The Labour Party and Taxation: Party Identity and Political Purpose in Twentieth-Century Britain

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The Labour Party and Taxation Party Identity and Political Purpose in Twentieth-Century Britain

This is a political history of Labour's use of the tax system from 1906 to 1979: an epilogue brings the story up to the present, surveying New Labour's tax policies and dilemmas. Richard Whiting's broad-ranging, lucid and readable study examines how Labour used tax to further its political aims of funding welfare, managing the economy, promoting fairness and achieving greater equality. Whiting also shows the limits of Labour's ability to achieve a more equal society in this way, assesses the ability and standing of key ®gures in the labour movement, and delineates the problems caused by the political role of the trade unions. This study provides an original perspective on Labour's history, and is a valuable contribution to understanding both the tax structure and the politics of twentieth-century Britain more generally. R IC H A R D W H IT I N G is a senior lecturer in modern history at Leeds University. His earlier publications include The Boundaries of the State in Modern Britain (with S. J. D. Green, 1996), Oxford: Studies in the History of a University Town since 1800 (1993) and The View from Cowley. The Impact of Industrialization on Oxford, 1918±1939 (1983).

The Labour Party and Taxation Party Identity and Political Purpose in Twentieth-Century Britain Richard Whiting University of Leeds

          The Pitt Building, Trumpington Street, Cambridge, United Kingdom    The Edinburgh Building, Cambridge CB2 2RU, UK 40 West 20th Street, New York, NY 10011-4211, USA 477 Williamstown Road, Port Melbourne, VIC 3207, Australia Ruiz de Alarcón 13, 28014 Madrid, Spain Dock House, The Waterfront, Cape Town 8001, South Africa http://www.cambridge.org © Richard Whiting 2004 First published in printed format 2001 ISBN 0-511-03843-7 eBook (Adobe Reader) ISBN 0-521-57160-X hardback

For Betsey

Contents

List of tables Acknowledgements List of abbreviations Introduction: Taxation and political debate 1 Struggles within a liberal inheritance, 1906±1940 Labour and Liberals before 1914 The impact of war on the tax environment The national debt, expert opinion and Labour's tax strategy The surtax, social spending and party divisions Snowden and the middle classes Keynes, Labour and the onset of war The `culture' of tax politics

2 The changing balance of tax interests, 1940±1954

page ix x xiii 1 8

10 16 23 34 42 50 52

61

The rich Taxation and industry The people Taxation and the party The Conservative response Taking stock

67 83 90 105 111 122

3 The Kaldor era, 1951±1965

130

4 Social democracy examined, 1965±1970

173

Tax issues of the 1950s Labour's policy-making in opposition Socialism and taxation The impact of the Conservatives The 1965 budget Assessment Economic and social policy analyses Redistribution Tax reform Local government ®nance Economic management and tax administration

132 143 148 153 159 168 174 179 195 205 208

vii

viii

Contents

5 Defensive positions, 1970±1979

214

6 Epilogue: New Labour, old problems?

259

7 Conclusion

269

Select bibliography Index

274 287

Opposition, 1970±1974 Democracy and tax policy, 1974±1979 Public expenditure, taxation and the trade union presence Change

217 232 246 256

Tables

1 Increases in the rates of certain direct personal taxes, 1913/1914±1919/1920 2 Indices of tax receipts and nominal national income, 1949±1964 3 Income after all taxes and bene®ts as a percentage of original income for 1965 and 1970 for the poor, unskilled manual and skilled manual workers, and professional and administrative employees 4 Income tax threshold for a married man with two children, as a percentage of average earnings of adult male manual worker, 1964±1970 5 Percentage increase in income tax for married man with one child, 1964/1965±1970/1971, at various proportions of average earnings 6 Percentage of personal wealth owned by the top 5 per cent of the population 7 Percentage share of total revenue contributed by taxes on income and expenditure, 1975±1980 8 Income tax threshold (for married man with two children) as a percentage of average industrial earnings, and numbers paying income tax and tax at higher rates, 1973/1974±1977/1978

