By SIR JOSIAH STAMP.

Tr HE actual 'ultimate effects of a levy must vary according to the political circumstances by which it is attended, for such circumstances may be classified gong a line between two extremes, from the most favourable to the least favourable. On the other hand, the immediate effects of a levy, the administration of which is carried through with the maximum success attainable in the circumstances, are much less dependent on differences in those conditions ; and the first-hand effects will be much the same whether the circumstances of the levy governing the future are at one extreme or the other along that line.

Considerations relating to the Capital Levy may be classed under four heads : Political, Statistical, Economic and Administrative. There are very few people who are qualified to speak with authority under all four. Political considerations, such as justice in principle, expediency in practice, guarantees of non-repetition and intentions regarding future taxation, arc everybody's property, though, indeed, many a political intention may be defensible in theory if it can be carried out in practice, but becomes quite indefensible in view of practical difficulties. Statistical considerations, such as the amount of wealth to be taxed, the different classes of wealth, the number of people affected, the effect upon taxation and wealth subsequently, are of great importance in limiting and defining the consequences, but most of them require detailed reasoning of an expert kind, and are not well suited for public judgment. Economic aspects, of course, raise some of the most difficult and abstruse questions that economists can handle. Nowadays, while • nobody would think of setting up to be an engineer or a lawyer or a doctor or a chemist without long and arduous training, anyone can call himself an economist, and may, indeed, get some reputation as such without having any kind of mental aptitude or special experience. The platforms of the moment are crowded with politicians who have become economists on easy terms and without years of conscientious preparation. The economist cannot begin his work upon the subject of the Capital Levy until he is told by the politician in detail what is really intended, and can judge whether the " economic man " will ultimately regulate his actions as if convinced by that intention. The economist also must keep in touch with the administrative expert, who is acquainted with the technique of taxation and can tell him, within a little, what is possible and what measures will have to he taken to overcome particular difficulties.

If my remarks appear somewhat pontifical it is not because I care for speaking without qualification, but because space suffices only for conclusions and not for a detailed statement of the line of reasoning from which they flow. It is quite impossible to discuss economic effects profitably without carefully laying down the political postulates, • and great confusion has been caused because a careful line of economic reasoning, the political assumptions of which have been ill-defined or suppressed, has been transferred to proposals which arc politically different. Economic reasoning is organic with its ante- cedent data, not an interchangeable tail that can be fitted on to any body. From the point of view of ultimate effects of a levy the chief vital political postu- lates arc :- I. Whether non-repetition is : (a) guaranteed in a manner to carry general conviction; (b) politically promised, without carrying convie- - tion ; (c) not promised; or (d) expressly repudiated.

II. Whether the relief given by the levy is to be applied : (e) in full, to reduce'the future taxes of the payer of the levy ; in part to reduce the future taxes of the payer of the levy, and in part to other or social expenditure ; wholly to other expenditure ; wholly to other expenditure, where higher taxes are also intended.

(II. (e) will be found, in the writings upon the levy, divided into two classes : those which suggest an equi- valent relief to taxpayers as a whole, and those which contemplate a more or less • exact equivalence to individuals.) It is obvious that, in a combination of I. (a) and II. (e), where the non-repetition of the levy has been fully guaranteed, and those who pay it are to reap the advan- tage in a reduction of their subsequent annual taxes,' the satisfactory economic consequences of a levy would be at their maximum possible point. It is equally clear that where the right to repeat the levy is expressly left open, and where there is to be no relief to the future taxation of those who have paid it, the consequences are at the point of minimum advantage. In between these two points there is a considerable range of possi- bility.

For the purpose of setting out my conclusions, I adopt those features which appear to me to be, in the circumstances, most probable, and assume that some kind of promise of non-repetition will be made, without, at the same time, the invention of any new form of constitutional guarantee which will carry the degree of conviction we attach, for example, to the promised terms of repayment of War Loans. One could spend time in exploring constitutional possibilities, e.g., every levy receipt might, on the face of it, contain a Govern- ment undertaking that the " corpus of wealth " brought under the tax represented by the receipt is franked for a minimum period of twenty-five years from any tax of a similar kind. What such an expedient would be worth must depend upon individual psychology. Strong advocates of the levy have admitted that no " guarantee " actually binding on future electors or Ministers can, in fact, be given. Indeed, any assumption that the levy can be carried through with some rough measure of success is one presumption in favour of possible repetition.

Redemption of £3,000 million of the National Debt would relieve the annual- expenditure of an amount of interest between 140 and 150 millions per annum, but the sum taken as levy must have certain important effects upon future revenue, and the real average net relief on balance could not be more than £30 million. To 'what would this be applied ? Assurances that the whole £3,000 millions of levy will be used for redemption of debt must be carefully distinguished from undertakings to reduce taxation (instead of keeping taxes up and spending more on social purposes). The maximum assumption that it is safe to make is that the normal rate of Income Tax will be reduced from 4s. 6d. to 3s. 6d. in the £.

