POST-WAR FINANCE

November, 1918

Taxation after the War--Mr. Hoare's Scheme described and analysed--ThePosition of the Rentier--Estimates of the Post-War Debt--TheCompulsory Loan Proposal--What Advantages has it over a Levy onCapital?--The Argument from Social Justice--Questions still to beanswered--The Choice between a Levy and Stiff Taxation--Are we stilla Creditor Nation?--Our Debt not a Hopeless Problem--Suggestions forsolving it.

Under this heading two very interesting articles were contributed tothe October issue of Sperling's Journal by Mr Alfred Hoare and an"Ex-M.P.," and the subject is clearly one to which, now that the endof the war has been brought appreciably nearer by the feats of theAllied armies, too much thought and discussion can hardly be given. How are we going to face the problem that has been built up for us bythe bad finance of the war, the low proportion of its cost that hasbeen paid for out of taxation, and the consequent huge debt withwhich--it is already over L7000 millions gross--the State will besaddled? Mr. Hoare answered the question by proposing a scheme oftaxation of what he called Rente, by which he meant all forms of"unearned income"--"rentals from freehold and leasehold property,interest upon loans whether public or private, and dividends on jointstock companies or sleeping partnerships." He added that in hisopinion earned income above a certain figure might reasonably be addedto this category on the ground that it has, in some instances, verymuch the same characteristics as unearned; the income of a "successfulprofessional man or clown or jockey or opera star" being due topeculiar qualities; "and it would be no great hardship if earnedincome above, say, a thousand a year for a married couple, with anadditional three hundred for every child under twenty-five years ofage were regarded as unearned, and taxed accordingly." Income wasthus the basis of Mr Hoare's scheme. Rente he regards as an agencyregulating distribution, and requiring to be constantly checked. "Itis," he says, "an elementary principle of social health, and economicprosperity that the share of the national wealth enjoyed by theRentier, by the owner, that is, of unearned income, should not beexcessive," Most people who can follow his admirable example and takea detached and unbiassed view of questions which affect their pocketso closely, will agree with him In this opinion. The Rentier lives onthe proceeds of work done in the past by him or by some other person;and it is not good for our economic health that he should grow toofat at the expense of those who are working now, lest the latter bediscouraged and work with less spirit.

At the same time we have to remember that the work done in the past bythe Rentier or those whom he represents, has given us the plant andequipment (in the widest sense of the phrase) with which we are nowworking. If, therefore, we penalise the Rentier too severely we shalldiscourage his future creation; the present race of earners, if theysee that those who are living on past savings are shorn too closewill be deterred from saving, will put their surplus earnings intoextravagant spending instead of into plant and equipment, and theeconomic future of the nation, and of the world, will be _pro tanto_less hopeful. If once our fiscal system is going to propagate theview--already so rampant among the happy-go-lucky citizens of thisunthrifty people--that the worst thing to do with money is to save itthere will be bad times ahead for our industry and commerce, which canonly get the capital that it needs if somebody saves it. Mr Hoare'selaborate calculations led him to conclusions involving a tax of11s. 6d. in the pound on unearned income. This figure is, I hope, needlessly high. To arrive at it he assumed that peace might beconcluded towards the end of 1919, and that when peace conditions arefully re-established--which will take, he thinks, three years, theNational Debt will amount to L10,000 millions, involving annualinterest of L500 millions, which, added to the total Rente of thecountry in 1913 (which he made out to be L520 millions), will make atotal Rente in 1923 of L1020 millions. His view is that the burden ofthe National Debt should be thrown by means of the income tax upon thenational Rente, not taxing it out of existence, but by such a scale oftaxation as would reduce the net Rente of the country to approximatelythe level at which it stood before the war.

There is good reason to hope that Mr Hoare's figures will not bereached. He took L10,000 millions merely as a round sum. Mr Bonar Law,it will be remembered, worked out our net debt on March 31st next atL6856 millions, taking credit for half the estimated amount of loansto Allies as a good asset. If we prefer as sounder bookkeeping towrite off the whole of our loans to Allies for the time being andto apply anything that we may hereafter receive on that account toSinking Fund, the debt, on the Chancellor's figures, will amount onMarch 31st (if the war goes on till that date) to L7672 millions. Evenif the war went on for six months more it ought not to bring the debtup to more than L9000 millions at the outside. It is quite true, asMr Hoare says, that the return to peace conditions will be a gradualprocess, and that expenditure will not come back to a peace basis allat once. Demobilisation and other matters which were left, by ourcheery Chancellor, out of the airy after-war balance-sheet that he solight-heartedly constructed, may cost L1000 millions or more beforewe have done with them. But against them we can set a string ofrecoverable assets which, in the Chancellor's hands, footed up a totalof L1172 millions--balances in agents' hands, due debts (apart fromloans to Allies), land, securities, ships, buildings, stores InMunitions Department, arrears of taxation, and so on. With his 11s.6d. in the pound on unearned and 6s. in the pound on earned incomes,Mr Hoare expects a revenue of L620 millions, "or enough to provide forthe interest of the debt with a 1 per cent. Sinking Fund, andleave L20 millions towards the Supply Services." But Mr Bonar Lawanticipated a total peace Budget (if the war ended by March 31st next) of L650 millions. This was probably too low, but we may at least hopethat Mr Hoare has gone rather further than was necessary to be on thesafe side.

