5 JUNE 1920, Page 9


SIR,--At the moment of writing the decision of the Government in regard to the special taxation of wealth accumulated during the war has not been announced, although it is possible that by the time these lines are before your readers the expected statement will have been made by the Chancellor. Mr. Chamberlain stated previous to the Parliamentary recess that the result of the Cabinet examination of the question would be announced as soon as possible after the Whitsuntide holidays, and will not have failed to impress upon his colleagues the need of prompt conclusion. He is fully conscious of the necessity of ending uncertainty concerning any financial question of i the first importance, and is far more appreciative of the intimate relationship between finance and industry than might be supposed from the utterances of some of his critics. Whatever the decision may be, if it is endorsed by the Chancellor, it may be accepted that the action advised is taken solely in the national interest, and has not been influenced by any political motive. It was to be expected that opponents of financial policy as expressed in the Budget proposals would confront the Chancellor with statements made in last year's Budget speech in the matter both of the Excess Profits Duty and the particular taxation of wealth, but there is, after all, no great inconsistency between those utterances and subse- quent taxation proposals and suggestions ; and the nation as a whole will be disposed to admire his courage in advancing measures of taxation which he deems necessary and desirable, even though they may seem at first sight to run counter to previous opinions. Circumstances can modify former views, and it is proper that taxation should be so adjusted as to fall as equitably as possible on the community as a whole. In saying this I have no wish to suggest that from certain aspects the policy decided upon will not prove a handicap to trade, and by restraining enter- prise tend to retard the industrial recovery which alone can see us through our financial and-economic difficulties. But a Chancellor, confronted with the task of raising a great sum, would not be fitted to occupy his high office if he failed to take advantage of the prosperous conditions of business to secure for the Exchequer what he deemed to be its due.

Unless the profits of industry generally had been main- tained at a high level the substantial sum expected to accrue from the Excess Profits Duty could not be obtained ; but we know that the margin in favour of the trader and manufacturer has been exceptionally generous, and it would probably be difficult to prove that the addition to the duty constitutes a real hardship apart from the excep- tional cases to which the Chancellor has promised to give special consideration. The War Wealth Tax should perhaps be examined from the same standpoint, keeping in mind always that it was intended as a substitute and not as supplementary to the increase in the Excess Profiti Duty. Mr. Chamberlain has stood his ground firmly on the question of a general levy on capital. This has been advanced in a good many quarters as the only means by which the national finances can be substantially improved, but very properly the Chancellor has insisted upon the distinction between capital which was accumulated under natural conditions, and with corresponding effort and enterprise on the part of the possessor, and the wholly abnormal accretions which many have secured out of the nation's trials, and which it must be remembered are largely represented in the mountain of false money which finds expression in the floating debt.

But whatever the circumstances, and however strong the case for regarding war-acchmulated wealth from a stand- point of its own, the opposition to the principle of property valuation as the basis for taxation, even though of a special character and only once applied, is very strong. It is now a considerable time since the question of the capital levy was first definitely raised in relation to the immense size of the national liabilities. Mr. Bonar Law—during his occupancy of the Treasury, if memory serves me—brought it forward in an address to the Parliamentary Committee of the Trades Union Congress. His remarks were in a sense confidential, but their substance soon came to the know- ledge of the public. Mr. Law suggested that the question should be examined as one of expediency. He expressed the view that it was for the nation as a whole to consider whether it would prefer a levy on capital in order to effect a big reduction of the national debt to the payment of heavy taxation over a long series of years. He had in mind of course a levy on the wealth of the entire community —I hasten to make clear that he did not actually advocate the proposal—with no doubt a certain free minimum in the interest of those of quite moderate resources.

