PROPOSED LEVY ON WAR WEALTH Af ter the war the discussion took a specific direction, viz., it proposed to confine the levy to "war fortunes." It was realised that a capital levy would tax two fortunes of £20,000 identically, although one might have been reduced from L50,000 owing to the war, while the other might have been built up from practically nothing. The capital levy, therefore, was seen to work consider able injustice, judged from purely ethical standpoints. The pro posal for the moment thus became limited to the levying of a tax upon fortunes, which by a common public sentiment were re garded as specially fit for such a burden. It was soon, however, agreed to be administratively impracticable to examine every individual circumstance and to decide in which particular cases the increase was actually due to the war, so that a new proposition was put forward that anybody who had had an increment in his fortune between 1914 and 1919 would probably be a suitable sub ject for such a tax.
On coming into power the Labour Party appointed a special committee to consider questions relating to national debt and taxation (the Colwyn Committee). In their report (Nov. 1926) the majority concluded that "if there were a prospect of a capital levy being well received, the relief from debt which it offers would be insufficient to justify an experiment so large, difficult and full of hazard; this would hold good in any circumstances not differing widely from those of the present time. Further, unless a levy were accepted with more goodwill than it would be possible to anticipate under present conditions, it would be highly in jurious to the social and industrial life of the community." The minority said the levy would still be the best method of dealing with the debt, "provided that it were generally approved and were assured fair treatment by the taxpayers. The nation may yet turn to the capital levy as a wise and practicable measure affording the best road out of its difficulties." The proposal dis appeared from the Labour programme altogether in 1927.
The chief financial and economic contentions on the two sides for and against a levy may now be set out. The ethical considera tions that once loomed so large became later less prominent. The chief objections may be classified as follows : 1. Repetition.—A successful levy, although definitely aimed at re lieving war debt, can give no guarantee against repetition for other purposes in the future, and possibly even in the near future. No ordinary assurance against this possibility is of any use because no Government can bind its successor. Indeed the more successful the levy, the greater may be the incentive to repeat it. The consequence of this would be that under a fear of repetition the accumulation of capital would be restricted and slow, and, as a consequence, all indus trial progress must be retarded.
Against this view it has been contended that repetition is not a thing to be feared, because no one would think of imposing a special charge of this character except in a great emergency. In the event of a great emergency it would be a positive advantage to have the national accounts cleared of such indebtedness, and to be able to enter upon a war without a colossal debt. All war loans have condi tions attached to them which are honourably observed by Govern ments, and there is no reason to suppose that a similar assurance cannot be given to the taxpayer so that any economic effects through fear of repetition could be avoided.
2. Effects on Prices.—The second main contention is that the financial operation would be so huge, that the attempts to carry it out on practical simultaneous lines must destroy its own basis by depressing prices. If the treasury were satisfied to take only cash this would involve putting large blocks of shares on the market, for which there would be no ready sale, panic prices would ensue, and confidence would be destroyed. If, in order to avoid forced sales, the Government were to take stocks and shares in payment, they would find themselves with large miscellaneous holdings in industry which they could not realise without disastrous consequences. The mere passive holding of securities is no relief to the Budget.
It has been rejoined that the notion that a large quantity of se curities must be put on the market and result in depressing it is quite mistaken. It is merely a matter of synchronising the supply of securities with the demand, for whenever debt is redeemed an in vestor will be ready in the market to buy securities that are on sale, either by taxpayers or the Government. It is true that the banks and finance houses could talk the market into a state of panic, but if they were determined to support the scheme with their good-will, depression of prices would be quite unnecessary.
3. Damage to Individual Businesses.—The third contention is that the ordinary business in private hands could not pay a large levy without encompassing its own destruction. It could not divide its business, and would be forced to raise mortgages or debentures which, in view of the uncertain financial future, could only be obtained on onerous terms.
