Capital Levy

CAPITAL LEVY. During the first year of the World War it was thought in Great Britain that a loan policy should take the first burden of its cost, but as soon as it became obvious that the war would be a long one, it was equally clear that the amount of the war debt would reach figures quite unprecedented in financial history. There was the apparent impossibility of meeting the cost from current resources, either by taxation or by loan, and also a strong desire to avoid the evils of currency inflation.

Early Suggestions for a Levy.—The first suggestions for a levy in Great Britain seem to have been made by Mr. W. Watson Rutherford (Nov. 19 1914) in the House of Commons. He pro posed a 5% tax on capital, which would produce £500,000,000 and be taken in kind in the case of shares or real estate. He thought that the majority of persons would gladly pay if they understood that the levy was to take the place of a high income tax. It was put forward therefore as a sound business proposition. Sir Thomas P. Whittaker, M.P., in May 1915 proposed a 21% levy to raise 1250,000,00o, which was described as an attractive proposal, but very difficult to carry out. Professor A. C. Pigou, one of the earliest academic supporters of the scheme, incorporated a de tailed proposal for the special taxation of earned income to balance the special levy on objective wealth.

Development of the Plan.

The theory of "commutation," or the "business deal," did not, however, long hold the field. A considerable degree of inflation was taking place, and many were preoccupied with the inevitable fall in prices expected of ter the war. It was obvious that the repayment of £1,000,000,000 of debt at such a time involved far less real production and effort than the repayment of a similar amount when the price level should be lower in years to come. Moreover, what was a tolerable burden of interest at a high level of prices would become intolerable at some future period at a much lower level. It was said that "where we had borrowed one pair of boots we should really be repaying two," for, the debt being in sterling, sterling would in future have a much greater puchasing power with a lower price level. The proportion of the debt charge to the national income at that time was probably not more than one-eleventh or one-twelfth, whereas if the price level went back to its pre-war position that same sterling debt charge might represent one-sixth or one-seventh of the same real national income. Everything else in the national income might go down with the price level, but the debt charge could not. It was urged, therefore, that the opportunity to make a very substantial reduction in the indebtedness by a special levy on individual fortunes should not be missed.

During the last two years of the war the case for the levy became reinforced by two powerful semi-ethical considerations. In the first place enormous fortunes were being made, despite heavy taxation by income tax, super-tax and excess profits duty, at a time when large numbers of people were impoverished through the war, and it was considered to be wholly unjust that people who were able to avoid the fighting line should in addition secure a much greater personal wealth than they had at the begin ning of the war.

Moreover, conscription brought into prominence the so-called contrast between "life" and "wealth," and it was said that con scription of life on the part of the able-bodied should be matched by conscription of wealth on the part of the rich. Simultaneously, the argument arose that the war was one brought about by the old and fought by the young, that the old would chiefly benefit, and that it was unfair for the young to bear first the burden of fighting, and then, for the rest of their lives, by a toll on their effort and production, the burden of interest payments to those who had never borne their physical share of the conflict.

Approval of the principle of the levy was at first not confined to any particular political party. Mr. Bonar Law at one time showed a definite leaning towards the proposal, and a small group of economists were in favour of it on broad grounds. The chief battle-ground of controversy was the question of the practicability of carrying through so gigantic a financial operation without dis locating the delicate financial mechanism of the country, bringing about a wholesale slump in stock exchange prices, robbing indus try of credit , and generally undermining the whole foundation of stable values upon which the idea of the levy rested.