page 19 133 185

186 187 192 216 247

ix

Acknowledgements

A remark by Dr (later Professor) John Vincent at a gathering in Oxford in May 1973 aroused my interest in taxation and politics, but I have incurred many other debts since then which I am also happy to acknowledge. I am grateful to librarians and archivists who have facilitated the use of the materials on which this book is based. Stephen Bird at the National Museum of Labour History in Manchester, Dr Angela Raspin (and later Ms Sue Donnelly) at the British Library of Political and Economic Science, and Christine Woodland and her staff at the University of Warwick's Modern Records Centre, have been very helpful over many years. Professor Alan Thirlwall of the University of Kent and the staff at the Modern Archives Centre at King's College, Cambridge have provided every assistance with the Kaldor Papers, as did Ms Mary Furlong with the Gaitskell Papers at University College, London. The ef®ciency of the staff at the Public Record Of®ce, Kew, added to the enjoyment of consulting government papers. I gratefully acknowledge permission to draw upon unpublished records in these holdings. Crown copyright material in the Public Record Of®ce is reproduced by permission of the Controller of Her Majesty's Stationery Of®ce. I am grateful to the CBI for permission to quote from their records and from those of the FBI. It is an especial pleasure to be able to thank the staff of the Brotherton Library, University of Leeds, for their unfailing ef®ciency and helpfulness in making the best use of its impressive holdings. I have received ®nancial support from the Economic and Social Research Council and from my own department. Study leave funded in part by the Arts and Humanities Research Board was vital for completing the project. I have bene®ted from the work of many scholars, in particular the Cambridge thesis of Dr Mary Short, which deals with the period 1918 to 1931, and the penetrating analyses of Professor Martin Daunton, as they address the legitimacy of taxation and its role in upholding consent for the state. Mr David Worswick gave valuable insights into the tax questions of the 1950s. Professors Jose Harris, Kenneth Morgan and x

Acknowledgements

xi

Bill Speck offered encouragement and comment at important stages of the research. My brother Nick provided generous hospitality on many research trips to London. I must acknowledge permission from Edinburgh and Oxford University Presses to draw upon work originally published by them. Two intellectual debts deserve particular mention. Dr Patrick Bell kindly read a number of chapters in draft, and I have bene®ted considerably from his good judgement and extensive knowledge of the Labour Party. Dr Owen Hartley not only offered incisive comments on a complete draft, but over the years has put forward a stream of stimulating ideas about the subject, which I have drawn upon heavily. They have both improved the book beyond measure. Its defects remain my own responsibility. I am glad to have had the support and guidance of Mrs Elizabeth Howard at Cambridge University Press, and Katy Cooper has been a most conscientious and constructive copy-editor. My family have been supportive in many ways which they may not have known; that they have had to be almost endlessly so is entirely my fault.

Abbreviations

AEU BLPES CBI CPAG CSO CTT EPT FBI FIS IFS ILP LPA MRC NDC NEC NEDC PAYE PLP PRO SET TGWU TUC VAT

xii

Amalgamated Engineering Union British Library of Political and Economic Science Confederation of British Industry (successor to FBI in 1965) Child Poverty Action Group Central Statistical Of®ce Capital transfer tax Excess pro®ts tax Federation of British Industries Family Income Supplement Institute for Fiscal Studies Independent Labour Party Labour Party archives Modern Records Centre (University of Warwick) National Defence Contribution National Executive Committee (of the Labour Party) National Economic Development Council Pay-as-you-earn Parliamentary Labour Party Public Record Of®ce Selective employment tax Transport and General Workers' Union Trades Union Congress Value added tax

Introduction: Taxation and political debate

This study brings together the twentieth-century tax system and the history of the Labour Party. Its subject is the way the party used taxation to ful®l its political purpose, and the degree to which that was shaped by its strategy, the capability of the revenue departments, and social attitudes. Political parties have been regarded by some social scientists as making poor use of the powers of government, and this has been true for taxation as for other functions of the state. One study of the period 1965±74, which saw many plans for reform but few results, concluded of both Conservatives and Labour that `They could pay more attention to the internal logic of their ideological positions and re®ne and clarify their objectives.'1 Not only have parties been poor at deciding exactly what they want to do, but they have also, according to some writers, prevented the achievement of the best policy solutions because of their injection of unhelpfully adversarial pressures into government.2 But taxation, even in its details, is so powerfully connected with ultimate political values that it could not be divorced from the party struggle.3 The main body of this book analyses Labour's performance in this intricate part of government. It does so selectively. I am primarily concerned with the national tax system; local government ®nance is viewed episodically from this perspective, while special taxes on land have also received less attention than others might think they deserve. It 1 2 3

Ann Robinson and Cedric Sandford, Tax Policy-making in the United Kingdom. A Study of Rationality, Ideology and Politics (London, 1983), pp. 233±4. This is the theme of Andrew Cox's Adversary Politics and Land. The Con¯ict over Land and Property Policy in Post-war Britain (Cambridge, 1984). A good example of this view comes from Dick Taverne, a Democratic Labour MP before he left for the `middle ground' of the SDP: `They [the better-off ] should not be allowed to get rich by avoiding the taxes that the rest of us pay, while others live in poverty. The unpopularity of the Conservatives is partly caused by a strong sense that they have promoted unfairness; for example, in the heady days after 1970, when they ®rst won back power, they proceeded to help their friends, the rich, by handsome tax concessions. Among other things they allowed tax reliefs on overdrafts and personal loans, greatly reduced the tax on unearned income, and restored the separate taxation of certain kinds of children's income': The Future of the Left (London, 1974), p. 150.

