Now let us consider the reform of the Income Tax.

In the first place it is suggested that the Inhabited House Duty should be entirely abolished. As has been already pointed out, it is a clumsy second Income Tax and its incidence is most unequal. It is not paid in Ireland, and too much of it falls upon poor clerks and tradesmen in London and other big towns. It is urged here that if we properly reform the Income Tax it should not be necessary to levy a second one under another name.

It must be frankly recognized that, in principle, the Income Tax reforms urged in "Riches and Poverty," edition 1905, have been largely conceded. Method is so important in this connexion, however, that it is necessary to insist that the Income Tax still needs serious revision.

Why is it that so much misplaced ingenuity has been applied to our Income Tax law by successive Chancellors of the Exchequer? Why these alleged rates of Income Tax, which on inquiry prove to be nominal, and the enactment of a clumsy Super-Tax to amend a sufficiently clumsy Income Tax? Why should it be necessary to arrive at a "sort of" graduation by a series of provisions, which few men, inside or outside the legislature, pretend to understand?

The explanation is that we have not a complete Census of Incomes. The point is of the first importance. The establishment, within the limits of a very small possible margin of error, of the number of British Income Tax payers in 1903, which I effected by a careful examination of so far uncorrelated facts in "Riches and Poverty," edition 1905, brought to light the then unsuspected fact that about 750,000 out of about 1,000,000 Income Tax payers actually declared their individual aggregate incomes from all sources for the purposes of Income Tax.

These declarations, as already explained, were made by the smaller Income Tax payers in order to avail themselves of the abatement system, the abatements being granted only to those persons with incomes not exceeding £700 a year who made declarations. In effect, those of this class who do not declare are heavily fined.

The number of the declarants was further increased in 1907 by Mr Asquith's differentiation of the Income Tax.

Mr Asquith enacted, as we have seen, that persons who earned their incomes, and whose incomes did not exceed £2,000 a year, should enjoy a lower rate of taxation if they declared their incomes.

This led to declarations by a fresh batch of Income Tax payers, and it became possible for Somerset House to collect and publish a new set of most valuable statistics. Unfortunately, the precise facts of the case have neither been collected nor published, important as the knowledge of them is if we are to tax wisely and justly. Nevertheless, there is little doubt that the new batch of declarations between £700 and £2,000 a year raised, or will soon raise, the proportion of Income Tax payers making personal declarations to over nine out of eleven of the whole body.

The question immediately suggests itself: Why should not the balance of two out of eleven, or thereabouts, be compelled to fall into line with the majority? This balance consists, of course, of the well-to-do and rich, chiefly those who derive their incomes from property. These persons are not taxed directly at all. The State relies upon what is called "taxing at the source." That is, dividends are taxed at the company's offices before they are distributed, and rents are taxed through the occupier, the occupiers being left to recover the Schedule A tax from the landlords and houselords.

This reliance upon an indirect form of "direct" taxation leads, of course, to much income escaping tax, for rich people, it will be seen, have not to make a return of their incomes, but are in the happy position of letting the State catch them when it can. No other country levying an Income Tax does this thing; yet we perversely maintain that there is no system so effective as ours. Happily, the Finance Act of 1909 (passed in 1910) still further increases the number of those who are to declare.

First, as to earned incomes, as noted above, Mr Lloyd George enacted that earned incomes over £2,000 but not over £3,000 are to continue to pay one shilling in the £, and that those over £3,000 are to pay fourteen pence. It follows that a new batch of declarations will be forthcoming from those, or most of those, between £2,000 and £3,000, in order to get the shilling rate.

Again, a Super-Tax is to be levied upon all those whose incomes exceed £5,000 a year, of whom there are not less than 14,000 or 15,000. This Super-Tax is to be collected by Special Commissioners. How will these Special Commissioners know to whom to apply? Obviously they have not a list of the fortunate 15,000. They will doubtless go to work by sending a form asking for a return of total income to all people who appear to be very rich.

All the inhabitants of big houses, and, indeed, all the obviously rich, will receive a declaration form to fill up. And, of course, in order to catch the 15,000 the Commissioners will have to send notices to many times that number of people, for it is really exceedingly difficult to decide by appearance or reputation whether a man has £2,500 or £5,000 a year. The Budget provides that every person sent a form must fill it up, whether or not he has £5,000 a year. Consequently, at the very top of the scale, the Income Tax Commissioners will come into possession of personal declarations relating to 50,000 or more of our moneyed citizens.

And yet we shall not arrive at complete declarations from all Income Tax payers. Nearly all persons who earn their incomes will declare, but as to unearned incomes there is a big hiatus.

Small unearned incomes up to £700 a year will be mostly declared in order to get the abatements.

Very big unearned incomes must be declared, as we have seen, through the demands for Super-Tax.

But, between £700 a year and £5,000 a year, the unearned scale is ungraduated, and, save for the people with less than £5,000 a year, asked in error to declare by the Super-Tax Commissioners, there will be no personal declarations.

