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War-Time Financial Problems - V


2. I

3. II

4. III

5. IV

6. V

7. VI

8. VII


10. IX

11. X

12. XI

13. XII

14. XIII

15. XIV

16. XV

17. XVI

18. XVII


20. XIX

21. XX



_January_, 1918

The Objects of the Levy--Its Origin and History--How it would work in
Practice--The Attitude of the Chancellor--The Effects of the Scheme
in discouraging Thrift--Its Fallacies and Injustices--The Insuperable
Obstacles to its Application--Its Influence on Production--One of the
Tests of a Tax--Judged by this Test the Proposed Levy is doomed.

By some curious mental process the idea of a levy on capital has come
into rapidly increasing prominence in the last few months, and seems
to be gaining popularity in quarters where one would least expect it.
On the other hand, it is naturally arousing intense opposition, both
among those who would be most closely affected by its imposition, and
also among those who view with grave concern the possible and probable
economic effects of such a system of dealing with the national debt. I
say "dealing with the national debt" because, as will be clear, as
a system of raising money for the war the suggestion of the levy on
capital has little or nothing to recommend it. But, as will also be
made clear, the proposal has been put forward as a thing to be done
immediately in order to increase the funds in the hands of the
Chancellor of the Exchequer to be spent on war purposes.

A levy on capital is, of course, merely a variation of the tax on
property, which has long existed in the United States, and had been
resorted to before now by Governments, of which the German Government
is a leading example, in order to provide funds for a special
emergency. This it can very easily do as long as the levy is not too
high. If, for example, you tax a man to the extent of 1-1/2 per cent.
to 2 per cent. of the value of his property, on which he may be
earning an average of 5 to 6 per cent. in interest, then the levy on
capital becomes merely a form of income tax, assessed not according to
the income of the taxpayer but according to the alleged value of his
property. It is thus, again, a variation of the system long adopted
in this country of a special rate of income tax on what is called
"unearned" income, i.e. income from invested property. But it is
only when one begins to adopt the broadminded views lately fashionable
of the possibilities of a levy on capital and to talk of taking, say,
20 per cent. of the value of a man's property from him in the course
of a year, that it becomes evident that he cannot be expected to pay
anything like this sum, in cash, unless either a market is somehow
provided--which seems difficult if all property owners at once are
to be mulcted of a larger amount than their incomes--or unless the
Government is prepared to accept part at least of the levy in the
shape of property handed over at a valuation.

Before, however, we come to deal in detail with the difficulties
and drawbacks of the suggestion, it may be interesting to trace the
history of the movement in its favour, and to see some of the forms in
which it has been put forward. It may be said that the ball was opened
early last September when, in the _Daily News_ of the 8th of that
month, its able and always interesting editor dealt in one of his
illuminating Saturday articles with the question of "How to Pay
for the War." He began with the assumption that the capital of the
individuals of the nation has increased during the war from 16,000
millions to 20,000 millions. A 10 per cent. levy on this, he
proceeded, would realise 2000 millions. It would extinguish debt to
that amount and reduce the interest on debt by 120 millions. The levy
would be graduated--say, 5 per cent. on fortunes of L1000 to L20,000;
10 per cent. on L20,000 to L50,000; up to 30 per cent. on sums over
L1,000,000; and the individual taxpayer was to pay the levy "in what
form was convenient, in his stocks or his shares, his houses or his
fields, in personalty or realty."

Just about the same time the _Round Table_, a quarterly magazine which
is usually most illuminating on the subject of finance, chimed in with
a more or less similar suggestion in an article on "Finance After the
War." It remarked that the difficulty of applying a levy on capital is
"probably not so great as appears at first sight." The total capital
wealth of the community it estimated at about 24,000 millions
sterling. To pay off a war debt of 3000 millions would therefore
require a levy of one-eighth. Evidently this could not be raised in
money, nor would it be necessary. Holders of War Loans would pay their
proportion in a simple way by surrendering one-eighth of their scrip.
Holders of other forms of property would be assessed for one-eighth of
its value and be called on to acquire and to surrender to the State
the same amount of War Loan scrip. To do this, they would be obliged
to realise a part of their property or to mortgage it, "but," added
the _Round Table_ cheerfully, "there is no insuperable difficulty
about that."

