XI Taxation and Public Expenditure

XI TAXATION AND PUBLIC EXPENDITURE IN speaking of an income of £10,000 a year, I feel guilty of practising something in the. nature of a decep-: tion ·upon the reader. Except. to the 10,270 persons who, to use the official phrase, are" in the enjoyment of" an income of £10,000 or more,- the discussion of my financial position so far -must almost of necessity -have led to a great deal of misunderstanding . The reader with £5°0 a year very naturally imagines me to have twenty times his income, £20 for everyone which he possesses, _and carries that simple propor tion through all his ideas as to what I can afford in compariso~ with himself. To those with smaller incomes still the disparity is even greater.' . It is a natural and a pardonable fact that most people are _ quite unable to conceive of any· limitations· to the enjoyment or power or freedom associated with an income stated to be £10,000 a year.

Human experience is to a large extent disillusion ment, and in this matter of income we discover at the end of a successful endeavour to secure a coveted posi tion or prize that our ideas as· to its quality or value have to be much modified. £10,000 or rather more is what I call my "taxit." It is the amount figuring against my name in the national accounts. It is added up by the statisticians and economists and duly re corded as part of the nation's income. It goes to form part of the glorious picture so skilfully painted by those TAXATION AND PUBLIC EXPENDITURE rS3 whose self-imposed mission it is to educate the poor with regard to the wealth from which they have been disinherited; but it is in no real sense 'an income. I believe my real income, my actual profit, to be, in 1914 figures, something less than £3,000. As nearly as I can calculate, I am now in the position, so far as purchasing power is concerned, that I should have been in in 19 14 with an income of £3,000 per annum.

The injustice of stigmatising me with a £10,000 income is· the more cruel having regard to the fact that a very large proportion of this money never comes into my hands at all. I am not even 'permitted' the luxury of receiving it and handing it over to the Chancellor of the Exchequer. By the process of taxa tion at the source, the person in my position receives ISS. and is required by Act of Parliament to call it £I. He is also required to· pay further taxation upon this fictitious pound. Almost half my income goes in direct taxation. The official rates-income tax, 4S. 6d.; super-tax, graduated up to 5s.-1 do not reach the 6s. mark-do not quite amount to 50 per cent. of one's income. As most taxpayers will appreciate, actual income and taxable income have a way of varying, and the variation .does not operate in favour of the taxpayer, so that of my £10,000 my bankers are only troubled with the handling of £5,000. Another big slice is taken from me through local imposts and indirect taxation.

I have, as we all have, to suffer the effect on prices traceable to taxation. Although I admit there is room here for complicated and difficult argument, I put the cost to me of local and indirect taxation at another £2,000, thus bringing my real position down to the more modest qualification of a £3,000 man. For present purposes it is sufficient for me to state-a statement which no one will attempt to controvert184-THE CONFESSIONS OF A CAPITALIST •that I bring home and myself spend far less than I actually pay to the Chancellor bf the Exchequer and his satellites. Taxation has been defined as " the art of so plucking the goose as to secure the largest amount of feathers with the least amount of squealing." That definition is as true to-day as it was when Colbert used it in the seventeenth century. He knew nothing of income tax and super-tax. The methods of his time for .. securing the feathers without the squealing were confined to the imposition of indirect taxes placed upon such commo dities as appeared to render them least obvious. The modern method for reducing the "squealing is alto gether different. It is not so to spread the taxes over the largest numbers that they are' not readily recog nised, but to reduce the taxpayers, or the nominal taxpayers, to the smallest possible numbers,. well know~ ing that the louder they squeal the less will be the attention paid to them. I recognise that it is no use squealing, and, in any case, I have no particular admir ation for the squealer. This problem of taxation is a question of the public good and nothing else. I flatter myself that I possess enough of the qualities of the good citizen to believe that, if it is in the public interest that we should spend large sums upon labour exchanges and a base at Singapore, it may well be in the public interest also that half my income should be taken for those purposes. But it is permissible to point out that there may be a danger of obscuring what is really and truly in the public interest, if the public is befooled into thinking that its interests can be secured, not at its own expense, but at the expense of a small body of insignificant persons like myself. Twenty-two million electors express by a majority their opinion that a Singapore base is desirable. That opinion would be a more serious one if each of these twenty-two million TAXATION AND PUBLIC EXPENDITURE 185 electors, when giving it, were fully conscious of the fact that each of them would have to bear his or her proportion of the expense of the enterprise. The value of the opinion may be, and is in fact, vitiateq by the common and altogether fallacious theory that the ex pense is met by taxation imposed upon me and the small number of persons in the country in my position.

Out of the whole population there are rather less than two and a half millions who pay any income tax at all. Assuming that every income taxpayer has a vote, it follows that barely one voter in ten has any sense of direct financial responsibility attaching to the exercise of his franchise ;,rights. The heavy taxpayers, the people who have considerable sums to pay, are less than 90,000, this being the number liable to super tax. Those who pay on the scale which applies to me number only a paltry 10,270 persons. So that the futility of anything in the nature of squealing becomes obvious. Super-taxpayers are just about as numerous as the inhabitants of the Isle of Wight, or Wigan, or Rochdale, from which it may be deduced that any agitation on their part, or any squealing by them, would carry just about as much weight with the nation or with Parliament as some grievance, however keenly felt, of the estimable persons who happen to have their homes in one of these delightful plC:lces. As to my own class, the unfortunate ten-thousand-pounders, they would, as persons, be rightly regarded by the nation and the Empire as of equal importance with the inhabitants of the Laccadive Islands, their num bers almost exactly corresponding to the population of these important territories. To wipe out my class completely, to remove from the stage (as has been done in Russia) persons like me would, from a per sonal, a liberty, or an individual point of view, be exactly as important as the wiping out of the white 186 THE CONFESSIONS OF A CAPITALIST population .of Bocksburg, and I confess that, one Britisher .being as good as another, I should have no more· reason to squeal at being wiped out than would the least important of my Bocksburg fellow citizens.

