In the above words the Income Taxes of 1905 were faithfully described in their essential details. In the years that have elapsed various reforms have been made.
In the Finance Act of 1907 the principle of differentiation as between earned and unearned incomes was introduced. Mr Asquith embodied the principle in the following words (Finance Act, 1907, clause 19, section 1):
"Any individual who claims and proves, in manner provided by this section, that his total income from all sources does not exceed two thousand pounds, and that any part of that income is earned income, shall be entitled, subject to the provisions of this section, to such relief from income tax as will reduce the amount payable on the earned income to the amount which would be payable if the tax were charged on that income at the rate of ninepence."
As the nominal rate of tax was 1s., earned incomes thus enjoyed a substantial reduction. The abatement system, described on page 297, continued to apply to both earned and unearned incomes, so that two very roughly graduated scales of taxation came into existence, which are illustrated on page 304.
The number of tax-payers who understood what had been done for them may be described as negligible. Without working out such a table as that on p. 304, the income tax payer remained in ignorance of what treatment had been meted out to him. The moral effect of a considerable reform was almost completely lost.
In the famous Finance Act of 1909, which did not pass into law, owing to the action of the House of Lords, until the present year (1910), Mr Lloyd George, succeeding Mr Asquith as Chancellor of the Exchequer, made alterations in the Income Tax as excellent in principle and as obscure in operation as that just described.
He raised the nominal rate of taxation to fourteen pence in the £, and left the rate for earned incomes at ninepence, thus increasing the differentiation between earned and unearned incomes. He also introduced a new step in differentiation by enacting that earned incomes exceeding £2,000 a year but not exceeding £3,000 a year should pay twelve pence instead of fourteen pence in the £.
THE EFFECT OF MR ASQUITH'S DIFFERENTIATION
OF THE INCOME TAX, 1907