The first thing that strikes one when one examines these two schemes
is the difference in their view concerning the amount of capital
wealth available for taxation. Mr Gardiner made the comparatively
modest estimate of 16,000 millions to 20,000 millions; the _Round
Table_ plumps for 24,000 millions, and, incidentally, it may be
remarked that some conservative estimates put it as low as 11,000
millions. Thus we have a possible range for the fancy of the scheme
builder of from 11,000 to 24,000 millions in the property on which
taxation is proposed to be levied. But it is when we come to the
details of these schemes that the difficulties begin to glare. Mr
Gardiner tells us that millionaires would pay up to 30 per cent. of
their property, and that they would pay in what form was convenient,
in houses, fields, etc., etc. But he does not explain by what
principle the Government is to distribute among the holders of the
debt, the repayment of whom is the object of the levy, the strange
assortment of miscellaneous assets which it would thus collect from
the property owners of the country.

In commenting on this scheme the _Economist_ of September 15th took
the case of a man with a fortune of L100,000 invested before the war
in a well-assorted list of securities, the whole of which he had, for
patriotic reasons, converted during the war into War Loans. He would
have no difficulty about paying his capital levy, for he would
obviously surrender something between 10 and 20 per cent. of his
holding. But, "in exchange for nearly two-thirds of the rest, he might
find himself landed with houses and bits of land all over the country,
a batch of unsaleable mining shares, a collection of blue china, a
pearl necklace, a Chippendale sideboard, and a doubtful Titian,"
The _Round Table's_ suggestion seems to be even more impracticable.
According to it, holders of all other forms of property besides War
Loans would be assessed for one-eighth of its value--it does not
explain how the value is to be arrived at, nor how long it would take
to do it--and would then be called on to acquire and to surrender to
the State the same amount of War Loan scrip. To do this they would
be obliged to realise a part of their property or to mortgage it, a
process which would seem likely to produce a pretty state of affairs
in the property market; and a very pleasant state of affairs indeed
would arise for the holders of War Loan scrip, since there would be a
large crowd of compulsory buyers in the market from whom the holders
would apparently be able to extort any price that they liked for their

The next stage in the proceedings was a deputation to the Chancellor
of the Exchequer, concerning which more anon, of leaders of various
groups of the Labour Party, to press upon Mr Bonar Law the principle
of what is called "the Conscription of Wealth," and the publication at
or soon after that time, which was about the middle of November, of a
pamphlet on the subject of the "Conscription of Riches," by the War
Emergency Workers' National Committee, 1, Victoria Street, S.W. Among
what this pamphlet describes as "the three practicable methods of
conscripting wealth" No. 1 is as follows:--

A Capital Tax, on the lines of the present Death Duties, which are
graduated from nothing (on estates under L300, and legacies under L20)
up to about 20 per cent. (on very large estates left as legacies to

If a "Death Duty" at the existing rates were now levied simultaneously
on every person in the kingdom possessing over L300 wealth (every
person might be legally deemed to have died, and to be his own heir),
it might yield to the Chancellor of the Exchequer about L900,000,000.
It would be necessary to offer a discount for payment in cash; and in
order to avoid simultaneous forced sales, to accept, in lieu of cash,
securities at a valuation; and to take mortgages on land.

Here it will be seen that the Emergency Workers had improved on the
_Round Table_, and agreed with Mr Gardiner, by providing that the
Government should take securities at a valuation and mortgages on land
in lieu of cash in order to avoid simultaneous forced sales. But they
do not seem to have perceived that, in so far as the Government took
securities or accepted mortgages on land, it would not be getting
money to pay for the war, which was the object of the proposed
Conscription of Wealth, but would only be obtaining property from
which the Government would in due course later on receive an income,
probably averaging about one-twentieth of its value.

