116. The view that taxation destroys the incentive to save even among the wealthy who pay the heaviest taxes is not by any means universally expressed even by those of our witnesses who might be supposed to be familiar with the psychology of the well-to-do investor. Mr. Gordon Selfridge, for example, gave it as his opinion that "One cannot say that the existing taxes act as a deterrent to the individual or the company from trying to save and trying to increase the surplus, but of course it has a very serious effect on the result of that effort." (E. in C., 4.)

117. Mr. Coates, who had six years' experience as Director of Statistics and Intelligence in the Inland Revenue Department, stated that he did not think that "the existing rates of income taxation act as a deterrent to saving generally, or to enterprise on the part of individuals engaged in trade, whether on their own account, or in the conduct of joint stock companies." (Ev., p. 640; E. in C., 26.)

118. We are of opinion that those who have expressed the view that progressive taxation seriously impairs the incentive. to save have not appreciated the distinction clearly drawn in Mr. Selfridge's statement between the effects of taxation upon the incentive and upon the ability to save. Taxation by itself (i.e., if the subsequent expenditure of the proceeds of taxation be ignored) obviously limits the individual taxpayer's margin for saving, but, for the reasons given, we do not think that it has any serious effect upon the effort to save within that margin.

119. The foregoing relates to the savings made by individuals. We have, however, also to take into account the considerable sums that are accumulated by joint stock companies in the form of reserves, out of funds which have never been distributed into the hands of individuals.

120. Such savings, being liable only to Income Tax at the standard rate, are not affected by the progressive character of our taxation. If existing taxation destroys the incentive to make savings of this character, this incentive can only be restored either by reduction of the standard rate of Income Tax (to which policy there are obvious limits) or by special discrimination in favour of companies' reserves, which we do not think practicable.

121. In any case, however, we do not think that the motives which induce this kind of saving are of a character likely to be much affected by taxation. Chief among these motives is a desire to provide for the stability and expansion of the individual firms by which the savings are made.

122. The incentive to make allocations to reserve will evidently be affected by matters bearing on the position and prospects of the firm; but since a company, as such, pays the same rate of taxation on all profits, whether distributed or not, we fail to see how the standard of reserve allocations aimed at can be

* Mr. Coates' evidence was, however, given in his private capacity.

affected by taxation. In this connection we are much impressed by the remarkable steadiness in companies' allocations to reserve. The investigations into company accounts made by The Economist, quoted by Mr. Layton, show that, for the five years before the War, allocations to reserve amounted to 24.4 per cent. of gross total profit, and to 2.3 per cent. of capital; while, in the five years after the War, a similar investigation covering a much larger number of companies showed reserve allocations amounting to 24 per cent. of gross profits and 2.8 per cent. of capital.

(ii) The Capacity to Save.

123. It is obvious that direct taxation reduces the taxpayer's capacity to save. It is obvious also that this reduction is greatest in the case of the comparatively wealthy, from whom, under the existing distribution of wealth, the greater part of the total volume of new saving must come. On the other hand, expenditure of the funds raised in taxation increases the wealth, and therefore, the potential capacity to save, of the recipients. The questions that we have to consider are, therefore, first, whether the transfer of wealth effected by existing taxation and existing expenditure, considered together, is on balance a transfer from saver to spender; and, if so, whether the result is to make the total volume of saving only less than it would be were taxation lower, or also less than it should be if the best interests of the nation are to be served.

124. In connection with the first question we think that it is important to bear in mind that, out of a total expenditure in 1925-26 of £754,695,000 on all objects other than the Post Office Services and the Road Fund (neither of which falls upon the general tax revenues), expenditure upon the internal debt services absorbed about £325 millions, or 43 per cent. The direct tax revenues (including under this head all the Inland Revenue duties) amounted, for the same period, to £428,441,000, of which total 43 per cent. or £184,230,000 may be regarded as used for meeting cost of interest on and repayment of the internal debt

125. This last portion of our tax revenues appears to us to stand in a category by itself. We can see no reason to suppose that the recipients of National Debt interest and repayments are likely to save a less proportion of these receipts than would have been saved by the taxpayers from whose pockets this money is taken. Indeed we think the probability is rather the other way. We have already given reasons for supposing that the payment of interest on the National Debt by taxpayers to debt holders is on balance a payment from the community at large to its relatively well-to-do members. If the common assumption is true that the proportion of income likely to be saved is greater in the higher income groups, it follows that a transfer of this kind would, if anything, tend to increase the total volume of saving.

126. The matter is indeed somewhat conjectural, and we are not prepared to say that payment of interest on the internal debt must create a substantial increase in saving in this way. We think, however, that it is at least clear that taxation for this purpose neither destroys any part of the aggregate national capacity to save, nor transfers money into the hands of persons who are likely to save less of it than are the taxpayers from whom it is taken.

127. The case is much clearer in regard to taxation for debt repayment. We are of opinion that such taxation definitely increases aggregate saving. It has been put to us by witnesses-and we see no reason to doubt the truth of the contention that practically the whole of the money received by debt holders as repayments will be regarded by them as capital and reinvested. On the other hand, it is virtually certain that the taxpayers who provide the money for these repayments do so by restricting not only their savings but also their consumption. Practically the whole of the money is saved by the recipients, whereas part, at least, would have been spent had it remained with its original owners. The transfer is thus definitely favourable to saving. We regard this aspect of taxation for debt redemption as of considerable importance, and we doubt whether sufficient attention is generally given to it. We recur below (paras. 242 to 244) to its implications.

