The Income Tax, from Economic and Fiscal Facts and Fallacies By Sir Guilford Lindsey Molesworth 1909
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The income-tax is a burden for which there is absolutely no necessity—it is one that should never be used as a part of the permanent revenue of a country, but should be held in reserve against any great national emergency. It is essentially a war tax, to be abolished as soon as the emergency may have passed away. It is the height of folly to draw upon our reserves in time of peace, leaving no reserve upon which we can draw in any national emergency. It is the resource of an incompetent or unscrupulous Minister for raising revenue, and it encourages political extravagance. It is of all taxes the most unjust, unequal, and mischievous. In its direct action it falls with undue severity on some classes, and with unreasonable lightness on others. In its indirect action it is detrimental to national wealth, it tends to drive away capital, and has a pernicious effect upon our industries. It taxes the employers of labour, and indirectly bears heavily on our working classes in reduction of wages and short employment. It ought to be abolished, or, at all events, reduced to reasonable limits. Financially, there should be no difficulty in doing this by the substitution of indirect for direct taxation. The taxation of articles of luxury generally consumed would bring in a large revenue and scarcely be felt, and in that case the burden of taxation would fall almost exclusively on the wealthy.
Moreover, the income-tax is opposed to the principles of political economy.
John Stuart Mill, in discussing the income-tax, says: 'This tax, while apparently the most just of all modes of raising a revenue, is in effect more unjust than many others which are prima facie more objectionable,' and he added, 'this consideration would lead us to concur in the opinion which, until of late, has usually prevailed, that direct taxes on income should be reserved as an extraordinary resource for great national emergencies, in which the necessity of a large additional revenue overrules all objections.' He also pointed out that the real effect of a tax on profits is to diminish the capital and production of a nation, and he added, 'A tax on profits is thus, in a state of capital and accumulation like that in England, extremely detrimental to the national wealth.' Now the income-tax is essentially a tax on capital and profit.
Herbert Spencer has pointed out that:
Amongst the costs of production have to be reckoned taxes general and local; if, as in our large towns, local rates now amount to one-third of the rental or more; if the employer has to pay this, not only on his private dwelling but on his business premises, factories, warehouses, or the like, it results that the interest on his capital must be diminished by that amount, or the amount must be taken from the wages fund, or partly one and partly the other. ... If capital, not getting adequate interest, flows elsewhere and leaves labour unemployed, then it is manifest that the choice for the artizan under such conditions, lies between diminished amount of work or diminished rate of payment for it.
Lecky has also pointed out that, 'Graduated taxation, if it be excessive or frequently raised, is inevitably largely drawn from capital; it discourages its accumulation, it produces an insecurity which is fatal to its stability, and it is certain to drive great masses of it to other lands.' He also says, 'No truth in political economy is more certain than that a heavy taxation of capital, which starves industry and employment, will fall most heavily on the poor.'
Turgot, the eminent Finance Minister of France, has defined taxation as 'the art of plucking the goose without making it cry out.' The direct burden of the income-tax falls on the shoulders of a patient, law-abiding class that does not cry out under the process of plucking; but the tax is inefficient, because it fails to fulfil its intended object of helping the working classes, while indirectly, it bears more heavily upon them than on any other class. The artisan goose is not only plucked, but is having its skin taken off. Goose as it is, it feels sore, but does not realise the cause of its excoriation, and is apt to turn in blind fury on its suffering fellow goose, the overtaxed employer of labour, who, in consequence of its plucking, is unable to afford higher wages, or more employment. The artisan fails to recognise the fact that the interests of capital and labour are inseparable, and that it is to his advantage that there should be as many employers as possible to compete for his labour. There is much truth in the old saying that when employment runs after labour prices rise, but when labour runs after employment prices fall.
Macleod, in his 'Economics,' asked the question, 'If a man has not wealth himself, but only his labour to sell, what is most to his advantage? Why, of course, that there should be as many rich men as possible to compete for his labour. Nothing can be more fatal than the cry against capital, so often and so unthinkingly uttered.'
