702. The burden of direct taxation, while we do not wish to belittle it, is less crushing than is frequently represented. lt does not, with trivial exceptions, enter directly into prices, and its indirect effects are not such as substantially to affect the general price-level. It has a materially adverse effect on savings, but this does not hold good, so far as the receipts are applied to payments on account of the internal debt. Again, it has widely diffused psychological effects, and has been responsible for a good deal of discouragement, while trade has been suffering from long-drawn-out depression due to wider causes; on the other hand, some of the psychological effects have been actually beneficial. In our opinion the present taxationeven in conjunction with the loss of material wealth due to war expenditure, which lies behind the National Debt-is not one of the main causes of industrial difficulty. Causes other than taxation lie outside our province, but, in their very wide range, have been under the consideration of the Committee on Industry and Trade. For an analysis of the serious difficulties of our export trade due to one set of causes-conditions prevailing in the various markets abroad-we may refer to the Committee's introduction to their Survey of Overseas Markets (1925). The overseas conditions dealt with cover the decline of purchasing power, the shortage of capital, the growth of local manufac ture, &c. So far as taxation is concerned, we think that, if general conditions improve and times become more prosperous, the burden will be carried with comparative ease. We base our conclusions, not on preconceptions, but on the long analysis contained in the foregoing part of our Report, in the light of which they must stand examination. We may perhaps remark that the view which we take is more optimistic than the view which attributes to taxation a very large responsibility for the present industrial position; for, while there is little prospect of any great lightening of the tax burden in the early future, there is legitimate hope that in many respects more general conditions, both at home and abroad, may improve. PART II. SECTION I. THE CAPITAL LEVY. INTRODUCTION. 703. The proposal that a levy should be imposed upon all accumulated capital wealth, and the proceeds used specifically for the redemption of debt, is so far-reaching, and has been so actively debated, that it stands out as having a strong claim to special consideration. We therefore issued a series of questions to witnesses who offered or were requested to give evidence on this subject (see Appendix I). 704. In the replies to those questions a levy has been justified by its advocates on many different grounds, but in general the outstanding point in their case is that it would bring about a saving in interest charges on the debt. While they admit that this saving would be to some extent offset by a reduction in tax revenue following the levy, they take the view that the net relief to the Budget would still be such as to make possible substantial reductions in taxation, or an extension of expenditure in other directions, or a combination of both 705. They also lay emphasis upon the advantage of repaying debt immediately, if a further fall in prices is anticipated; upon the desirability of having a much reduced debt in the event of a national emergency; upon the more even distribution of wealth which would follow a levy; and upon the alleviation of the sense of injustice at the continued existence of so large a debt which they believe to be felt by a large section of the population. 706. The opponents of the levy, on the other hand, consider that the net relief to the Budget would be too small to justify a taxation experiment on so grand a scale, and that, in so far as the net saving might be used to meet additional expenditure, any gain would be largely neutralised. They generally anticipate that a levy would have injurious effects on trade and industry in many directions, that the ensuing dislocation would have serious effects on employment, and that the credit of the country abroad would sustain a shock. They consider that a levy could not be so equitably adjusted to ability to pay as a tax on income, and often emphasise the unfairness of the burden which it would throw on the life savings of the thrifty. Finally they regard the political and administrative difficulties of a levy as exceedingly great. 707. The order of our discussion will be as follows: Paragraphs. (i) Practicability of a levy ... 708-17 ... (ii) Scale, etc., and yield of a levy: 718-36 (iii) The levy and the price level ... 737-43 repetition 744-48 (v) Methods of payment; effect on value of 749-65 ... 766-8 ... 769-70 ... 771-90 791-801 (vi) Effect on Government rate of borrowing ... (x) The levy and agricultural landowners... 802 803-9 810-31 832-36 837-59 con 860-77 I. PRACTICABILITY OF A LEVY. 708. The first question that has to be faced is that of the practicability of a Capital Levy, a matter on which the opinions of witnesses varied greatly. The history of taxation gives practically no direct guidance. A levy on a large scale, collected over a short period and in other respects comparable with the proposal as understood in this country, has not in fact been tested anywhere (see Appendix XXIV); further, owing to differing political and economic conditions, inferences could only be drawn from one country to another with very great caution. 