Squealing will not help my argument. The nation ~ust have the maximum of feathers and there must, no doubt, be a certain amount of squealing however they are plucked. That brings the argument on, to much firmer ground-that of the public good. We are led to inquire whether the public good is reilly being secured by the present rates of taxation and public expenditure. National expenditure during my business life has, of course, grown enormously, as will be seen by the following table, which, even after mak ing allowance for differences in money-values, still shows an enormous increase for which it is difficult to find justification. Growth ofNational Expenditure 189° 1899 19°6 1914 192 3 £ 86,000,000 127,000,000 160,000,000 207,000,000 9 69,000,000 These figures do not' tell the whole story, because between 1890 and 1923, local expenditure, which at the earlier date was almost negligible, has grown to a proportion which makes it to-day a heavier burden than was the whole of the national expenditure thirty years ago. In considering the enormous figures which are now believed to be necessary, we have to remem ber that at least £300,000,000 a year must. be col lected and distributed as War Debt service, the price which we have to pay for the calamity of 19 14-19 I 8.

'So far as the rest of our public expenditure is conTAXATION AND PUBLIC EXPENDITURE 187 cerned I take the view that the great .bulk of it is largely wasted. It is spent, I know, in pursuit of objects which are mostly good, but objects which we shall learn only by experience are not to be achieved this way. Whether, however, we achieve the objects by public action in greater or lesser degree, 'it will be generally admitted that such action is expensive and wasteful. In 19 14 the expense to the Exchequer on account of education was £19,169,647. In 1922 the Exchequer paid out under this heading no less than £65,909,000. These figures represent only a portion of the cost, that portion which falls upon the national Exchequer. It cannot be pretended, indeed I have never heard' it argued, that we were enjoying 3!times as much education in 1922 as in 1914; nor is it suggested that education was 3! times as good in 1922 as it was in 1914. It must, I fear, be ,admitted that the addition of nearly a million a week to the national school bill which has. taken place in a short period of eight years is in large part due to the elabora tion of machinery created and maintained in deference to the modern faith in system and organisation.

The national accounts in the last few years have swollen, and will continue to swell, not on account of the extra work which is done for the nation's bene fit, but on account of the introduction of the military mind into the arrangement and direction of national affairs, aided and abetted by the Socialist idea that there is some virtue in creating a job, quite apart from the product that comes out of that job. I remem ber a distinguished Colonel in command of a training camp on the South Coast who turned down a proposal for a telephone from one part of his command to another on the ground that the orderlies would then . have nothing to do, an excellent example of the prin ciples upon which we conduct our public business.

188 ~ THE CONFESSIONS OF A CAPITALIST A further instance is provided by the Board of Trade: " We have given some consideration," says the second Geddes Report, " to the organisation of the Board of Trade, and are particularly struck by the fact that although some of the operations of the old Commer cial Department of the Board now form part of the fu"nctions of the separate Department of Overseas Trade, the part of the Commercial Department re tained has been expanded into three costly specialised departments, namely, the Industries and Manufac tures Department, the Power, Transport, and Econo mic Department, and the Commercial Relations and Treaties Department." Wherever one looks in the national accounts the same tendencies are evident. The Board of Works spent £3,62 1,37 8 ih 1914. In 1921 the figure was £12,607,000. In 1922, in spite of the Geddes Report, and notwithstanding falling prices, the figure was £14,7 02 ,655.

This is not some bureaucratic conspiracy, although were I to attempt to deal with it on the lines of the critics of Capitalism it would not be difficult to build upa theory of the greedy, bloated bureaucrat fattening in idleness on the work of the people. I know too much of the Civil Servant, and have too high a regard for his qualities and his energies, to indulge in this kind of abuse. The Civil Servant is a victim of his circumstances. He is struggling with a system which never has, which never will, and never can, work. Red tape is not the invention of an idiot. It is an absolute necessity in the performance of public work. The remedy is the reduction of public work to the barest minimum. Public work cannot have the advant age of individual responsibility behind it, and thus must be performed with the handicap of rule, regula tion, and red tape, which must always render it both TAXATION AND PUBLIC EXPENDITURE 189 inefficient and expensive. It is, for instance, stated that the windows of Buckingham Palace are cleaned on the inside by the Office of Works, and on the outside by the Department of Woods and Forests.

Whether that be so or not, it is obviously right and proper that it should be so. The taxpayer could have no confidence in the correctness of· public accounts which allowed one department, in the exercise of its own discretion, which might be wrong, to trespass upon the preserves of another. Since the Ministry of Munitions led us all astray, even private business has suffered terrific harm from the" system" mania. The City, as well as Whitehall, is still full of flappers filing futile forms. Though the City is beginning to recover from the illness, Whitehall can never recover from it. The remedy is not to allow the latter to dispense with necessary system, but to ~ recognise that Whitehall is an unwieldy, clumsy, and expensive instrument, and to reduce its functions to the essential minimum. The disease of public expendi ture and activity springs, however, from other causes. Herbert Spencer, with a prGphetic knowledge, the quality of which was little appreciated at the time, told us all about it in The Coming Slavery. He wrote: " A comparativc:ly small body of officials, coherent, having common interests, and acting under central authority, has an immense advant age over an incoherent public which has no settled policy, and can be brought to act unitedly only under strong provocation.