1

2

Introduction

is the purpose of this introduction to examine the structure of the tax debate within which Labour operated. This explains why the activities detailed in the following pages took the form that they did. Labour's position in the public eye for much of this century has been as a `tax and spend' party. Until recently it has shown little sign of being ashamed or concerned about this. Taxes are the instruments upon which a reforming social democracy will inevitably rely. As Labour's Social Justice Commission argued in 1994, `It is important to restate an old principle: taxes are the contribution that we all make towards building a better society. Taxation in a democratic society is based upon consent; it is a desirable good, not a necessary evil.'4 But taxes have also aroused strong feelings the other way. Taxes take `their' money from the people and consign it to a `black hole' deep inside government. They are not exchanged for speci®c services. They are handed over in trust that they will be productively used for services beyond immediate and sel®shly de®ned needs. Although taxes clearly cannot be justi®ed on the basis of payment for speci®c purposes, they do have instrumental functions, such as the provision of welfare services or economic stabilization, by which they can be measured. But the connection between revenue and expenditure is far from encapsulating the tax debate. Taxes have been argued about for their particular structure and impact, as much as for any output which may result. For the Labour Party taxation has been important for its support of state spending, but it has also had a continuing interest in the characteristics of taxes themselves. This need not have been the case. Redistributive social spending does not require progressive taxation to fund it; indeed, for much of the period, a tax system that was only mildly progressive overall supported cash bene®ts which were slanted more heavily to the poor.5 However, Labour has always had a strong interest in taxes for their own sake, as expressions of the desirable relationship between a government and its people.Taxes should embody trust and consent, and so make a positive contribution to the strength and stability of society. How has Labour conducted itself in debates about taxes? It has pursued two rather different arguments. The ®rst is for greater equality: that high incomes should be reduced and inequality of wealth lessened in the interests of a more stable society. The Labour Party, it hardly needs stressing, has always challenged the prevailing distribution of income and wealth. The gain from high income taxes or steep death 4 5

Commission on Social Justice/Institute for Public Policy Research, Social Justice. Strategies for National Renewal (London, 1994), p. 376. Central Statistical Of®ce, `The Incidence of Taxes and Social Service Bene®ts in 1968', Economic Trends, 196 (February 1970), p. xvii.

Taxation and political debate

3

duties has not been solely or primarily for the revenue they have raised, but mainly for taking away from the rich income and wealth that is offensive. The second argument has been about fairness, which has been used to de¯ect attention away from levels of tax: `The real issue is not high versus low tax, as the right tries to claim, but fair rather than unfair tax.'6 A fair tax system should not only treat people with different levels of income equally, but it should also deal fairly with those whose income comes from different sources. It should not provide opportunities for people to avoid their proper tax burdens without breaking the law. Paying taxes becomes a moral duty. These two approaches have certain differences. The ®rst relies upon the power of the state to identify and extract revenue from inevitably resistant taxpayers (those enjoying inherited wealth and high incomes, for example). It is adversarial. The second rests upon a moral agreement that taxes ought to be paid as a necessary service to the community, and therefore to seek reduction of personal taxes to the limit of the law was unethical. It is less class based than the ®rst in its logic. The two aims, however, have often seemed similar. When it is assumed that the betteroff are largely to blame for the avoidance of taxes, achieving a fairer tax system and pursuing equality seem to be the same thing, and to require a common vigilance by the tax authorities. But they are different, and as the party's tax experts pursued greater `fairness' in the 1960s, for example, so an agenda of equality was still waiting to be ful®lled. The superimposition of one tax strategy upon another has certainly caused the party problems, but it has also seemed to face an uphill struggle in the tasks it has set itself. Some of its favoured schemes have never reached the statute book, such as the capital levy, while others which ought to have served Labour's purpose, including surtax and capital taxes, have been disappointing in their yields. A ¯avour of the intense activity involved with tax avoidance, and the problems it caused the revenue authorities, can be gained from comments by one tax expert, Arthur Cock®eld, on the di®culties which would have faced the implementation of an expenditure tax in the 1950s (a tax never proceeded with): Legal avoidance would be a more serious problem with an Expenditure Tax than it is with the existing Surtax. The creation of an entirely new and untried basis of charge would open up a completely fresh ®eld of evasion devices and it must be accepted that the lawyers and accountants who specialise in these matters would make the most of their opportunities. It would be many years 6

Peter Mandelson and Roger Liddle, The Blair Revolution. Can New Labour Deliver? (London, 1996), p. 23.