The main ultimate economic problem is : What difference will there be in the incentive to accumulate new savings in the future with Income Tax at 4s. 6d. on the one hand, and no fear of a levy, compared, on the other hand; with Incoine Tax at 3s. 6d. and an apprehension of a second leVy at a moderate distance of time (the degree of apprehension varying with individuals, but being appreciable on the average and represented by a definite mathematical risk) ? Under vhich outlook will the aggregate savings of the British people be greater ? To get any approach to an answer the. present aggregate savings have to be resolved into their several constituents or categories, the behaviour of each class considered, and the results aggregated.

The problem is partly one of statistics and partly one of psychological economics. Economists know that a change in the rate of net reward (or interest) for saving increases some kinds of saving and decreases others. Under the levy scheme the reduced Income Tax should give a greater power to saving or scope for saving. Is the will and incentive to save going to be less or more ? The first broad classification is :- (1) Individual. savings against being worse off.

(2) Individual savings in order to be better off.

(3) Collective saving, not subjected to the individual decision.

The chief example of the third class arc the reserves of limited companies, where the effect of the fear of a repetition of a levy is negligible. Whether more or less is put to reserve instead of being paid to share- holders, i.e., whether the money is " saved " or " spent," is determined somewhat impersonally by a board of directors and not by a balance of individual replies to the personal question : Is the reward for saving good enough or shall I spend ?

Such collective savings might be increased by the full scope allowed by the reduced tax, say by one-fifteenth, but probably the maximum figure would be seven millions per annum. Certain other small sections of savings might show increases, being little deterred by the fear of a second levy, but other classes would receive a most important check. On balance in the aggregate I have come to the conclusion that to go on as we are with our present tax and no fear of a levy would result in a fairly substantial balance of aggregate savings in excess of the accumulation that would take place with a shilling less on the Income Tax and the " shadow of a new levy." Partisan opponents of the levy—those who feel their objections to the levy first, and collect their reasons afterwards—as distinct from scientific opponents--who try not to let the wish be father to the thought and whose conclusions follow from their reasoning--con- sider that I greatly understate the " case against the levy." What modifications of this unsensational con- clusion would flow from a change in the postulates ? A reduction of the Income Tax relief from ls. to 6d. would not have any important effect. But a change in the degree of " risk " measured, let us say, by the ratio that a 20 per cent. risk at Lloyd's bears to a 10 per cent. risk, would be much more than proportionate —indeed, exceedingly marked—in its effect upon savings, and the " fairly substantial " difference referred to above becomes a really dangerous one. Much, therefore, must depend upon the future of political ideas as to the ultimate effect upon savings. This, in turn, must affect employment and general industrial expansion, and if the accumulation of savings for embodiment in fixed capital assets, factories, etc., does not keep step with increasing population, the average net yield to human effort in this country must diminish. The risk of a second levy is an economic dynamic of the first importance.

The proposed levy is so progressive in its rates as to modify profoundly the present distribution of wealth. Such a modification transfers a responsibility to those whose position is relatively improved, to keep the volume of annual savings adequate to our needs. Whether we like it or not, a large part of the onus of that saving, which, while its most obvious effect is the enrichment of the smaller section making the saving, has also important beneficial reactions to the community, has been upon the wealthy. It would doubtless be wholly good if the general advantage of the total saving could be more widely enjoyad. But unfortunately there is no sign that those who benefit by redistribution will actually perform this function to the same extent. Out of £100,000 in the hands of one individual £50,000 may well be put into permanent forms, but if that sum is divided amongst 50,000 people, it is very unlikely on present indications that more than 5s. per head out of the £2 each, or £12,500, will be saved. Better apparent redistribution of spendable wealth may bring about less aggregate future production. The majority of people are deceived into thinking rather of 10 per cent. of a stationary 100 than 9 per cent, of a progressive 110, 120, etc.

To consider the immediate economic effects of a levy, I assume that there is no disastrous slip by the Treasury in handling the vast marketing of securities and in steadily equating the supply of securities (which the Government would have received) with the demand (from individuals with funds released by redemption of War Loan). I make the big assumption that the financial market stands the psychological shock, and is determined not to be " rattled." The chief effects would be, in my judgment :- (1) A considerable shortage of fixed-yield secured stocks, tending to increase their price and to lower the main rate of interest..

(2) A lowering of the price of ordinary speculative and little known stocks, making, for a time, a greater divergence in yield between this class and the preferred kinds.

(3) A sharp contraction in many kinds of manufactur- ing businesses, and a fall, in prices, with a check to employment.

(4) Much shifting of the basis of credit, resulting on balance in a considerable measure of natural credit deflation, with perlu►ps less disastrous effects than an equivalent amount of ordinary deflation, operating as the latter does over the activities of companies as well as individuals.

Most of the influences at work must be depressing to business, lasting for some time, and any relief to taxation which might be forthcoming must be slow in counter- acting them.