"Hence an organisation of officials, once passing a certain stage of growth, becomes less and less resistible; as we see in the bureaucracies of the Continent. " Not only does the power of resistance of the regulated part decrease in a geometrical ratio as the regulating part increases, but the private interestsof many in the regulatedpart itselfmake the change of ratio still more rapid. In every circle conversations show that now, when the passing of competitive examinations renders them eligible for the public service, youths are being educated in such ways that they may pass them and get employment under Government. One con190 THE CONFESSIONS OF A CAPITALIST sequence is that men, who might otherwise reprobate some further growth of officialism, are led to look on it with tolerance, if not favourably, as offering possible careers for those dependent on them and those related to them. Anyone who remembers the numbers of upper-class and nliddle-class families anxious to place their children, will see that no small encouragement to the spread of legislative control is now coming from those who, but for the personal interests thus arising, would be hostile to it.

" These variousinfluencesworking from above downwards meet with an increasing response of expectations and solicitations proceeding from below upwards. The hard-worked and over-burdened who form the great majority, and still more the incapables perp~tually helped who are ever led to look for more help, are ready supporters of schemes which promise them this or the other benefit by State agency, and ready believers of those who tell them that such benefits can be given, and ought to be given. They listen with eager faith to builders of political air-castles, from Oxford graduates down to Irish irreconcilables; and every additional tax-supported appliance for their welfare raises Hopes of further ones. Indeed the more numerous public instrumentalities become, the more is there generated in citi.. zens the notion that everything is to be done for them, and nothilJ.g by them. Each generation is made less familiar with the attainment of desired ends by individual actions or private combinations, and more familiar with the attainment of them by governmental agencies; until, eventually, governmental agencies come to be thought of as the only available agencies." (" The Man versus The State": The Coming Slavery.) It is to the causes so accurately diagnosed by Herbert Spencer that we must attribute the existence to-day of such useless institutions as the Ministry of Labour, the Ministry of Transport, the Department of Overseas Trade, the Mines Department, the Petroleum Depart ment, to mention ,only those the abolition of which was definitely recommended by the Geddes Report less than three years ago.

We badly need another such report to save us from the error of accepting these -abuses from habit, for they are fast becoming very bad and deep-rooted habits. That Mr. Winston Churchill, with the backing of a Conservative Government, should standardise national TAXATION AND PUBLIC EXPENDITURE 191 expenditure at eight hundred millions emphasises the seriousness of the present position. I .am conscious that it. may appear that I am squealing because my money is being spent in these ways, but, as I shall presently show, I am not at all sure that it is my money which is being so spent. For, notwithstanding all the intolerable taxation, I have more money tha:n ever. I am much more concerned with the harm that these absurd departments do, quite apart from the money that they cost. Everyone of them stands in the way of individual action and personal initiative, and everyone of them constitutes at innumerable points a discouragement to those who would be glad to get along with the work of reconstructing the . world and supplying the needs of mankind.

Public expenditure must, from its nature, be waste ful. It is as well that we should recognise that inherent weakness in it. State work tends to be done at an uneconomic price, a well-known fact which is widely recognised but little understood. This difficulty does not arise from greed or avarice or chicanery on the part of public servants. The trouble is deeper seated. It arises from the fact that in public work, as distin gutshed from private work, there is no real test of service. If private work is bad, private persons decline to have it. The test of competition, the freedom of choice, the· checks on extravagance, and the incen tives to betterment, which are essentialelments of . private business, are absent in dealings with a public body. A bad piece of work sold to a private person brings discredit on a private trader and robs him of future business. A bad, useless, or extravagant piece of work sold to the public is invariably blamed upon the politicians ..

A great deal might be written about the injustice of taxation; the unevenness of the burden; the way in 192 THE CONFESSIONS OF A CAPITALIST which it presses more hardly in some quarters and more lightly in others. But there is really very little in this kind .of squealing .. Taxation, like any other public action, must be inefficient, unjust, and uneven. There is no more injustice about taxation than about any other big public scheme, which can never, from its nature, fit itself to all the many variations of indi vidual circumstances. As will be noticed by reference to the figures I have given of the early profits of The Hardware Trade Journal, I was paying income tax long before I ever had a profit. The following simple illus tration shows what happened to me and what happens to every man who starts in business: . Taxation upon a New Business subject to the Three rears' Average 1st Year Loss, £2,000 Assessment, Nil.

2nd Year Loss, ,£500 Assessment, Nil. 3rd Year Profit, £500 Assessment, Nil. 4th Year Profit, £1,000 Assessment, £333 5th Year Profit, £1,000 Assessment, £833 Total Profit, Nil; Total Assessment,[,1,166 Itis argued that this injustice is balanced by the oper ation of the average later on,in the account, when profits are rising more rapidly than the assessment for taxa tion. Those who press this point overlook the fact that any advantage secured in this way is often more than balanced by the taxing regulations which forbid the calculation of many expenses in estimating profits. These are many and complicated. The cost of repairs in excess of· some fictitious statutory average is not allowed. Large sums are collected from traders on the strength of the regulation which says that " losses not connected with, or arising out of, the trade in which they are engaged may not be set against profits." The list of liabilities which the trader has to bear and which TAXATION AND PUBLIC EXPENDITURE 193 are not allowed as trading expenses has been growing for years, and continues to grow, a fact which, together with the steadily increasing powers of the taxing autho rities, tends to make taxation ever more oppressive and unjust.

