Any taxation scheme dependent upon general capital valuation, where the amount to be paid is large—say larger than a year’s revenue—falls, in my judgment, into the second or third rate category of taxation expedients. Whenever we are living in uncertain times, with no steadiness of outlook, valuation of many classes of wealth is then a tremendous lottery, and collection—which takes time—may be no less so.
The fair face of the outright and graduated levy would be marred in many ways. First, there are cases affected by valuation. The valuation of a fixed rate of interest on good security is easy enough. The valuation of a field or a house in these days presents more difficulty, but is, of course, practicable. In practice, however, people do not own these things outright. They have only an interest in them. This is where the rub comes. A very large part of the property in this country is held in life interests, and on reversions or contingencies. It is not a question of saying that a given property is worth £10,000 and that it forms part of the fortune of Jones, who pays 40 per cent. duty. The point is that the £10,000 is split between Jones and Robinson. Jones maybe has a life interest in it, and Robinson a reversionary interest. You value Jones’s wealth by his prospect of life on a life table, and Robinson has the balance. But the life table does not indicate the actual likelihood of Jones’s life being fifteen years. It only represents the actuarial average expectation of all the lives. This may be useful enough for insurance dependent on the total experience, but it may be a shocking injustice to the individual in taxation. Only some 10 per cent. of the Joneses will live for the allotted time, and for the rest your valuation and your tax will be dead wrong, either too much or too little. Jones will be coming to you two years after he has paid, or rather his executors will come to you and say: “We paid a tax based on Jones living 15 years, and he has died; this ought, therefore, to be shifted to Robinson.”
Difficulties of Valuation
People often say that a Capital Levy merely imagines everybody dying at the same time. This parallel is wrong in degree when you are considering the ease of paying duty or of changing the market values by a glut of shares, and it is still more wrong when you are thinking of ease of valuation. When a man is dead, he is dead, and in estimating the death duty you have not to bother about how long he is going to live! But every time you value a life interest and take a big slice of it for tax you are probably doing a double injustice. The charge is incorrect for two taxpayers. On a flat rate of tax this difficulty might be made less, but the essence of any effective levy is a progressive scale. Moreover, whether you are right or wrong about Robinson’s tax, he has nothing in hand with which to pay it. He has either to raise a mortgage on his expectation (on which he pays annual interest) or pay you by instalments. So far as his burden is concerned, therefore, there is no outright cut. You will be getting an annual figure over nearly the whole class of life interests and reversions. It is difficult to see how one can escape making adjustments year after year for some time in the light of the ascertained facts, until the expiry of, say, nine or ten years has reduced the disparities between the estimated valuations and the facts of life to smaller proportions.
Next come those valuations which depend for their accuracy upon being the true mid-point of probabilities. A given mine may last for five years in the view of some experts, or it may go on for fifteen in the view of others, and you may take a mid-point, say ten, and collect your tax, but, shortly after, this valuation turns out to be badly wrong, though all your valuations in the aggregate are correct. While the active procedure of collecting the levy is in progress for a number of years these assessments will simply shout at you for adjustment. There are other types of difficulty in assessment which involve annual adjustment, but you will appreciate most the necessity for care in the collection. Enthusiastic advocates for the levy meet every hard case put forward where it is difficult to raise money, such as a private ownership of an indivisible business, by saying: “But that will be made in instalments, or the man can raise a mortgage.” But the extent to which this is done robs the levy of all the virtues attaching to outrightness, for each instalment becomes, as the years roll on, different in its real content upon a shifting price level, and every payment of interest on the mortgage—to say nothing of the ultimate repayment of that mortgage—falls to be met as if reckoned upon the original currency level. Then those classes of wealth which are not easily realisable without putting down the market price also require treatment by instalments, and those who wish to put forward a logical scheme also add a special charge upon salary-earners for some years—a pseudo-capitalisation of their earning power.
A really fair and practicable levy would certainly be honeycombed with annual adjustments and payments for some period of years, and one must consider how far this would invalidate the economic case of the “outright cut,” and make it no better than a high income-tax; indeed far worse, for the high income-tax does at least follow closely upon the annual facts as they change, or is not stereotyped by a valuation made in obsolete conditions. Imagine three shipowners each with vessels valued at £200,000, and each called upon to pay 20 per cent., or £40,000. One owning five small ships might have sold one of them, and thus paid his bill; the second, with one large ship, might have agreed to pay £8000 annually (plus interest) for five years; while the third might have mortgaged his vessel for £40,000, having no other capital at disposal. At to-day’s values each might have been worth, say, £50,000, but for the tax. The first would actually have ships worth £40,000, so he would have borne the correct duty of 20 per cent. The second would have £50,000, bringing in, say, £5000 annually, and would be attempting to pay £8000 out of it, while the third would be paying £2000 a year out of his income and still be faced with an 80 per cent. charge on his fortune! His assessment is computed at one point of time, and liquidated at another, when its incidence is totally different.
If one cannot have a levy complete at the time of imposition, it clearly ought not to be launched at a time of rapidly changing prices. But that is, perhaps, when the economic case for it is strongest.
A Desperate Remedy
I do not rule the Capital Levy out as impracticable by any means, but as a taxation expedient I cannot be enthusiastic about it. It is a desperate remedy. But if our present temper for “annual” tax relief at all costs continues, we may need a desperate remedy. Without a levy what kind of position can you look forward to? Make some assumptions, not with any virtue in their details, but just in order to determine the possible prospect. If in fifteen to twenty years reparation payments have wiped out 1000 millions, debt repayments another 1000, and ordinary reductions by sinking funds another 1000 millions, you will have the debt down to 5000 millions, and possibly the lower interest then effective may bring the annual charge down to some 200 or 225 million pounds. If the population has reached sixty millions the nominal annual charge will be reduced from £7 16s. by one-half, but if prices have dropped further, say half-way, to the pre-war level, the comparable burden will still be £4 10s. per head.
It is no good talking about “holidays from taxation” and imagining you can get rid of this thing easily; you won’t. We are still in the war financially. There is the same need of the true national spirit and heroism as there was then. Thus hard facts may ultimately force us to some such expedient as the levy, but we should not accept it light-heartedly, or regard it as an obvious panacea. Perhaps in two or three years we may tell whether economic conditions are stable enough to rob it of its worst evils. The question whether the burden of rapidly relieving debt by this means in an instalment levy over a decade is actually lighter than the sinking fund method, depends on the relation of the drop in prices over the short period to the drop over the ensuing period, with a proper allowance for discount—at the moment an insoluble problem. I cannot yet with confidence join those who, on purely economic and non-political grounds, commend the scheme and treat it as “good business for the income-tax payer.”