A LEVY ON CAPITAL.
AS regards the economic situation of this and of most countries after the war, there is at any rate one thing that can be predicted with some certainty—namely, that there will be a dearth of capital. During three long years already the belligerent countries have been using up capital at an unparalleled rate. There has, in the first place, been a vast amount of actual destruction of pre-existing capital. Ships have been sunk, railways and rolling-stock and stations have been destroyed by bombs, farm-buildings have been burnt, agricultural fields have been rendered barren by the operations of war. In addition, there has been an immense waste of capital caused by the diversion to war purposes of the labour usually employed in keeping machinery and other fixed capital in working condition. This applies on an enormous scale to agricultural land, which in many of the belligerent countries has been covered with weeds because there has been no labour to keep it clean. It applies also to roads and railways. There is scarcely a railway in the United Kingdom that is not suffering from deterioration in its rolling- stock and in its permanent way. In the same manner, most of the existing houses in the kingdom are suffering from want of normal repairs ; while the whole country is suffering from the lack of the normal supply of houses owing to the virtual suspension of the building industry. Finally, a good deal of capital previously used m the industries of peace has been converted to the manufacture of munitions, and cannot be reconverted without considerable expense. The broad result is that after the war practically every industry in the country will be clamouring for an increased supply of capital, and if that supply is not forthcoming there will be no adequate means of employing the vast number of men who will be coming back from the war demanding work.
In view of this outlook, it might have been imagined that every writer on economic subjects at the present tune would be devoting his whole energy to urging upon the Government and upon private individuals the duty of doing everything possible to increase the accumulation of capital, so that there may be something to draw upon when the after-war needs come. In addition, it is fairly obvious that we want to increase capital for the immediate needs of War Loans. Yet, strange to say, even in so responsible an organ as the Round Table an article appears advocating that after the war a levy on capital shall be instituted as a means of paying off the War Debt. It is certain that if the suspicion were to gain ground that such a tax was contemplated by the Government, the immediate effect would be to discourage saving, and so to diminish the accumulation of capital. For the essence of a levy on capital is that people are taxed, not according to their current income, but in proportion to their past accumulations. Consequently a man who during the war has saved every penny he -could possibly squeeze out of his daily expenditure and put it into War Loans will be subject to a special tax upon those savings ; whereas another man who has preferred to enjoy life to the full, while other people were giving their lives for their country, will have no war accumulations to be taxed when the war is over. This is the first and most obvious objection to a levy on
capital as a financial instrument, and in the present economic condition of the world it is an absolutely final objection. Gon- ceivably in an economic phase such as the country passed through some score of years ago, when there was apparently a plethora of capital and 21 per cent. Consols touched 113, a tax on capital might have been discussed as an instrument of finance. But to-day, when there is an ever-growing dearth of capital, it is difficult to understand how such a proposal can be seriously advocated.
Quite apart, however, from this primary and fundamental objection, there are the gravest possible objections on the administrative side. The great advantage of our present system of taxation is that, in the main, people are called upon to pay a tax only when they have the means wherewith to pay it. This argument holds good pre-eminently, as Adam Smith long ago pointed out, with regard to taxes on com- modities. A tax on tobacco is paid only when the consumer has the money in hand with which to pay for the tobacco he wants. In a lesser degree the same proposition holds good of the Income Tax. People are taxed upon the actual in- comes they possess, and out of those existing incomes they pay the tax. There may be a few cases of hardship with the present high scale of taxation, where the taxpayer cannot lay his hands upon the ready money and has to borrow to meet the tax, but these are exceptional. With a tax on capital, however, the exception would become the rule. The greater part of the capital which individuals own is not fluid, and if money has to be paid out of capital, the capital must be realized. But the process of realization takes time, and if hurried involves heavy loss. Doubtless up to a certain point the owner of capital is able to meet the situation by mortgaging his capital to his banker ; but that is only possible as long as there is a constant renewal of the capital in the country, so that the banker is able to obtain from some of his customers the ready cash with which he accommodates others. A universal levy on capital would throw so many people simultaneously upon their bankers seeking accom- modation, and would throw so many stocks and shares, farms and houses, upon the market, that it would be extremely difficult to find either lenders or buyers to provide the ready cash with which to pay the tax.
Moreover, this demand for capital to pay the tax would synchronize, as above urged, ',with the universal demand for capital with which to make good the losses of the war. Take as a particular case that of railways. After the war, assuming for the sake of argument that the railways remain private companies—and the position would not be economically altered if they remained under the State—every railway company will be circularizing its shareholders asking them to provide some additional capital in order to make good the wastage that has been going on during the war. Yet simultaneously, according to the proposals of the Round Table, the Chancellor of the Exchequer is to call upon these same shareholders to sell some of their shares in order to pay a new tax to him.
As far as we are able to see, the only argument in favour of a tax on capital is that it might conceivably be a financial method of equalizing matters between the man who has an income derived from his daily work and the man who has an income of the same magnitude derived from past investments. That the latter of these is effectively the richer man can hardly be questioned. But this fact has already been admitted in our fiscal system by the introduction of a discrimination between earned and unearned incomes. That discrimination is now well established, and the administrative machinery for making it is in operation. It may be that ib does not go quite far enough, but surely it is better to extend that discrimination than to introduce an entirely new type of tax, which would present the gravest difficulties for assessment and collection. To value a man's income is a comparatively simple matter ; to value his capital is a matter of much greater difficulty. It has to be undertaken for Death Duties, but that operation on the average occurs only once in thirty years. Apart from all other objections to a tax on capital, it would mean that the Valuation Department in Somerset House would have to be increased some twenty to thirty fold. From every point of view, the proposed levy on capital scents to us a profound, and a purely gratuitous, mistake. It is impossible to discover any national purpose that would be served by a levy on capital which cannot equally well be served by a tax on income or a tax on consumption. The advantage of a tax on income is that it can be adjusted with close accuracy to meet the circumstances of every individual citizen, so that each may be called upon to make approximately the same sacrifice for the needs of the State. A tax on consumption,
apazt from the advantage above referred to, that it is paid at the moment most convenient to the payer, has in the present emergency the further advantage that it tends to diminish consumption. That advantage will continue after the war. It will be the duty of-all of us after the war, as it is the duty of all Of us now, to keep down our private consumption and to add all that we can to the capital of the country. Therefore after the war, as to-day, it will be desirable to maintain very con- siderable taxes on consumption as a means of restricting expenditure and promoting economy. A tax on capital would have exactly the reverse economic effect, and to that extent would gravely injure the nation ; while it would do nothing towards equalizing the individual burdens of taxation that cannot better be done by a well-adjusted Income Tax.
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