George, he stated that "the cause of this remarkable increase in the revenue is to be found in the differentiation clause itself. The mere offer of the lower rate of tax has sufficed to increase the amount of income submitted. Thus

I may say that differentiation has worked not only a financial, but a moral reform."1 Asquith went on to give his judgment of the matter in a passage which deserves to be quoted in full: "I hope I may say without undue self-complacency, that differentiation, always deemed to be just and fair, was for sixty years strongly denied by almost every great authority to be workable in practice. Differentiation has been proved by experience to be not only practicable, but smooth and easy in its operation; and it has in fact paid for itself, and it has removed, once and for all, the most obvious and crying grievances and inequalities, I do not say all of them, by any means, but the most crying grievances and inequalities which have marred the equity and clogged the efficiency of the income tax as a permanent instrument of revenue."

§ 8. The Adoption of Graduation in 1910

Now that the principle of differentiation had been definitely adopted, the government was ready to proceed to the consideration of the other great principle that of progression. It is doubtful how soon this would have become a practical matter, however, were it not for the exigencies of the treasury and the need of securing additional revenue for the purpose of financing the great scheme of social reform known as the Old Age Pensions. The hope was that the adoption of the scheme of progressive taxation as applied to the income tax would thus accomplish two results; first, it would yield considerably increased revenue, and second, it would make the wealthier classes feel that they were directly interested in the programme of social reform, the benefits of which were to apply to the less fortunate members of the community.

1 The Parliamentary Debates, vol. 188, p. 451.

On April 29, 1909, Lloyd George introduced his now his toric budget. After reviewing the history of the income tax, he pointed out that it was feasible to keep the tax at the permanent figure of five per cent, and at the same time render it possible to rely upon the tax for additional large sums in case of emergency. "A careful consideration of these figures ought to convince the most sceptical that the maximum rate of the tax may be retained at Is., or even increased, without seriously encroaching upon our available reserves for national emergencies." Lloyd George called attention to the fact that "the income tax, imposed originally as a temporary expedient, is now in reality the centre and sheet anchor of our financial system," and he proceeded to discuss the question of securing additional revenue from it. The time, he thought, had gone by "when a simple addition of pence to the poundage of the tax, attractive as the simplicity of that expedient is, can be regarded as a satisfactory solution of a financial difficulty." He pointed out that "the principles of graduation and differentiation, the apportionment of the burden as between different classes of taxpayers, according, on the one hand, to the extent, and, on the other hand, to the nature of their resources, are in the lower stages of the income tax scale already recognized by abatements and allowances." He added that "it remains to complete the system by extending the application of these principles, and in regard to differentiation by taking account to some extent, at any rate, not only of the source from which income is derived, but also of the liabilities which the taxpayer has contracted in the discharge of his duties as a citizen, and of the other burdens of taxation borne by him by virtue of those responsibilities." 2 Notwithstanding the changes effected by the law of 1907, Lloyd George held that the burden of the tax upon earnings was still disproportionately heavy. He therefore proposed that while the general rate of the tax should be raised to IS. 2d., the rate upon earned incomes in the case of persons whose total income did not exceed £3000 should remain as it 2 Ibid., p. 507.

1 The Parliamentary Debates, Session 1909, vol. iv, p. 506.

then stood, namely at 9d. up to £2000 and at Is. between £2000 and £3000. He also suggested that in case of incomes not exceeding £500 there be an abatement of £10 for every child under the age of sixteen.

1

Proceeding to the question of progression, the Chancellor took a conservative position. "The introduction of a complete scheme of graduation, applicable to all incomes, besides raising questions of general principle, which it is not necessary now to discuss, would require an entire reconstruction of the administrative machinery of the tax, including in all probability the abandonment to a very large extent of the principle of collection at the source, upon which the productivity of the tax so largely depends." He therefore stated that he would accept in principle the scheme suggested by the Committee of 1906, namely, the idea of a super-tax. After considering various methods of accomplishing this result, he proposed to limit this additional tax to incomes exceeding £5000, and to levy a super-tax at the rate of 6d. upon the amount by which such incomes exceed £3000. He pointed out that the machinery of the tax would in the main be independent of that of the existing income tax, but that the assessments would be made by Special Commissioners appointed under the general code. In the case of real property in Schedule A he also proposed that a special five per cent allowance be made for cost of management, in addition to the existing allowance of one-sixth and one-eighth for repairs. The Chancellor estimated that the super-tax proper, when in full working order, would yield an additional £2,300,000.

