SPENDERS AND SAVERS.
ivr R. HENRY BELL, of Lloyds Bank, is to be eon- JL gratulated on the service he has rendered by publishing a correspondence between and Mr. Arthur Henderson on the subject of a levy on capital. At the time the correspondence was started M r. Ilenderaon was a recognized leader of the Labour Party, and as such held a position of influence in the country. The General Election has shown that his claim to that position Wtli not justified. Like other leaders of the Labour Party, lie hat been rejected by an overwhelming majority of eleetors. most of whom belong to the labouring classes. Ths: the views that he expressed in this rorrespondenee hare no-.r mainly an historic interest. On the other hand. it unlit be realized that within the past twelve north, a good many people, including Mr. Boner Law, hate given their support to the idea of a levy on capital. Seine of dies, people still support that idea; and it is therefon. worth while once again to examine the defects underlying it. The primary defect is this, that it imposes taxation upon the savers in order to exempt the spenders. • Thep, are conceivable conditions of society in which melt a tax would be defensible. If the emmtry were bursting with pros- perity, if a very large proportion of its inhabitants vier, living comfortably on accumulated savings, and if the demand for capital for new developments or for repairing old losses were small, then there would be no great economic harm in distributing taxation in such a way that a greater burden fell upon those who saved titan on those who spent. To some extent indeed our pre-war system of taxation was based on this conception, for not only were the Death Duties heavy, but the Income Tax was imposed at a higher rate on incomes derived from investment than on those derived front current exertion. Thus the accumulators of wealth and the inheritors of wealth were taxed at a relt- tively high rate. This extra taxation was doubtless a theoretical discouragement of saving, but the general economic situation was such that practically little harm was done. The situation has now been completely re- versed. The main economic need of the nation to-day is to accumulate fresh capital as rapidly as possible in order to pay off old debts and to build up, by the expansion of indusiry, a. higher standard of living for the whole cont. munity. For this reason our scheme of taxation ought to be so devised as to check spending and encourage saving.
A levy on capital must have the reverse effect. The advan- tage of the correspondence which Mr. Bell has published lies in this, that it pins Mr. Henderson down to a professed economic defence of a false economic policy. If Mr. Henderson had taken the view that he wanted a levy on capital in order to destroy the capitalist classes, as the Bolsheviks in Russia are rapidly doing, there would have been nothing more to be said. The Bolshevik has no use for argument ; his controversial weapon is a bayonet or a machine-gun. But Mr. Henderson does not take the Bolshevik view—at any rate in this correspondence. Instead he argues that a levy on capital is a sound economic device for encouraging thrift and securing equality of taxation.
The ease submitted to him by Mr. Bell was this. Two persons, A and B, have each enjoyed for a period of twenty years an average income of £1,000 a year. A, unmarried and with no encumbrances, has had a good time and spent the whole of his income on himself ; B, married and prudent, has saved half his income year by year for the sake of the future of his family. After twenty years A has nothing in hand, while B has a capital sum of £10,000. Obviously in this case a levy on capital would penalize the saver and exempt the spender. Mr. Henderson's answer is, in the first place, to point out that under the operation of the Income Tax the thrifty man is already taxed more heavily than the thriftless, because he has to pay Income Tax on the income derived from his investments as well as on his earned income, and probably the two together will make the rate as well as the amount of his tax higher. Mr. Henderson then goes on to any :-
" What the Labour Party proposes is to reduce this penalty on thrift. The capital levy will enable the Income Tax to be reduced probably to its pre war rate, so that B, whilst paying his tiny quote to the capital levy, will be spared the considerable annual payment he now has to make as Income Tax on his 1:10,000 of investauent. The thrifty B will under the Labour Party's proposals be left in enjoyment of a larger net income than he now ham" It would be interesting to know whether Mr. Henderson before indicting this letter consulted Mr. Sidney Webb, who may be described as the brain of the Labour Party. The argument will not bear serious criticism. As Mr. Bell pointedly asks in his reply, how can a " tiny " levy- on capital yield sufficient revenue to render possible the heavy reduction in Income Tax which Mr. Henderson contem- plates ? Beyond this financial absurdity, there is complete neglect