tax. Taking up next the other phase of discrimination, namely, the difference between precarious and realized incomes, or what he preferred to call "industrious" and "lazy" incomes, Gladstone held that there was practically no income which was "perfectly and entirely a lazy income, except the income of the fund-holder"; and there were in his mind insuperable objections to levying a higher tax on the funds. The scheme of the actuaries for a capitalization of the income tax he brushed aside as a "mere mathematical speculation," which "of all the plans of income tax reform is placed the furthest beyond the reach even of imagination, as a possible, or as a feasible measure." Finally, coming to the case of professional incomes, Gladstone confessed that it "appeals to our sympathies." But he held that here also "you cannot exempt professional incomes without breaking up the whole scheme of the tax." "The real tendency of all these exemptions," said Gladstone, "is the breaking up and destruction of the tax. I do not say the 'relinquishment,' because relinquishment is one thing and breaking up is another. To relinquish it is altogether safe because it is altogether honourable; but to break it up is to encourage the House of Commons to venture upon schemes which may look well upon paper and may serve the purpose of the moment, yet which will end in the destruction of the tax by the absurdities and by the iniquities which they involve."

Gladstone closed this part of his speech by stating: "One thing I hope this House will never do, and that is to nibble at this great question of state policy. . . . Depend upon it, when you come to close quarters with this subject, when you come to measure and test the respective relations of intelligence and labour and property in all their myriad complex forms, and when you come to represent these relations in arithmetical results, you are undertaking an operation of which I should. say that it is beyond the power of man to conduct it with satisfaction. . . . Whatever you do in regard to the income tax, you must be bold, you must be intelligible, you must be decisive. You must not palter with it. I believe it to be

of vital importance, whether you keep this tax or whether you part with it, that you either should keep it or should leave it, in a state in which it will be fit for service on an emergency; and this it will be impossible to do, if you break up the basis of your income tax."

Passing on to the question of the permanence of the tax, Gladstone pointed out that, while it is an engine of gigantic power for great national purposes, "there are circumstances attending its operation which make it difficult, perhaps impossible, at any rate, in our opinion not desirable, to maintain it as a portion of the permanent and ordinary finances of the country. The public feeling of its inequality is a fact most important in itself. The inquisition it entails is a most serious disadvantage, and the frauds to which it leads are an evil such as it is not possible to characterize in terms too strong.". It is essential, he thought, to allay the feeling "that the country is about to be entrapped unawares into its perpetuation." He proceeded to unfold his plans "to lay the ground for placing Parliament in such a position that at

given period it may, if it shall think fit, part with the tax." Here, however, he put fairly and squarely before the House the alternative: "If you determine to renew the income tax, will you make its early extinction your first and sole object, or will you, in order to bring to completion the noble work of commercial reform which is so far advanced, once more associate the income tax with a remission of duties, extensive in itself and beneficial to the community? We have considered fully these two alternatives," added Gladstone, "and we have decided deliberately in favour of the second." In other words, Gladstone proposed that the tax be renewed for two years at 7d. in the pound, for two more years at 6d. in the pound, and for three more years at 5d. in the pound; so that at the end of seven years, or in 1860, the tax would expire.

Such was Gladstone's argument on the income tax. The income tax has been of incalculable assistance, but it is an inherently bad tax. It must therefore serve only as a temporary measure. The alleged inequality of the tax, espe

cially from the point of view of differentiation, is perfectly true; but the remedy is impracticable. The only way to get rid of the inequality is to abolish the tax itself; and since the tax is to be kept only as a temporary tax it is better to continue it with these inequalities rather than to disrupt it as an engine of finance. The objection that property as such pays but little as compared with industry is met by the proposal to extend and to generalize the Death Duties.

Gladstone's suggestions led to a heated debate, in which Cobden, Disraeli, Henley, and Bulwer-Lytton took part; but Gladstone carried all his points by a large majority. Not only did he succeed at the time in turning the tide of public opinion, but so commanding was his mastery over parliament and the country, that as long as he remained in power he was able successfully to resist any attempt to alter the essential character of the tax.