"Some writers on economics," says Ireson, "evidently with no practical knowledge of accountancy, have assumed as a matter of course that the official statistics form a tru'e record, in no way exag gerated, of the income actually received by payers of income tax. This assumption has been shown to be incorrect. It will be under stood, of course, that what is challenged is not the textual accuracy of these statistics, but the popular use of them for a purpose for which they were neverintended. They do not agree, and were never meant to agree, with ordinary accountancy results, and in certain respects it is quite proper that they should not so agree." ('lhe People's Progress.) " ... Otficial statistics are ... misleading, i.e. they do not recognise any loss of capital which has been suffered by the taxpayer.... Losses from bad investments, or from unsuccessful trading, in so far as they result in the exhaustion of capital, are also ignored. Assume, for example, that I invest the sum of £1,000 equally in ten different companies. In the first year nine of these pay me dividends at the rate of 5 per cent., while the tenth company goes'so hopelesslywrong that my investment in it must be treated as totally lost. Thus for the year I receive £45 in dividends, and lose £100 of capital, the actual result to me being a loss of £55. Nevertheless, income tax on £45 has to be paid, and in the official figures I appear as having made in that year an income, i.e. a projlt, of £45. It'is no exaggeration to say that the example just given is representative of thousands of others occurring ,every year. All around us, in every trade, capital is being destroyed in various unsuccessful ventures, yet no <notice whatever of such destruction is taken by the Revenue authorities, and there is absolutely no record of it kept by them. When there is a profit, it is sought out, assessed,and taxed, but when there is a loss of capital the income tax officialspass it by as if it had never occurred. No one would accept as reliable the statistics ora general who published the achievements of those of his soldiers who survived, ·but suppressed all mention of those who were killed. Everyone would agree that such a record was misleading. For a precisely similar reason the income tax returns are mi~leading, for they include only.the profit of success ful ventures, and suppress all mention of those which destroy capital when they fail and die." ('lhe People's Progress.) N 194 THE CONFESSIONS OF A CAPITALIST The sense of injustice in connection with taxation is created and fostered in another way. The taxpayer is perhaps beginning to understand that he must pay upon losses as well as upon profits, but there is a new and a deeper resentment against taxation which arises from complications that are beyond the power of almost any taxpayer to understand. .This is in some measure due to the several new forms of tax invented as a result of the bigger demands .of the War. It always seems to me that it should not be beyond the power· of the taxing authorities to make their calcu lations and their demands a little more intelligible to the victims. I profess to know something about figures; I am supposed to be a fairly good judge of accounts; but I admit myself totally unable to understand some of the calculations upon which my taxes are computed. .

A recent experience which befell me is worth quoting as some excuse for my confessed ignorance. My busi ness became liable to excess profits duty. I shall go to my grave with the feeling that I never made any excess profits, within the meaning of that term as dis cussed in Parliament and by the public, but I have long ago learnt to ignore Parliamentary discussion upon details of taxation. My accountants and the authorities agreed together that I was liable for some years for fairly heavy payments of excess profits duty. I paid. But when the duty was abolished and the last account ing period was reached, my patience was exhausted and I kicked at a final. demand for the last year, amounting to £6,500. The demand was doubly offen sive to llle, partly because I had no £6,500 readily available, but also, and more definitely, because I objected to the stigma attaching, and rightly attach ing, tq a man· found liable for £6,500 on account of excess profits made by reason of the nationts difficulTAXATION' AND PUBLIC EXPENDITURE 195 ties arising out of the War. My accountants went into' the matter with Somerset House. A stack of papers, which could not be read in a month, was accumulated.

Calculations were made, and arguments adduced which would have conveyed just as much to my intelligence had they been written in Greek. It was agreed that I must pay this £6,500. I was not satisfied and took the exceptional course of consulting a second firm of chartered accountants, who had the reputation of being experts in their. knowledge of the workings of the excess profits duty. A further stack of papers was slowly accumulated; further arguments were brought forward on either side,' and I received an assurance from these experts that the demand was proper and correct, and that I had no alternative but to pay up. I was still unsatisfied, still unhappy (as indeed might be expected) about the whole business and decided to consult yet further experts. I employed, therefore, another well-known City firm of chartered accountants. All this professional assistance cost money, but this time I was' rewarded. After going through the usual process, and using another hundredweight of ruled foolscap, another decision was reached. I do not pro fess to understand anything about it; I only know that in so far as the Chancellor of the Exchequer made the purpose of the excess profits duty clear to Parlia ment and to me, I was never intended to pay any such duty, .but I did have the satisfaction of receiving, not a demand for the payment of £6,500, but a Treasury Warrant for £500, repayment of duty now admitted to have been collected in error in respect of previous years. I tell this little story not because of any interest in the details of it. It is a story which could be capped by many thousands of traders up and down the country, but I press it because of its bearings on the question of taxation and justice. I suggest that it is not just, not 0* J96 THE CONFESSIONS OF A CAPITALIST expedient, and not good for the State or the body politic that taxing technicalities should be developed to a point where the taxpayer is reduced to a helpless cypher in the hands of experts, and where he finds himself at one moment asked for £6,500 and a few months later receiving £500 on the same figures and' the same facts and the same position, being all the time totally and absolutely ignorant of the ways in which, the principles' upon which, or the figures by means of which these results are secured. The loss of confidenGe in the Treasury and the State engendered in the minds of commercial men by these methods is not only detri mental to business, but harmful in the highest degree to the State itself.