128. There remains some £244,211,000 of direct taxation which is spent upon the external debt, the Civil Services and the Defence Forces, &c. Undoubtedly a part of this money is expended for the benefit of persons whose incomes are not large enough to permit of their making any great savings. This is true, for example, of part of the outlay of the Ministries of Education, of Labour and of Pensions.

129. To take an extreme case, it is evident that practically none of the money spent on Old Age Pensions, or State contributions to the Unemployment Insurance and Health Insurance Funds is invested by the recipients. In so far as these services are financed from direct taxation, we do not think that it can be denied that the direct effect of this taxation is to reduce the total of individual saving; though, even in this case, if any of these services contribute so much to the well-being of the workers as to increase their productive powers, the indirect effects of such taxation may be favourable both to output and to saving.

130. These, however, are extreme cases and they do not represent more than a small part of the total cost of the Civil Services and defences. As regards the whole of these services we do not think that it is possible to say more than that in all probability the ultimate beneficiaries save a somewhat smaller proportion of the money raised for these services than would have been

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accumulated by the direct taxpayer had the money been left with him. Such taxation, therefore, is likely somewhat to reduce the total volume of saving.

131. Looking at both sides of the account, and attempting to estimate the quantitative importance of these figures, we are unable to see any cause for the belief that direct taxation as at present imposed, and as at present spent, can seriously reduce aggregate savings. The funds raised by such taxation flow in two main directions; first, to meet the cost of the debt service, and, second, to meet the general expenses of Government. The first stream is likely to be, on the whole, favourable to saving; the second is, in part, unfavourable. The first stream exceeds the second by some £60 millions, a figure which represents approximately 16 per cent. of the total national income and 2.6 per cent. of the total income in the hands of Income Tax payers. We do not see cause to infer from these figures alone, or in the absence of other evidence, that existing direct taxa tion has, on balance, effects seriously detrimental to saving.

132. We have so far confined this argument to consideration of the effects of direct taxation, since it is the injurious effect of existing direct taxes that has been most strongly urged upon us. The effects of taxation on saving ought, however, rather to be considered as a whole. No witnesses have suggested to us that the indirect taxes are to any serious extent drawn from savings, since the bulk of them is paid by the poorer classes whose contribution to aggregate savings must in any case be small; while such part as is paid by the relatively well-to-do does not represent a large enough proportion of the incomes of this class materially to affect their capacity to save. Hence the collection of such indirect taxes as are required to meet the cost of the National Debt services is likely to cause a definite increase of saving greater than results from the collection of direct taxes for the same purpose; while, further, there is no corresponding loss of saving on indirect taxes that are used for the ordinary expenses of Government. Existing taxation as a whole is, therefore, more favourable to aggregate capacity to save than is existing direct taxation alone.

133. Our conclusion is, then, that existing direct taxation distributed over existing Government expenditure is not seriously prejudicial to our aggregate capacity to save, and that existing taxation as a whole is even less so. We do not think, therefore, that there is justification for the view that an important cause of the present unemployment or slackness of trade is a shortage of capital for which taxation is responsible. It is indeed the opinion of witnesses eminently well qualified to speak on this subject that the real value of our annual new savings is less now than before the War. Mr. Coates estimated national savings in 1924 at £500 millions as compared with £350-£400

millions in 1913. He added, however, that " there seems little doubt that the existing capital equipment of industry is sufficient to maintain a marked expansion of activity without addi. tional capital requirements except in the form of working capital," and that he was "not disposed to think that the existing rate of income taxation has a harmful effect upon the supply of permanent capital" (Ev. p. 640; E. in C., 19-25). In any case we think that the considerations which we have mentioned show that the principal causes of a decline in new savings must be sought in factors other than taxation.

Direct Taxation and Enterprise.

134. We come now to the last of the five principal grounds. on which existing taxation is held to be injurious to national prosperity-viz., that it discourages enterprise and initiative. "All business enterprise involves risks of greater or less degree. But while the profits of any enterprise are reduced by the amount of direct taxation, 100 per cent. of the risk always remains to be borne by those engaged in it." (Brand, E. in C., 2.) In illustration of this argument, our attention has been called to the fact that in the past few years gilt-edged securities have formed a larger, and industrials a smaller, proportion of the new issues offered for subscription upon the London market. Thus in the three years 1911-13, Government and municipal securities represented 23.3 per cent., 210 per cent., and 38.3 per cent. respectively of the total of new issues on the London market, while industrials accounted for 76-7 per cent., 790 per cent. and 61.7 per cent. of the total. In 1924 the proportions were Government and municipal 58.9 per cent. and industrials 41.1 per cent.

135. We are of opinion that it is a mistake to ascribe any large responsibility for a decline in enterprise to existing taxation as such. Some part of such decline may indeed be traced to the effect of existing methods of expenditure of the proceeds of taxation, in so far as money spent on the debt services goes, as we have already pointed out, into the pockets of persons who may be presumed, in general, to have a preference for giltedged over more risky investments. This redistribution of income in a manner unfavourable to industrial investment is incidental to payments of debt interest, and (unlike the effects of taxation for the debt services upon the quantity, as distinct from the "quality," of saving), it results also from the process of debt repayment. This, however, is quite distinct from the argument, which has been put before us, that existing direct taxation as such (i.e., apart from its expenditure upon the debt service) tends to encourage the taxpayer to abandon risky undertakings in favour of the security of a gilt-edged investment.

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