709. However, the experience of other forms of taxation in this country, particularly of the death duties, provides some basis on which to proceed. We print as Appendix XXII a note by the Board of Inland Revenue on the Practicability of a Capital Levy. The Board illustrate by reference to the success of the Excess Profits Duty and the failure of the Land Values Duties the primary importance of the attitude of the taxpayer to any large scheme of new taxation. They point out very forcibly the dangers that might befall the administration of a levy, either if there were systematic obstruction or if there were widespread anxiety. The importance of these considerations can hardly be rated too high. We do not see how so difficult a task as that of a levy could be carried through with any real success unless it were received with a fair measure of equanimity and assent 710. It seems clear that a levy would be less readily accepted now than it would have been in the first year after the War. Views to this effect were expressed by several witnesses including advocates as well as opponents of the levy. As to the degree of goodwill that might still be hoped for, there would be less agreement. In order to judge the all-round merits and defects of the proposal, we must leave open the possibility of its being either well or ill received, and consider it in the light of both alternatives. 711. The Board of Inland Revenue, while they view the levy as" a task of the first magnitude" even under the most favourable conditions, do not regard the inherent difficulties as too great to be overcome. They state-thus confirming the supposition of the Trades Union Congress (Ev., p. 588; E. in C.; 24, -that from the technical point of view the difficulties of assessment would normally be less than in the case of the proposal for a levy on war wealth, which was under consideration in 1920, and which they held to be workable. They add that the task of valuation, would be " essentially similar to that regularly undertaken for purposes of Estate Duty" (Appendix XXII ; para. 8). 712. A source of difficulty which we have had in mind from the first is the large amount of settled property in this country. Among the questions which we addressed to witnesses was one regarding the position on the death of a life tenant, supposing the year of his death not to bear out the forecast of life on which his interest had been valued. The difficulty as regards life tenant and remainder man was generally recognised by the witnesses. Professor Pigou suggested that the life tenant, instead of paying a lump sum on a valuation of his interest, should make his contribution in the form of a special Income Tax, leaving the corpus of the estate to be attacked when the settlement fell in (Ev., p. 437; E. in C.; 17). As, according to the Board of Inland Revenue, about one-sixth of the total property liable would be settled property, this procedure would very much delay the gathering in of the amount anticipated to be raised by the levy. We do not think it should be adopted, except under necessity. Similarly, any system applying payment by instalments to the case of all settled property, with a provision allowing valuations to be reopened, would postpone the completion of the levy, and would add to its complication. 713. The difficulties connected with the valuation of interests in settled property are many and varied. An idea of their complexity can be obtained from a study of the official memorandum on the subject put in by the Board of Inland Revenue to the Select Committee on War Wealth, and published with the proceedings of that Committee (H. of C., 102, of 1920, pp. 244 et seq.). While the Board, in the note which they supplied to us, do not suggest that the problem of dealing with the separate interests would be incapable of solution, they explain that it would be more serious for a Capital Levy than for the War Levy proposal. They point out, however, a possible method of avoiding these special difficulties altogether. An alternative course would be for the levy to be imposed, not on the separate interests of individuals and payable out of their estates, but on the whole value of settled property and payable out of the settled fund, the rate of duty both for the settled fund and for the free wealth of the life tenant being found by aggregating the value of the settled property with the life tenant's other property. If this course were taken, the problem would be assimilated roughly to the same level as that arising in the case of free assets (Appendix XXII; para. 12). 714. This manner of treating the settled property would agree with that now in force for the Estate Duty. For that duty the settled property has normally to be aggregated at its full value with the free property of the deceased. The duty appropriate to the settled property is thus determined by the range of principal value within which the total estate falls; it is payable in the ordinary course by the trustees of the settlement out of their funds. 715. The procedure has, it is true, a somewhat different appearance in the two cases. In the case of the Estate Duty it falls naturally within the general principle under which all property passing at a death is chargeable. It is, perhaps, less easily to be reconciled with the Capital Levy, which has in view a tax upon living persons at a particular date according to a valuation of their individual wealth at that date. The life tenant or the remainder man might feel that he had a strong claim not to suffer under a levy more than he would on a valuation of his own interest. 716. Questions of equity would undoubtedly arise, but they do not seem to us to differ essentially from those under the Estate Duty. We refer to them again in a section dealing with the equity of the levy proposals (paras. 854-7). All we need say here is that the suggestion put to us by the Board of Inland Revenue cannot, in our view, be ruled out on the score of unfairness to individuals. Indeed, we think it likely that it would prove less unfair than an attempt to value the separate interests. This being so, full weight can be allowed to the superiority of the method from the practical point of view, and we should favour its adoption in preference to any alternative that we have had before us. 717. The question of the method in which payment of the levy might be allowed gives rise to a number of difficulties. We consider them under a separate head (para. 749 et seq.); they do not appear to us to be insuperable. Other important factors bearing on practicability are the exemption limit and the rates at which the levy would be charged. We will discuss |