Perhaps, however, it would be more correct to say that those who put
the scheme forward did not ignore this drawback to it, but rather
liked it, for reasons quite irrelevant to the objects that they were
apparently pursuing. A good deal of prominence was given about the
same time to the question of a levy on capital in the _New Statesman_
well known to be the organ of Mr Sidney Webb and other members of the
Fabian Society. These distinguished and very intellectual Socialists
would, of course, be quite pleased if, in an apparent endeavour to pay
for the war, they actually succeeded in securing, by the Government's
acquisition of blocks of securities from property owners, that
official control of industry and production which is the object of
State Socialists.

It will be noted, however, in this scheme that no mention is made of
any forms of property to be accepted by the Government in lieu of cash
except securities and mortgages on land. Items such as furniture,
books, pictures and jewellery are ignored, and in one of the articles
in the _New Statesman_, discussing the question of a capital levy, it
was distinctly suggested that these commodities should be left out
of the scheme so as to save the trouble involved by valuation.
Unfortunately, if we leave out these forms of property the natural
result is to stimulate the tendency, lately shown by an unfortunately
large number of patriotic taxpayers, of putting money into pearl
necklaces and other such gewgaws in order to avoid income tax. If
by buying fur coats, old masters and diamond tiaras it will be be
possible in future to avoid paying, not only income tax, but also a
capital levy, it is to be feared that appeals to people to save their
money and invest it in War Bonds are likely to be seriously interfered

Unfortunately, the _Statesman_ was able to announce that the appeal
for this system of taxation had been received with a good deal of
sympathy by the Chancellor of the Exchequer, and the next stage in the
history of the agitation was the publication on Boxing Day in several
of the daily papers of what appeared to be an official summary, issued
through the Central News, of what the Chancellor had said to the
deputation of Labour Leaders introduced by Mr Sidney Webb, which
waited on him, as already described, in the middle of November. Having
pointed out that he had never seen any proposal which seemed to him
to be practicable for getting money during the war by conscripting
wealth, Mr Bonar Law added that, though "perhaps he had not thought
enough about it to justify him in saying so," his own feeling was that
it would be better, both for the wealthy classes and the country, to
have this levy on capital, and reduce the burden of the national debt
when the war was over. It need not be said that this statement by the
Chancellor has been very far from helpful to the efforts of those who
are trying to induce unthrifty citizens to save their money and put it
into National War Bonds for the finance of the war.

"Why," people argue, "should we go out of our way to save and take
these securities if, when the war is over, a large slice of our
savings is to be taken away from us by means of this levy on capital?
If we had been doubting between the enjoyment of such comforts and
luxuries as are possible in war-time and the austere duty of thrift,
we shall naturally now choose the pleasanter path, spend our money on
ourselves and on those who depend on us, instead of saving it up to
be taken away again when the war is over, while those who have spent
their money as they liked will be let off scot free." Certainly, it is
much to be regretted that the Chancellor of the Exchequer should have
let such a statement go forth, especially as he himself admits that
perhaps he has not thought enough about it to justify him in saying
so. If the Chancellor of the Exchequer has not time to think about
what he is going to say to a Labour deputation which approaches him on
an extremely important revolution in our fiscal system, it is surely
high time that we should get one who has sufficient leisure to enable
him to give his mind to problems of this sort when they are put before

In the course of this review of the forms in which suggestions for a
levy on capital have been put forward, some of the difficulties and
injustices inherent in it have already been pointed out. Its advocates
seem as a rule to base the demand for it upon an assumption which
involves a complete fallacy. This is that, since the conscription
of life has been applied during the war, it is necessary that
conscription of wealth should also be brought to bear in order to make
the war sacrifice of all classes equal. For instance, the Emergency
Workers' pamphlet, quoted above, states that, "in view of the fact
that the Government has not shrunk from Compulsory Conscription of
Men," the Committee demands that "for all the future money required
to carry on the war, the Government ought, in common fairness, to
accompany the Conscription of Men by the Conscription of Wealth."

