Janus in Modern Life

by W. M. Flinders Petrie

It is therefore needful to leave the way open for gradual changes. In every new law, the changes of circumstance which are likely to arise should be anticipated, by leaving the way open for them to begin to act gently and gradually. The principle of fixed fines (based on income tax), regardless of any reflection on character, for various infractions of a civil law (or even of some criminal laws) should be always open, so that, as necessities arise, the prevalence of such fines would call attention to the need of some change. An excellent system has been found in allowing a department a large latitude in interpreting a law, or a dispensing power in administering it; and this system might well be extended so far as it was not seriously abused by favouritism. Another mode of change is to permit a variety of types in different places, as in local administration, and then allow a large latitude for the adoption of any type found to work well in another place. This is partly reached by varying bye-laws; but this might well be extended higher in the scale, and with local liberty to adopt any bye-law already sanctioned elsewhere. The ways would thus be open for gradual movements, which could extend until they produced such pressure on the larger and more organic laws as to cause a serious legislative step.

We will now turn to observe the far-reaching actual and probable effects of various laws, which at first might seem quite inadequate to cause such changes. Some years have passed since the graduation of death-duties, and we can begin to see the effects. The simple action of a tax, without any compulsion, has produced a profound change in a family system which centuries or thousands of years had left unaltered. The notorious clinging to power and money among the aged, has given way before the screw of the State. The custom which left the control of large estates to men generally between fifty and eighty years of age, and hampered their development by the dying hand, has largely yielded to the Indian custom, of the division of property among sons on their marriage or entry on public life. It is becoming habitual for a father to establish his sons with the family property, and only to retain such a portion of the estate as he may wish to fill his declining activities. This is a very beneficial change, though by no means a grateful one to the Exchequer which has brought it about. In lesser properties the same action occurs; a father will buy an annuity for himself, and distribute the remaining capital, each son being at liberty either to place his portion at compound interest, so as to replace at the probable date of his father's death the full amount which he would have received otherwise, or else to trust to replacing the amount when he may be at his most remunerative age.

Not only is this a great social change, with far-reaching consequences in the management of property, but it will also act in other lines. When a man deals with his property in the unchecked privacy of a will, he can neglect the pressure of personality of his children in favour of the sentiment of leaving a powerful family name in perpetuity. But primogeniture must more or less succumb before the obvious personal claims of those who are joining in the daily life. It requires not only a flinty heart but also a brazen face, to leave younger sons penniless when personally distributing the means of ensuring the happiness and the amenities of life. Hence it is probable that estates will be much more sub-divided, and sons encouraged to continue to live on corners of the paternal acres. In short it will be a step toward the French infinitesimal splitting of property.

This again will act in a fundamental manner on our colonising ability. Primogeniture has made us a colonising race; no system is so perfect for ensuring a supply of fit colonists. When each wealthy house in the land educated two or three sturdy sons, with every benefit of health and knowledge, and then sent them out to form new centres, with a small capital to start with, and a reserve of help at home for any dire emergencies, the most perfect colonising machine had been evolved. Without these conditions England could never have filled other continents as she has. When sons stay at home on portions of the old estate, and have not enough wealth for the high training of their families, all this colonising power will be at an end. France cannot colonise because her domestic system does not produce this type of man, fitted in person and in condition to take up such a life. Our high death-duties are a certain way to stop educated colonisation.

Another change is also seen resulting from these duties. England, more than other lands, was rich in private treasure houses of precious things—pictures, statuary, libraries, and other collections. These represented a large amount of capital locked up, but it yielded a rich interest in the home education of the upper classes, in redeeming them from the dull, unimaginative, coarse, or sordid lives of wealthy classes in some other lands. So long as a duty only equal to a few months' or a year's interest was levied, the succession was not too burdensome, and the state reaped a steady small return. But when the possession of such means of amenity involves at each generation a crushing tax on the productive part of an estate, they must be sacrificed. The collections are vanishing to other lands, where such short-sighted policy is unknown, and England will be left bare. A far more profitable policy would have been to exempt all artistic or historical collections from death-duties, if they were thrown open to the public for a certain number of days in each year. They would thus have become partly public museums, provided free of all cost to the surrounding districts.

Another serious consideration is that 10 or 15 per cent., or even 20 per cent. in case of bequests for public purposes, is taken off accumulated national capital and thrown into yearly income. The estate duty is incessantly eating up the national reserves, and using them for current expenses. We should call any family which did this shameless spendthrifts, yet this is the immoral fashion of our taxation.

