partly, though not wholly, one of "taxation and representation. It appears to us that it would be damaging to the sense of responsibility in an electorate that a large section should be able to vote for some perhaps expensive policy, feeling all the while that, because they were not personally liable to taxation, the expenditure would not touch them in any way. It is sometimes argued that the poor, since they are the first to suffer from bad legislation, would not be likely to vote irresponsibly even if entirely immune from taxation. The argument seems, however, to be defective, for the cause of suffering may not be clear; moreover, we have to consider, besides legislation which is positively bad, legislation the benefits of which, although real, do not sufficiently outweigh the damage done to the community by the attendant taxes-in other words, legislation which is "bad value for money.'

689. Standards of living and saving.-We have compared the pre-war and post-war standards of living and saving in paragraphs 9-44 and 45-60, respectively.

We need not summarise again the complicated effects of existing taxation under these heads. Reference may be made to the summaries in the following paragraphs :

Standard of living.

Income Tax, paragraph 439.

Death Duties, paragraphs 545-6.

Customs and Excise Duties, paragraphs 659-67.

Standard of saving.

Income Tax, paragraph 440.

Death Duties, paragraph 547.

Customs and Excise Duties, paragraphs 668-70.

690. A general conclusion we reach is that the post-war taxes, combined with other factors, do not appear to have reduced the average or general standard of living of the working classes below the pre-war level. The pre-war level, however, even in a boom year like 1913, has no claim to be considered final; a higher standard, such as increased production might bring, is much to be desired. There is no doubt that the Customs and Excise duties considerably affect the purchasing power of people with small incomes and bear hardly on large numbers in the depressed industries, whose real wages have fallen, and who suffer much from unemployment. A clear distinction must be drawn between the duties on luxuries and those on necessaries; we think that the sugar duty is relatively high, even in the financial needs of the present time. While the effect of the duties is to some extent adverse to the standard of living (and, as a consequence, to physical efficiency), there is a set-off, even if its importance cannot be measured, so far as the alcohol duties and some would add the tobacco duty-curtail excessive

consumption; this effect cannot be ignored, although the idea of taxation as an element in social reform should in our view, take only a very subordinate place. As always, it is necessary to keep in view the expenditure side of the account, and credit must be given to the Customs and Excise duties for their proportional contribution to education, pensions, &c. Moreover, the direct taxes contribute largely to these social benefits, assisting the workers' standard of living and purchasing power at considerable expense to the living and saving standards of the well-to-do.

691. In regard to the standard of saving, we conclude that the increased direct taxes have contributed appreciably to a pro rata decline in saving-not startling, but very substantialbelow the pre-war amount. The deficiency below the standard of 1913 may be as much as £150 millions to £200 millions in present money values. The decline, whatever its cause-and taxation must not be over-emphasised-is a feature to be watched with some anxiety. It is true here, as it is in the case of living standards, that there is nothing sacrosanct in the pre-war level. It would, however, be most unsatisfactory, if we had to look forward to a permanently lower level of saving. The capital needs of the future may be great.

692. A balance has to be struck somewhere between the claims of individual equity and the social need of saving. In the Victorian era it is generally true that saving was left as a monopoly in the hands of the wealthier classes, who were allowed to remain in almost complete control of their riches. In our view it is impossible to justify the old distribution of taxation, even though it reduced interference with saving to a minimum. It is true that under it industry advanced enormously, and the standard of living improved for the whole community more than in any comparable period. Nevertheless, a tax system falling less on the purchasing power of the poorer classes and more on the savings of the richer might have been beneficial to production, as it certainly would have been to immediate consumption.

693. In the last 20 years before the War, the rate of saving continued to expand, but it answered to a big demand, especially from abroad. It is not clear that the recent lower standard of saving has been inadequate to the actual demand for capital. We have no doubt that, with trade revival, there will be an expansion in the margin of saving, and the increase may be very rapid, as Lord Bradbury suggested (Q. 9242). At the same time, we cannot take for granted that there will be no shortage. In view of the large amount of revenue which has to be raised, we think the general character of tax distribution in post-war years has been satisfactory, but we would emphasize that highly progressive taxation is a growth of the last decade, and it is still too early to speak of its final economic effects on

the community. Growing experience must, therefore, be looked to for guidance as to the best disposition of taxes. We observe that the notion of aiming at a fixed proportion between direct and indirect taxation continues to figure largely in public discussion, a 50-50 relation being often referred to as if it had rare intrinsic merit. We regard this idea as wholly unfounded, and contrary not only to the science of taxation but to plain

common sense.

694. Business enterprise.-Savings, as we have said (para. 440), depend on saving or economy on the one side, and work and enterprise on the other. For a summary of the effects of taxation on business enterprise we may refer to the following paragraphs :

Income Tax, paragraphs 445-51.

Death Duties, paragraph 547.

Very briefly we may say that, in business generally, the existing taxes tend to discourage a sanguine outlook. The Income Tax has little direct effect on public companies, and the death duties none. Private concerns are much more susceptible to influence. In the middle range of incomes, the Income Tax frequently leads to a greater output of effort, although individual reactions vary widely; in the higher range the tax (including Super-tax) tends to check enterprise, especially of the more speculative kind. The effects of the death duties are less pronounced in either direction.