4

Introduction

before the administration caught up with them and it would involve a formidable mass of legislation.7

One dif®culty was that legal arrangements that had perfectly legitimate functions, such as trusts and small companies, could also be used as instruments for tax avoidance. The manifesto of `New Labour' summed up a good deal of the party's experience when it noted that `tax reliefs for seemingly good purposes can easily become tax loopholes that are exploited by the accountants of the rich and privileged'.8 The fact that taxpayers proved to be tireless and endlessly inventive in avoiding tax should not hide the fact that the tide of moral opinion ran in Labour's favour for much of the century. That is, the desirability of progressive taxes went largely unchallenged at the level of political debate. This might be explained by the fact that, until the mid-1960s, the impact of all taxes was not progressive at all, because the effects of a progressive income tax were more than offset by regressive indirect taxes and national insurance contributions.9 However, this would be far from the mark. Taxes were rarely discussed in their overall impact, and attention focused far more on personal direct taxation, where progressivity was clear. The concept of progressivity lay at the heart of conventional wisdom about tax. In the early years of the century, the assumption that the marginal utility of income declined at a faster rate than income rose supported an interpretation of equal sacri®ce by taxpayers, which meant that the higher up the income scale the disproportionately heavier the tax burden.10 These beliefs were questioned during later years, so that the supporting assumptions of a clear connection between income and satisfaction which could be common to all, and that utility declined more than proportionately with income's rise, received less assent. But even without its scienti®c props, the progressive idea in taxation remained remarkably solid. When that ferocious liberal critic of conventional wisdom, F. A. Hayek, challenged the virtue of progressive taxation, he noted that `In many ways I wish I could omit this chapter. Its argument is directed against beliefs so widely held that it is bound to offend many . . . Redistribution by progressive taxation has come to be almost universally accepted as just.'11 7 8 9 10

11

University College, London, Gaitskell Papers, C. 100.9, `The Administration of an Expenditure Tax', 30 March 1955. Mandelson and Liddle, The Blair Revolution, p. 131. J. A. Kay and M. A. King, The British Tax System (Oxford, 5th edn, 1990), p. 196. For a discussion of equity issues, see A. R. Prest and N. A. Barr, Public Finance in Theory and Practice (London, 1985 edn), esp. pp. 95±7. See also F. Shehab, Progressive Taxation. A Study of the Development of the Progressive Principle in Income Tax (Oxford, 1953), p. 209. F. A. Hayek, The Constitution of Liberty (London, 1993 edn), p. 306.

Taxation and political debate

5

At the time of Hayek's book (1960), the main challenge to progressive taxation was not at the moral level but concerned its impact on incentives to work. In other words, it was for its practical impact upon the economy that it was criticized, which, however much it was dressed up, was essentially an empirical question. Academic and social survey research did not ®nd much substance in the view that a high marginal rate of income tax damaged incentives. It was only in the post-1979 period that an ethical judgement was made. In his memoirs Nigel Lawson reported his exasperation at yet another piece of research which suggested that reducing marginal tax rates did not encourage people to work harder, and noted that `the case for low taxation is ®rst and foremost a moral one. It is the case for enlarging individual freedom of choice and keeping to a necessary minimum the area where decisions are taken for people by the state.'12 Where did tax debate take place, if not at the level of the fundamental moral issues that surround it? The main political challenge to Labour came from the particular interests that its taxes affected. When Labour put forward tax reforms it found itself confronted by an array of interests provoked by its intentions. Companies affected by pro®ts taxes, unit trusts apparently disadvantaged by capital gains tax, or small businesses complaining about death duties, are all examples of this. Such interests inevitably operated upon a rather narrow interpretation of tax debate. They were concerned with speci®c levels of taxes or particular provisions; the larger nature of the tax system was accepted as given.13 Indeed, it was often felt that the detailed revisions being demanded stood a better chance of success if the overall balance of the tax structure went undisturbed. Tax politics quickly descended to the details of particular measures. It therefore drew upon quite speci®c talents among politicians, because it required an expertise and interest which seemed far away from the bigger questions that taxes ought to have generated. Yet this quite narrow focus did, in the end, return its participants to the 12 13