The new law of 18531 included some important changes. The tax was extended to Ireland, which was now treated like Scotland, except that the assessment in Schedules A and B, instead of being on the full annual value, was upon the valuation for the poor rate; i.e., generally twenty per cent below the full annual value. In arguing for the cessation of the exemption of Ireland from the taxation, Gladstone had said: "Let me remind the Committee what exemption means; it does not mean that we have got a bottomless purse, that we can dispense exemptions to one man without injuring another. No, sir. The exemption of one man means the extra taxation of another, and the exemption of one country means the extra taxation of another." It was this consideration that carried the day.

Professional incomes (Schedule D, second case) were now charged on the average profits of the last three years, like the profits of trade. Investors in life-insurance policies were allowed to deduct the amount of their premiums. In the act of 1806, it will be remembered, the allowance for life-insurance premiums was restricted to persons with an income of

1 16 and 17 Vict., c. 34.

£150 or less. In 1842 this allowance was not granted. Now it was reintroduced, but made applicable to incomes of all amounts. So far as abatements and exemptions were concerned, the total exemption was now reduced from £150 to £100, while incomes between £100 and £150 were charged only 5d. instead of the regular 7d. Some changes were also made in the administration of the tax. The concession granted in 1850 to tenant farmers to have the assessments in Schedule D reduced to the actual profits, if they fell short of the assessment, was now extended to all tenants. Furthermore, an important alteration was made in Schedule D. Under the Act of 1842, it will be remembered that the income from foreign government securities in Schedule C was to be assessed by Special Commissioners, and that the bankers, or other individuals charged with the payment of the interest were required to make returns of such payments. This provision was now extended to the securities of all foreign companies under Schedule D, thus making the bankers, or agents, virtually responsible for the tax on all foreign securities whether public or private.

87. A Decade of Quiet

The expectations aroused by Gladstone as to the early extinction of the tax were doomed to be disappointed. Instead of the tax being reduced according to his forecast, the preparations for the Crimean War in 1854 and 1855 entailed the necessity of increasing the rate until it reached the figure of Is. 2d. a rate higher than any time since 1842. In 1857 Sir G. Lewis reduced the rate to 7d., and in 1858 Disraeli, in the hope of carrying out the proposals of 1853, reduced it still further to 5d. In 1859, however, when Gladstone again became Chancellor of the Exchequer, he raised the rate from 5d. to 9d., simply because he needed the money. Now, for the first time, the tax was utilized, in time of profound peace, as the elastic element in the budget, and was increased for the year in order to make good a deficiency in the ordinary

revenue. When 1860 arrived, Disraeli pointed out that the income tax "is unfortunately still alive; nay, more, it is a child which has gradually grown." As has been well said: "Alas, at the end of seven years, the long-suffering nation found itself in possession not of the much-desired Rachel, but of the ill-favored Leah." 1

Mr. Gladstone now made his second great budget speech, in which he carried through the commercial treaty with France and did away with all the remaining survivals of the protective tariff. But in order to make up the deficiency, in part at all events, he was compelled to increase the income tax to 10d., the highest point it had yet reached in time of peace; "and this, cruel fate, in the very year in which it was to have disappeared."2 The question of the repeal of the tax was not even discussed.

The administrative and other changes that were made in 1861 and the two previous years were as follows: In 1859. the allowance for life-insurance premiums was extended to contracts for deferred annuities issued by the government.3 In 1860 it was provided that railway profits should henceforth be assessed by the Commissioners for Special Purposes, and that the tax on salaries of railway officials and employees under Schedule E, likewise to be assessed by the Special Commissioners, should be paid by the company.5 In 1861 the provisions of the act of 1853 applicable to the securities of foreign companies were still further extended to those of colonial companies, the banker or agent being made responsible for the tax.6

So convinced, however, were many members of parliament that the tax was now in a fair way of becoming permanent, that Hubbard was able, despite the opposition of Gladstone, to carry, on February 19 1861, his motion for the appoint

1 Mr. Gladstone: A Study. By Sidney Buxton. London, 1901, p. 124.

2 Ibid., p. 44. For exact figures as to the annual rate and yield of the income tax see Appendix to chap. iii, infra.

8 22 and 23 Vict., c. 18, sec. 6.

423 and 24 Vict., c. 14, sec. 5.

5 Ibid., sec. 6.

6 24 and 25 Vict., c. 91, sec. 36.