It is a prevalent fallacy to suppose that the income-tax bears only on the rich, for, taking income in the ordinary sense in which it is used, namely, employment under Schedules D and E, the report of the Inland Revenue Commissioners shows that, for one person whose income exceeds £700 a year, there are thirty whose incomes are under that amount, so that in this portion of the income-tax the burden falls chiefly on people who are struggling hard to keep their heads above water, weighed down as they are already by intolerable Imperial and Local taxation, and by the misappropriation of funds by municipal and other public bodies. But, besides these, the greatest portion of the income-tax falls on the employers of labour, and consequently, in an indirect manner, on the working classes and the poor. For example, under Schedule D, 'railways, canals, mines, gasworks, ironworks, and other industries' are assessed on a gross income of about £78,000,000, tending to increase the cost of transport and production; 'private industries, business, and trade' at about £200,000,000; 'land' at more than £50,000,000, tending to increase the ruin of agriculture, and to drive the agricultural labourers to swell the ranks of the unemployed; 'houses and buildings' at nearly £200,000,000, tending to raise rents which are already far too high, and which press very heavily upon the working men and the poor. Thus we have altogether between 75 and 80 per cent, of the total income-tax falling upon those items which are injurious to the working man.
Sir Stafford Northcote has shown that the income-tax is mischievous in inducing political laxity and extravagance, and he said: 'If we maintain the income-tax as a permanent tax, we are tempted to spend whatever it is pleasant to spend, and to take off whatever it is pleasant to take off.' He added that, by substituting the income-tax for indirect taxation, 'You have, in the past, been tolerably free in admitting new items of expenditure and very liberal in striking off taxes, but the consequence has been that a large number of sources of revenue have been brought down to a dangerously low ebb.'
The income-tax was introduced into England in 1799 by Pitt as a temporary war tax, but was repealed in 1816 by a vote which defeated the Government. Alison, commenting on this matter, said:
A greater error in finance was never committed than the introduction of the income-tax without any graduation but that arising from the amount of revenue to correct its manifold inequalities. In appearance the most equal, such a tax is in reality the most unequal of burdens, because it assesses, at the same rate, many classes whose resources are widely different. The landed proprietor, whose estate is worth 30 years' purchase of the rental at which it is assessed —the fundholder whose stock is worth 20 or 25 of the same annual rate—the merchant whose profits one year may be swallowed up by the losses of the next—the professional man whose present income is not worth five years' purchase—the young annuitant whose chance of life is as 20, and the aged spinster in whom it is not worth two, all are assessed at the same annual rate.
The tax, in consequence, falls with excessive and undue severity on one class, and with unreasonable lightness on others.
A graduated income-tax, 'voted by the many and falling on the few,' was condemned by the Supreme Court of the United States as contrary to the constitution of that country, and a violation of the liberty of the subject.
The American Economist remarks:
Federal taxation from the foundation of our Government except in time of war, or national emergency, has almost exclusively been applied to commodities and materials. It has been the policy of our national Government not to govern individuals, so far as taxation is concerned, but to leave to the various States of the Union the relation between individuals and taxing power. . . . Internal taxation is almost exclusively applied to commodities. There is a tax on spirits and tobacco from which the largest portion of internal revenue is received. The Customs tariff applies to foreign commodities and materials only. Any departure from this policy is foreign to the traditions and the policy of the United States Government. Hence our opposition to an income-tax. A tax on inheritance we believe to be impossible, because it would conflict with the rights and revenues of the various States of the Union.
In the United States no private property can be taken for public use without just compensation, and the Federal Constitution contains an invaluable provision forbidding any State to pass a law impairing the obligation of contracts.
The danger of partial or highly graduated taxation, voted by the many and falling on the few, has been in a great measure guarded against by the clauses in the Constitution providing that representatives and direct taxes shall be apportioned amongst the States according to their population. . . . The judgment of the Supreme Court condemning the income-tax, in 1894, brought into clear relief the full force and meaning of these provisions.
