CHAPTER III

THE MODERN INCOME TAX: A HALF CENTURY OF ACHIEVEMENT, 1862-1911

§ 1. The Uneventful Decade, 1862-1872

As we have seen in the last chapter, it had proved to be impossible to abolish the income tax at the beginning of the sixties. The only result of the discussion was that Gladstone contented himself knocking Id. off the rate. During the next few years the same policy was followed. The tax continued, but the increasing prosperity of the country made possible a progressive diminution in the rate. In 1863 Gladstone reduced the tax to 7a., and in 1864 to 6d., basing his action on the ground that the country might soon be able to decide fairly and squarely whether it desired to retain the tax permanently. "For it is very undesirable," declared he in 1864, "that the income tax should creep unawares into perpetuity." In 1865 the rate was reduced to 4d., a reduction which in Gladstone's opinion made the reduction of the tax easy, or its extinction practicable. The succeeding years, however, with their frequent changes in ministry, were not uniformly prosperous, and Gladstone's second attempt to prepare for the extinction of the tax proved a failure. Under both the Conservative and the Liberal ministries up to 1874 the income tax was continued, now at a higher and now at a lower rate.

In the interval from 1862 to 1874 several minor changes were made in the law. In 1863 the abatement which in the case of incomes between £100 and £150 had been allowed on so much of any duty as might exceed the rate of 5d.,. was fixed at the definite figure of £60, and was now made applicable to incomes of from £100 to £200. Incomes below £100 were as before totally exempted. In 1865 a modification was made in the system of permitting deductions in

In

Schedule D in cases where the actual profits for the year fell short of the profits computed on the average system. Section 133 of the act of 1842, following a similar section in the old law of 1806, had made general provision for such deduction. Taxpayers were permitted to avail themselves of this privilege when the actual profits for the year turned out to be less than the average profits for the three years; but the government was not permitted to charge more in the reverse case. The provision, therefore, was so one-sided, and had worked so unfairly in practice,1 that the taxpayer was now required to prove not only that his profits for the year were less than the sum assessed, but that they were less than the average of three years, including the year of assessment. other words, the taxpayer was compelled to show that his profits for the year were abnormally low. Moreover, the reduction was limited to the difference between an average based on the profits of the three preceding years and an average based on the profits of the year of assessment and two preceding years.2 In 1866 permission was given to the concerns mentioned in No. III. of Schedule A — mines, quarries, iron-works, and the like to be assessed, if they preferred, according to the rules of Schedule D.3 Practically, this was a concession to mine owners, enabling them to return their profits in one sum to the Special Commissioners, instead of having them assessed by the General Commissioners. In 1869 the Valuation (Metropolis) Act placed the assessment of Schedules A and B in London in the hands of surveyors, and provided for a quinquennial valuation a custom that was subsequently extended to the rest of the

1 Cf. Report of the Departmental Committee on the Income Tax, 1905, p. xvii. 2 28 and 29 Vict., c. 30, sec. 6. 8 $29 and 30 Vict., c. 36, sec. 8.

+ See Twenty-fourth Report of the Commissioners of Inland Revenue (1881), p. 78. This provision was at first held to transfer these concerns from Schedule A to Schedule D; but in 1881 the House of Lords reversed the decision on the ground that mines would be reduced from a five-year to a three-year period, and quarries increased from a single year to a three-year period, which had evidently not been contemplated. See Dowell, The Acts Relating to the Income Tax, 6th ed., by Piper. London, 1908, p. 81.

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country. Another act of the same year abolished the quarterly payment of income tax in Schedules A and B, as fixed by the law of 1842, and converted it into an annual payment, except in the case of railways. In 1872 poundage - remuneration of so much per pound on the assessment was abollished so far as it applied to civil service departments, and replaced by fixed salaries. In the same year an important change in abatements was made. The limit was now extended from £200 to £300, and the amount of abatement was increased from £60 to £80, so that incomes below £100 were wholly exempt, while incomes from £100 to £300 enjoyed an abatement of £80. In 1874 the privilege granted to taxpayers under Schedule D, who were assessed according to a three-year average, to compound for a term of three years, was withdrawn.4

The feeling of opposition to the tax was now gradually diminishing, although it had indeed by no means disappeared. McCulloch, for instance, in a new edition of his general treatise, declared his repugnance to the tax to be unshaken.5 Scarcely less antagonism was shown by Peto, who, after a long consideration of its defects, arrived at the conclusion that "the tax must be put upon a footing which will permit of fair assessment, and which will make it properly productive to the revenue at a moderate rate of duty. If this cannot be done, the tax must be abandoned. It is too oppressive, too obnoxious, too unequal, too immoral in its character to permit of its continuance." In the same way Professor Thorold Rogers 7

A Treatise on the Principles and Practical Influence of Taxation and the Funding System. By J. R. McCulloch, 3d ed., Edinburgh, 1863. See esp. pp. 105-107, 115, 135. But see Proposed Reform in the Income Tax and Extension of the Franchise to the Payers of the Same. By J. O. Y. London, 1863.

