cent of the amount collected; while Lloyd George is quoted as saying that the collection of the tax on the very low incomes of other than wage-earning people, "small shopkeepers and men who do odd jobs of all kinds," would cost the Exchequer as much as 70 per cent of the resulting collections. The gain in receipts through the lowering of the exemption limit was placed at £1,000,000, an almost insignificant amount when the total yield of the tax is considered.

8

The South Wales miners were especially active in opposing the retention of the exemption limit of £130. In June, 1919, Mr. Charles Edwards, M. P., appeared before the commission and in behalf of the South Wales Miners' Federation presented a protest against maintaining the limit at £130.10 The protest was based principally on the arguments (1) that the reduction of basis had been made at a time when the cost of living was going up; (2) that the tax under these conditions pressed more heavily upon the poor than upon any other part of the community; and (3) that the cost of collecting this part of the tax was at least more than half the amount collected." The exemption limit recommended by the miners' representatives was £250, a limit which had just previously been proposed by the Labor party and discussed in the House of Commons.12 It was generally believed at this time that a refusal to work up to the point where wages would come inside the income tax limit was a common practice with the miners, a belief which was supported by the testimony of their representative in connection with the evidence noted above. In the autumn of 1919 the miners' opposition to the low exemption limit became so strong that a project for strike to resist the payment of income taxes on wages not exceeding £250 a year won a favorable majority in a strike ballot among the South Wales miners' organizations.13 The strike was postponed, however, and no concerted action resulted.

Few witnesses before the commission failed to testify in some

7 Second Instalment of Minutes of Evidence, appendix 8, p. 73.

8 Parliamentary Debates (Commons), vol. 115 (1919), col. 1169.

9 Ibid, vol. 115 (1919), col. 1176.

10 Second Instalment of Minutes of Evidence, pp. 114-125.

11 The commission later noted the fact that the figures for cost of collection presented by the Board of Inland Revenue failed to support this contention as to cost.

12 Parliamentary Debates (Commons), vol. 115 (1919), col. 1167. 13 The Times (London), Dec. 2, 1919.

connection on the question of the exemption limit. Various higher figures were suggested, and a number of variations in the general scheme were proposed; but underlying the diverse testimony a general and strong sentiment in favor of raising the limit became apparent to the commission. The arguments presented are summarized in the report as follows:1

(a) The cost of living has greatly increased since the present limit was fixed.

(b) There should be no taxation on an income so small that it is only sufficient to satisfy ordinary human needs.

(c) Existing indirect taxation lays upon a person with a small income the full share of the State burden which he ought to be called upon to bear.

On the other hand, it was argued before the commission that the limit should be lowered, in order to make possible the lightening of the burden of indirect taxation, and also in order that the majority of the voters might not be absolved from direct payment towards the country's expenses.

The recommendation that the exemption limit should be raised to £150 for single persons and to £250 for married persons without children, is accompanied by the recommendation that these limits should be maintained without fluctuation from year to year, until there is a substantial change in the cost of living. In recommending the increases the commission states that it has given due consideration "to ability to pay and to the cost involved in collecting small sums of Income Tax [and to the fact that] no tax can be successfully administered that is contrary to the general sense of justice in the community."15

Accompanying the recommendation for raising the exemption limit are suggestions that the joint assessment of married persons should continue; that the wife allowance formerly permitted should disappear and be merged in the exemption allowed to a married couple; that the allowance for children should remain at £40 for the first child but should be increased from £25 to £30 for each subsequent child; and that the allowance for dependent relatives, which formerly applied only to incomes of not more than £800, should apply throughout the scale of income.16

14 Report, part III, paragraphs 240, 241 (p. 55).

15 Idem, 246, 247 (p. 56).

16 Idem, 260, 272, 282, 287 (pp. 54-63).

The general effect of these recommendations, as set forth graphically in the charts appended to the report, is to make the burden of the income tax heavier for single persons, especially for those with moderate incomes; lighter for married persons without children whose incomes are small; and lighter for married persons with children whose incomes are small or moderate.

Included in the same division of the report" are the recommendations that allowance should be made for wasting assets in cases where the life of the asset falls short of 35 years; that no allowances should be granted to any other asset; that an increase should be made in the graduated allowances for houses of small annual value; and that allowances for life insurance premiums should be continued, but with a slight modification in rates.

These changes in exemptions and allowances, if incorporated into law and income tax practice, are hardly calculated to cause noticeable changes in the amount yielded by the income tax. The advantage will lie in the satisfaction of the desire of the taxpaying community for a more equitable and convenient application of the tax.

