It must be frankly recognized that, in principle, the Income Tax reforms urged in "Riches and Poverty," edition 1905, have been largely conceded. Method is so important in this connexion, however, that it is necessary to insist that the Income Tax still needs serious revision.
Why is it that so much misplaced ingenuity has been applied to our Income Tax law by successive Chancellors of the Exchequer? Why these alleged rates of Income Tax, which on inquiry prove to be nominal, and the enactment of a clumsy Super-Tax to amend a sufficiently clumsy Income Tax? Why should it be necessary to arrive at a "sort of" graduation by a series of provisions, which few men, inside or outside the legislature, pretend to understand?
The explanation is that we have not a complete Census of Incomes. The point is of the first importance. The establishment, within the limits of a very small possible margin of error, of the number of British Income Tax payers in 1903, which I effected by a careful examination of so far uncorrelated facts in "Riches and Poverty," edition 1905, brought to light the then unsuspected fact that about 750,000 out of about 1,000,000 Income Tax payers actually declared their individual aggregate incomes from all sources for the purposes of Income Tax.
These declarations, as already explained, were made by the smaller Income Tax payers in order to avail themselves of the abatement system, the abatements being granted only to those persons with incomes not exceeding £700 a year who made declarations. In effect, those of this class who do not declare are heavily fined.
The number of the declarants was further increased in 1907 by Mr Asquith's differentiation of the Income Tax.
Mr Asquith enacted, as we have seen, that persons who earned their incomes, and whose incomes did not exceed £2,000 a year, should enjoy a lower rate of taxation if they declared their incomes.
This led to declarations by a fresh batch of Income Tax payers, and it became possible for Somerset House to collect and publish a new set of most valuable statistics. Unfortunately, the precise facts of the case have neither been collected nor published, important as the knowledge of them is if we are to tax wisely and justly. Nevertheless, there is little doubt that the new batch of declarations between £700 and £2,000 a year raised, or will soon raise, the proportion of Income Tax payers making personal declarations to over nine out of eleven of the whole body.
The question immediately suggests itself: Why should not the balance of two out of eleven, or thereabouts, be compelled to fall into line with the majority? This balance consists, of course, of the well-to-do and rich, chiefly those who derive their incomes from property. These persons are not taxed directly at all. The State relies upon what is called "taxing at the source." That is, dividends are taxed at the company's offices before they are distributed, and rents are taxed through the occupier, the occupiers being left to recover the Schedule A tax from the landlords and houselords.
This reliance upon an indirect form of "direct" taxation leads, of course, to much income escaping tax, for rich people, it will be seen, have not to make a return of their incomes, but are in the happy position of letting the State catch them when it can. No other country levying an Income Tax does this thing; yet we perversely maintain that there is no system so effective as ours. Happily, the Finance Act of 1909 (passed in 1910) still further increases the number of those who are to declare.
First, as to earned incomes, as noted above, Mr Lloyd George enacted that earned incomes over £2,000 but not over £3,000 are to continue to pay one shilling in the £, and that those over £3,000 are to pay fourteen pence. It follows that a new batch of declarations will be forthcoming from those, or most of those, between £2,000 and £3,000, in order to get the shilling rate.