THE CAPITAL LEVY. I.—"PRACTICABILITY."

BY SIR JOSIAH STAMP.

ANY student of taxation at home and abroad who has had to ,pore over the evidence given before committees of inquiry, to read old Hansards or Con- gressional Records relating to matters which are now accomplished and accepted facts, knows that prophets of calamity have been universal. There never has been • a tax that some did not prophesy would be " impractic- able " or -" dangerous " or " fatal." Any practical administrator also who has had the task of formulating new schemes, whether or not they have ever seen the light of day, has handled masses of correspondence bearing the same burden. Less than twenty years ago even experts said that the graduation of the Income Tax by means of a Super Tax and the differentiation between different classes of income was impracticable. They have been proved wrong. Just so have the prophets of evil been proved wrong—but not always. The bootless cry of " wolf," whether wanton or honest, has never made that animal extinct. Any prophecies about the difficulties of a practical and administrative nature that would arise over the Land Values Duties were not unjustified.

In my study of the different projects for the Capital Levy I have, therefore, not approached the matter with any natural bias against its practicability. In 1917 the idea of an immediate capital composition for future tax burdens, reducing the debt at a time when the • price-level was high, was so attractive as a way out of future financial difficulty that it was only to be rebutted by strong practical considerations. In fact, when I gave evidence before the Committee on the Taxation of War Wealth in the spring of 1920, so imbued was I with a sense of our terrible difficulties in handling the floating debt, and the absolqte necessity for bringing to an end in some way the ever rising spiral of inflation, that I thought the scheme for raising some five hundred millions, though a task transcending in practical diffi- culty anything that had been attempted before, was just worth the risk of the attempt. It was on the border-line of practicability,- but I preferred an immediate crisis then, of limited scope and known cause, to the inevitable smash that was ahead. Almost anything was better than remaining in the fool's paradise we then enjoyed. Within a few weeks after, however, the tide of inflation turned. The outlook of the financial world became critical, and what had been practicable or barely practic- able before became highly dangerous. I did not hesitate to tell Mr. Austen Chamberlain that I had changed my views.

I changed them because the circumstances had changed, and the check to continuous inflation had come otherwise.

From the point of view of practicability the Capital Levy is, in my judgment, considerably more difficult than the War Wealth Levy, both in technique and also by reason of causes related to the very much larger sums that it is intended to raise. Nearly every difficulty that existed in the more limited scheme is multiplied, not merely six-fold, but often much more, and a whole set of other difficulties are added. The first thing that one has to realize is that " practicability " is a relative term. We have a certain standard of efficiency for a tax in this country, which is higher than the standard, say, in France, and particularly in Italy, and if that standard is not reached, we say that the tax has " failed." By " practicability " the possibility of reaching such a standard is implied. Again, difficulties arise in some particular applications of the scheme which threaten to jeopardize the whole principle of a tax, and if we have to resort to such extraordinary devices to deal with them that we set up new economic tendencies which themselves tend to make the rest of the tax more difficult, then the scheme is ceasing to be " practicable." If, therefore, by the best administration that we can devise we could not succeed in getting more than 70 or 80 per cent. of the theoretical yield of the tax, owing to evasion and owing to technical difficulties, the tax is not a " practicable " one. Again, if our, methods of dealing with difficulties in the course of assessment and collection are such that grave inequalities are introduced between individuals as compared with what was theoretically intended by the legislature, again we should have to say that it was not practicable. Upon what does practicability depend ? Hard arithmetic marks the outside boundary, but within that area of the prac- ticable, psychology marks out a field much more limited in extent. Taxation is psychology in the sense that psychology alone can upset any scheme theoretically perfect. What ispossible where there is hope and acquiescence may tweak down hopelessly where there is fear and distrust.

The peculiar. difficulties of the Capital Levy fall mainly under two heads : valuation and collection. The valuation of wealth looks simple, but often involves some of the most difficult matters the human mind can attempt. (1) If a tax of 1 or 2.per cent. (on the Conti- nental models) is being based upon capital values, £100 on £10,000 is not altered to any material extent if the valuation of i10,000 proves to be too much or too little by 5 per cent., but if the tax is heavy, say. 50 per cent., then, of course, every error in a valuation carries an enormous burden of error in the duty that is payable. (2) The difficulty is not avoided if the valuation is correct when it is made, for if the duty can be paid only over a period of time, the valuation has to remain correct over a period also, unless injustice is to ensue. ,(8) Directly a tax exceeds in amount the annual income that can be drawn from the wealth under taxation and such a tax has to be paid outright, the question at once arises of the necessity for realizing a portion of the wealth itself in order to discharge the duty, and in the process of realization the valuation itself may be jeopardized.

(4) The case is often compared with that of Death Duties, but there are many important differences. In the first place, even if the amount of Death Duty should be incorrectly computed, or not quite just in comparison with another similar case, the duty is paid by the estate, the estate is divided up amongst the various beneficiaries, and nobody is precisely in a position to compare the actual divergences or feel the injustice. But such is not the case where two men are dissimilarly taxed upon equal fortunes and both live on side by side into the future to realize in their own persons the full disparity.

(5) Again, the practical problems raised by the realiza- tion of fifty millions per annum continuously are of a different order from those which attend the payment of three thousand millions.