The proposals of the government with reference to the income tax met with remarkably little opposition, largely perhaps for the reason that the main fight was concentrated upon some of the other features of the budget, more especially the land-tax provisions.2 The super-tax proposition was

1 The Parliamentary Debates, Session 1909, vol. iv, p. 509.

2 For a general statement of the real meaning of the now historic budget, see the article by the present writer entitled "The English Budget Proposals " in The Survey, vol. xxiii (1910), pp. 575 et seq.

P

indeed opposed by some speakers; but even Balfour, the leader of the opposition, confessed that he had "never been able to take that clear abstract view of John Mill," and said that he was not prepared to deny "that some graduation is fair, convenient and expedient." Balfour contented himself with remarking that if the effect of the death duties be considered, it would be found that they, in connection with the proposed super-tax, led to a perilously high degree of progression. "I think the Chancellor of the Exchequer will find that the rise is almost dangerously steep." The overwhelming majority, however, expressed an approval of the views of the Chancellor of the Exchequer.

In a later speech Lloyd George definitively extinguished the lingering idea that even the super-tax might be considered simply as a reserve for special exigencies. "Why should the tax be treated as a reserve," he asked, "as something which is of a temporary character, while other taxes are regarded as permanent? Why should not the other taxes have their turn as temporary taxes, the taxes on the food of people, for instance? Why should taxes on the necessaries of life be regarded as permanent and the taxes on high incomes as purely temporary? If any taxes are to be treated as a reserve, I should say that the taxes which ought to be so treated are those which would press heaviest on the people who can least afford them."2 And somewhat further on he discussed the administrative features of the proposed super-tax. "In this country," he said, "you have got taxation at the source. In Germany the whole of the income is submitted; there is a system of investigation which probably we would not stand in this country; it is a very severe one. We do not propose anything of the kind here. We have done everything in our power to make the conditions as little oppressive as possible to those whom we are obliged to submit to this process. I do not see that there is any

1 Speech of May 3, 1909; The Parliamentary Debates, Twenty-eighth Parliament, 4th session, pp. 755-757.

2 Speech of May 12, ibid., p. 1959.

real protest against it. . . . I think the general feeling among the rich people is that they can afford to give more and they are prepared to give more; I honestly do not think that this proposed income tax has created protests. . . . Certainly there is no real resentment against this proposal. We have not made it oppressive. We have made it perfectly fair. The graduations are quite gentle." 1

The budget of 1909, after first being thrown out by the Lords, was, as is well known, adopted in 1910.2 The income tax for the year 1909-10 was levied at the rate of 1s: 2d., but it was provided that whenever the total income of any individual exceeds £5000, there shall be "an additional duty of income tax (in this act referred to as a super-tax) at the rate of sixpence for every pound on the amount by which the total income exceeds three thousand pounds.' "3 The supertax was to be assessed by the Special Commissioners. The law states it to be the "duty of every person chargeable with a super-tax to give notice that he is chargeable "; but provision is also made for the serving of notice upon such persons by the Special Commissioners. If any one without reasonable excuse fails to make return or to give the notice, he shall be liable to a penalty of fifty pounds for every day during which the failure continues, and if he fails to make any return, the Special Commissioners may make an assessment of the supertax according to the best of their judgment. The rest of the procedure is similar to that in force for the ordinary income tax, although it is again specifically provided that the Additional Commissioners may amend any assessment, or make a new or an additional assessment during any time within three years of the expiration of the original year of assessment.1

With reference to the differentiation, it was now provided

1 Speech of May 12, 1909; The Parliamentary Debates, Twenty-eighth Parliament, 4th session, p. 1963.

2 The Finance (1909–1910) Act, 1910, April 29, 1910, 10 Edw. VII, c. 8. The income tax provisions are found in part IV, secs. 65-72. 4 Sec. 72.

8 Sec. 66.