LEVY ON CAPITAL

Dominion, Volume 12, Issue 154, 25 March 1919, Page 3

LEVY ON CAPITAL

INTERESTING EXCHANGE OF VIEWS

FALLACIES EXPOSED

[The following correspondence, on tho subject of levies on capital for the reduction of ■ the national debt recently took place between Mr. Henry Bell (an eminent, banker) and Mr. Arthur Henderson, before the latter relinquished his post in tho War Cabinet, lhe correspondence appeared in the London "Morning Post," and provides an interest ing. expose of. popular fallacies resard-. injr Capital.] ~ TT , To the Eight Hon. Arthur Henderson. Sir,—l understand that one ot the items of the political programme which you are asking the country to adopt is a levy on capital for the'repayment or reduction of the National Debt. 1 can fairly say that I have no preconceived prejudices' against any plan for the reduction of that debt, which, on examination, would seem likely to promote tie interests of trade and industry and the welfare of the communty as a whole; but, as a student'for many years of financial questions and concerned as a banker with their practical eftects on tho commerce of the country. I have come, to the conclusion that such.a prolweal, if carried into eft'ect, would, so tar from bein* of any benefit to the community or any section of it, have prceiselv the opposite effect—and that to a disastrous 'Ict-ree The question is a big one. but for the moment I am more imniediately concerned-with the.unfairness with which a capital levy would operate upon largo goctions of the people. Individual interests must no doubt to a large extent give way to the common welfare, but it has ■hitherto .been accepted as an axiom for tho purposes of all taxation that the incidenco of a tax mjjst, in its general-effect, be fair. '. From that point of view I have frequently propounded the following -miestions to which, up to the present. 1 have never succeeded in obtaining satisfactory replies. Can' you supply Jhemi , 1 ' Two persons, A' and 13. have each of them for a period of 20 years enjoyed an average income of '.fiIOOO a year. "A" being unmarried and having no encumbrances ■ and having, moreover, desired to "havo a good'time has spent the whole of his income. "B,' on tho • other hand, being married and of a prudent and thrifty disposition, has saved and invested half, his income and has lived on tho other half, plus - the interest on his savings, which have added to his income year by year. Ho has thus accumulated a capital sum of .£IO,OOO with which to ' provide for the old age of himself and his wife and to start his children

in their careers. ■• • ■ Now, I do not "suppose" that--mr-shall, differ as to which o£ these two men has lived the more useful life or has deserved batter of the State. Even from the merely inatsrial point of view B. has. in fact," contributed'larser.eums in direct-. taxation not only on his original income, also ori.the interest -derived from ■ "what possible'justice ca.n there be in now subjecting him to a tap* Ins harclearned capital, from which "A"_ would, bo entirely exempt? . . ■ 2. Again, a sea captain who has r.e- ---■ tired after forty years , of service has-.. • accumulated' during that time-a pro-r----vision of .85000 for -his old age.- He.. lias only been able to do this'(for the■mariner's 'rate- of pay is none too "cuprous) bv continuous and earnest thrift and self-denial. A'comraoo in a like position, who has spent every penny he has earned,, is hi his old - Lβ 'dependent"on tho generosity of his relations and friends and may even become a charge on the btate. What possible justice can thore bo in taxing the capital of such.a man s hardearned savings?. ' 3 Or take the' case of an army officer who,' with a capital of .£30.000 ' ■ invested in a flourishing business left that'business to servo his country in the war, and on his return.finds that in his absence that capital has,, through inefficient management or some other cause, suffered, a. loss ot £10,000. ' , Is he to be taxed on the remaining *"0000 in order, that ..his competitors who are younger 'men earning gooff i?comes, may.be .relieved'of part ot their inoome tax? ■ ■ ':•"."■' '•'■' ; t , A very large proportion.of the capuai,, of the-country'is represented not by inherited wealth, but by the savings of individuals, accumulated by thrift and self-denial out of income earned, during a life of foil whether of hand or brain, and to impose a capital levy on suoh savings-nlmdy subject to Keavy deatli duties-would be to strike-.the heaviest blow OBoinst thrift that I can eoncwve. A.fter careful consideration of. the whole subject with nn open mintf, I have.therelore come to the conclusion that it would be difficult to find a form of taxation which would militate.more against thrift, would operate with greater injustice against large sections'of-the community or would involve a greater disturbance of industry and credit—aflccting the manual workers every bit as, much .as other classes-than such. a. levy on .capital ns is proposed. -. • ■ . . .... To'me it seeuis that, there is only, one ■way in which, .with benefit .to the, community as a whole, the National Debt can be reduced, auil. that is by the accumulation of new. wealth out of the nation's savings from increased production, fostered 'by ■»■■ well scheme for the equitable co-operation ot inuustry ■ and capital, and. by the practice, by our people of economy and tlwitt over, a loiig period .of years. ... I propose to publish this letter, together with any reply you may/be good enough to give **r-™"ffWo£