This contention seems to imply that the conscription of men and the
conscription of wealth apply to two different classes; in other words,
that the owners of wealth have been able to avoid the conscription of
men. This, of course, is absolutely untrue. The wealthiest and the
poorest have to serve the country in the front line alike, if they are
fit. The proportion of those who are fit is probably higher among the
wealthy classes, and, consequently, the conscription of men applies
to them more severely. Again, the officers are largely drawn from
the comparatively wealthy classes, and it is pretty certain that the
proportion of casualties among officers has been higher during the war
than among the rank and file. Thus, as far as the conscription of men
is concerned, the sacrifice imposed upon all classes in the community
is alike, or, if anything, presses rather more heavily upon those who
own wealth. Conscription of wealth as well as conscription of life
thus involves a double sacrifice to the owners of property.

This double sacrifice, in fact, the owners of property have, as is
quite right, borne throughout the war by the much more rapid increase
in direct taxation than in indirect. It is right that the owners of
property should bear the heavier monetary burden of the war because
they, having more to lose and therefore more to gain by a successful
end of the war, should certainly pay a larger proportion of its cost.
It was also inevitable that they should do so because, when money is
wanted for the war or any other purpose, it can only be taken in large
amounts from those who have a surplus over what is needed to provide
them with the necessaries and decencies of life. But the argument
which puts forward a capital levy on the ground that the rich have
been escaping war sacrifice is fallacious in itself, and is a wicked
misrepresentation likely to embitter still further the bad feeling
between classes.

Nevertheless, Mr Bonar Law thinks that, since the cost of the war must
inevitably fall chiefly upon the owners of property, and since it
therefore becomes a question of expediency with them whether they
should pay at once in the form of a capital levy or over a long series
of years in increased taxation, he is inclined to think that the
former method is one which would be most convenient to them and best
for the country. This contention cannot be set aside lightly, and
there can be no doubt that if, by making a dead lift, the wealthy
classes of the country could throw off their shoulders a large part of
the burden of the war debt, such a scheme is well worth considering as
long as it does not carry with it serious drawbacks.

It seems to me, however, that the drawbacks are very considerable.
In the first place, I have not seen any really practicable scheme of
redeeming debt by means of a levy on capital In so far as the levy is
paid in the form of surrendered War Loans, it is simple enough. In so
far as it is paid in other securities or mortgages on land or other
forms of property, it is difficult to see how the assets acquired by
the State through the levy could be distributed among the debt
holders whom it is proposed to pay off. Would they be forced to take
securities, mortgages on land, furniture, etc., as the Government
chose to distribute them, or would the Government have to nurse an
enormous holding of various forms of property and gradually realise
them and so pay off debt?

Again, a great injustice would surely be involved by laying the whole
burden of this oppressive levy upon owners of accumulated property, so
penalising those who save capital for the community and letting off
those who squander their incomes. A characteristic argument on this
point was provided by the _New Statesman_ in a recent issue. It argued
that, because ordinary income tax would still be exacted, the contrast
between the successful barrister with an Income of L20,000 a year and
no savings, who would consequently escape the capital levy, and the
poor clergyman who had saved L1000 and would consequently be liable to
it, fell to the ground. In other words, because both lawyer and parson
paid income tax, it was fair that the former should escape the capital
levy while the latter should have to pay it!

But needs must when the devil drives, and in a crisis of this kind it
is not always possible to look too closely into questions of equity in
raising money. It is necessary, however, to look very closely into the
probable economic effects of any suggested form of taxation, and, if
we find that it is likely to diminish the future wealth production
of the nation, to reject it, however attractive it may seem to be
at first sight. A levy on capital which would certainly check the
incentive to save, by the fear that, if such a thing were once
successfully put through, it might very likely be repeated, would dry
up the springs of that supply of capital which is absolutely essential
to the increase of the nation's productive power. Moreover, business
men who suddenly found themselves shorn of 10 to 20 per cent. of
their available capital would find their ability to enter into fresh
enterprise seriously diminished just at the very time when it is
essential that all the organisers of production and commerce in this
country should be most actively engaged in every possible form of
enterprise, in order to make good the ravages of war.

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