Surely this ought not to be. If the poor are to declare and the very rich are to declare, why should not the middle incomes be declared? Why should the State continue to rely, in respect of the considerable amount of income concerned, upon taxation at the source? The question becomes the more urgent when we reflect that the fresh batch of declarations brought in by Mr Asquith's differentiation scheme of 1907, noted above, brought to light many millions of "new" income (see p. 14). Every new revelation of existing income, of course, lowers taxation pro tanto.

Perhaps the final argument for universal personal declaration of income is furnished by the following enactment of the Budget of 1907:

Finance Act (1907), Section 21.

"Every employer, when required to do so by notice from an assessor, shall, within the time limited by the notice, prepare and deliver to the assessor a return of the names and places of residence of any persons employed by him."

We thus go behind the backs of small tax-payers to their employers, and compel the divulgence of incomes which are usually the total incomes of the employed. Yet the employer who, by our direction, hands his employee over to the tax-collector, is not compelled by us to declare his own total income, unless (1) he has no other income than his Schedule D income, or (2) he is a payer of Super-Tax.

Given a Census of Incomes it would become possible to arrive at a practical and just Income Tax.

We could set up a plain graduated scale of taxation, differentiated up to a certain point as between earned and unearned incomes, making it quite clear to the tax-payer what is demanded from him and revealing to him the justice or injustice of our methods by enabling him to compare his rate of taxation with that of those richer or poorer than himself.

We need not abandon taxation "at the source." We could levy on property incomes at the source a certain rate of tax, say 1s. in the £. Then when the total income was declared, the tax-payer would point out upon what items, if any, 1s. in the £ had been deducted at the source and pay the balance of the tax.

Let us take a hypothetical case—that of a barrister earning £2,000 a year, and deriving a further £1,000 from rents and a further £300 from Consols. The total income, £3,300, let us suppose taxed under the graduation scheme at 14d. in the £. The Income Tax on the £1,000 of rents would be paid by his tenants and deducted from the rents paid him, while the Bank of England would deduct 1s. in the £ from the interest on the Consols. Declaring his total income at £3,300 he would pay the balance due, thus:—

If, upon the introduction of such a system, local assessors were empowered to ask every householder assessed for local rates at £20 a year and upwards to declare his income in the place where he resides, there would undoubtedly be a great increase in the Income Tax assessments. A great part of the evasion of Income Tax results from persons being taxed at their places of business, where there is often little evidence of means. In a man's own neighbourhood it is difficult grossly to understate income.

For several years I put down in the House of Commons the following suggested amendment to the Finance Bill:

Every person upon whom notice is served in manner prescribed by section forty-eight of The Income Tax Act, 1842 (which section relates to the delivery of notices by assessors), requiring him to make a return of his income chargeable to duty under any and every schedule of the Income Tax, shall make a return, in the form required by the notice, which shall show the amount of his aggregate income from all sources, whether he is or is not chargeable with duty, and upon what part or parts of such aggregate income, if any, Income Tax has already been paid under the Income Tax Acts by deduction at the source, and in default shall be liable to a penalty under section fifty-five of The Income Tax Act, 1842.

On one occasion some twenty Members of Parliament consented to put down this amendment with me, but every attempt to obtain its enactment has failed. Until it is obtained there can be no just graduation of the Income Tax, and tax-payers who declare their incomes under the existing law will continue to pay too much because others pay too little.

Some smaller matters claim our attention.

A minor but not unimportant reform, for which we have to thank Mr Lloyd George, is the concession made to small Income Tax payers who have young children, a concession which the present writer believes he was the first to urge in the House of Commons. The Finance Bill of 1909 (Sect. 68) provided that Income Tax payers with incomes not exceeding £500 should be entitled to exemption from taxation to the amount of £10 for each child under the age of 16 years. The effect of this provision is far-reaching. A clerk with £200 a year and three young children gets the £160 abatement and £30 abatement in respect of his children. His taxable income is thus reduced to £10 and his payment of Income Tax to 7s. 6d.

On the same ground, respect for the principle of ability to pay, the Income Tax law should provide for special abatements in case of the illness of salary earners, special misfortunes, the support of poor relatives, etc. It is found possible to work such provisions in Prussia; it ought to be found possible to do so here.

The importance of a thorough revision of the Income Tax law is growing. The view urged here is that the citizen's subscription to the National Club should not only be justly proportioned to his means, but presented to him intelligibly, and collected without waste or undue interference with business.

The phenomenon of an annual Budget debate has come to be regarded as a necessary Parliamentary evil, but is there any justification for it?

When the nation has decided, through its representatives, for good reasons or for bad reasons, that a certain sum of money must be raised for public purposes, it is not the function of the Chancellor of the Exchequer qua Chancellor of the Exchequer to decide whether the purposes are good or bad, or whether the sum is too large or too small. As a member of the Government, the Finance Minister has, of course, a voice in deciding what sums should be spent and upon what purposes, but, as Chancellor of the Exchequer, his duty is not to reason why but to find the money. In the finding of the money, ought there to be, year by year, a long and painful discussion as to how it should be done?