Mr. Hendorson's Reply. «. To Henry Bell, Esq. ■■■■■'■ . ~ Sir,—l am mush obliged .for your letter of the 2nd inst., to.wnich only my ab-sence-from London and great pressure of business has prevented mo from replying by return. The Labour Party desires that the' whole or a, large part of tho burden of indebtedness with which, this -nation is charged—over and above euch.reparation and compensation as may., be niado by'the Central Empires-should be borne by an assessment according to capital fortunes, instead of an assessment.according to annual incomes.' This is the pro-, posal commonly referred to as a levy on capital or the • conscription of wealth. 1 may point out, however,- in reference to your remark, that such: a proposal would have ii disastrous effect, that in this project of a Capital Levy the.Labour Pnny is committing itself to no invention of its own, , but is merely supporting the suggestion made by the political economists—soe the significant series of- articles in favour of the proposal in the "Economic Journal," the quarterly of the Boval Economic Society, for March last— ■which is not without considerable adhesion among financiers. i 1 would remind you further of the remarkable degree of favour which the proposal, as a measure that would become practicable as soon as peace was secured, received irom -Mr. Bonar Law, Chancellor of the Exchequer when it was put before him by the joint deputation from the Parliamentary Committee of the Trade Union Congress and the Executive 'Committee of the Labour Partv. Tho scheme has since been exhaustively examined in the little volume bv ifr. F. W. P. Lawrence (George Allen nn-rUmvin, Limited). I come now to tho particular cases you put to me as demonstrating its unfairness and its injurious effects on diameter and thrift. I should like to point out. to begin with, that' vou are assuming that the proposed capital lew is to me tho only tax that is levied ' Tim Labour Party is not able to make anv snch assumption. It seems dear thai', besides a considerable amount cif" indirect'taxation—which has tho approval of the Labour Party only in so fa' , ns it fulls on luxuries ot which it is not desirable to increase the consumption —there will necessarily have to bi , an in--com" tax on tho one hand and death di'tics on the other. The Labour Parly holds that the wholo burden of taxation should be made to fall, according to the dictum of the economists, in proportion to "nbilitv to pay." But it is not, and cannot be" possible, to make cadi separate tax taken by itself, fall equitably on al poisons and classes. What must be aimed at is to balance one fax with another, ami inakc the abrogate burden fall in proportion to "ability to. pay." [ now take your cades. A. Hip tliriltlcss bachelor,'who spends all his income, is contrasted with "B," the prudent husband and father, who saves halt Ins m-

