454. On practical grounds, we think it is impossible to say that the incidence of the Estate Duty is uniform. If a testator has consciously stinted his expenditure and saved more year by year than he would otherwise have done, regarding the difference solely as a piling up of the tax against the day of his death, it is hard to deny that the incidence is upon him during his life. If, on the other hand, the feelings and action of the testator have not been influenced in any direction by the prospect of the duty, the successor is the only person who suffers and the only person to whom the incidence can well be assigned. can 455. The difficulty is that, apart from outward evidence not usually available, such as deliberate insurance, no-one precisely gauge what is in the mind of the predecessor. Generally speaking, we do not think the prospect of the Estate Duty has so much influence on work or saving as the annually recurring Income Tax. On the other hand, we think it undoubtedly affects the behaviour of many people, whether their wealth is, e.g., in a business which they are building up them-selves, in a landed estate, or in stocks and shares which they have inherited. It can be argued that in the last case provision for payment of duty is a good deal less likely to be made than in the first two, but this is very much a matter of individual judgment. 456. Certain more general considerations require to be mentioned, but these again are indecisive. In favour of the view that the duty is on the successor it may be pointed out that it is not paid by the predecessor, that there is no liability till he dies, and that he is free to ignore the duty if he wishes, while the successor, as a hard matter of fact, comes into so much less than he would have done, and has no kind of redress. 457. On the other side, it may be answered that the subject of taxation is, after all, the property which has been held or accumulated by the deceased, and that the tax has fallen upon him, in the sense that it has affected the amount of which he could dispose. Further, the mere fact that the duty diminishes the property into which the successor may enter is no proof of its incidence being on the successor. There is no absolute distinction between the Estate Duty and the Income Tax in this respect; the Income Tax, so far as it takes away income which would have been saved, is a tax on potential capital, retarding the accumulation of wealth and diminishing the estate which can be left on death, yet no one hesitates to ascribe the whole of its incidence to the predecessor. 458. In fact, when one compares the Income Tax with the Estate Duty, regarding the latter as a kind of postponed Income Tax, one sees clearly the solidarity of the interests of predecessor and successor. The Income Tax, in a concealed way, hits the taxpayer's son as well as the taxpayer himself, and may hit him just as severely. But the damage is separated by a timegap. In the case of the Estate Duty the time-gap is bridged, and the damage is at once apparent. ' 459. On the whole, we think we have good support for giving primary but not exclusive place to the notion that the incidence of the duty is on the predecessor. This idea was present at the inception of the duty in 1894, when the Chancellor of the Exchequer (Sir William Harcourt) said, "The graduated Estate Duty may be, in fact, reckoned in terms of an annual charge upon the estate, and in that shape may be regarded as a graduated Income Tax, which is levied only upon realised property, and does not fall upon what are called precarious incomes. So that, in point of fact, you do arrive at the result which is aimed at in the demand for a graduated Income Tax falling upon what are called spontaneous,' as distinguished from industrial' incomes." In 1906 the same idea was expressed in a paper put before the Select Committee on Income Tax then sitting. The paper, which was handed in by Mr. (now Sir Bernard) Mallet, at that time a Commissioner of Inland Revenue, embodied tables illustrating the burden upon incomes of the Income Tax and the Estate Duty. The Estate Duty was treated as equivalent to an annual insurance charge upon the ** unearned income of the predecessor, just as in paragraphs 229 et seq of this Report. A prefatory note explained that the object was to consider the Income Tax and Estate Duty, if possible, in their relation to each other as different forms of the taxation of income, bringing out the effect of the latter tax as an additional tax on the income from property." 66 Since 1906 differentiation between earned and unearned, or 'investment," income has been introduced within the Income Tax, and similarly graduation according to size of income has been enormously extended and developed. The aspect of the Estate Duty, as introducing an element of differentiation in the taxation of income, has, therefore, been to some extent obscured. 460. In passing, we may note a third view, viz., that, strictly speaking, the Estate Duty has no personal incidence at all, merely falling upon the estate as such. This theory has some theoretical cogency, and historical support may be found for it in the old idea of the State as the common heir of all men. For practical purposes, however, it is clearly necessary to relate the incidence to some individual. II.-Legacy Duty and Succession Duty. 461. These minor duties are in the nature of acquisition duties on the beneficiary. A testator who looks forward to leaving his property to his wife or children, and who sets himself to work harder or to save more in order to provide for payment of Estate Duty, is likely also to take these duties into account (the rate payable where property passes in direct line is only 1 per cent.). He is less likely to attempt to make provision as regards any property going to a brother or sister (in which case the rate would be 5 per cent.), or to a cousin or friend (in which case the rate would be 10 per cent.). The main yield of the duties is from the 5 per cent. and 10 per cent. rates. No account is taken of the inheritor's wealth. (cf. para. 539.) The intention is that the duties should fall upon the person receiving the benefit, and we think that, in fact also, the burden should generally be regarded as falling upon him. SUB-SECTION VI: EFFECTS OF THE DEATH DUTIES. Introductory. 