In the other article on the subject of post-war debt contributed tothe last number of this Journal, an "Ex-M.P." plumped for a somewhatnovel variety of the Levy on Capital, in the shape of a CompulsoryLoan, bearing no interest and repayable in 100 years. Each individualcitizen to be made to subscribe to the extent of 20 per cent. ofhis possessions. Ten per cent. of the amount due to be paid onapplication, 10 per cent. six months after allotment, and 80 per cent.on January 1st of the following year. When desired, the Government toadvance at 5 per cent. the money necessary for the payment subsequentto allotment, full repayment of such advances to be made withineight years. A Sinking Fund to be established to redeem the loan atmaturity. But is there any real advantage in this scheme over the Levyon Capital, from which it only differs by the receipt by the payer ofa promise to repay in 100 years' time? The approximate value ofL1000 nominal of the Compulsory Loan stock would be, according to"Ex-M.P.'s" calculation, in the year of issue L7 12s., money beingworth 5 per cent. and assuming that rate to be current during theremainder of the term. The claim that there is no confiscation,because "a perfectly good security is given for the money received,"would seem rather futile to those who paid L1000 and received asecurity, the present value of which might be below L10. They mightvery likely think that outright confiscation (since confiscationoriginally means nothing but "putting into the Treasury") is really asimpler way of dealing with the problem. "Ex-M.P.," however, estimatesthat the immediate redemption of L2800 millions of debt (which he,rather modestly, expects to be the result of his 20 per cent. levy)would enable the balance of the War Debt to be converted into 3-1/2per cent. stock. This may be true, but if so it is equally true if asimilar or larger amount of debt is cancelled by means of an outrightLevy on Capital.

The merits and demerits of a Levy on Capital have already been dealtwith in the pages of this Journal "Ex-M.P.," however, brought forwarda slightly novel form of argument in its favour. He pointed out thatthe money constituting the great increase in debt that has taken placeduring the war will have been, in the main, contributed by people whohave worked at home under the protection of the Army and Navy, whilethe soldiers and sailors have been prevented by the duty which sentthem out to risk their lives from subscribing a proportionate share tothe National Debt. Hence "a class that deserves most of the State willfind itself indebted to a class which--if it does not deserve least ofthe State--has, at any rate, turned a national emergency to personalprofit." This is a strong argument, which, has been used frequentlyin the course of the war in the pages of the Economist, againstborrowing for war purposes to the large extent to which our timidrulers have adopted the policy. "To be really just," the writercontinued, "the process of taxation ... must be applied with greatestforce to those who have accumulated their money since the outbreak ofwar, and only to a less degree to those whose fortunes have not beenbuilt upon their country's necessity. The difficulty of separatingthese two classes of wealth is great, and must, in the writer'sopinion, be effected by separate legislation--legislation which mightjustly be based upon the increase in post-1913 incomes, a record ofwhich should now be in preparation at Somerset House." Everyone willagree that everything possible should be done to take the burden ofthe war debt off the shoulders of those who have fought for us; but itis equally clear that now that the mischief of this huge debt has beendone, it will be exceedingly difficult to repair it by any ingenuitiesof this kind. For instance, if the kind of taxation--in the shape ofa Compulsory Loan--proposed by "Ex-M.P." were enforced, how can we besure that it would not take a large slice off capital, the next heirto which is a soldier or a sailor? Bad finance is so much easier toperpetrate than to remedy that one is almost certain to come acrosssuch objections as this to any scheme for making the war profiteers"cough up" some of their gains.