coma, mid thereby accumulates .£IO,OOO. Is it fiiir that ■"A"/BhouUl escape, and "B" have to pay?/ May I point out tliut it is the present system ot taxation, not the Labour Party's proposal, which has this result? At present, apart from taxation on their '.wn.ed. ■incomesi, so lomr us those last, "A" VW notliiiig, an.l "B" the very heavy tux on his jiicome from the .£1(1,000 invested. He evrm has to pay the tax on his earned income at a higher rate than the thriftloss "A" has to do just because ot his prudent thrift in having accumulated the. ,£10.0(10. . . Whit the Labour Party propose is to reduce this penally on thrift, the Upital levy will enable the income tax to be riduccd probably to its pre-war rate, so tlmt "13," whilst paying Ins tiny quota to the Capital Levy, will be spared the considerable annual payment that lie now has to make as income tax on his .£lO 000 of investment.?. llie tnnuj "i!" will, under the Labour Party s proposals, be left "in enjoyment of a larger act income than he now has. _ So with your thrifty sea captain wth JiaOOO. At'present he is severely mulcted by the heavy income tax, which will have to be further increased if then ie no Capital Levy. Substitute the Capital Lew for this income tax, and the thr-ftv sea captain will find he has more left tn live on than lie has now. Wr ha;is I need not pursue your further in to'surest that in deciding that "it would bs difficult, to find ft form of taxation which would militate more asrainst thrift, or would operate witu injustice,-" you had perhaps not considered how very seriously the present income ta\ incurs this criticism; nor yet weighed to what an extent tion is affected if you take .the Capital Lew as a substitute for a ten shillings i'Konie tax You had, too, perhaps not corsidered the bearing upon such a judgment oi Mr. Bonar Law's cautious favour of the capital tax. , , I BKrae with you in thinking that what wo have to do is to produce additional wei'.lh and to accumulate, further capital: but I would point out that it ifl not bv these means that the National Debt, can be reduced. That can only bo done bv taxation, and what the Labour Party -followiiu the political cconomists-de-sireg is that the taxation should bo assessed according to tho ability to pay. That is the cows for the Capital Levy.Yours faithfully. TiiußHM])EESoN| Fallacies Exposed. To the Bight' Hon. Arthur Henderson. Sir —I am very much obliged by your letter of the 9th' inst, and by the troublo vou have taken in replying to the questions raised in'my letter of the 2nd. it would not be practicable, ■ within the limits of a letter of any reasonable length, to deal with the general economic aspect of tho proposed Capita! Levy/ It may be that this form of taxation has received some measure of support from political economists, and that at first sioht it may have presented attractions even to Mr. Bonar Law, as it undoubtedly has to many others. But I take leave to doubt whether, after tho further study which, ho has no doubt'devoted to tho question, Mr. Bonar Law could now bo claimed as a supporter of the proposal. Certain-it. is, that amongst those who have to consider and deal with tho practical, as opposed to tho theoretical, sice of the question, there is a consensus of opinion that a Capital Lovy would not only militate against thrift and operate with great injustice towards largo sections of the community, but would a!#> •react disastrously upon the trade and prosperity .of. the country. Coming now to the two examples of injustice given in my letter, with which you have been kind enough to deal, I cannot help thinking that you have fallen into a fallacy. You agree that, as pointed out in my letter to you, the thrifty "B" income tax' on his savings which "A, because he lias no savings, escapes, and also pays tax at a slightly higher rate, and you suggest that the Capital Levy will "reduce this penalty on thrift because the Capital Levy will enablo the income tax to be reduced probably to its pre-war rate, so that 'B , whilst paying his tiny quota to the Capital Levy will be spared . the considerable annual payment that he now has to make

as income tax on his of investments." Now in the first place, it seenjs to be a pretty large nr.d sanguine nssumption that a Capital Levy, which can accurately be described as ''tiny" in ■relation to tho amount of capital on which it is levied, will lie sufficient to reduce tho income tax to its pro-war rate. But , the main fallacy of your argument lies in tjie fact that it altogether ignores the relative positions of "IC' and "B." Tt is true that "B's" position as regards future income tax may bo iranfovml by ttw? Capital Levy, but so is "AV position equally benefited in respect of h'js earned income of •£IOOO a year,! although tio Ims not contributed a sixpence to the levy from which that benefit. results, whilst the unfortunate "B" has been mulcted of a large part of his Savings! It is inconceivable that in future there should be different, rates of income tax Jor (a) those who hn/e contributed to the Capital Levy, and (l>) those who have rot, and the result therefore wi.ll bo that those who have by thrift accumulated capital will be taxed for the benefit of the unthrifty who have not, and your whole argument falls to the ground.' Yon y.'ind up your letter Tjy saying' that it is the desire of the Labour Party that "taxation should be assessed according lo the ability to pay." May-1 point out that in Hie case which we are supposing tho ability of "A" and "B" to pay taxation was precisely equrfl, each having an; income of JMOOO a, year. "B," however, 'Mis improved, his ability to pav by his own self-denial and thrift. Can it possibly be argued that it is jusft that "B's" self-denial and thrift should be taxed for the b'e'nefit of "A"?— Yours* faithfully, .. HENBY BELL.