A LEVY ON CAPITAL

January, 1918
The Objects of the Levy--Its Origin and History--How it would work inPractice--The Attitude of the Chancellor--The Effects of the Schemein discouraging Thrift--Its Fallacies and Injustices--The InsuperableObstacles to its Application--Its Influence on Production--One of theTests of a Tax--Judged by this Test the Proposed Levy is doomed.

By some curious mental process the idea of a levy on capital has comeinto rapidly increasing prominence in the last few months, and seemsto be gaining popularity in quarters where one would least expect it.On the other hand, it is naturally arousing intense opposition, bothamong those who would be most closely affected by its imposition, andalso among those who view with grave concern the possible and probableeconomic effects of such a system of dealing with the national debt. Isay "dealing with the national debt" because, as will be clear, asa system of raising money for the war the suggestion of the levy oncapital has little or nothing to recommend it. But, as will also bemade clear, the proposal has been put forward as a thing to be doneimmediately in order to increase the funds in the hands of theChancellor of the Exchequer to be spent on war purposes.

A levy on capital is, of course, merely a variation of the tax onproperty, which has long existed in the United States, and had beenresorted to before now by Governments, of which the German Governmentis a leading example, in order to provide funds for a specialemergency. This it can very easily do as long as the levy is not toohigh. If, for example, you tax a man to the extent of 1-1/2 per cent.to 2 per cent. of the value of his property, on which he may beearning an average of 5 to 6 per cent. in interest, then the levy oncapital becomes merely a form of income tax, assessed not according tothe income of the taxpayer but according to the alleged value of hisproperty. It is thus, again, a variation of the system long adoptedin this country of a special rate of income tax on what is called"unearned" income, i.e. income from invested property. But it isonly when one begins to adopt the broadminded views lately fashionableof the possibilities of a levy on capital and to talk of taking, say,20 per cent. of the value of a man's property from him in the courseof a year, that it becomes evident that he cannot be expected to payanything like this sum, in cash, unless either a market is somehowprovided--which seems difficult if all property owners at once areto be mulcted of a larger amount than their incomes--or unless theGovernment is prepared to accept part at least of the levy in theshape of property handed over at a valuation.

Before, however, we come to deal in detail with the difficultiesand drawbacks of the suggestion, it may be interesting to trace thehistory of the movement in its favour, and to see some of the forms inwhich it has been put forward. It may be said that the ball was openedearly last September when, in the _Daily News_ of the 8th of thatmonth, its able and always interesting editor dealt in one of hisilluminating Saturday articles with the question of "How to Payfor the War." He began with the assumption that the capital of theindividuals of the nation has increased during the war from 16,000millions to 20,000 millions. A 10 per cent. levy on this, heproceeded, would realise 2000 millions. It would extinguish debt tothat amount and reduce the interest on debt by 120 millions. The levywould be graduated--say, 5 per cent. on fortunes of L1000 to L20,000;10 per cent. on L20,000 to L50,000; up to 30 per cent. on sums overL1,000,000; and the individual taxpayer was to pay the levy "in whatform was convenient, in his stocks or his shares, his houses or hisfields, in personalty or realty."

