TAXING WAGES AND WAR PROFITS. THE most important problem that
Mr. McKenna now _L has to solve is the possibility of raising revenue both from the general body of wage-earners and from those employers who are making special profits out of war work. The two questions are not entirely on the same plane, for it is desirable that a tax on wages, even if instituted primarily for the purposes of the war, should remain a permanent institution, whereas a tax on war profits by the nature of the case ceases with the arrival of peace. There is a further distinction. A tax on wages is required permanently both for the sake of revenue and for the sake of its political value as a means of bringing home to the wage-earner his responsibilities as a citizen, whereas a tax on war profits is only required as a temporary and not a very important source of revenue, and is principally required at the moment as a means of reconciling the Trade Unions to the suspension of their restrictive rules. From this point of view it is questionable whether it would not be better to impound war profits entirely rather than to tax them.
An idea which has been much discussed lately is a proposal to put a tax of ten shillings in the pound on all excess profits, including excess income of every kind, in the current year, as compared with incomes made in the average of the last three years. Doubtless some cases of hardship would arise with so heavy a tax in addition to the ordinary Income Tax, for there may be persons who in the previous three years, owing to the ordinary fluctuations of busi- ness, did extremely badly and in the current year are merely picking up their average. Therefore to take half of their excess would be a real hardship. On the-other hand, only to take half of the war profits would not satisfy Trade Union feeling in the case of firms who are engaged in producing munitions of war, for the wage-earner would still then be able to argue quite fairly that park of his extra work was going to swell the profit of his employer, and that he could not reasonably be expected to suspend what he regards as a necessary safeguard of his position in order to put his employer in a better situation than previously. In view of these considerations, it may be suggested that, instead of a flat ten-shilling special tax on this year's profits, a distinction should be drawn between employers engaged in making munitions of war and other individuals. Purely for revenue purposes, a tax of five shillings in the pound should be imposed on all incomes drawn this year in excess of the previous three years' average. In addition, and as a separate proposition, firms engaged in making munitions of war or doing other work for the Government should be brought under complete financial control, and compelled to surrender the whole of their excess profits to the Government, subject to the retention of a bonus to be shared between employer and workpeople. It may be argued that this proposal would leave untouched one of the greatest practical difficulties of the present situation—namely, the danger, indeed the certainty, that firms which are not employed on war work would be at an advantage as compared with those which are. This is true, but the difficulty is insuperable. For even if we were to confiscate the whole of the profits made by these non-war-work firms, they would still be in an advantageous position, because in any case they will be able to improve their business connexion at the expense of firms engaged in war work. Indeed, the difficulty goes deeper, for there are some kinds of war work which can be combined with subsequent peace work, whereas there are other kinds of war work, such as the making of shells, which must come to an end when the war is over. The truth is that we cannot attain absolute equality of sacrifice either in industrial or in military operations. All we can do is to aim at correcting as far as possible the obvious injustices as between individuals, while concentrating attention mainly upon the supreme necessities of the State. Turning now to the question of a wages tax, we reach a comparatively simple set of problems. Broadly speaking, all the wage-earners in the kingdom come into- two categories—those earning less than £160 a year who are subject to the National Insurance Act, and whose wages are consequently already docked each week by their employers for the purposes of that Act ; and persons earning more than £160 a year, in whose case the employer is compelled to make a return of the wages earned to the Inland Revenue authorities for Income Tax purposes. These two classes are both within reach of our existing financial machinery. As regards the former class, all that is needed is a very small amount of moral courage on the part of the Cabinet. Our definite suggestion is that a universal wages tax of twopence in the pound, in addition to all existing taxes, should be imposed upon all persons receiving wages or salaries, and should be levied even on persons earning only ten shillings a week. A tax of one penny a week is not an excessive contribution to the cost of the war to exact from any one. No doubt the cost of living has increased in the course of the last year ; but it is still much lower than it was a. generation ago, and the poorest wage-earners can and do find money for amusement and other personal indulgences. To tell the working man that he cannot afford even twopence in the pound for his country's needs is nothing but an insult. As regards insured persons, the proposed tax would be levied through the employer, who would be required to keep a wages-tax card as well as an insurance card, and to affix the stamps week by week. There is no practical or administrative difficulty in this case. As regards persons earning more than £160 a year, the tax could either be levied through the employer or through the ordinary Income Tax machinery as an addition to the Income Tax. The question is one of administrative convenience, and probably both systems could be employed. Some firms would find it convenient to deduct the tax from the salaries they pay, others to return to the Inland Revenue authorities a note that the tax had not been paid. In either case, the amount paid in wages tax ought to be deducted from the income upon which Income Tax is payable. A tax upon a tax is clearly unfair. This, by the way, is a consideration which applies to the Super Tax, and while dealing with other problems of taxation Mr. McKenna would be well advised to remove what is undoubtedly an injustice in the method of levying the Super Tax. At present the tax is levied, not on the net income which the owner receives after Income Tax has been deducted from his dividends by the bankers, but on the gross income which he would have received if the Income Tax had not been levied. He is consequently compelled to add mentally to the sum which he receives the sum which has been deducted, and then to return the total for Super Tax. The absurdity of this practice was pointed out by Mr. Gibson Bowles at the time the Super Tax was invented. As Mr. Bowles well said, supposing the Socialist ideal were carried out, and all unearned incomes were taxed at twenty shillings in the pound, the result would be that a man receiving no income at all might be called upon to pay a heavy Super Tax. This is a point which should be dealt with in any revision of the Super Tax scales or in any general reform of the Income Tax.
That the time has come for such general reform on administrative grounds most people will agree. The tax is growing much too complicated, and the multiplication of exemptions in the last few years has led to an enormous- increase of clerical work at Somerset House. At the same time, the Government have never yet had the courage to carry out the ideal of compelling a return from every indi- vidual in the kingdom. Yet practically there are few people who do not have to make such a return either for the purposes of Super Tax, or in order to secure one or other of the numerous exemptions now operative. It would be far better to face the whole problem boldly, to compel a return from every individual, and then to grade the tax scientifically. It may be argued that the present is hardly the time for considering these administrative reforms. On the contrary, economy in administrative work is even more important in time of war than in time of peace. One of the most regrettable results of the recent multiplication of officials in nearly every Department of the public services is the fact that so many young men have been kept at home who would be willing to volunteer for service in the field. Many of the Departmental chiefs have, to their credit, made arrange- ments for sparing a considerable number of young men, but they are prevented from sparing more because of the hideous complications of our administrative system. One of the most important elements in any system of taxation is to make the system work with as little administrative complication as possible. But the enthusiastic reformer must always remember that no perfect system can be evolved. Human nature is much too complicated for any simple system.
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