of the fact that if the Income Tax is reduced the spender A will benefit just as much as the saver B. That, as pointed out above, is the crux of the matter. The men who have saved are to have their capital taken from them in order to lower the Income Tax not for themselves alone but also for the men who have not saved. Put in terms of contributions to War Loans, it means that those members of the community who have stinted themselves during the war in response to the appeals of various Chan- cellors of the Exchequer, including Mr. Boner Law, and have lent their money to their country to finance the war, are to see a part of their savings confiscated, while those people who have lent nothing will be subject to no corre- sponding imposition. There is no escape from this con- clusion by arguing, as a few well-to-do capitalists have themselves argued, that it is better to pay off part of the Debt with a lump contribution than to contemplate a continued high Income Tax. That argument would be sound enough if all members of the community were in the position of well-to-do bachelors with no belongings to whom to leave their money. But the average man who has accumulated money wishes to leave it to wife or child or other relative, and it is obviously better for him to pay a high Income Tax for the term of his natural life than to have his capital cut down.
In addition, there is the large body of people, professional men of various kinds, well-to-do artisans, Government employees, who earn comfortable annual incomes, but require no capital for the development of their business, and who in some cases at any rate are entitled to pensions when they cease to work. No reason whatever has been given why these people should escape their share of responsi- bility for the Debt which their country has incurred. Yet no part of a levy made on capital to wipe out the National Debt would come out of their pockets, while it would relieve them of part of their burden. Some advocates of
the levy on capital are indeed so conscious of this gross injustice that they have made the extraordinary proposition that professional men should be liable to a capital levy charged upon an assessment of their supposed personal value. How this assessment is to be worked out has never been explained. What is the present capital value of a barrister in good practice, who may die a year hence ; or of a munitioner earning ten pounds a week, who may be out of work at the end of a month I The only fair way of taxing such men is to tax them 011 their incomes, and that is equally the fairest way of taxing men whose incomes are earned with the aid of capital.
It may now be asked how it is that so unjust and also so unworkable a scheme as this proposed levy on capital should have received the amount of support which it has done. The answer appears to be that a good many people are mentally unable to look beneath the surface of obvious facts. Such people observe that an appreciable fraction of the community is living in comfort upon inherited or accumulated wealth, and it occurs to them that it would be a convenient way of wiping off Debt to seize part of the capital of these comfortable persons. They never reflect on the ulterior consequences. No capital levy which was confined to the claas indicated would yield any appreciable sum, and directly an attempt was made to extend the levy so as to secure a substantial amount of money, the accumulation of capital on which the industrial progress of the community depends would promptly cease. We get back in fact to the old but ever-true legend of killing the goose that lays the golden eggs. Mr. Hender- son's levy on capital, instead of encouraging thrift, as he contends, would destroy it. Moreover, it would not secure what he declares to be his object—namely, taxation according to ability to pay. It is true that this object would be secured so far as the limited comfortable class is concerned ; but in addition to that class of capital- owners there is an enormous class of persona whose power to earn an income depends upon the use of capital, and if their capital is taxed their income disappears. One good point is indeed made by Mr. Henderson—namely, that no single tax can ever be fair to everybody. This, of course, is not a new point. The answer to it is that the Income Tax, which must always remain the basis of our revenue and is the best of all taxes, if applied to all classes ought to be supplemented by other taxes, and particularly by those which will forward the economic policy most beneficial to the country. At this moment our most urgent economio need is to check expenditure and to encourage saving. Therefore our peace Budgets ought to be framed with the purpose of lightening the present load of taxation on capital and placing additional taxation upon expenditure. As for wiping out our Debt, no patent devices of any kind for effecting that end can be invented. It can only be secured by universal hard work and universal economy.
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