Moreover, we have to remember that by no means the whole of thewar debt represents the gains of those who "have turned a nationalemergency to personal profit." Some people whose incomes have beenactually decreased by the war, especially when currency depreciationis taken into account, have, in response to the appeals of theWar Savings Committee, saved more than they ever saved before bypatriotically stinting themselves. And even the savers who have savedout of war profits were so far more patriotic than the war profiteerswho did not save but squandered. In all the discussion concerningthe Levy on Capital I have not seen any answer (even in Mr PethickLawrence's very persuasive little book in its favour) to the threegreat objections to it (1) that it lets off the squanderer andpenalises the saver; (2) that the difficulty, trouble and expenseinvolved by the necessary valuation, and the iniquities and fraudsthat are almost certain to arise out of it, will be enormous; and(3) that its economic effect may be very serious in discouragingaccumulation. "Why should any one save," the unthrifty soul will mostnaturally ask, "if his savings are liable to have a slice cut out ofthem by a levy at any time?" The advocates of the Levy, and "Ex-M.P."in his advocacy of a Compulsory Loan for repayment of debt; assumethat it can be done once and for all and never again. "Take one-fifthof a man's savings away as an emergency measure not to be repeated,and he will at once endeavour to save it back again." But how will youpersuade him that it is an emergency measure not to be repeated? Howcan you be sure that it is so? I have heard a very distinguishedSocialist, discussing in private the beauties of the Levy on Capital,point out that it is the sort of thing which, when once the ice hasbeen broken, can be done again so easily. From the Socialist point ofview the Levy on Capital is, of course, a simple means of getting, byrepetitions of it at regular intervals, all the means of productioninto the hands of the State; but would the State make a good use ofthem?

Another assumption about the Levy on Capital that seems to me to bethe merest will o' the wisp is the delusion that the whole saving thatit would entail by reducing the debt charge would necessarily andcertainly go to the relief of income tax. On this assumption MrPethick Lawrence bases his most persuasive appeal to the smallerincome-tax payer, by showing that he would be better off after a Levyon Capital than before it, thanks to the reduction in income tax,which is assumed as axiomatically arising in its train. But isthis certain or even likely? Is it not much more probable that our Government, finding its post-war Budget greatly lightened by a Levy onCapital or a Compulsory Loan to redeem debt, will think itself free toindulge in extravagance, maintaining a considerable part of the warincome tax and wasting it on rash experiments? All these weaknesses,which appear to be inherent alike in the Levy on Capital or in thescheme which gilds the pill by calling it a Compulsory Loan, seem tobe ignored or neglected (perhaps because they are unanswerable) bytheir advocates. On the other hand, there are certain psychologicalarguments on the other side. If the well-to-do, who would have to paythe Levy or subscribe to the Compulsory Loan, would prefer that systemto a high income tax, there is no more to be said. A tax that ispopular with the payer, as compared with other modes of shearinghis fleece, needs no further recommendation. But, in view of theprobability of the experiment, once tried, being shortly andfrequently repeated, I Very much doubt whether this is so; as far as Ihave been able by personal inquiry to test opinion on the point I havefound it almost unanimously adverse among those whom the Levy wouldmost seriously affect. If, as is much more likely, the imposition ofa Levy created better feeling among the working classes and thereturning soldiers and tended to more harmonious co-operation inafter-war tasks of reconstruction, it might be worth while to face itsevils and its dangers. But here again it is quite probable that if theburden of war debt were clearly and palpably put on the shoulders bestable to bear it, that is, on those who are lifted by the giftsof fortune--either in inherited money or unusual brainpower orfaculties--by an equitably graded income tax, the effect might be justas good on the minds of those who suspect that the rich have battenedthroughout the war on exploitation of the poor.

This much at least seems to be agreed by most reasonable people aboutthe debt charge--that it will have to be raised, either by a Levy onCapital or by income tax or some other form of direct taxation, fromthose who are blessed with a margin. We are not likely to repeat ourancestors' mistake, after the Napoleonic War, of throwing the wholeburden on to the general consumer by indirect taxation of necessariesand of articles of general consumption. Even Tariff "Reformers" saylittle about the revenue that their fiscal schemes would bring in. Andwith good reason. For in so far as they secured Protection they wouldbring in no revenue; we cannot at once keep out foreign goods and taxthem; and any revenue that they brought in would be most expensivelyraised, because a large part of the extra price paid by the consumerwould go not to the State but into the pockets of the home producer.Nor is it likely that any of the many schemes--of which Mr Stilwell's"Great Plan, How to Pay for the War," is a particularly boldexample--for paying off debt by a huge issue of inconvertiblecurrency, will achieve any practical result. Not only would theydefraud the debt-holder by paying him off in currency enormouslydepreciated by the multiplication of it that would be involved; butthey would also, by that depreciation, throw the burden of the debton the shoulders of the general consumer through a further disastrousrise in prices, and so would accentuate the bitterness and discontentalready rife owing to the war-time dearness and all the suspicions ofprofiteering and exploitation that it has engendered.