Just about the same time the _Round Table_, a quarterly magazine whichis usually most illuminating on the subject of finance, chimed in witha more or less similar suggestion in an article on "Finance After theWar." It remarked that the difficulty of applying a levy on capital is"probably not so great as appears at first sight." The total capitalwealth of the community it estimated at about 24,000 millionssterling. To pay off a war debt of 3000 millions would thereforerequire a levy of one-eighth. Evidently this could not be raised inmoney, nor would it be necessary. Holders of War Loans would pay theirproportion in a simple way by surrendering one-eighth of their scrip.Holders of other forms of property would be assessed for one-eighth ofits value and be called on to acquire and to surrender to the Statethe same amount of War Loan scrip. To do this, they would be obligedto realise a part of their property or to mortgage it, "but," added the Round Table cheerfully, "there is no insuperable difficultyabout that."
The first thing that strikes one when one examines these two schemesis the difference in their view concerning the amount of capitalwealth available for taxation. Mr Gardiner made the comparatively modest estimate of 16,000 millions to 20,000 millions; the RoundTable plumps for 24,000 millions, and, incidentally, it may beremarked that some conservative estimates put it as low as 11,000millions. Thus we have a possible range for the fancy of the schemebuilder of from 11,000 to 24,000 millions in the property on whichtaxation is proposed to be levied. But it is when we come to thedetails of these schemes that the difficulties begin to glare. MrGardiner tells us that millionaires would pay up to 30 per cent. oftheir property, and that they would pay in what form was convenient,in houses, fields, etc., etc. But he does not explain by whatprinciple the Government is to distribute among the holders of thedebt, the repayment of whom is the object of the levy, the strangeassortment of miscellaneous assets which it would thus collect fromthe property owners of the country.

In commenting on this scheme the Economist of September 15th tookthe case of a man with a fortune of L100,000 invested before the warin a well-assorted list of securities, the whole of which he had, forpatriotic reasons, converted during the war into War Loans. He wouldhave no difficulty about paying his capital levy, for he wouldobviously surrender something between 10 and 20 per cent. of hisholding. But, "in exchange for nearly two-thirds of the rest, he mightfind himself landed with houses and bits of land all over the country,a batch of unsaleable mining shares, a collection of blue china, apearl necklace, a Chippendale sideboard, and a doubtful Titian,"The Round Table's suggestion seems to be even more impracticable.According to it, holders of all other forms of property besides WarLoans would be assessed for one-eighth of its value--it does notexplain how the value is to be arrived at, nor how long it would taketo do it--and would then be called on to acquire and to surrender tothe State the same amount of War Loan scrip. To do this they wouldbe obliged to realise a part of their property or to mortgage it, aprocess which would seem likely to produce a pretty state of affairsin the property market; and a very pleasant state of affairs indeedwould arise for the holders of War Loan scrip, since there would be alarge crowd of compulsory buyers in the market from whom the holderswould apparently be able to extort any price that they liked for theirstock.

The next stage in the proceedings was a deputation to the Chancellorof the Exchequer, concerning which more anon, of leaders of variousgroups of the Labour Party, to press upon Mr Bonar Law the principleof what is called "the Conscription of Wealth," and the publication ator soon after that time, which was about the middle of November, of apamphlet on the subject of the "Conscription of Riches," by the WarEmergency Workers' National Committee, 1, Victoria Street, S.W. Amongwhat this pamphlet describes as "the three practicable methods ofconscripting wealth" No. 1 is as follows:--

A Capital Tax, on the lines of the present Death Duties, which aregraduated from nothing (on estates under L300, and legacies under L20)up to about 20 per cent. (on very large estates left as legacies tostrangers).

If a "Death Duty" at the existing rates were now levied simultaneouslyon every person in the kingdom possessing over L300 wealth (everyperson might be legally deemed to have died, and to be his own heir),it might yield to the Chancellor of the Exchequer about L900,000,000.It would be necessary to offer a discount for payment in cash; and inorder to avoid simultaneous forced sales, to accept, in lieu of cash,securities at a valuation; and to take mortgages on land.
Here it will be seen that the Emergency Workers had improved on the_Round Table_, and agreed with Mr Gardiner, by providing that theGovernment should take securities at a valuation and mortgages on landin lieu of cash in order to avoid simultaneous forced sales. But theydo not seem to have perceived that, in so far as the Government tooksecurities or accepted mortgages on land, it would not be gettingmoney to pay for the war, which was the object of the proposedConscription of Wealth, but would only be obtaining property fromwhich the Government would in due course later on receive an income,probably averaging about one-twentieth of its value.

