tinguished men, including officials like Sir Henry Primrose, who had been a member of the departmental committee of 1904, Sir Thomas Hewitt, and Mr. Gyles; prominent merchants and bankers like Sir Felix Schuster; economists and statisticians like Messrs. Bowley, Coghlan, Chiozza Money, and Bernard Mallet; and socialists like Philip Snowden. The committee sat during the remainder of the session of 1906, and brought in their report on November 29, 1906.1

The report had practically been a foregone conclusion in view of the existing sentiment in parliament and the particular complexion of the committee. The officials of the inland revenue department, especially Sir Henry Primrose and Mr. Gyles, were indeed opposed to the scheme of the committee, but the evidence of the other witnesses was so overwhelming that the committee found no difficulty in arriving at its conclusion. A draft report prepared by Sir Charles Dilke, which was voluminous and interesting,2 was not accepted, but the important conclusions were virtually the same as those to which the committee as a whole gave its adherence. Taking up first the question of graduation, the committee pointed out that the tax was already graduated by abatement in the case of incomes of not over £700. They proceeded to consider whether the graduation could be extended or made universal, with due regard to economical administration. Graduation, as the committee pointed out, might be effected in various ways. First, they might follow what we have called in this volume the "lump-sum" scheme, or, as the committee put it, "the method of collecting the whole of the tax directly from each person, upon his own declaration." This, however, would involve an abandonment of the principle of stoppage at source. To such a course the committee were unalterably opposed. "The importance of retaining a principle which is mainly responsible for the present development of the tax and the ease with which it is collected, and

1 Report from the Select Committee on Income Tax; together with the Proceedings of the Committee, Minutes of Evidence, and an Appendix. London, 1906. 2 Report, pp. xv-xxxvi. Report, secs. 4-17.

8

the extreme undesirability of doing anything which would reduce its efficiency, can scarcely be over-estimated." Accordingly, the committee declared their conviction that "direct personal assessment for the whole tax is not practicable in this country in the sense of being an expedient or desirable means of collecting revenue."

A second method of graduating the tax would be that of the so-called "super-tax"; that is, a second tax distinct from, and supplementary to, the existing tax, to be levied on individuals by direct personal assessment. The chief suggestion of this nature that had been made was that all persons with incomes over £5,000 should be required to make a separate return showing the total amount of the income. Graduation might then be applied to this part of the tax. The committee conceded that this new portion of the tax would be directly personal in its nature, and that some of the objections just urged would apply to the proposal. They considered, however, that these objections "are modified to the extent that the tax which is now collected at the source would continue to be so collected, consequently there would be no loss of revenue there as the result of failure to obtain full disclosure for the direct personal tax."

The committee adverted to the difficulty of discovering individuals who have an income of £5000 a year, and referred especially to the objections on the part of the official witnesses. They contended, however, that the difficulties had been exaggerated, although they conceded that time would be required to make the tax work smoothly. They indorsed the recommendations of the departmental committee of 1904 that every individual be required to make a return, whether he is liable or not. The committee therefore concluded that "the super-tax upon the larger incomes is practicable, but it offers some disadvantages and difficulties which have been pointed out."

The third method of graduation which the committee discussed was that of graduation by degression, which might take the form of extending the existing system of abatements, or

of charging a lower rate of tax on the smaller incomes. The committee assumed that whatever changes might be made in the rates, it was not desirable to diminish the total yield of the tax. Since, therefore, graduation was advocated by some, not only for the sake of securing greater equality as between individuals, but also for the purpose of securing additional revenue, it would be necessary to raise the rates on the higher incomes in proportion as the abatements were extended, as well as to enlarge decidedly the costly process of repayment. On the one hand the very much higher rates on the larger incomes "would arouse a feeling of resentment against the tax which it is very desirable to avoid"; and secondly, the collection of immense sums, which would afterwards have to be returned, "would be a serious inconvenience, and a genuine ground of grievance" to individuals, and “could not fail to interfere injuriously with the ordinary operations of commerce." Out of 1,100,000 people, with an income of nearly £700,000,000, abatements were already allowed on incomes of some 700,000 people, with a total income of £250,000,000, the amount collected and returned being about £1,600,000. While this gave rise to no particular difficulties, the committee held that "there are limits beyond which it cannot conveniently and usefully be extended." They concluded that it would be perfectly feasible to increase the abatements to £1000, or even more; but they maintained that they did not possess sufficient information to fix the precise figure at which the extension of the present system would cease to be prudent and convenient.