1 once paid 26s. in the £ on a part of my income; a thoroughly unjust imposition which I do understand and which, because I understand it, I do not resent to anything like the same extent. A large slice of my income is derived from. a commission on ,the profits of the company over which I preside. The reader will remember the arrangement made in 190 I, when I can celled my original shares in the Hardware Trade Journal, Ltd. I~ some of the small type of the many taxing Acts of Parliament passed during the War it was provided that a director's commission should not be allowed as' an ·expense in calculating profits for the purpose of taxation. Out of consideration .for the peculiar views of the Socialist Party, directors, pre sumed to be the agents of Capitalism, were singled out for a special form of treatment in this way. My com mission did not amount to as much as the cOJTImission paid to some of my managers, but your Socialist will admit that a manager may earn his commission, while no director can,' of course, earn anything. So that, at the height of War taxation, ,a portion of my income waS added back to the profits of my company and was TAXATION AND PUBLIC EXPENDITURE 197 assessed to excess profits duty at 80 per cent. My company, therefore, paid £1 of commission to me and 16s. of E.P.D. to the Exchequer. The £1 which I received was liable to income tax at 6s. and super-tax at 4S" and I, in my personal capacity paid these sums.

There was only one sovereign; that was admitted. It formed part of the profits of my company which were, under my contract, payable to me by way of commis sion. In respect of that sovereign, the Chancellor of the Exchequer collected 16s. from my company and lOS. from me. The remedy for this injustice was, so I was informed, in my own hands or in the hands of my company. The Act provided that, although the company was liable for the 16s., it was empowered to recover that sum from me, and had I been willing to repay that amount to the company and be content with 4S. income instead of £ I, I should then only have been charged with 2S. income tax and super-tax instead of "lOS., on a gross income of 4S. instead of £1. Seeing that my contract with the company was of very long standing, and seeing, moreover, that my family de pended upon the commission which was properly mine, I did not see my way to renol}nce my contract or my commission, and, as I have said, th~ result was that for a period of a year or two a part of my income, some £2,000 or £3,000, actually produced to the national Exchequer rather more than 20S. in the£, the loss falling upon the shareholders in my company.

These little things are unimportant in individual cases, but, multiplied as they are into thousands of others, they give rise to an attitude of mind towards this question of taxation which is in every way to be deplored. Instances of this kind could be m~ltiplied indefinitely, but there is one other point that may be mentioned even at the risk of appearing to squeal. It is quite impossible to earn or win anything in the 198 THE CONFESSIONE OF A CAPITALIST nature of a character with the taxing authorities. The business man who behaves himself moderately well can build up a character in the course of time. He may reach the position where a bank will grant him accommodation merely upon his name. He will cer. tainly reach a position where his colleagues in business, other firms the world over, will take··his statement as conclusive evidence of the correctness of figures, how ever much they represent. No such reputation is ever obtainable with the taxing authorities. I have for over thirty years been in close communication with those who are· responsible for collecting my income tax. In the whole course of all those negotiations and all that period no question has ever arisen as to my integrity, as to the correctness of my figures, as to· the fullness of my return, and no suspicion, so far as' I am aware, has ever. at,tached to me of an attempt at evasion· or of an unwillingness to discharge obligations properly laid upon me. Even so, after thirty years, no simple, unsup ported statement of mine is admissible in connection with matters of taxation. I must fill up every form; I must give every detail; I must recapitulate every item. No such thing as.a character is known in public affairs. I may be marked up in the highest grade in every inquiry office in the world; I may be classified by the merchants as worthy of any credit; I may win the highest position among my fellows; but I can hevet get ~ good mark of any kind from this thing called the State.

The tyranny of the taxing machine and the growing lack of confidence in its workings are enhanced by the feeling that Parliament has less and less to do with it, and that it is becoming more and more a matter of bureaucratic discretion. A couple of illustrations will show what I mean. When Mr. Asquith, as Chancellor of the Exchequer, first introduced a discrimination TAXATION AND PUBLIC EXPENDITURE 199 between earned and unearned income he was asked in Parliament as to the position of the small family company. It will be remembered that income was divided into "earned " and " unearned," so that rather more taxation might be placed upon the shoulders of those whose incomes were derived .from mere owner ship. It was felt, and there is a good deal to be said for the feeling, that an income arising from a dividend on a share should be taxed at a higher rate than an income which was the result of personal work and effort. Parliament was anxious that this distinction should be a true and not a fictitious one, and debated the po~ition of the small family limited company. There were and are many thousands of small traders who, for the convenience. of accountancy and for simplicity in the settlement of family interests, run their businesses as limited companies, although the shares are entirely held by fathers and sons and brothers actually working in the businesses themselves. That was in fact the position of Benn Brothers, when Mr. Asquith went to some trouble to explain to Parliament that the heavier taxation on unearned income would not apply to dividends earned by such companies as these. He gave the most categorical assurance that the dividends of persons actually working in small limited companies would be regarded as earned income. So definite was this undertaking that the Chambers of Commerce went to the trouble of issuing a circular to explain to small tradesmen that such dividends would be taxed at the 9d. as distinguished from the IS. rate. When, however, the Finance Act for the year came to be finally passed and printed, no reference was made to this under taking, and from the first introduction of the distinction .all the profits made by little shopkeepers who happen to have taken advantage of the Joint Stock Companies Act have paid at the higher unearned rate.

zoo THE CONFESSIONS OF·A CAPITALIST Another illustration of this same trouble was afforded by the Budget -and Finance Act of 1924, introduced by Mr. Philip Snowden. Reference to the Parliamentary debates will show that Mr. Austen Chamberlain brought forward an amendment providing that sums placed by limited companies to a development fund, and not distributed as dividends, should be taxed at half-rates, upon the understanding that if at any future time such sums were distributed by way of bonus shares or capitalised in any other way, they would then pay the full rate of the current income tax. The arrange ment was a very proper and useful one. It removed an injustice widely felt and gave an incentive to trading concerns to build up reserves and thus ensure future development. The amendment was accepted by Mr. Snowden, and the House of Commons was left with the impression that the thing would be done. The Finance Act of 1924, however, contains no reference to the matter. Parliament has been overruled by some higher a\lthority behind. c I am quite convinced that the taxing machine is the most efficient thing we possess. The troubles of which I complain a.re due to the difficult nature of the work that it has to do-extracting the national revenue, which reaches a figure in total and a figure per head of population neither of which has ever been ap proached in the history of mankind, and both of which are far in excess of anything it is possible to attempt in any other country.