The differentiation plan. The commission recommends that the present differentiation against unearned incomes should be diminished.18 The device suggested, through which the differentiation may be lessened and the whole scheme simplified at one stroke, is the diminishing of earned income by one-tenth for the purposes of assessment. The income so diminished would be charged at the rate of tax applicable to unearned income. The commission comments incidentally on the public objection to the expression "unearned income," and advocates the substitution of the term "investment income"-a terminology the use of which is illustrated in the titles of the appended graphs.

The distinction between earned and unearned income for purposes of taxation is a recent development in British income tax practice. The Board of Inland Revenue makes the comment that "it is rather remarkable that an agitation that began as soon as Pitt introduced his Bill in 1798 and was carried on by a devoted succession of enthusiasts throughout the whole of the following century did not attain its legislative end until 1907."19 The Select Committee of 1906, appointed to consider (in addition to

17 Report, part III, paragraphs 187, 191, 232, 300 (pp. 41-72).

18 Report, part II, paragraphs 109, 110 (p. 25).

19 First Instalment of Minutes of Evidence, appendix 7 (b), p. 54.

graduation) the practicability of "differentiating . . . between Permanent and Precarious incomes," reported that differentiation on incomes not exceeding £3,000 a year was practicable, and could most conveniently be carried into effect by charging on such incomes a rate of tax lower than the normal or foundation rate. The difficulty of making a logical division between "earned" and "unearned" incomes was recognized, and the distinction between private traders' incomes and the profits of public companies was suggested as a possible working basis.

The committee's recommendation was approved and the general structure of the plan was incorporated in the Finance Act of 1907,20 according to the terms of which the rate on earned income was placed at 9d. in the £ instead of 1s., provided that the taxpayer's income did not exceed £2,000. Subsequent finance acts have increased the degree of differentiation and have elaborated the scale of rates until there are at the present time five rates applicable to earned incomes up to £2,500, above which point the full normal rate is in effect.

come.

In the course of the sessions of the Royal Commission in 1919, evidence was given that the scale of differential reliefs operated harshly against the smaller unearned incomes, especially as these are often derived from the investment of savings out of earned inThe commission reports that it is not practicable to attempt to decide how far income from investments is derived from the saved portion of earned income, but nevertheless presents a recommendation materially diminishing the differentiation against small incomes. The fraction one tenth, suggested for diminishing earned incomes for the purposes of taxation, would not only remove the present burden on unearned incomes at the foot of the scale at the lowest point of which the differentiation is now in proportion to the fraction one fourth-but would also simplify the tax. Furthermore, the commission regards the point of £2,500, at which differentiation ceases, as wholly arbitrary, and recommends the substitution of £2,000, earned income. The maximum deduction for differential relief would consequently be £200. Graduation. Immediately following the section on differentiation is a full discussion of graduation and recommendations for the simplification of the scheme.21

The movement for the graduation of the British income tax 207 Edward 7, c. 13, s. 19.

21 Report, part II, sec. II (pp. 28-35).

has in many ways paralleled the movement for differentiation. Pitt's "Triple Assessment" and the following income tax of 1799 contained the feature of graduation for the smaller incomes, but not for the larger.22 It was held at that time that graduation at the lower end of the scale was a practical necessity, but the suggestion of graduation at the upper end of the scale was regarded as an absurdity. From 1842 to 1853 the tax was charged at a uniform rate, but in 1853 a step was again taken in the direction of graduation by the introduction of an abatement for incomes of less than £150 at the time when Mr. Gladstone reduced the exemption limit to £100. This change was regarded by Mr. Gladstone, who remained a steadfast opponent of both differentiation and graduation, merely as a readjustment of the exemption limit. He refused to consider proposals for a graduated tax, on the ground that past experience showed that Pitt's system of graduation was bad, and that such a system "tended to communism." Another famous opponent of graduation, John Stuart Mill, described such a mode of taxation as "graduated robbery."

In succeeding years the fierceness of the opposition to the bare idea of graduation slowly died away. In 1894 Sir William Harcourt extended the abatement system for small incomes and announced his adherence to the principle of graduation for large incomes. In 1906 the Select Committee appointed to deal with the questions of graduation and differentiation noted in its report the fact that graduation up to £700 was already in force through the system of abatements, and stated that the system could be extended. In addition, the committee outlined the method of effecting graduation by means of a supertax, and gave it as its opinion that such a plan, although offering disadvantages and difficulties, was practicable.

These recommendations of the committee were not incorporated into law until the passage of the Lloyd George budget of 1909,23 when a supertax was imposed on incomes of over £5,000. The Finance Act of 1914, passed before the outbreak of the war, further extended graduation. In 1918 the limit above which the supertax becomes payable was brought down to £2,500, and the maximum rate chargeable reached 4s. 6d., at which point it has remained.

The difficulties inherent in the methods of graduation now in 22 First Instalment of Minutes of Evidence, appendix 7 (a), p. 51.

23 10 Edw. 7, c. 8, s. 66.