THE SINEWS OF WAR. T HERE is nothing truer in the
realm of political science than the often-made statement that money provides. the sinews of war, and that therefore a financial system which can easily and quickly raise large sums of money is a most important part of a comprehensive scheme of national defence. In preparing for war we must think not only of ships and armies, but of the power of obtaining money quickly and without too great a, sacrifice. There are many ways of preparing a national money reserve for war, but undoubtedly the best and the most effective are, first, an ample Sinking Fund in peacetime, and next, a direct tax, like the Income-tax, which in time of war can be increased and made to yield a large extra sum of money without the necessity of creating any fresh machinery, or of raising new and difficult financial problems at a moment when the attention of Parliament, the Government, and the country is taken up with the absorbing problems of attack and defence. Let us examine these two forms of financial reserve in order. The immense advantage of an ample Sinking Fund is easily perceived. If during peace a nation is regularly paying off, say, six millions of its Debt every year, it is in effect, though not in name, creating a fund which can be used for war without increasing the burden on the taxpayer at a time when, owing to the dis- location and depression of business caused by war, he is least able to stand new burdens. If the State, with an annual Sinking Fund of six millions, is able to borrow at 3 per cent., it can raise two hundred millions without recourse to fresh taxation by the simple process of devoting six millions to paying the interest on the new loan instead of paying off old Debt. The advantages of such a, position are clear enough; but it may further be pointed out that the. ability to raise the loan on easy terms has been, as it were, prepared for by the annual purchases of the Sinking Fund. The gradual shrinkage of the indebtedness of the nation owing to the operation of the Sinking Fund has tended to keep up the price of the national stock,—that is, to keep the rate at which the nation borrows at a low figure. Stocks, given the demand for them is constant, rise or fall in price, like other commodities, according to whether there is less or more of the commodity in the market. This is, of course, only another way of saying that interest, or the annual sum required to hire money, tends to fall as the stock of a National Debt is paid off. From this point of view, the Sinking Fund ads, as we have just said, as a, preparation for borrowing cheaply when necessity arises. On the other hand, if no Debt is paid off annually, but instead there is a gradual increinent of national• indebtedness, the rate at which money can be borrowed is always tending to rise. An example of this may be seen by comparing the cases of Britain and Germany. The German Imperial Government does not pay off Debt, but adds to its Debt, and therefore borrows on comparatively unfavourable terms ; whereas the British Government, owing to the Sinking Fund, can borrow with comparative ease, even though the conditions of trade, and the conditions created by the borrowings of local authorities and by the operations of the Government itself for such purposes as Irish land purchase, are tending to create an unfavourable situation in the money. market. In other words, a Sinking Fund is the chief buttress of national credit, and national credit is a great war asset.
The possession of a tax like the Income-tax is another form of national financial reserve for war. A Chancellor of the Exchequer who can, by the simple expedient of putting an extra penny on the Income-tax, raise two millions a, year without incurring any extra expense for revenue collection is in a position of great strength. He has only got to add 6d. to the Income-tax to get twelve millions a, year. But it is an essential condition, if the Income-tax is to act as a war reserve, that it shall be kept low in time of peace. A direct tax, or, indeed, any tax, is very like a well or a spring of water. To get the full advantage of the spring you must not over-burden its capacity. You may exhaust a well by over-pumping exactly as you may exhaust a horse by over-driving. To be sure that your well will give you what you require in a sudden emergency, you must in ordinary times take care not to draw from it the maximum number of gallons which it is capable of yielding. To put the matter in a practical form, an Income-tax of 2s. in the pound in peacetime would be of very little use to a Chancellor of the Exchequer in wartime, because he would have already reached the point where extra pumping would tend to overtax the capacity of the well. In order, then, that a Chancellor of the Exchequer should get the full benefit of an Inceme-tax as a war reserve, it ought to be comparatively low in years of peace, and by "compara- tively low" we mean something well under a shilling. Experience, indeed, seems to show that 8d. would be the ideal limit for a peace Income-tax. When the Income-tax is at that figure it can be doubled without any very great difficulty, and the doubling would then yield an extra sixteen millions a year, and there would still be a good margin available in case of supreme necessity. The country would not be ruined if during a couple of years of crisis the 8d. Income-tax were actually trebled. A strong practical reason in favour of keeping the Income-tax low in peacetime is the fact that people do not use their ingenuity to evade a low Income-tax in the way in which they use it to evade a high one. If the Income-tax were at this moment reduced to 8d., we have little doubt that in a very short time the yield would be considerably more than what it should be mathematically,—that is, two- thirds of the existing yield. A low tax on a commodity often brings in as much as a high tax, because the high tax teaches people to be sparing and jealous in their use of the commodity. So a high Income-tax makes men either very careful in their returns, or else not very scrupulous in concealing income which they imagine they can conceal with safety. But people in whom a low Income-tax has inculcated, a habit of being either careless or scrupulous, or both, in returns do not lose this habit in a moment. Therefore in the first year or so after there is a sudden rise in the rate of Income-tax the yield can be calculated on the low rate of payment. No doubt if the high rate is permanently maintained, people after a year or two begin to find ways of dodging the tax, and, human nature being as it is, feel justified in dodging it on the ground that they are not being treated fairly by the State. To take a concrete example of what we mean. If the Income-tax were doubled next year, the yield at first would be some- thing nearly double what it is now, because people would not have had time to take means to protect them- selves, as they wonld say, from the rapacity of the tax- collector. If, however, the double tax were to become permanent, they would begin to adjust themselves to their environment, and, unless we are greatly mistaken, would ultimately manage to withdraw what in the aggregate . _ would amount to very many millions from the field of direct taxation.