It is not a convenient thing to be in corresponq,ence with fifteen surveyors of taxes at one time, but that has been my experience. I admire the skill and pertinacity of each of the fifteen, although' I confess that I have not always been able to maintain"a perfect equanimity of temper with everyone of them. If a man in my position happens to have the good fortune to earn a TAXATION AND PUBLIC EXPENDITURE 20I few sovereigns outside the district in which his income tax is usually collected, a new member of the Inland Revenue staff will pounce upon him and will require all sorts of declarations as to the total amount of his income set out on the numerous pages of the various big forms, in the detail with which most readers will be familiar. It is, as a rule, possible to satisfy these hard ...working servants of the public with the name and address of the colleaguewho is looking after one's account, but that does not always settle the matter ..

Some years ago a friend of mine persuaded me to take' a seat upon the board of directors of a small company which wanted my advice. Meetings of the board were held once a month, and the directors' fees were a guinea a meeting. The secretary of the company, "in accordance with the requirements of income tax law, promptly sent my name to the surveyor of taxes with the information that I was entitled to £12 125. a year in fees. Thereupon I was assessed at 55. in the £ on £12 125., and the appropriate officer in this case was --not satisfied with my statement that the amount went into my general account, and that I could be relied upon to pay the tax as part of my general total. I referred him. to my own local surveyor, but, from an examination of the papers,it did not appear that I had specified this particular company in the long schedule of my previous emoluments. That was perfectly true.

I have so far succeeded in satisfying the assessors with detailed information on all items of £20 and upwards, and I finish my taxation account with a convenient entry which I call " sundries," which includes all odd ments of this kind. Thus the surveyor was justified in claiming that these directors' fees were not duly scheduled in my income tax returns, and he, the~e fore, pressed a separate payment in his own district in respect of them. I sat upon that board' for some 202 THE CONFESSIONS OF A CAPITALIST eighteen months; I attended only five meetings and received in fees £5 5s., but the local tax-collector, good fellow that he was, with his intimate knowledge of averages and the year before and the year after, and statutory income, assessable income, taxable in come, and actual income, adding these things together and dividing them into -first instalments and second instalments, extracted from· me in all over 2t years £6 17S. Id. income tax on my five guineas in fees.

I am quite aware that I might have put the matter right had I been willing to spend a great deal of time explaining that, although I had. been returned by the secretary of the company as entitled to twelve guineas per annum if I attended twelve meetings per annum, I had in fact only attended five meetings in eighteen months. Or I might have got out of the whole busi ness by elaborating still further my complete return to my own surveyor in my own district. But there is a limit to the time a business man can give to these things. I estimate my time to be worth £5 an hour and it actually pays me better to submit to a demand fora few odd sovereigns than to give the time that would be required to argue the matter with my official superiors. Your income tax official, like every official, has no time sense. It does not matter to him how many weeks he spends in collecting a few shillings so long as the system and the principle are right.

We have in Great Britain attained a standard of honesty and proficiency in this matter of taxation which is unequalled· in any other country of the world. I believe that to be a very precious asset which we should be at great pains to preserve. While there is, no doubt, a certain amount of tax evasion by a minority of persons, we English, in conformity with our commercial traditions, and assisted by our highly-developed sense of citizenship, do, in point of TAXATION AND PUBLIC EXPENDITURE 203 fact, pay our taxes with a correctitude which is absol utely unknown in any other part of the world. The Frenchman who evaqes taxation enhances his social position. The German and the American are not quite so bad, but no Englishman can gain any cre¢it from his fellows by reason of defalcations in the payment of taxes. But the high rates at present prevailing, and the oppressive methods which they render necessary, are developing a new mentality in the individual towards public obligations which is much to be deplored. We are busy encouraging the habit of legal tax evasion in a way that will cost us very dearly in the future. It is a regrettable thing from this point of view that the National Council of Social Service, a body with the highest motives, should be able to issue a circular (N.C.S.S. 29) containing elaborate instructions to tax payers as to modes and methods whereby they can so arrange matters as to double their subscriptions to charities at the expense of the Exchequer. The super taxpayer who is willing to give £50 a year to a charity can, it appears, through the agency of the National Council of Social Service, increase his subscription to £100 a year without adding to his expenses. This is a typical example of the evil that follows in the wake of high taxation. It is very natural, very understandable, and is bound to occur if we must have such high taxes as those which now oppress us. I do a little legal evasion, and I suppose everybody in my position is forced into the same sort of thing, in the effort to make my income perform a mere fraction of the things that are expected of it. I am bound to con sider the effects of taxation upon each of my tra ns actions.

Here is an illustration of the expedients to which one is driven. I own a house which, if let, would produce 204-THE CONFESSIONS OF A CAPITALIST me an income that would be subject to income tax and super-tax. I am also blessed with an impecunious friend whom it is my duty to assist. I therefore put the friend into the house rent free. I make a contri bution to his income,. nearly half of which comes out of Treasury funds, -and the house pays taxes through my poor friend on the lowest possible scale. Or take a case that I believe will become historic when its details are known and its implications are thoroughly understood. Sir Alexander Grant handed over to Mr. J. Ramsay. MacDonald, when Prime Minister, 30,000. preference shares .which, it is st~ted, .were to be held by Mr. MacDonald during his life, on condition that he willed them back to the Grant estate.1 Sir· Alexander G;~nt was very prop~rly and generously desirous of easing the personal financial anxieties of a man of modest mellns who found him self in the onerous position of Prime Minister. But, when the .transaction is examined from the taxation point of view, I conceive it to be possible that a large portion of the assistance given· to Mr. MacDonald may in fact have come out of the coffers of the Treasury.