Perhaps, however, it would be more correct to say that those who putthe scheme forward did not ignore this drawback to it, but ratherliked it, for reasons quite irrelevant to the objects that they wereapparently pursuing. A good deal of prominence was given about thesame time to the question of a levy on capital in the New Statesman well known to be the organ of Mr Sidney Webb and other members of theFabian Society. These distinguished and very intellectual Socialistswould, of course, be quite pleased if, in an apparent endeavour to payfor the war, they actually succeeded in securing, by the Government'sacquisition of blocks of securities from property owners, thatofficial control of industry and production which is the object ofState Socialists.

It will be noted, however, in this scheme that no mention is made ofany forms of property to be accepted by the Government in lieu of cashexcept securities and mortgages on land. Items such as furniture, books, pictures and jewellery are ignored, and in one of the articlesin the New Statesman, discussing the question of a capital levy, itwas distinctly suggested that these commodities should be left outof the scheme so as to save the trouble involved by valuation. Unfortunately, if we leave out these forms of property the naturalresult is to stimulate the tendency, lately shown by an unfortunatelylarge number of patriotic taxpayers, of putting money into pearlnecklaces and other such gewgaws in order to avoid income tax. Ifby buying fur coats, old masters and diamond tiaras it will be bepossible in future to avoid paying, not only income tax, but also acapital levy, it is to be feared that appeals to people to save theirmoney and invest it in War Bonds are likely to be seriously interferedwith.

Unfortunately, the Statesman was able to announce that the appealfor this system of taxation had been received with a good deal ofsympathy by the Chancellor of the Exchequer, and the next stage in thehistory of the agitation was the publication on Boxing Day in severalof the daily papers of what appeared to be an official summary, issuedthrough the Central News, of what the Chancellor had said to thedeputation of Labour Leaders introduced by Mr Sidney Webb, whichwaited on him, as already described, in the middle of November. Havingpointed out that he had never seen any proposal which seemed to himto be practicable for getting money during the war by conscriptingwealth, Mr Bonar Law added that, though "perhaps he had not thoughtenough about it to justify him in saying so," his own feeling was thatit would be better, both for the wealthy classes and the country, tohave this levy on capital, and reduce the burden of the national debtwhen the war was over. It need not be said that this statement by theChancellor has been very far from helpful to the efforts of those whoare trying to induce unthrifty citizens to save their money and put itinto National War Bonds for the finance of the war.

"Why," people argue, "should we go out of our way to save and takethese securities if, when the war is over, a large slice of oursavings is to be taken away from us by means of this levy on capital?If we had been doubting between the enjoyment of such comforts andluxuries as are possible in war-time and the austere duty of thrift,we shall naturally now choose the pleasanter path, spend our money onourselves and on those who depend on us, instead of saving it up tobe taken away again when the war is over, while those who have spenttheir money as they liked will be let off scot free." Certainly, it ismuch to be regretted that the Chancellor of the Exchequer should havelet such a statement go forth, especially as he himself admits thatperhaps he has not thought enough about it to justify him in sayingso. If the Chancellor of the Exchequer has not time to think aboutwhat he is going to say to a Labour deputation which approaches him onan extremely important revolution in our fiscal system, it is surelyhigh time that we should get one who has sufficient leisure to enablehim to give his mind to problems of this sort when they are put beforehim.

In the course of this review of the forms in which suggestions for alevy on capital have been put forward, some of the difficulties andinjustices inherent in it have already been pointed out. Its advocatesseem as a rule to base the demand for it upon an assumption whichinvolves a complete fallacy. This is that, since the conscriptionof life has been applied during the war, it is necessary thatconscription of wealth should also be brought to bear in order to makethe war sacrifice of all classes equal. For instance, the EmergencyWorkers' pamphlet, quoted above, states that, "in view of the factthat the Government has not shrunk from Compulsory Conscription ofMen," the Committee demands that "for all the future money requiredto carry on the war, the Government ought, in common fairness, toaccompany the Conscription of Men by the Conscription of Wealth."

