Financial Supflement
Paying for the War—An Income Tax Overhaul Needed
By " CUSTOS " EVER since this war started we have been warned that it was going to prove inordinately expensive. Now, within the first eleven months of hostilities, the force of this warning is being brought home to us. Lord Simon's Budget, which seemed Draconian in April, looks ridiculously lenient in July, and Sir Kingsley Wood faces an entirely new problem in making both ends meet.
His task next Tuesday imposes a severe strain on Treasury ingenuity. Here is the rough measure of it. Current expendi- ture is at the rate of £3,500 millions a year and current revenue, on the basis of Lord Simon's estimate, is at an annual rate of about £5,230 millions. Add in another £50 millions for the rise in Excess Profits Tax, and there is still a gap to be bridged of something like £2,200 millions. In the April Budget it was proposed to borrow £1,485 millions, which was generally regarded as somewhere near the upper limit unless the Government were prepared to swell the nation's income by a rise in prices, so that if we leave borrow- ing for the moment at that figure we have a gap of over L700 millions.
A PROBLEM OF ADJUSTMENT I will not attempt to guess at the Chancellor's intentions, but this much is clear. First, it would be quite impossible to add this L700 millions to the existing borrowing total of £1,485 millions without letting loose inflationary forces on a really serious scale. Since the Government is already committed to avoiding inflation—not only on broad politico-economic grounds, but in its relations with the banks and the City—it is safe to assume that it will seek to fill as large a proportion of the gap as possible by additional taxation.
Fundamentally, the internal financing of war is not, of course, a problem of finding the money at all. Whatever the cost within the country itself—the purchase of materials from abroad is another matter—the money can always be supplied in the last resort by the simple process of turning on the print- ing press. That means inflation, with all its hardships and inequitable incidence on different sections of the community. The real problem, underneath the purely fiscal problem which faces the Chancellor, is to ensure that such proportion of the nations' capital and income is diverted from peace to war purposes as is necessary for victory. In other words, it is an adjustment problem—guns instead of butter, saving instead of spending—itself forming part of the much larger problem of adjusting the whole economic machine—its labour, plant and machinery—to the purposes of war.
RESTRICTING CONSUMPTION
Up to the present the Government has led us gently along the path of sacrifice, perhaps too gently even in a democracy with a delicate financial apparatus and accustomed to " good living," but the wrench with past standards has now to be faced. It is clear, therefore, that the Chancellor's real task on Tuesday will be to introduce further measures, within the limits of the country's taxable capacity and, so far as is practicable, without penalising any one section of the com- munity, which will divert resources from civilian consumption to war uses.
This must mean (i) new taxation on a substantial scale to cut down private spending, and (2) a strong appeal to all classes to " shun delights and live laborious days," so as to permit a further extension of borrowing out of genuine savings. Just how the Chancellor will attempt to achieve his object it is useless to attempt to predict. Luxuries will doubtless be made dearer, and by more direct methods, such as rationing and the actual closing down of luxury production, the tempta- tion to spend will be reduced. The limits in this field are set largely by considerations of what may be necessary for the maintenance of morale.
STANDARD RATE PROBLEM
Side by side with stringent taxation of luxuries and further imposts on the higher income classes, however, it will surely be necessary to tap the incomes between, say, £200 and £500 a year. The response within this group to the Government's appeal for savings has been encouraging, but there is ample evidence that consumption on non-essentials is also on a higher plane than the country can now afford. Mr. Keynes' plan for compulsory saving is one way of tackling this problem. Another is a complete overhaul of our income-tax which would not only raise the rate of tax on present taxable incomes but extend the effective incidence of the tax to lower income ranges. As Lord Simon emphasised in his Budget speech in April, the whole conception of a standard rate of income-tax is mis- leading. For example, even with the standard rate at 7s. 6d. a married couple with two children and an income of L400 a year are liable for just under LI2, or an effective rate of 7d. in the pound. Some idea of the distribution of the nation's in- come can be gleaned from the figures quoted by Mr. Keynes last autumn. He estimated at that time that of war incomes totalling £6,075 millions, £3335 millions could be attributed to those with incomes below £250 a year, another £740 mil- lions to the £250-ksoo a year group, and £780 millions to those with incomes above £500.
He also pointed out that the £250-k5oo a year group paid an even smaller proportion of their incomes in taxation, namely, just under 8 per cent., than the under £250 a year group, which paid I I per cent. Obviously, it is not going to be easy to per- suade the people in these income groups, especially those who have only recently been enjoying something above a subsistence level, that their consumption must be cut down, but that it what is now required in the national interest. If the Govern- ment lacks the courage to tackle this problem by a drastic over- haul of the income-tax system, then it will have to achieve the same object by some form of compulsory deductions from wages. The simpler method, it seems to me, is to carry through a tax reform which is overdue in any case, and draw off a considerable volume of purchasing power in this way.
CAPITAL TAX PROPOSAL
Here, I feel, the solution lies, and not in a tax on private fortunes such as is now being suggested in some quarters. Admittedly, a capital tax has the attraction that it would bring in a substantial yield even if it were levied at a very modest percentage, say, 5 per cent. It also has the advantage that it slows down the rise in the national debt and the growth of the interest bill. In this respect it is exactly like a levy on capital after the war. But having said that, one has exhausted the claims of the tax as a useful instrument at this stage. What its sponsors apparently ignore is that, unlike a tax on incomes or com- modities, a capital tax would not directly help the war effort to any appreciable extent by diverting resources from peace to war uses. That object can be served only by taxes on current income or by loans to the State made out of current savings. Apart from this fundamental weakness, a tax on capital would present some serious administrative problems. It would involve a large-scale valuation of property, it would be difficult to collect quickly in the form of cash, and in present circumstances it would mean hardship in many cases. In my view, these disadvantages greatly outweigh the gains.
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