After all, this problem of the war debt, in so far as it is held athome, is not one that ought to terrify us if we look at it steadily.People talk and write as if when the war is over the business ofpaying for it will begin. That is not really so. The war has been paidfor as it went on, and, except in so far as it has been financed byborrowing abroad, it has been paid for by us as a nation. Whatever wehave used for the war we have paid for as it went on, partly withthe help of loans from America and from other countries--Argentina,Holland, Switzerland, etc.--that have lent us money. These loansamount, as far as they can be traced from the official figures,to about L1300 millions. Against them we can set our loans to ourDominions, over L200 millions (a perfectly good asset), and our loansto our Allies, perhaps L1500 millions, which the Chancellor proposesto write down by 50 per cent., and might perhaps treat still moredrastically. To meet this foreign debt we shall have to turn out somuch stuff--goods and services of all kinds--for sale abroad to meetthe interest and repayment. We have further impoverished ourselves byselling our foreign securities abroad No figure has been publishedgiving any clue to the amount of these sales, and we may perhaps guessthem at L1000 millions. If the pre-war estimates of our overseasinvestments at L4000 millions were anywhere near the mark. It thusappears that we shall end the war still a great creditor nation.

In so far as the debt was raised at home, the war was paid for bythose who bought the securities offered, and we have now to pay theminterest and set about repaying them the capital. This processwill not diminish the national wealth, but will only affect itsdistribution. It will not diminish the amount of available capital,but may even rather increase it by gathering into the hands of thedebt-holders--who are ex-hypothesi folk with an inclination forsaving--money that might, if left in the hands of those from whom itis collected, have been squandered. The payment of the debt chargemerely means that those who came forward with their money when theywere asked to subscribe to war loans, have, according to the extentof the effort that they then made, a set-off against the subsequenttaxation involved by the war debt. It would have been a much simplerand more businesslike proceeding to have taken, instead of borrowing,a much larger proportion of the war's cost during the war; but it istoo late now to rub in this platitude which is now pretty generallyadmitted. Mr Hoare showed in last month's Journal that the creationof the War Debt has caused a huge addition to what he has calledRente--the gross income of the propertied classes; and there is muchlogic in his contention that this income is the source from which thedebt charge should be met. At the same time both justice and economicexpediency seem to demand that his wider interpretation of Rente, tomake it include the earnings of those whose special qualifications(or, we may add, special luck) put them in a position to earn moreeasily than the struggling majority, should be applied to taxationinvolved by the debt charge.

How, then, shall we deal with the debt? In the first place we wanta good Sinking Fund--1 per cent. at least--and all realisations ofassets in the shape of loans repaid, ships, etc., sold, should beused for reduction of our foreign debt. For the home charge we want aspecial form of income tax that will fall as lightly and indirectlyas possible on industry; that is, that it should be imposed on theindividual taxpayer direct. So that what we want is an extended,reformed and better graduated form of the super-tax brought down solow that every one who is not merely rich but comfortable should payhis share, For example, any single man or woman with any excess overL500 a year of unearned income, or over L800 a year of earned incomemight well pay super-tax on that excess. The exemption limit mightwell be raised by 50 per cent. for married couples (if their jointincomes are still to be counted as one), and by L100 a year for eachchild between the age of five and twenty-five. But all these figuresare mere suggestions, and the details of the scheme would have to beworked out by Inland Revenue officials, whose experience and knowledgeof the practical working of such matters qualifies them for the task.The broad principle is a special tax for the debt charge to be raiseddirect from individual incomes with skilful differentiation, accordingto the circumstances of the taxpayer, in the matter of the numberof his dependants, and also according to the source of the income,whether it is being earned by exertions which illness might terminateor received from invested funds, and therefore beyond the reach of the"slings and arrows of outrageous fortune." That portion of the taxthat is required for Sinking Fund might be made payable, at the optionof the taxpayer, in Government securities at prices giving someadvantage to the holder. This form of special debt-charge super-taxwould enable the ordinary income tax to be reduced considerably atonce. Mr Edward Lees, secretary to the Manchester and County Bank, hasput forward a scheme by which taxpayers can buy in advance immunityfor so many years from so much annual income tax. If this suggestioncould be worked it might provide a means of quickening the debt'srepayment, though it looks rather like exchanging one form of debt foranother. But, in any case, it is urgent that the long promised reformof income tax should be set in hand at once, so that it may be purgedof its present inequities and anomalies and set to work in peace toredeem debt on a new and more scientific basis.