6 Taxation: Its Levy and Expenditure, Past and Future; being an Enquiry into our Financial Policy. By Sir S. Morton Peto. London, 1863, p. 82.

7 J. E. Thorold Rogers, "On the Statistical and Fiscal Definitions of the Word Income," Journal of the Statistical Society, vol. xxviii (1865), p. 257.

"The income

declared his preference for a property tax. Urquhart, also, desired the abolition of the tax, suggesting that it be replaced by a land tax coupled with a house tax;1 and Baxter held that the feeling against the income tax was held in check only by the public attachment to a theory. tax is an excellent example of the love of the British nation for abstract principles. It is founded upon two- the great principle of Direct Taxation, so strongly advocated by financial reformers; and the still greater principle of Equality of Taxation, so dear to political economists. Yet, if the income tax should be the test, it will be difficult to decide which of the twain is the most cordially hated by a discerning public."2 The opposition reached its climax, perhaps, in a violent pamphlet published in 1872, and written in the interests of an Anti-Income Tax Association. In this it is declared that "the income tax is unequal in its incidence, is vexatious in its operation, and is immoral in its mode of assessments and in its influence on those taxed." 3

Notwithstanding all these utterances, however, the general sentiment, which was slowly gaining ground, was expressed not only by Sir Stafford Northcote in 1862, when he stated that "the income tax is generally regarded as the financial reserve of the country, which should be kept available for emergencies," but especially by Noble in 1867. Noble, after showing how the administration of the income tax was being improved from decade to decade, declared that "the income tax may be regarded by the unreflecting with aversion; it may be more agreeable to be deceived into the payment of taxes, than to meet the open demand of the tax gatherer; yet unless the facts narrated in this volume are imaginary and our prosperity

1 Dialogues on Taxation, Local and Imperial. By W. Pollard Urquhart. Aberdeen, 1867, pp. 102, 103.

2 The Taxation of the United Kingdom. By R. Dudley Baxter. London, 1869, p. 92.

& The Income Tax. A Review of its History, and Reasons for its Repeal. To which is added a Reprint of a Pamphlet," Resist or Be Ruined," originally published in 1816. London, 1872, p. 13.

4 Twenty Years of Financial Policy, p. 367.

a delusion, the question naturally arises, whether the limits of improvement have been reached, or whether it would not, on every consideration, be a wise and statesmanlike policy to seek fresh triumphs in a field in which such laurels have been won. Shall we dismiss the mighty engine of such undoubted advantages from the public service; or shall we endeavour, by its aid, still further to advance the prosperity and happiness of the community?" The same idea is elaborated in a second work, where Noble now also demanded differentiation.2 Perhaps the strongest defence is made in a third work by Noble, published in 1875, in which he tells us that "it should, moreover, never be forgotten that the income tax is the great instrument by means of which our recent national prosperity has been accomplished." He adds that "this tax has one great and transcendent merit in comparison with the taxes that it has replaced; it does not hinder the creation of wealth, the expansion of trade, nor the development of manufacturing industry." He refers scornfully to the action of the Chambers of Commerce in "demanding the repeal of the income tax which, with all its faults, has been the main source of the great prosperity which has accrued to British commerce during the last twenty years." "3 There were even not wanting writers like Burt who were so enthusiastically favorable to the tax as to declare the distress of England between 1816 and 1842 to be due largely to the abolition of the income tax. Referring to the fact that it was being denounced as an inquisitorial tax, Burt added: "As a matter of fact, I

1 Fiscal Legislation, 1842-1865. A Review of the Financial Changes of that Period and their Effects upon Revenue, Trade, Manufactures, and Employment. By John Noble. London, 1867, p. 179.

2 The Queen's Taxes: An Inquiry into the Amount, Incidence, and Economic Results of the Taxation of the United Kingdom, Direct and Indirect. By John Noble. London, 1870, chap. 17-22.

3 National Finance: a Review of the Policy of the last two Parliaments, and of the Results of Modern Fiscal Legislation. By John Noble. London, 1875, pp. 226-228. Cf. also pp. 328–329.

4 The Incidence of Taxation and Debt on Industry. By J. Gurney Burt. London, n. d. [1871], p. 4.