In the circumstances which we have just set forth, we feel no small sympathy with the effort which was made on Wednesday night by Mr. S. Roberts, the Member for the Eccleshall division of Sheffield, to substitute an 11d, for a is. Income-tax. Mr. Roberts quoted from the first Budget speech of the present Prime Minister some words which are worth putting on record :— "With regard to Income-tax, I do not hesitate to associate myself with the declaration of more than one of my predecessors that an Income-tax of a uniform rate of is. in the pound in a time of peace is impossible to justify and difficult to defend. It is a burden on the trade of the country which in the long run affects not only profits, but wages, and from the point of view of the nation it is open to the same objection as the continuance at an abnormal figure of the floating Debt—namely, that it tends to destroy, or at any rate to contract, the most readily available reserve on which the State can rely in a sudden or unforeseen emergency."
Mr. Roberts went on to point out very clearly what a great source of national strength we possess in a large Sinking Fund and a comparatively low Income-tax. Unfortunately, however, these are benefits which, unless the House of Lords will relieve us from the threatened catastrophe of the Old-Age Pensions Bill, are bound to come to an end with the year 1908. The need for raising some ten or twelve millions a year permanently for old-age pensions will not only destroy our reserve for national defence in the shape of the Sinking Fund, but will make it impossible for us ever to return to a moderate Income-tax. We shall be obliged to increase our present high rate of is. to is. 4d. or le. 6d. It is all very well for the Chancellor of the Exchequer to talk about robbing hen-roosts, and so forth ; but, as a matter of fact, unless he is prepared to have recourse to a general tariff, he will find that the only way to get the money he needs will be by very largely increasing the Income-tax. We shall be told, no doubt, that if he does have recourse to the Income-tax, it will not be by raising the tax on normal incomes, but by a System of graduation which will make the rich and the very rich pay at a high rate, while their poorer brethren have to endure only the present burden. If that is the idea in the mind of the Chancellor of the Exchequer, all we can say is that he is preparing for himself a great dis- appointment. No doubt the graduation of the Income-tax is quite possible. A graduated Income-tax will not, how- ever, raise the money which financial enthusiasts like Mr. Chiozza Money imagine it will. A stiff, graduated, inquisitorial Income-tax might conceivably bring another million, or possibly two millions, into the Treasury. In doing so, however, it will cause a sense of irritation and resistance, which, to begin with, will help to bring about the ruin of the present -Government, and later will cause the abrogation of a tax which will be unjust and unpopular as well as unremunerative.
As to the result upon the Free-trade controversy of such an alteration in the Income-tax as we are con- templating, we need not enter upon it now, for it is obvious that it is of little use to appeal to the present Government in the interests of Free-trade. By burdening the country with ten or twelve millions of extra expenditure under the Old-Age Pensions Bill they have already shown themselves worse enemies of Free-trade than even the zealots of the Tariff Reform League. These latter talk against Free-trade. It has been reserved for a so-called Free-trade Government to forge the weapon which will be used for the destruction of the cause they profess to serve. Our present purpose, however, is not to discuss the question of Free-trade, but merely to point out the danger which we shall run by the abolition or great reduction of the Sinking Fund, coupled with an increase of the Income-tax. At one blow our two financial reserves for war will have fallen, and this not in a time of calm and security, but when every man instructed in foreign affairs knows that the outlook is dark and precarious.
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