We have also become accustomed to regarding the Budget as a great and glorious secret, to be carefully guarded until the Chancellor of the Exchequer makes his annual speech. Does the tradition of secrecy rest upon necessity? For my part, I call the necessity in question. I affirm that our annual Budget need present no difficulties; that it is not inherently a difficult thing to accomplish; and that the conception of a Budget as a great secret, to be carefully hidden until Budget Day, is an altogether childish conception. There is some excuse for reserving a child's Christmas presents until he wakes up and finds the gifts of Santa Claus in his stocking on the morning of December 25th, but there is no excuse whatever for the ridiculous secrecy with which tradition shrouds the annual Budget statement.

I do not deny that secrecy has been necessary in connexion with such Budgets as have been put on record in the past. Of what have these Budgets consisted? Year by year, a number of clumsy, inefficient and indefensible taxes have been tinkered by successive guardians of the national purse. Tea taxes, coffee taxes, beer taxes, sugar taxes, alleged income taxes, double inheritance duties, have had bits carved off them, or bits attached to them, without rhyme or reason. Year after year, Mincing Lane has been in throes of excitement as to whether there was to be a penny on tea, or a penny off tea. Cunning gentlemen have rushed in tea to evade a suspected inclination to tax that article further, or sugar brokers have been excited at the prospect of making something, or losing something, over a little less or a little more on sugar. We are a grave and respectful people, or assuredly we should laugh at this annual exhibition of mingled greed and incompetency. If as much intelligence were put into the making of boots, none of us would be able to walk.

The subject is made additionally interesting by the fact that all along men have known perfectly well how taxes ought to be levied. It is 130 years since Adam Smith wrote his first maxim of taxation, which I have already quoted:

As long ago as 1848 John Stuart Mill wrote ("Principles of Political Economy," Book V. Chapter 2):

"As, in a case of voluntary subscription for a purpose in which all are interested, all are thought to have done their part fairly when each has contributed according to his means, that is, has made an equal sacrifice for the common object; in like manner should this be the principle of compulsory contributions: and it is superfluous to look for a more ingenious or recondite ground to rest the principle upon.... To take a thousand a year from the possessor of ten thousand would not deprive him of anything really conducive either to the support or to the comfort of existence: and if such would be the effect of taking five pounds from one whose income is fifty, the sacrifice required from the last is not only greater than, but entirely incommensurable with, that imposed upon the first. The mode of adjusting these inequalities of pressure, which seems to be the most equitable, is that recommended by Bentham, of leaving a certain minimum of income, sufficient to provide the necessaries of life, untaxed.... The exemption in favour of the smaller incomes should not, I think, be stretched further than to the amount of income needful for life, health, and immunity from bodily pain."

In passing, this quotation may be commended to those who regard the exemption of very small incomes from taxation as a tenet of modern Socialism. Here we have it propounded in 1848 by John Stuart Mill, who got it from Jeremy Bentham.

It is in spite of such admired utterances as these that we have still, in the year 1910, such outrages upon common sense as taxes upon sugar, taxes upon petrol, taxes upon cocoa, taxes upon business contracts, taxes upon marriage certificates, and a great party in the State is at this hour ardently desirous of adding to the number of such stupidities by thousands or even tens of thousands.

When we inquire for the reason for the existence of such unbusinesslike and costly stupidities, we find a simple explanation. It has been held in the past universally, and is held in the present by many, that the Government has no business to inquire into the incomes of the people it governs. Lacking knowledge of incomes, it has been obviously impossible for Governments to tax people according to their ability to bear taxation. Consequently, Chancellors of the Exchequer have had to devise all sorts of trumpery and costly expedients to get by indirect means what should have been got honestly and directly.

In short, the first condition of fair budgeting is a Census of Incomes. Given that, we are able to throw away all the lumber of indirect taxation and of inefficient taxation. And it should be observed that fair budgeting means simple budgeting—budgeting admitting of no annual argument. The annual budget wrangle is the effect of our devious methods of taxation.

Given universal declarations of income, and an end could speedily be made of our present array of taxes. We could decide upon some minimum of income which should be totally exempt from taxation on the ground that it represented the smallest sum upon which a family can be sustained in health and decency. Above that margin, we could arrange a graduated scale of taxation which should present to each citizen a fair bill for public expenses. That bill could be made payable in two or even four instalments, to make the payment an easy matter for the tax-payer. This arrangement once made, any increase of taxation would simply call for a proportionate increase from each tax-payer. Argument would not lie in the province of the Chancellor of the Exchequer, for the matter would be finally settled. Argument would begin and end with the decision of Parliament to spend certain moneys; that would not be a Budget argument, but an argument upon public policy in expenditure. And the plainer the bill for taxes, the more closely expenditure would be scanned.

My remarks, of course, must not be taken to condemn taxes upon alcohol or taxes upon inheritances. And beyond lies the question of the acquisition of monopolies by the State, and the consequent reduction of taxation by reason of the State carrying on revenue-producing undertakings.