My only point, and it is a simple but important one, is that such things as these are sapping at the roots all our standards of taxation honour, and are developing a me1)tality towards public obligations which is highly . undesirable. Perhaps the gravest aspect of our present taxation position is to be found in the frightful discourage ment which high ,rates and oppressive regulations offer to new enterprises. .It is not too much to. say that they must, from their nature, kill initiative and damp down at the source much new development which would be very helpful to us as a nation. The 1 I understand that since the publication of my first edition, these shares have been handed back to Sir Alexander Grant.

TAXATION AND PUBLIC EXPENDITURE 205 case of the young man who would start in business is rendered ten times more difficult to-day than at any previous time, and in England more so than in any other country. My purpose in stressing this question of taxation is to bring the public conscience back to a realisation of the depths of the plight into which war and war's aftermath have landed us. There is a very large sec tion of the public which looks upon taxation as good in itself. Some people, and they are all too numerous, look upon the taxation of the ri<;h as a proper punish ment for being rich. If this view could be sustained and justified, there might be something in it. But so far from really acting as a punishment to the rich, taxation, as at present arranged,. can, I think, be shown to be nothing more nor less than a fraud on the working man. It is commonly argued that, while local rates enter into the cost of production of commodities, Imperial taxation does not. The old economists showed con clusively that when the income tax was varying from 8d. to IS. in the £ it did not in fact exercise any influence on the cost of commodities. It may, how ever, be necessary to reverse that opinion in the light of recent experience. The old economist never con sidered the possibility of taxation running up to lOS.

in the £. When income tax stood at IS. I do not remember ~ single case where a manufacturer or merchant took taxation into account in considering costs and selling prices. To-day it is, I think, true to say that no business of any kind is undertaken until the bearing of taxation. upon it has been fully investi gated. The taxpayer hims'elf is subject to the grave inconvenience of finding large sums for the Exchequer and does all the grumbling, and for the most part he is no more conscious of what I believe to be the truth 206 THE CONFESSIONS OF A CAPITALIST than is the non-taxpaying public, that the bulk of high' taxes is added to the cost of goods. We have reached a position where the taxpayer is really the tax-collector. I regard myself, not as a' payer of taxes, but as the conduit pipe through which the State receives large sums that I collect from other people. Sir Jesse Boot showed beyond question that this was true of excess profits d~ty, and I am inclined to think that it may also be true to a large extent of income tax itself.

Whoever pays the taxes, however, there is another way of looking at the matter. The taxes are spent for the benefit of all. Even if it were possible to collect them at the expense of a minority, it is not possible to spend them for the benefit of a minority. Parliament has never sanctioned the expenditure of a single penny piece except for the reason that such expenditure was in the national interest, and we are all concerned with that. Eveh such a costly blunder as war itself is never under taken except upon the excuse that it is essential in the interests of the whole nation. From this it follows that it is right and proper to consider the income of the State as the income of its citizens, and to give credit to each citizen for an equal share of the State's expenditure. Now the Treasury and the local authorities are be tween them responsible for the expenditure of £3 per week per family, taking the average family as a man and wife and three children. If this money is wisely spent; if it is really spent in the interests of the nation irre spective of class or party, every father of a family receives his due share of the benefits which come from this expenditure; so that it may be said that the Chancellor and his satellites do in fact expend on behalf of each fatpily amongst us £3 each Saturday.

It would be useful if we were, as a .public, to con centrate our attention upon this expenditure per family TAXATION AND PUllLIC EXPENDITURE 207 and the benefits which we receive in .respect of these disbursements, and ignore for the moment the more complicated argument as to who really pays. I would, if I had my way, take steps to bring home to every father of a family the real nature of the benefits which he receives from all this public money. It would, I think, do much to develop a real sense of citizenship and a degree of personal responsibility in these matters, which is woefully absent so long as we go on thinking of public expenditure as paid by the rich. When I receive a dividend, there is.. attached to it an explana tory note, which sets out the gross amount of the dividend, th,e appropriate amount of taxation, and calls my attention to the reason for my receiving a smaller sum than has actually been earned by my investment.

I am thus constantly reminded of the" benefits" which I receive as a citizen through the activities and dis bursements of the public authorities. I propose that a similar plan should be adopted in the payment of wages. I would print a pay envelope in something like the following way (I take the case of a labouring man receiving £2 rose weekly): Wages Stopped by the Exchequer Balance £ s. d. 5 10 0 3 00 £2 10 0 The labouring man Saturday by Saturday would thus have his attention called to the fact that in addition to the £2 lOS. which he took home to his wife, he was also receiving at the hands of the numerous officials appointed to look after his needs and his comforts in many various ways, the equivalent of another £3, thus making his total income £'5 lOS. Such a plan could 208 THE CONFESSIONS OFA CAPITALIST not fail to stir a public interest· in this question rather more intelligent than it can at present claim to be.