Coming, then, to the question of differentiation between permanent and precarious incomes, the committee stated that they had found it desirable to define clearly the meaning of the terms. Other terms that have been used are "industrial and spontaneous, earned and unearned, incomes from investment and personal effort." A great many more terms, which were customary half a century ago, might have been mentioned.2 The committee stated that probably the words Report, secs. 18-24. 2 Cf. supra, p. 145.

"earned" and "unearned" most accurately represented the distinctions which they had in mind. They confessed that they were unable to provide a completely logical and satisfactory definition, and they called attention to some of the difficulties. "A rough working distinction which would probably meet with general acceptance," they thought, "would be to regard the profits of private traders as earned and those of public companies and similar undertakings as arising from investment"; that in the same way "the owner of land who cultivates it himself would be regarded as earning his income," but that "the owner of an estate who let it to others to cultivate would not be regarded as earning the net income which he derived from the lands of that estate, although he might act as his own steward and devote much time to its supervision." Having settled that point, the committee stated that "the existing feeling in favor of some differentiation in the amount of the tax levied upon earned incomes does not require that all incomes, irrespective of size, should receive privileged treatment"; for, in general, "the smaller the business and the smaller the profits derived from it, the larger will be the proportion of that profit which has in the strictest sense of the term been 'earned."" These and other difficulties and objections would be avoided, in the opinion of the committee, by limiting the differentiation between earned and unearned incomes to incomes not exceeding, say £3000 a year. "Your Committee," we are told, "are of opinion that such differentiation is practicable and can most conveniently be carried into effect by charging on such incomes a rate of tax lower than the normal or foundation rate."

It may be remarked that Sir Charles Dilke had referred with approval in his draft report to the German system, which, as we shall learn, attains differentiation through a separate property tax. But he recognized the difficulty of introducing a new property tax and declared his preference for the scheme which was ultimately adopted by the committee. Another point deserving of special mention is the opinion

expressed by Sir Felix Schuster, in discussing the advisability of asking the recipients of larger incomes to make a declaration of their total income. Sir Felix, while recognizing the immense advantages of the English over the German system, nevertheless held that it might be possible to exaggerate the method of stoppage at source. "I think the collection of a tax at the source might be carried to an extreme, and I do not think it is desirable to carry it to an extreme. I think the effect now of the collection at the source on the minds of many people is that the revenue gets the tax wherever it can, and that there is no more duty imposed on people to make a correct return. I would not like to strengthen that feeling. Personally I think that there are limits."1

Finally, the committee proceeded to consider the bearing of death duties on graduation and differentiation. 2 They referred especially to the calculations submitted by Sir Henry Primrose and Mr. Mallet, showing that if, as is perfectly legitimate, the death duties be regarded as partaking to some extent of the nature of a deferred income tax, the combined operation of the two taxes does in practice effect a very considerable graduation and differentiation. Despite this fact, the committee concluded that further graduation was desirable.

The conclusions are summarized as follows: 3

(1) "Graduation of the income tax by an extension of the existing system of abatements is practicable. But it could not be applied to all incomes from the highest to the lowest, with satisfactory results. The limits of prudent extension would be reached when a larger increase in the rate of tax to be collected at the source was necessitated, and the total amount which was collected in excess of what was ultimately retained, became so large as to cause serious inconvenience to trade and commerce, and to individual taxpayers. Those limits would not be exceeded by raising the amount of income on which an abatement would be allowed to £1000 or even more.

1 Evidence, question 3013, p. 174.

2 Report, secs. 25 to 29.

8 Ibid., sec. 30.