Controversy was immediately aroused and statisticians got busy on the question of the amount of capital which would be available for the purpose of the levy if ever attempted. The estimates covered a wide range, some, but not all, endeavouring to take account of the rise in values which had occurred in consequence of the world- wide disturbances produced by the war, a rise which, of course, has proceeded much further since that time. Mr. Chamberlain's idea, as you know, is far less comprehensive. With an all-embracing levy he has stated unequivocally he would have nothing to do. He recognizes that to attempt to impose a tax of such a sweeping character would not only be extremely difficult, but would produce very serious financial disorganization. The much more limited plan which has been suggested is an entirely different matter and, as you are aware, the Chancellor asked the business com- munity to regard it as an insurance against the larger proposal. A levy limited to 75,000 persons and calculated to produce something less than £500,000,000 on the lines which the War Wealth Committee believes to be practicable, while not specifically recommending it, could scarcely be regarded as a really penalizing tax taking into account that it is to be based on capital which at any rate in considerable measure would not have been in the hands of the possessors except for the calamity of the war. With the main outlines of the Inland Revenue Scheme adopted by the Committee your readers are doubtless familiar, and I do not propose to examine it in detail, but it might be worth while to take some account of the sug- gested yield in its relation to the product of the increase in the Excess Profits Duty, for which it was intended as a substitute, and likewise to consider which tax would be the more readily available. The additional receipts from the Excess Profits Duty as a result of the 20 per cent. increase made in the Budget will for the current year be slight—a matter of only £10,000,000. It is in the following and subsequent years that the advantage will be gained, assuming that the tax is retained. The increase in the year in which the 60 per cent. is fully operative has been estimated at £100,000,000, and if it be assumed that profits will continue on the present scale—a large assumption perhaps—just five years would. be required to bring in the £500,000,000 which it is believed would be yielded by the War Wealth Tax. Whether the latter impost would produce the sum more rapidly or whether the proceeds would be available for a corresponding reduction of the floating debt is of course uncertain. Everything would depend upon the policy adopted by the Treasury. As you know, the War Wealth Scheme involves two valuations with five years intervening, and this undoubtedly presents a problem of some difficulty because of the great change that has occurred in money values since 1914, the year of the first calculation. If 75,000 persons are affected by the tax, 150,000 separate valuations must be made, and although it would be necessary to impose a time limit to prevent unjustifiable delay, pretty considerable latitude would have to be allowed. Concessions would doubtless be necessary to those whose capital was not liquid or readily realizable. In many cases, probably, resources would be embarked in businesses in such form that the impost, although regarded as a capital levy, would really be furnished from income. No substantial sale of property could be hurriedly effected without causing a fresh inflation which is the very opposite to what is desired, since no contribution would be made to the solution of the problem of high prices if Treasury deflation were balanced by corresponding credit creation on the part of the banks for the purpose of facilitating transfers of property. The liability of course might be dealt with by the tax- payer handing over Government securities to the Treasury for cancellation, and this undoubtedly would be the most simple way, but many of those liable might not have them at disposal, and if the principal object of the capital levy is to secure a reduction of the floating debt, that would not be secured unless the payment were made in cash or Treasury Bills. Moreover, if the question is examined still more closely, it will be realized that while a payment in Treasury Bills would curtail the floating debt, inflation can be reduced only by the use of existing funds—bank deposits—in extinguishing Government securities in the hands of or advances made by banks or others. It is these security holdings and advances that form the basis of the artificial money—not the securities owned by the public except to the extent that they are held by means of bank-created credit. Until they are redeemed from the proceeds of revenue or a capital tax produced in liquid form, the inflation will not have been dealt with. It is necessary that that redemption should be gradual. Deflation to be attended by the beat results must not be hurried, and it is certainly an open question whether the revenue from the Excess Profits Duty or the receipts from a tax on wealth would produce in the most effective fashion the result desired.

I think it will be realized from this analysis that the problem which the Government had to solve was somewhat complex. It was necessary to give very close considera- tion to the financial aspects of the question in the administrative sense, and likewise to the general effects of a proposal which could not find general acceptance. Needless to say, the decision will be regarded as of the greatest importance by the financial and commercial