The position of the House of Representatives is widely different from that of our House of Commons. It is a body in which the Ministers do not sit, and which has no power of making or destroying a Ministry. It is confronted with a Senate, which does not rest on the democratic basis of mere numbers, but which can exercise a much more real restraining power than the House of Lords. It is restricted by a written Constitution under the protection of the Supreme Court, which makes it impossible for it to violate contracts, or to infringe any fundamental liberty of the people. In this respect it is far superior to our faulty system, which enables a temporary majority, sometimes obtained by trickery and misrepresentation, to tyrannise over the minority and to pass unconstitutional and mischievous measures.
Mr. Gladstone denounced the income-tax in unmeasured terms, as 'being on a scale far exceeding all other taxes put together, a demoralising tax, and a dangerous tax, vexatious to trade and industry.' It was introduced by him as a war tax, which he said 'could not be retained as permanent and ordinary finance of the country,' and he pledged himself to the reduction of it from 7d. to 6d. after two years, then to 3d. after two years more, and finally to abolish it altogether after the expiration of three years. When in opposition he vehemently urged the Government then in power to adhere to the pledges which he had given when in office, and he protested indignantly that 'to break an engagement of such deliberation and such solemnity would be a fresh blow to the confidence of the people in their representative institutions, and a fresh incentive to dangerous innovators.'
Senior, in his 'Political Economy,' has denounced unnecessary taxes as 'a fraud and a robbery'—and the income-tax is essentially an unnecessary tax. Sir Robert Giffen, the statistician of the Board of Trade, and a strenuous upholder of Free Trade policy, wrote in January 1902, as follows:
The question of new taxes must be faced when a large revenue is required; recourse must be had to indirect rather than direct taxation. Pound for pound that is raised, direct taxes bite more severely than indirect, which are hardly felt at all when placed on a few articles of luxury generally consumed. . . . The aim should be, I believe, to relieve the income-tax. There should be no real difficulty in providing the necessary taxes. We have only to go back to a date just before those wanton sacrifices of indirect revenue began, which have landed us in our present difficulties. That date is prior to the Gladstone Government of 1869-74, since which time many remissions of indirect taxes have been received with absolute coldness by the taxpayers. No taxpayer, that one ever heard of, recognised himself as better off by the repeal of a shilling a quarter on grain. What is necessary, in order that the country's finances may have indispensable strength, is substantially to undo the remissions of the indirect taxation which have taken place since 1874, or shortly before that date—the time of Mr. Gladstone's famous proposal to abolish income-tax.
The Times, commenting on this letter, said: 'The restoration of Is. a quarter on corn, which was wantonly flung away by Mr. Lowe's economic pedantry, would not be felt in the price of bread, and might probably be doubled without becoming perceptible.' This forecast of the Times has been justified by subsequent events. The duty of about Is. per quarter was shortly afterwards imposed, with the result that, in spite of the unscrupulous attempt of political agitators to raise the price of bread, the price of wheat fell, and it was only after this useful tax had again been wantonly flung away by Mr. Eitchie's economic pedantry that the price of wheat rose. A good source of revenue has thus been foolishly sacrificed, and the burden of taxation, which was then borne by the foreigner, has been transferred to the British taxpayer without a single corresponding advantage.
Again, the income-tax bears unfairly upon our Colonies and dependencies. It is impossible for those who have not resided abroad to realise the burden under which British subjects suffer, and from which the foreigner residing in those parts is exempt unless he has a house of business in Great Britain. After securing new markets at great cost of blood and treasure, we foolishly allow the foreigner to reap the benefit at our expense and to our detriment.
At the fourth Congress of the Chambers of Commerce of the Empire, the following resolution was passed:
That it is inequitable that income-tax should be paid on profits made in any British Colony or possession, upon which income-tax has been paid in such colony or possession. It is equally inequitable that income-tax should be paid in any British Colony or possession, on profits made in the United Kingdom.
In November 1902, a bitter cry against the double income-tax arose in India, in the shape of a petition to Lord Curzon, from the whole of the mercantile and trading community in Calcutta, protesting against the injustice of a double income-tax being levied, and pointing out the injury it had done 'in discouraging capitalists from investing in India, and checking the supply to India of British capital which is so much needed for the development of the country.'
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