695. The enterprise of public companies receives some indirect check, so far as their reserves and the supply of capital from the public are diminished; in the case of private concerns, which depend on an internal supply of capital, the material basis for enterprise is more seriously affected, especially where there is heavy liability to Super-tax or where death duties come at an embarrassing time. In the majority of cases, however, the position is eased through the proprietors having relatively large additional resources outside their businesses.

of

696. Savings and employment.-One aspect in which savings have to be regarded is their function in relation to the needs of an increasing population. Mr. A. M. Samuel suggested that an annual provision of something like £160 millions out of national savings is required in order to keep pace with the growth of numbers, this sum allowing £400 per head for 400,000 persons (Ev., p. 78, general observations). In the course his evidence (Q. 1074-1093) he showed that he was not bound to these particular figures; the matter, however, is one of importance, and the degree of its importance depends almost entirely on the scale of magnitude of the figures, as Mr. Samuel's own argument illustrates. Starting with the £160 millions, he added £88 millions, the Sinking Fund provision of 1923-24, and then proceeded to say that he did not believe we had saved earnings in that year totalling £248,000,000. Therefore, by

the amount we had less than the £248,000,000 that you had to find-those two sums of £160,000,000 and £88,000,000—you have drawn on capital, and if you have drawn on capital, you have reduced the possible earning power of the country." (Q. 971.)

697. There are several points here which call for comment. The first is that the inclusion of the £88 millions Sinking Fund provision in the net amount on which taxation should not encroach is fallacious, for we have seen that taxation for Sinking Fund is an actual support of national savings. We may therefore confine ourselves to the £160 millions figure. In regard to this we may observe that while, before the War, the natural increase in population (excess of births over deaths) was about 400,000 per annum, in the four years 1921 to 1925 the average natural increase was little over 300,000, and against this has to be set the annual loss by migration in those years, which was round about 90,000. The present growth of population is thus brought down to about 200,000 per annum, and assuming the necessity of providing £400 for every unit, we get £80,000,000 as the sum to be found. With regard to the national savings we should judge, on such evidence as we have received (cf. paras. 45-47), that they were somewhere in the range between £450 millions and £500 millions. Provision of £80,000,000 for growth of population would, on this showing, account for something between 18 per cent. and 16 per cent. of the national savings.*

In

698. But we now come to another important point. dealing with this subject, it is necessary to keep clear (i) the necessity for an increase in the supply of commodities in order to maintain the standards of living of a growing population, and (ii) the necessity for capital in order to provide employment for an increasing body of workers, the worker receiving a sufficient share of the produce of labour and capital to enable him to maintain himself and his dependants at the requisite standard. In our view, it is only to the second of these necessities than any figure representing new capital requirements can usefully be related.

699.' We have estimated (see Appendix XXI) that the number of new entrants into the labour market is likely to average about 125,000 up to 1931, about 46,000 from then till 1936 and about 20,000 from 1936 to 1941. To diminishing figures on some such scale as this we have to relate some figure of capital per head. Sir Hugh Bell told us that in his business before the war about £250 was needed to set a man to work (E. in C., 12); he was of the opinion that"in the last 10 or 15 years the capital cost per unit in the British steel works has greatly increased, and

The fact that overseas borrowings are proceeding without any apparently dangerous strain suggests that there is little danger of savings being reduced below the minimum required for the country's internal needs.

tends to increase more and more (Q. 8444). In regard to industry as a whole his general impression was that a tendency existed to increase the capital per unit (Q. 8446). Professor Bowley thought that we should have to look to the necessity, in the future, of having more capital per head rather than less, if we were to keep abreast of possible developments (Q. 3837). The capital employed per head varies, of course, very greatly in different industries. It may be that £400 per head is a little on the high side for the actual present position, but it may well become desirable in the near future to provide considerably more than that figure. Taking £400 in conjunction with the increase of occupied population we get the following hypothetical estimates of the necessary provision of new capital for the particular purpose in view :

£50,000,000 average per annum up to 1931.

£18,400,000 average per annum from 1931 to 1936.
£8,000,000 average per annum from 1936 to 1941.

No high degree of accuracy is claimed for these figures, but they suffice to show that provision of capital according to old standards, and sufficient to maintain the existing rate of production and the status quo of the standard of living, can continue to be found without the least difficulty, and is not imperilled by the present scale of direct taxation.

700. It must be remembered, of course, that the figures quoted above represent only a small fraction of the savings needed in order to cover losses due to wastage and obsolescence of assets, and to provide for factories, plant and machinery, &c., in line with the latest improvements and inventions. Again, the figures are exclusive of savings needed for investment abroad, which are especially important for the development of the Dominions and the maintenance of food supplies. The sufficiency or otherwise of savings in all these directions is involved in the question whether the country can maintain not merely the status quo of production and the standard of living, but also a rate of improvement per head comparable with that of some periods in the past, or with that now shown in the United States of America. As we have indicated, a revival of trade may bring opportunities requiring a large expansion in the rate of saving. if they are to be fully used.

701. The general burden.-Our analysis of the taxation required for the debt and for other expenditure leads to broad conclusions which will have become evident. The burden of indirect taxation appears formidable when viewed as a whole. On analysis, however, it is found that the duties on food are now light except for the sugar duty, which we consider relatively high. The high level of the duties on luxuries (as we understand the term-cf. para. 615) appears to us to be justifiable at present, considering the large amount of revenue required, and the risk of interfering too much with savings, if heavier direct taxation were adopted.