Can a valuation be insisted upon for final settlement which cannot itself stand the shock of settlement ?

I have formed the conclusion that any scheme which must rely upon capital valuation of highly uncertain annual yields as its main feature is a third-rate taxing expedient only to be resorted to when all else fails.

The great question of life interest of remaindermcn does not arise to any material extent upon Death Duties, whereas it is the central difficulty of the Capital Levy.

If a given block of wealth under consideration, correctly valued at, say, £100,000, does not belong to any one person outright, then our difficulties begin. Suppose that there is a life tenant who has such an expectation of life on the tables of mortality that his share is worth £70,000, then there will be a remainderman whose interests are worth -130,000. The remainderman will be assessed to the levy on this amount. He may have no other resources at present than a salary, and many years may elapse before he is put in funds to meet the tax. But his tax will have to be paid, and paid pre- sumably by anticipation of the trust funds. If the trust funds are affected, and the life tenant lives on so that the proportions do not work out as assessed, who is to reimburse the affected party ?

The root of the trouble is that while valuation of interests by reference to expectation of life must be dependent upon mortality averages, although such averages arc satisfactory for the mass operation of life insurance, they are wholly unsatisfactory for the individual burden and justice of taxation. The average is right in the mass, but badly wrong as an individual estimate in over 90 per cent., of the individual cases. In other words, the valuation of a life interest for a heavy tax thereon would be seriously different from the ultimate facts, either too much or too little, in the great majority of cases. The life tenant " A " has a valuation of £70,000 on his expectation of life, say, seventeen years, and has other property £30,000. Assume that he pays £35,000, the bulk of which he raises by mortgaging his whole independent property. He dies the following year, and instead of being -worth £30;000 his estate is wholly bankrupt and his dependents penniless. " B's " reversion was valued at the residual £30,000, on which he pays, say, £5,000. The following year he comes into the full interest and has really been undercharged by a very large sum. There is a double injustice, and it is certain that provision would have to be made for some years to come for the revision of cases of the " A " type, at any rate, even if " B " were not re-charged. It might be thought that simple provision could be made for a transfer of the burden, e.g., the trustees could take the responsibility for the whole duty assessed on " A " and " B " together, or realize part of the trust funds, and pay to " A " an income appropriately reduced, and by such arrangement appor- tion the whole burden automatically on any eventuality. This would be possible, indeed, if the rate of levy were a flat rate, but it is completely defeated by the varied rates and high progression.

A and B have fortune; of quite different size. The total duty on £200,000 at 45 per cent. and -£100,000 at 30 per cent. is £125,000, but, on the adjustment, when A dies much before his expectation the duty ought to be, say, £20,000 at 10 per cent., and £280,000 at 50 per cent. equals £142,000. The combina- tion of differing shares in a total valuation with different tax rates makes the original duty too much or too little at every readjustment, and a just assessment of the levy involves a continual modification, in which the true yield 'of the levy to the nation is unknown for many years. Moreover, one has to settle the principle of such questions as this : On readjusting A's life interest, should any allowance be made if his other fortune has meantime increased in value ? On read- justing a life interest must one .adhere strictly to the original valuation, despite the fact that the corpus of the trust has in the meantime completely changed in value ? If these questions are pondered they will be seen to be most far-reaching in principle and comparative justice. Only the simplest case of life interest has been referred to above ; in practice many much more complicated cases arc found, for which a proper remedy is even more elusive. The importance of the question may be judged from the fact that somewhere between 15 and 20 per cent. of the wealth that would come under the levy is subject to such settlements.

Considerations of a -different order apply to " valua- tions " on other " average " views of such assets as mines of capacity not strictly known, where the valuation can be clearly falsified within a period during which the total annual profit itself may not aggregate to 'the amount of the tax on such valuation. The total wealth under the levy in which such a contingency is possible is probably not less than 25 to 30 per cent. of the whole.

So much for examples of practicability on valuation. Space fails for me to refer in detail to problems which arise on collection, -due to the admitted necessity for instalments or mortgages in many cases, liquidated over a period in which price levels fluctuate or the original values change. I will content myself with repeating an illustration which so far has not been satis- factorily met (and which, incidentally, is a comment upon a recent dictum that the present time is not so propitious, as three years ago). A levy of 20 per cent, was applied in 1920 to A, B and C, each with a fortune of £200,000 in shipping. A owned five vessels, each worth £40,000, sold one and paid his duty. B and C each owned one vessel worth £200,000. B arranged a mortgage of £40,000 and paid the duty. C arranged to pay £8,000 per annum for five years, plus interest. In 1928, A's five vessels are worth in all /50,000 ; he owns only four, worth £40,000, and so has suffered a tax of 20 per cent. as intended. B has ships worth £50,000, mortgaged for £40,000, and is worth £10,000 instead of £50,000, so he has been taxed 80 per cent. C is trying to pay £8,000 per annum out of an annual income of, say, £5,000, and is forced to mortgage at this rate ; his final rate of _taxation is still unknown.

The Capital Levy is " impracticable " in the ordinary sense of the word. It is " practicable " upon an alto- gether lower level of equity, yield and efficiency than has hitherto contented us, and it is practicable even on that level only if certain essential political conditions are present. Those conditions are net present in any proposals now actually before us.