Gilbert rendered immortal the man who mi.ght have been a Russian, a Turk, or yet a Prussian, but in spite of all tempta~ions remained an Englishman. If Gilbert were alive and writing to-day he would, no doubt, elaborate this theme, and remind us, in a way we could all understand, not only of the advantages of our nationality, but of the price we pay for it. To be an Englishman is, of course, worth any sacrifice, but we are nearing the point whenE,nglishmen themselves are entitled to inquire whether the charges associated with the privileges they epjoy are all of them necessary and reasonable. The examination of the rates of taxation in different foreign countries and in our colonies discloses some very startling differences. Mr. McKenna, in a speech to the shareholders of the Midland Bank, stated that' we were the most heavily taxed people in the world; a statement which, 'to the minds of his hearers, sug.gested a difference which might be measured in small percentages. As a matter of fact, the Englishman with an income of £5,000 a year pays more than double the income tax and super-tax which would be levied upon him in the next most expensive place on earth, France.

In presenting the following figures it is necessary to utter a word of caution. The comparison between the taxes of various countries can only be of a rough-and ready kind. The circumstances in each country are different, the method of assessment is not the same in all respects in any two, and various complications make the following figures unreliable in detail. Nevertheless, the margins disclosed in the following table are so big as to leave no possibility of error in the general con clusions that can be drawn· from them.

TAXATION AND PUBLIC EXPENDITURE 209 ifable Jhowing the Income .Cfax and8uper-tax Payable on Incomes of £2,000 and £5,000 in the following Countries: Income, Income, £2,000 £5,000 £ £ Great Britain 600 1,787 France 200 838 Norway 24-0 600 U.S.A. 146 526 Denmark 130 500 Sweden 160 4-00 Australia 1+2 '736 South Africa 92 27° Holland 65 21 3 It will be seen from the above that a man "vith. £2,000 a year can change his nationality and move to Amsterdam and add to the income, which he spends as he chooses, rather more than £loa week; the man with £5,000 can improve his financial position by no less than £1,500. This piece of information is not likely to cause a run on the office which issues natural isation certificates for Holland, because most English men would agree that in spite of all temptations they will retain their nationality. The Dutchman, however, contemplating settling in. this country, will find the difference in taxation a powerful deterrent.

The point was brought up to date by a statement issued from the Treasury dated February 28th, 1924, which set out the tax burden per head before the War and in 1923-24 in the leading foreign countries and in some of our dominions (see table, page 2 10). That ever-growing section of society which is inter ested in the question of peace and entertains the hope of abolishing the habit of war might add some very 210 THE CONFESSIONS OF A CAPITALIST 'Ireasury Statement issued by the Chancellor of the Exchequer, and dated February 28th, 1924-. 'lax Burden per Head: 1913 or 1913-1923 or 192314- (actual). 24- (estimated). In sterling In sterling at par at par £ s. d. £ s. d. United Kingdom ... 3 II 0 IS 18 0 France 3 7 0 6 18 2 United States (Federal) I 7 II 6 14-10 Italy 2 2 8 3 6 II Germany (Reich) ... I 10 8 4-I 4Canada (Domin,ion) 3 8 2 7 19 8 Australia: (Commonwealth) 3 8 I 8 I 9 (States) ... I 5 II 3 4-2 South Africa: (Union) ... I 9 0 3 9 II (Provinces) 0 4-9 0 II 9 New Zealand 6 3 0 12 5 3 powerful arguments to those which it ordinarily uses, derived from an examination of the effects of war upon taxation. Nobody can now deny that in war the victor pays. It is clear to the whole world what has long been clear to the student of economy, that it costs more to win a war than to lose it. These simple truths are obvious to any who will look at the relative financial position of the victors and the vanquished in the 1914-18 War. What could be more illuminating than the spectacle of the nations of the world, acting through the League of Nations, imposing an obligation on the defeated Austria so to frame her normal budget that her maximum taxation shall not exceed a rate of £2 per head of population? Consider Great Britain, suffer ing from an actual tax burden of £22 per head and TAXATION AND PUBLIC EXPENDITURE 2II possessing all the advantages supposed to attach to victory, insisting, as one of the punishments which must be inflicted on the vanquished, that they shall be let off with a burden of one-eleventh per head· of the taxation that the British citizen is carrying . We now know, which was not clear at ·the time, that the much-vaunted fruits of victory really consist in the . privilege of taxing ourselves eleven times as heavily as those who are deprived of these fruits. Along these lines, the believers in the possibility of ending war might do much more to further their cause than can possibly be done by some of the arguments to which they give greater prominence.

In concluding this chapter, I desire to repudiate once again any intention on my part of attacking the officials whose duty it is to administer the financial affairs of the nation. I have had, perhaps, as much experience of, and personal contact with, surveyors of taxes and tax-collectors and clerks to special commissioners, and all the rest, as most living men, and I have never failed to find them, as persons, helpful and courteous and desirous of assisting. The trouble is not with the men who work the taxes; it is in the unworkable nature of the machine as a whole. Like all big things, it must be clumsy and cumbersome and, in detail, inefficient. If it could be seriously contended that all this taxation was for the good of the people as a whole, then no squealing by me or by anybody else would be entitled to a hearing; but since it can be stated that the maxi mum in taxation has in fact coincided with the mini mum of national prosperity, squealing or no squealing, there is a prima facie case for further inquiry.

We have a bad way, we English, of attributin~ our troubles to causes beyond our control. Weare invited to believe that our unemployment, our bad trade~ our low standard of living, are the direct outcome of the 212 THE CONFESSIONS OF A CAPITALIST state of affairs in Russia and in other remote parts of the world. My suggestion is that.a further under standing of these matters may lead us to appreciate that the main cause of the majority of our troubles is the modern mania. for invoking public aC,tion, for .taking money which would be productive and useful if left in private hands, and. rendering it sterile and useless in the dead hand of the State machine.,