462. We have found a remarkable diversity of opinion among our witnesses as to the merits and demerits of the death duties. Sir Felix Schuster, for instance, described them as "a very injurious form of Capital Levy "(Ev., p. 10; E. in C., 12); Lord Hunsdon said of them that they seemed to him" to have almost every defect that a tax can possess (E. in C., 6). On the other hand, many witnesses had no particular complaint against the death duties as compared with other taxes; Mr. R. H. Brand, for example, considered that, in important respects, it was "difficult to draw a hard-and-fast line between the effect of death duties and the effect of a very high Income Tax " (E. in C., 9); Mr. McKenna, while he thought that "the death duties impose great hardship and inconvenience upon the individual" (Q. 1931), regarded some of the principal allegations as to their damaging effect upon the community as ill-founded (Q. 1920 et seq.); the Co-operative Congress considered that "the merits of death duties far outweigh the disadvantages they create for individuals " (Ev., p. 306; E. in C., 23); and the economist witnesses were generally welldisposed to the duties in principle, even when criticising them in form or detail. 463. We propose to deal first with the Estate Duty, which is far the most important part of the death duties system. The framework of our discussion is as follows: I. The post-war rates of Estate Duty and the weight of the burden ... Paragraphs 464-474 II. The equity of the Estate Duty 475-495 ... III. The treatment of life insurance policies 496-497 498 V. Special cases: (i) The private business... (ii) The agricultural landowner 499-504 505-512 VI. The effect of the Estate Duty on saving VII. The Legacy and Succession Duties 513-524 525-532 533-534 535-540 541-544 545-548 I. The post-war rates of Estate Duty and the weight of the burden. 464. A table showing the rates of Estate Duty in force, 1909-10 to 1925-26, is included in Appendix VIII. The following figures, showing for Great Britain the numbers of estates for certain ranges of value, and the net receipt of duty from each, may help to illustrate the pre-war and post-war position. The official pre-war and post-war figures of duty are computed on bases which very slightly differ; the difference, however, is not such as to affect the validity of the comparison. Numbers of liable estates and net receipt, Great Britain. thou- sands sands. sands. Not exceeding £1,000 net £5,000 253 61,652 382 64,206 Exceeding £1,000 and not exceeding £5,000... 14,451 1,137 22,636 1,814 24,378 £10,000... 3,182 1,030 4,808 1,634 5,209 £50,000 3,250 4,134 4,560 7,841 5,073 8,867 Total 65,150 18,890 94,544 43,842 99,900 49,805 105,947 50,514 465. The aggregate net capital value of all liable estates averaged £271 millions for 1911-12 to 1913-14, and £402 millions for 1920-21 to 1922-23; for 1923-24 it was nearly £442 millions, and for 1924-25 a little over £461 millions. For 1911-12 to 1913-14 over 79 per cent. of the total related to estates exceeding £5,000; for 1920-21 to 1922-23 the corresponding percentage was over 78; for 1923-24 and 1924-25 it was 79. 466. As in the case of the parallel Income Tax figures (para. 335), the high post-war yield in the case of the wealthy and the inequality in the distribution of wealth leap to the eye. It is also interesting to note that, in spite of the fluctuations in values and prices since 1913, the net accumulations in nominal values during and since the War have not altered the proportion between the value of estates under £5,000 and those over £5,000. 467. The scheme of progression in the Estate Duty may be roughly compared with that in the Income Tax by showing the effective rates in pence per pound (i) of Estate Duty on estates of principal value ranging from £5,000 to £2,000,000, and (ii) of Income Tax and Super-tax payable by a married man with no children on investment incomes equivalent to 5 per cent., 7 per cent., and 10 per cent. respectively of those estates. This is done for the scale of duty as modified by the Finance Act, 1925, in the graph in Appendix XVI. It should be noted that, strictly, the Estate Duty progresses by a series of steps, but for purposes of comparison the line of the graph has been smoothed out. It will be seen that the progression of the Estate Duty is very slight at first, while the Income Tax rises strongly. Up to estates of about £15,000, the Estate Duty continues to be much the flatter; then, up to estates of about £150,000, the curves do not differ very markedly; from £150,000 up to £1,000,000 the Estate Duty drops away from the Income Tax, and then rises again sharply up to estates of £2,000,000, while the Income Tax is becoming nearly level. It may be noted that, for deaths prior to the 1st July, 1925, the graduation of the duty would be considerably less steep above the £25,000 point. 468. Even when the Finance Act, 1925, is taken into account, the rates of Estate Duty have been less severely advanced over the pre-war level than the rates of Income Tax. Up to estates of £15,000 there was no change in the rate of duty till 1925, when 6 per cent. was substituted for 5 per cent. for estates between £12,500 and £15,000. 469. The following figures may be given, showing the liability of selected estates up to £12,500, passing on deaths after the 30th June, 1925 : |