The statement of the Chancellor that he had been converted to a belief in the abstract principle of graduation could not fail to start a notable discussion. Most of the disputants were inclined to agree with the Treasury officials, who had summed up the situation in 1885 as follows: "With regard to the inquisitorial character of the income tax, we may observe that under the present system the evil is reduced to a minimum. At the present time it is not too much to say that under Schedules A, B, and E fraudulent evasion is very difficult, and that under Schedules C and D, in a large number of instances, no temptation to fraud exists. . . . It is probably owing to these considerations that proposals which have been made from time to time for a graduated income tax have never been received with favour by any one who has had a practical experience of the working of the case. A graduated income tax could only be made dependent on personal returns of incomes, and the doors would thus be widely reopened to fraud."1 About a decade later Blunden, one of the most accomplished of the British officials, took a similarly conservative view of the situation, and summarized his arguments as follows:

1. "That the British income tax is at present constructed on lines peculiarly ill-adapted for conversion to the progressive model, owing to the very large extent to which incomes are taxed at their sources.

2.

"That its conversion would involve the reconstruction of the tax on the discarded and unscientific lines of direct assessment on general returns of the total income.

3.

eral.

"That evasion would then be easy, and would speedily become genThe tax would be an effective instrument of national demoralization. 4. "That the yield of the tax would be very little, if at all, enlarged by the change.

5. "That the suggestions made for attaining (in part) the desired ends, by a considerable extension of the system of degressive rates are impracticable." 2

12

1 Twenty-eighth Report of the Commissioners of Her Majesty's Inland Revenue. London, 1885, p. 85.

2 G. H. Blunden, "A Progressive Income Tax," The Economic Journal, vol. v (1895), p. 531. Blunden repeated virtually the same argument six years later in the article entitled, "The Future of the Income Tax," The Economic Journal, vol. xi (1901), esp. p. 161.

Goddard, who thought that the chief object of progressive taxation was to secure the additional revenues needed for putting into effect the new scheme of old-age pensions, suggested in preference to a graduated income tax a very high tax on income from investments and a somewhat lower tax on incomes from business.1 And Blunden later on proposed that the income tax be supplemented by a tax on rent and interest.2 It was reserved, however, for James Burns to publish the suggestion which, after the lapse of another decade, was to bear fruit. In an article written in 1896, in which he stated that "the machinery for assessing and collecting the income tax is much more effective to-day than fifty years ago," he advocated what he called "a graduated and differential scheme," and he here advanced the idea of what he called a super-tax. "The solution of the difficulty can be found in the retention of the present scheme (of stoppage at source) as a means of obtaining the first quota of taxation, and by the direct super-imposition of a graduated tax on incomes exceeding a certain sum-in other words, by a combination of the direct and indirect schemes." 3

During the ensuing decade, however, foreign affairs, and especially the South African War, prevented the giving of much attention to the problem, and the government contented itself with making various minor changes in the system. In 1896 assessments in Schedule B were arranged according to a relative scale. It will be remembered that in 1894 the rates in Schedules A and B were fixed at 8d. and 3d. respec

1 J. G. Goddard, “Graduated Taxation," Economic Review, vol. v (1895), p. 37 et seq.

2 "A New Property Tax," The Economic Journal, vol. vii (1897), p. 610.

3 James Burns, "A Graduated Income Tax," Westminster Review, vol. cxlvi (1896), p. 563. Whether this was really the first suggestion of a super-tax is a little doubtful. In Sir Charles Dilke's report to the Select Committee of 1906 we are told that the Board of Inland Revenue had in 1893-1894 advised Sir William Harcourt against graduation, "after examining a proposal for a supertax by direct assessment on all persons having more than £5000 a year." He does not tell us, however, by whom the proposal was made and whether the word 'super-tax" was used. Cf. Select Committee on the Income Tax, 1906, p. xix.

