Fiscal Tips from Washington
By NICHOLAS DAVENPORT
A 'TREASURY delegacy, headed by Sir Frank Lee, has just re- turned from Washington and such is the ignorance of our financial affairs that no one has even troubled to ask the Chan- cellor a question about what it means. But it might have a tremendous importance. It might be the beginning of a radical change in British economic policy, that is if the Treasury decided, under the influence of the new men at Washington, to drop its monetary fantastic and follow the practical Kennedy line. It was the President's old friend and unofficial adviser on economic arra irs- Professor J. K. Galbraith—who campaigned against employing the interest rate as a major instrument of economic control. It is the Presi- dent's new official adviser on economic affairs— Mr. Walter Heller—who is said to prefer the fiscal to the monetary approach and to be in favour of sweeping tax reforms—'needed to pro- mote incentives'—in order to get the economy climbing again. It is not too late for Mr. Selwyn Lloyd to study the new American ideas before he frames his coming Budget.
Broadly, it is' the American Treasury view that budgets should be balanced not year by year but over the full cyclical period of recession and re- covery. This implies that during the recession there will be a deficit and during the recovery a surplus. No one in the British Treasury could object to that in principle, but it is surprising how rarely such an idea is put into practice by the Chancellor. Indeed, hard money is still given priority over economic growth in the British scheme of things.
Even in the United States there have been only two post-war occasions when tax reductions have materially contributed to counter-recession poli- cies. This was in 1948 and 1953—and both were really accidental. In the spring of 1948 Congress passed a cut in income taxes over the veto of the President, whose experts had advised him that the country was still faced with inflation and could not afford it. It turned out that the cut was beautifully timed to beat off the first post-war recession. In 1953 the tax cut had been proposed a long time before. In 1957 and 1958 there was a call for a temporary cut in taxes to offset the third recession, but it was defeated. The present (fourth) recession will be beaten, it is hoped, by an unbalanced budget for the fiscal year to June, 1962 (Eisenhower left a small surplus in the year to June, 1961). This deficit will be brought about by increases in unemployment compensa- tion, by more defence spending and foreign aid and by the return in Junc to a 47 per cent. cor- poration tax from the 52 per cent. rise of the Korean War. But this is not enough for the new experts at Washington. They are not so much concerned with contra-cyclical action, which has already been taken in good measure, as with the more permanent steps required to restore the lost dynamic of the American economy. Mr. Lloyd, please note!
Basically, the Kennedy plan is to make such sweeping tax changes as to restore lost business incentives and then, when businessmen are rarin' to go, to focus their drive on a drastic modernisation of factory plant. The first will be accomplished when the many tax exemptions and loopholes have been eliminated so that sub- stantial cuts can be made in the existing tax rates. It is said that the various exemptions cost the revenue about $15,000 million a year while un- reported income costs another $3,500 million. (The latter would be largely recovered if the revenue were to adopt the British practice of paying company dividends after deduction of tax.) The experts believe that when these tax 'escapes' have been removed, income taxes could be halved without much loss of revenue! With incentives thus restored the businessman would then devote less of his time to tax-dodging and more to his factory. To speed the modernisation of plant a tax relief would be granted in respect of any investment in plant in excess of the depreciation allowances. In the view of the Ken- nedy advisers, 'the basic sluggishness' of the American economy would vanish if only half the out-of-date plant were scrapped and new machines with new processes installed.
The same fiscal approach by Mr. Lloyd would enable the 'basic sluggishness' of the British economy also to be removed. The best way for him to eliminate tax avoidance is to raise the surtax level from £2,000 to £5,000 on earned incomes. (It would only cost the revenue a paltry £54 million.) Not only is it a matter of fair play, for £2,000 now is equivalent to £700 before the war, but of common sense. Far too much business time is spent on tax-avoidance schemes.
To substitute a tax on capital gain is, of course, the obvious sequel and no doubt the fairest way is to put a small tax on all capital increment as disclosed by annual capital returns of fixed property, securities and movables over a certain minimum figure. Objections are the administrative difficulties and the discourage- ment of saving and investment. An alternative plan is to tax short-term security and property speculation (i.e. purchases held, say, for less than twelve months for securities and two years for properties). The Americans administer a can'tal gains tax but it is a complicated affair and it has helped to perpetuate a stock market boom, for no one can 'afford' to take a huge profit and pay 25 per cent. of it away! I doubt whether Mr. Lloyd will be tempted to copy it. Some relief of other taxation to match the relief of surtax would probably be his choice. In any event he must stimulate the economy in this Budget, not drag it down, and the best way is Mr. Kennedy's —by restoring lost incentives and speeding up investment. It would be surprising to learn that British industry has less need than the American to modernise its plant.
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