The effect of income tax is one of the most serious economic subjects, because it directly touches the production of wealth. There is little objection to income tax for emergencies of war, because if merely nominal (1d. in the pound) during peace, the true amount taxable will be well known, and a sudden increase will be truly collected and will not have distinct economic effects if only used for a year or two. But treating direct tax on incomes as a large source of revenue has very important effects on a commercial nation. A tax as high as 1s. in the pound is practically a tax on all English enterprise as compared with foreign. If a mill can be run at Calais to produce non-dutiable articles, free of income tax on its dividends, while a mill at Dover pays 5 per cent. tax on its dividends, that constitutes a discrimination of 5 per cent. against the English manufacturer's capital. The outcome of the whole is that all shares of English companies will stand permanently at 5 per cent. lower value than the shares of foreign companies. Or in other words £4 interest will have to be paid by an English company for £95 raised by debenture, while the foreign company will raise £100 for the same interest. The immediate result is that investments will increasingly be made in foreign governments and companies, whose dividends are payable abroad, instead of in London. This is not merely an evasion of tax, but it is perfectly legal if the dividends are spent abroad. No one need pay tax on any cost of foreign travel or residence if they draw the money from foreign sources, and do not let it be trapped in London. Thus there will be an ever increasing demand for purely foreign investment, according to the amount of tax on the investments in England. If the proposal was carried out to tax all investments much higher as "unearned income," it would cripple all English manufacture for lack of the capital, which would be driven abroad to escape the tax. It might be thought that other governments will come into line, and tax equally with ours; but if they see their own commercial advantage they will be very loth to put this bar on English capital flowing into their land to gain freedom. Even if France and Germany did as we do, it might be well worth while for Monaco to become the financial centre of Europe by having no income tax on companies centred there. The recent De Beers decision illustrates this very clearly. A company with its work abroad, and its investors largely abroad, is taxed on all its income because it uses a few square yards of space in London as an office. Obviously it will not remain. London will no longer be the centre of commercial work of the world if 5 per cent. or perhaps 10 per cent. is the price to be paid by all who use it. No company will remain in England that is not fixed by its works being here, and all those who are fixed here will work at a permanent disadvantage compared to the foreigner. It is doubtless thought that the large income yielded by the interest on the national debt is a safe and easy subject of taxation; Italy indeed raises 20 per cent. income tax on its debt interest. But this tax is purely nominal, as it is discounted in the price of stock, and such a government is merely paying with the left hand what it takes with the right. The case is seen clearly in Italian stock which stands at 20 per cent. lower value than it otherwise would; that is to say, that Italy pays say £4 for the loan of £80 now, instead of for the loan of £100 which it would receive if this tax was not imposed. The same is equally true of the tax as applied to government salaries; it cannot be evaded, and therefore it is merely a diminution of the salary, or a depreciation of the quality of men obtained for the nominal salary. A government cannot tax its own payments by any financial jugglery. Of course a government can cheat like a private person; promise a certain payment, and then break its word, and pay less by a tax. But that is only a transient profit raised by the sale of its character, and is not a permanent bargain.

Another effect of income tax will be seen if the proposed higher grading of incomes is carried out. The same changes that we have traced owing to the death duties will be produced by the life duties. Property will be sub-divided wherever possible. Every child will have a trust created for its benefit, every member of a family will have a separate income, every large estate will be nominally the property of a group of independent persons—a family club. This will tend, like the death duties, toward equal shares, instead of the parent hive system of primogeniture; and it likewise marks the end of educated colonising. The effect of this may be good for family life, but it will be disastrous commercially. There will no longer be the large capitalists who can take the risks of great enterprises. To raise a large floating capital for great undertakings will require the co-operation of so many small capitalists, that it will not be worth while for any one investor to give time to the affair. The lack of personal concern and interest, and the cost of dealing with widely collected capital, will all be a detriment to enterprises of large extent.

But the most disastrous as well as immoral kind of taxation will be that proposed as additional upon all permanent investments, under the guise of "unearned income." It is a fatally easy screw for a government to put on; but the effect of it will be to penalise all British manufacture in competition with foreign productions. All that we have noticed about the effect of a 5 per cent. tax will apply far more rapidly and decisively if a 10 per cent. tax should be put on. Shippers would sail under another flag and transfer their offices of registration; manufacturers would pass to a tax-free country; and a larger proportion of persons living on fixed income would spend it abroad. Beside the material disadvantages of such high taxation on enterprise, it would be a grave moral detriment.

It is too often forgotten that in taxation the government wields one of the greatest means of moral education. What does it say now by its taxation? Suppose a man to have saved £100, and to consider whether he will spend it on unremunerative pleasures, or on useful public works. The government says, "If you will spend your money on waste and luxury, paying for useless and monstrous rooms, making men stand idle in your hall, or decorate your extravagant food; if you will make women waste their eyes and lives on a fresh absurdity of fashion, or sell their souls; or if you will pay boys to become ne'er-do-weels on golf-links—in short if you will do as much mischief as possible, we will take 5 per cent. of your money. But if you spend it on benefiting the world, improving cultivation, building railways, opening the waste places and making them blossom, we will take 18 per cent., and leave you only £82 out of your £100." That is to say 5 per cent. on the original earning of the capital, 5 per cent. tax on investment income, and 10 per cent. on death duties, as estimated on large capital by the Income Tax Commission, 1906. And if the proposed higher taxing of so-called "unearned income" were carried out, this government claim would rise to 23 per cent. or even higher. In all reason, after money when earned has paid its tax of 5 per cent. it should be free of all further claims, at least if employed for public utility, and there should be no tax on dividends whatever, nor any death duties on savings; all such taxation falls eventually on the capital of the useful undertakings, and directly cripples the industry of the country.