A counter contention to this takes the following form: If a busi ness were really valued at a figure necessitating a payment to the Government, it would also have sufficient credit to raise a mortgage and the charge or levy would be evidence of the fact. The money for this would be forthcoming in the market because of the funds set free by the redemption of debt. The utmost difficulty that could arise would be some slight redirection of capital. In all cases of hardship, or where a business was likely to be inconvenienced, the Government would grant payment by instalments. Against this it has been replied that a levy honeycombed with instalments and special cases would be very similar to a special income tax, but levied on an insecure and unfair basis. Such a system. it is urged, would take io or 20 years to bring to a definite conclusion.
4. Valuations Impracticable.—The next contention is that so much of the wealth of the country is held in contingent titles, such as life interests and reversions, and that the valuation of these would make an insoluble problem. However actually correct the valuation may be at the time, the results would be belied by subsequent events, and wherever duty was being paid by instalments there would be overwhelming demands for adjustments. These would be sufficiently important to reduce the levy to chaos.
5. Repayment of Part of the Debt Makes the Repayment of the Re mainder more Difficult.—The fifth argument relates to the deflation ary effect of the levy itself. It is stated in some financial circles that the sudden cancellation of £3,000,000,000 of debt according to the programme of the Labour party, would remove from businesses a very large amount of collateral security. This would cause credit to be withdrawn and restricted. In other cases credit would be with held, and prices would fluctuate with disastrous effects on business enterprise and employment.
Against this it is contended that the argument is a gross exaggera tion. Only a small proportion of the war loan is used as the actual basis of credit operations, and many people who so use it have other securities which can be used instead. Again, credit is much more largely personal, and does not depend upon collateral of this kind. Moreover, others contend that deflation can only be brought about by operations through the Bank of England, and the inability of an individual borrower to be granted a loan means that, in practice, a loan is given to someone else because the banks have this credit available. The total amount of effective credit, it is said, cannot be affected by the demands of the particular borrowers.
6. Future Saving Impaired.—The sixth contention relates to the effects of redistribution of wealth upon future saving. The idea that the wealth-accumulating classes would have not only to give up a part of their existing fortune, but also to suffer rates of tax in future as high. or higher, would, it is said, strike at the root of all thrift and lead to national wastefulness, because the other classes of the community would not themselves save an equivalent sum.
Against this it is stated, however, that the outlook is too serious for any ordinary arguments about the redistribution of wealth to avail. Money must be taken where it is to be found. Whatever the immediate disadvantageous effects of the levy, the dynamic effects in future are by far the more important. Greater good to the commu nity would come about by relieving the worker and the middle classes of some of the burden of taxation or by expending state funds on proper social purposes. This would lead to greater productivity, to lower rates of taxation and to greater general average prosperity.
7. The Price Level Argument.—In the next place, the price level contention is disputed. The idea that it will be an advantage to repay a debt before the price level falls must be qualified by the fact that the operation of the levy itself would bring about lower prices and thus make the remaining £4,000,000,000 sterling of the debt charge a much more onerous charge than would otherwise be. In view, however, of the denial that the price level will be necessarily lower in the long run, this contention is not accepted. But in so far as it might prove to be true, it is said that it would be so much to the advantage of the workers to have higher real value in their earnings that the whole country would gain. It is said that there are more factors making for a rise in prices than for a fall in the long run, and therefore future repayment may be easier than present repayment.
8. The Net Annual Relief.—In the last place the opponents of the levy say that the whole basis of the programme is fallacious, because it has been assumed that the effect would be to set free the whole of the interest on £3,000,000,000 of debt, say f 150,000,00o a year, and allow of expenditure programme to this amount, or of a reduction of taxation pro tanto.
It is stated that this view ignores the progressive features in the existing income tax, supertax and death duty schemes. Taking large sums away from individual fortunes would reduce their taxpaying power in future, and the revenue side of the Budget would also be seriously affected, so that all that could be reckoned upon would be a certain net saving. One authority has estimated that, in the long run, out of a saving of expenditure of £140,000,000, something be tween £90,000,000 and £q8,000,000 per annum would have to be set aside to make good the effects of the levy on future revenue, so that the net advantage to the Budget would have to be reduced to some £42,000,000 or £50,000,000 a year. No effective counter statistics have been so far put forward to alter this result.