"

tively. Now it was provided that henceforth the annual rate of taxation should be charged upon one-third of the annual value of lands chargeable in Schedule B; that is, the assessable net income in Schedule B, on which the annual normal rate of tax was imposed, was deemed equivalent to one-third of the rent or annual value.1 In the same year a notable change was introduced into the practice by executive order. The concession made by the law of 1878 with respect to the wear and tear of plant and machinery in Schedule D2 was extended by a letter of the Chancellor of the Exchequer to the Association of the Chambers of Commerce, in which it was laid down that "where a claim is made in respect of the introduction of more modern machinery into a factory, no objection is to be taken to the allowance, as a deduction from the assessable profits of the year, of so much of the cost of replacement as is represented by the existing value of the machinery replaced." 3 In 1898 Sir Michael Hicks-Beach introduced several improvements. In the first place, he enlarged the system of abatements. The limit of complete exemption still remained at £160, and the abatements on assessments from £160 to £400 remained at £160. further abatement of £150 was now granted on incomes from £400 to £500, an abatement of £120 on incomes from £500 to £600, and an abatement of £70 on incomes from £600 to £700, the full rate to be levied only on incomes of over £700. Furthermore, it was provided that the deductions in Schedule D for the annual value of business premises should not exceed the amount for which the premises are assessed under Schedule A, as reduced according to the law of 1894. Finally, permission was given to either party to an appeal to employ a barrister or solicitor. In 1899 the last "Names" Act (designating by name the Land Tax Commissioners who select the General Commissioners) was

1 59 and 60 Vict., c. 28, sec. 26.

2 Supra, page 178.

But a

8 This letter is printed in full in the Report of the Departmental Committee on Income Tax, London, 1905, Appendix V.

enacted;1 and after 1906 the custom arose of appointing the Commissioners by reference to a schedule of names signed by, and deposited with, the clerk of the House of Commons, in lieu of inserting the names in the act itself.2 The same law of 1906 also abolished the property qualifications for the Land Tax Commissioners, thus extending still further the gradual democratization of the tax.

§ 4. The Departmental Committee of 1904

With the return of peace and the growing insistence upon the social as well as the fiscal aspects of taxation, the government was finally induced to take up afresh the whole matter of differentiation and graduation. In 1903 the Chancellor of the Exchequer, Mr. Ritchie, announced his intention of appointing a committee to consider the question in all its bearings; but in 1904, when the committee was actually appointed, provision was made only for a Departmental Committee. The special matters referred to the committee were the following: The prevention of fraud and evasion; the estimation of income derived from copyrights, patent rights, and terminable annuities; the allowance made in respect to the depreciation of estates charged to capital account; the system of computing profits on the three-year average; the rules governing the recovery of overpayments; and finally, the exemption of coöperative societies.

The committee was composed of six leading officials connected with the income tax admir istration: Messrs. Ritchie, Primrose, Buxton, Bonsor, Murray, and Gayler, with Mr. Llewelyn Davies as secretary. It heard a large number of witnesses, among them important officials like Sir Thomas Hewitt, Mr. Stoodley, Sir Francis Gore, and Mr. Walter Gyles; eminent actuaries like Messrs. Cockburn, Carter, and Blandford; prominent bankers like Mr. (now Sir) Felix Schuster, and various representatives of mercantile associa tions.

1 62 and 63 Vict., c. 24. Cf. supra, page 58.

26 Edward VII, c. 52.

The committee began its sittings on June 7, 1904, and made its report in June, 1905, publishing in a portly volume. the report proper, the minutes of evidence, and fifteen valuable memoranda and statements, in the form of appendices.1

The report, which sums up the testimony in these respects, begins with a short account of the methods then in force for assessments in Schedule D. At the commencement of each year the legal assessor for the parish - who is appointed by the General Commissioners of the district-- prepares a list of all persons whom he considers properly liable to assessment under Schedule D, and issues to each a form of return. Persons coming into the parish, even though they have no ostensible income under Schedule D, also receive a form; and if no liability is disclosed, the process is repeated every three or five years. Employers are required to furnish a list of persons in their employ, and a return is then issued to each of these. General notices are also posted on the church doors. If the return form is not sent back in due course, another notice is sent. The assessor makes out the list of all persons to whom the forms have been sent, stating whether they have been returned to him, and giving his estimate of the assessable income, where the return has not been made. From this list, submitted about July 20, the clerk to the General Commissioners prepares the assessment, adding, for purposes of comparison, the particulars for each of the past three years. This takes considerable time, as the commissioners' books in the City of London alone are no less than two hundred and twenty in number. The assessment is then delivered to the surveyor of taxes, who checks the returns, sends a further application to those who have made no returns, institutes inquiries as to the returns in doubtful cases, and adds whatever details may have come to his knowledge for the information of the Additional Commissioners. The Additional Commissioners, who are appointed

1 Report of the Departmental Committee on Income Tax. London, 1905. (Cd. 2575.) Appendix to the Report of the Departmental Committee on Income Tax with Minutes of Evidence taken before the Committee, 1905.