the present differentiation between earned and investment incomes may be defended also on general grounds. An investment income involves a capital fund behind it; and, as we have already pointed out, the possession even of a moderate capital fund makes all the difference between economic security and insecurity. Moreover, the growing tendency of public opinion to regard earned as more meritorious than investment incomes appears to us both just and reasonable. It is admittedly desirable to discourage persons from living on the proceeds of invested wealth (that is, ultimately, on the labour of others), without themselves engaging in any useful activity; or, at least, to require from those who do so a substantially larger contribution towards public purposes than is paid by those who live upon the fruits of their own labour. 239. It must always be a matter of opinion whether any given differentiation between the rates of taxation upon earned and upon investment incomes is sufficient to counterbalance these differences in the character of the two types of income. In our view, the present (1926-27) differentiation, under which earned income enjoys a rebate of one-sixth, subject to a maximum allowance of £250, is not adequate. 240. Since we wish to raise additional sums for debt redemption from owners of invested wealth, we think that, if there be no Capital Levy, this might well be done by increasing such differentiation. 241. This proposal has, in our judgment, one further merit which should go far to commend it. In the section of our Report dealing with taxation we have discussed in some detail the possibility that existing direct taxation may imperil the accumulation of an adequate capital fund. Though we have given grounds for believing that this possibility is not at present realised, we are aware that, if the proceeds of taxation upon the rich are increasingly used to raise the standard of living of the poor, as on general grounds we hope will be the case, the possibility may have to be reckoned with. 242. Taxation of investment incomes for the purpose of debt redemption seems to us, however, to provide one certain safeguard against undue reduction of savings by redistributive taxation. As we have already pointed out, to meet this taxation taxpayers must certainly curtail their expenditure to some extent; but the debt holder in practically all cases treats money handed over to him in repayment of his holding not as income, but as capital. The whole process involves, therefore, a measure of compulsory saving. 243. We attach great importance to this point. It has been suggested to us in evidence by many of our witnesses that a reduction of direct taxation would be in the best interests of all classes, since the money remitted would be saved and invested and become the means of employment. At best, this is a dubious method of promoting saving, since remission of direct taxation. means to the taxpayer an increase of income, and there is no means of knowing how far he will employ this in increased expenditure, and how far in increased saving. 244. Taxation of income for debt redemption, on the other hand, is a certain method of transferring money from income to capital, i.e., of increasing savings. The risk, therefore, of a dangerous diminution of the national capital, which attaches to severe increases of direct taxation of income for other purposes, is practically eliminated in the case of taxation for debt redemption. We need not, therefore, hesitate to propose that large investment incomes should bear a considerable weight of taxation for this purpose. 245. We recommend, therefore, that, if there be no Capital Levy, an additional annual charge be imposed upon investment incomes for the purpose of debt redemption. By this we do not intend that the proceeds of such taxation be so earmarked for debt redemption by statute that they do not enter into the general Budget revenues at all. We are, in general, opposed to the rigid allocation of any taxes to specific objects; and we think that the objections to this course apply no less in the case of the new taxation which we are suggesting than to the earmarking of existing taxes for particular purposes. At the same time, we wish it to be understood that we are putting forward this proposal with the object of safeguarding the more rapid redemption of the debt, and of ensuring that sufficient funds will be available for this purpose, notwithstanding any increase of expenditure which the nation may be called upon in the future to incur. 246. As regards the amount of such taxation, we think that it would be reasonable to aim at an annual sum of £100 millions. We understand that, as far as Income Tax is concerned, about 70 per cent. of the present yield comes from investment income, and that the mere restoration of the standard rate of tax upon investment incomes only to the level (6s. in the £) charged upon all incomes as recently as 1921-22 would yield about £85 millions. 247. We quote this figure, however, merely for illustrative purposes to give an idea of the scale of our proposal. We do not suggest that the bulk of the additional revenue which we desire to raise should be obtained by an increase in the standard rate of Income Tax upon investment incomes. On the contrary, we think it most important that this revenue should be raised by graduated taxation, and that, whatever the precise form of tax adopted, its graduation should be at least as steep as that of the present Income Tax and Super-tax together. 248. We understand that for administrative purposes no complete division of all income liable to Income Tax and Super-tax into earned and investment income, respectively, is at present made. Our proposal would necessitate such a distinction, which would, we think, be valuable in itself for the incidental informa tion which it would yield as to the proportions in which income is divided between earners and owners. In view, however, of the already complicated character of the present Income Tax and Super-tax, with their appropriate allowances and reliefs, we think it might be found convenient to raise the additional revenue not by an adjustment of the rate of those taxes charged on unearned income but by the introduction of a special graduated Sur-tax applicable to investment income alone. The proposal would have the additional advantage that the exceptions and reliefs allowed under the new tax need not necessarily be the same as those provided under the present Income and Super tax. PROPOSALS AS TO DEATH DUTIES. (i) General Views on the System. 249. In addition to the proposals already given, we think that further funds for debt redemption might also be found from an extension of the present system of death duties. 250. We have heard much evidence on the general subject of the death duties, many witnesses being strongly opposed to the whole principle involved in this form of taxation, while others regarded the tax as a useful means of revenue of which the burden is comparatively little felt, and which complements in important particulars our system of taxation upon income. 251. In our judgment, the taxation of property passing at death has much in principle to recommend it. In the first place, inheritances are a principal cause of that inequality in the distribution of accumulated wealth which is so ugly a feature of our civilisation; and particularly of such inequality as bears no relation to differences in industry or social usefulness. Second, in spite of legitimate expectations," a great deal of property received by inheritance undoubtedly comes as something of a windfall to the recipient, and as such is a peculiarly fit subject for taxation. Third, death duties, being assessed upon capital, bring under taxation such assets as household property or speculative gains by way of capital appreciation, which do not vield, and cannot themselves be classed as, "income." 252. We have, therefore, to consider whether the objections to death duties which have been raised in evidence before us are sufficient to outweigh these advantages. These objections are, primarily, that the taxes are destructive of capital, and, secondly, that they fall with great hardship on the owners of private businesses and landed proprietors, whose resources are not available in liquid form. 253. We are not impressed by the force of these objections. The first appears to us to be based on a misunderstanding. Though death duties are assessed on capital they destroy no existing capital; at most they absorb potential capital by diverting to the payment of the duties income which would otherwise have gone into new savings. In this they do not differ from Income Tax or any other tax of comparable magnitude. Even where estates are sold to meet the duties, capital is only transferred, not destroyed. The property sold must eventually be bought by someone who has free income seeking an investment, and the only effect is to divert this income from the creation of a new, to the purchase of an existing, investment. There is no reduction of actual capital. 254. The difficulties which death duties occasion for those whose wealth is not available in liquid form appear to us to be greatly exaggerated. We have already referred to the evidence submitted by the Board of Inland Revenue in regard to the 65184 0 |