This contention seems to imply that the conscription of men and theconscription of wealth apply to two different classes; in other words,that the owners of wealth have been able to avoid the conscription ofmen. This, of course, is absolutely untrue. The wealthiest and thepoorest have to serve the country in the front line alike, if they arefit. The proportion of those who are fit is probably higher among thewealthy classes, and, consequently, the conscription of men appliesto them more severely. Again, the officers are largely drawn fromthe comparatively wealthy classes, and it is pretty certain that theproportion of casualties among officers has been higher during the warthan among the rank and file. Thus, as far as the conscription of menis concerned, the sacrifice imposed upon all classes in the communityis alike, or, if anything, presses rather more heavily upon those whoown wealth. Conscription of wealth as well as conscription of lifethus involves a double sacrifice to the owners of property.

This double sacrifice, in fact, the owners of property have, as isquite right, borne throughout the war by the much more rapid increasein direct taxation than in indirect. It is right that the owners ofproperty should bear the heavier monetary burden of the war becausethey, having more to lose and therefore more to gain by a successfulend of the war, should certainly pay a larger proportion of its cost.It was also inevitable that they should do so because, when money iswanted for the war or any other purpose, it can only be taken in largeamounts from those who have a surplus over what is needed to providethem with the necessaries and decencies of life. But the argumentwhich puts forward a capital levy on the ground that the rich havebeen escaping war sacrifice is fallacious in itself, and is a wickedmisrepresentation likely to embitter still further the bad feelingbetween classes.

Nevertheless, Mr Bonar Law thinks that, since the cost of the war mustinevitably fall chiefly upon the owners of property, and since ittherefore becomes a question of expediency with them whether theyshould pay at once in the form of a capital levy or over a long seriesof years in increased taxation, he is inclined to think that theformer method is one which would be most convenient to them and bestfor the country. This contention cannot be set aside lightly, andthere can be no doubt that if, by making a dead lift, the wealthyclasses of the country could throw off their shoulders a large part ofthe burden of the war debt, such a scheme is well worth considering aslong as it does not carry with it serious drawbacks.

It seems to me, however, that the drawbacks are very considerable.In the first place, I have not seen any really practicable scheme ofredeeming debt by means of a levy on capital In so far as the levy ispaid in the form of surrendered War Loans, it is simple enough. In sofar as it is paid in other securities or mortgages on land or otherforms of property, it is difficult to see how the assets acquired bythe State through the levy could be distributed among the debtholders whom it is proposed to pay off. Would they be forced to takesecurities, mortgages on land, furniture, etc., as the Governmentchose to distribute them, or would the Government have to nurse anenormous holding of various forms of property and gradually realisethem and so pay off debt?
Again, a great injustice would surely be involved by laying the wholeburden of this oppressive levy upon owners of accumulated property, sopenalising those who save capital for the community and letting offthose who squander their incomes. A characteristic argument on thispoint was provided by the _New Statesman_ in a recent issue. It arguedthat, because ordinary income tax would still be exacted, the contrastbetween the successful barrister with an Income of L20,000 a year andno savings, who would consequently escape the capital levy, and thepoor clergyman who had saved L1000 and would consequently be liable toit, fell to the ground. In other words, because both lawyer and parsonpaid income tax, it was fair that the former should escape the capitallevy while the latter should have to pay it!

But needs must when the devil drives, and in a crisis of this kind itis not always possible to look too closely into questions of equity inraising money. It is necessary, however, to look very closely into theprobable economic effects of any suggested form of taxation, and, ifwe find that it is likely to diminish the future wealth productionof the nation, to reject it, however attractive it may seem to beat first sight. A levy on capital which would certainly check theincentive to save, by the fear that, if such a thing were oncesuccessfully put through, it might very likely be repeated, would dryup the springs of that supply of capital which is absolutely essentialto the increase of the nation's productive power. Moreover, businessmen who suddenly found themselves shorn of 10 to 20 per cent. oftheir available capital would find their ability to enter into freshenterprise seriously diminished just at the very time when it isessential that all the organisers of production and commerce in thiscountry should be most actively engaged in every possible form ofenterprise, in order to make good the ravages of war.