Nigel Lawson, The View from No. 11. Memoirs of a Tory Radical (London, 1993, pbk edn), pp. 692±3. An example comes from the Confederation of British Industry's tax panel reporting on value added tax: `Any broadening of the tax base, whether by a VAT or not, would have an effect on income distribution and could place new burdens on the lower income groups.These would require to be compensated by other adjustments to taxation or bene®ts if the present balance between progressivity and regressivity in the tax system as a whole was not to be disturbed.' The CBI's economic directorate were aware of arguments which precisely challenged the idea of progressivity, of the sort found in Walter J. Blum and Harry Kalven Jr, The Uneasy Case for Progressive Taxation (Chicago, 1953). University of Warwick Modern Records Centre (MRC), CBI archive, MSS. 200, C/1/1/ E 406.68, meeting of the taxation panel, 17 November 1968. The CBI was constantly aware of the need to tailor its proposals to the prevailing political climate of the time.

6

Introduction

bigger issues of ideology that often lay at the point of origin of such tax strategies. It is a theme of chapter 5, for example, that it was only when capital transfer tax had to deal with the issue of small businesses that the price of the party's more general egalitarian strategy was uncovered. The argument is that the party's general propositions about taxes went largely unchallenged and unexamined in the political debate. This had two consequences. First, it meant that the party's strategy was rather poorly focused and led to a lack of clarity about aims. Secondly, it meant that big issues were only engaged as the outcome of what was for the most part an argument about the details of particular taxes. The party therefore confronted its use of taxes only in an oblique and imperfect way. The consequences of this state of affairs can be illustrated by two of the strands which run through the analysis in the main body of this book. The ®rst emerged after 1945 and was to do with reforming the tax system. Led by Nicholas Kaldor's intense, but rather narrowly directed, expertise, the party followed a road towards the comprehensive taxation of various kinds of rewards, which were sometimes income and sometimes capital. The purpose of this was to make the tax system fairer, by establishing a wider concept of taxable capacity and economic power than merely the de®nitions of earnings as income used by the tax authorities. At the same time, the social democratic leadership of the party was applying taxation to the pursuit of equality to replace nationalization as its core purpose. But the unity of the project began to crumble. The pursuit of a more comprehensive tax system demanded unanticipated amounts of administrative and political energy, yet was not delivering the greater equality which the party expected. As further attempts were made through taxes to meet egalitarian expectations, the vigorous treament of property that this required was revealed by the problem of how to protect legitimate small businesses from the rigours of the capital transfer tax yet prevent concessions turning into taxavoidance opportunities. Many in the labour movement not speci®cally interested in taxes had turned to taxation in a largely unexamined way as an instrument for achieving their aims. Yet it was only when their proposals intersected with particular interests that the dif®culties inherent in the strategy became apparent. Taxation has been a mine®eld that the major political parties have had to cross. It has involved general political and ethical principles and masses of technical detail. Throughout its history Labour has attached great importance to tax because it provides a practical dimension to so much of what it wants to achieve. Yet commitment to it tends to involve only a small section of the party at any one time, because of its technical, and often tedious, nature. Only a handful of MPs usually appreciate the

Taxation and political debate

7

dif®culties of taxes carrying this ideological weight. Hence, some of the problems of taxes ful®lling aspirations to fairness or equality only tend to add to the wider sense of frustration that the party is not achieving its proper aims because the complex questions at issue have not been fully appreciated. We might therefore anticipate that tax policy has been a fundamental yet problematic feature of Labour's history.

1

Struggles within a liberal inheritance, 1906±1940

Although Labour only held of®ce for two short periods down to 1931 its experience goes to the heart of the key themes of this book about the role of a party within the area of taxation. In particular, it explores the question of how far Labour was able to establish its legitimacy as a reforming party within two contexts for tax politics. One of these was presenting tax ideas to the people, where reforms had to be defended against popular instincts and prejudices, especially at election time. The other was arguing a case within the political institutions of the democracy, in royal commissions and in parliamentary committees, for example, which had a wholly different, and rather more academic, ¯avour than the popular domain. This period therefore establishes some early truths about the nature of tax politics and Labour's involvement in it. Labour faced these demanding tests in what were two strongly contrasting periods. Before 1914 it had to establish itself within the Liberals' programme of reform and it had to make sure it was not a mere spectator of this reforming energy. After 1918 it had to adapt that inheritance to the much less promising conditions of the 1920s. Reform was no longer carrying all before it and the Conservatives were able to use an anti-socialist appeal which fed off the anxieties towards the modern tax state developed by the war. Although the Liberal Party had been displaced, Liberals interested in public ®nance were still able to watch their usurpers with a disdainful and critical eye. Although Labour faced an uphill struggle, its own perspective and character changed considerably in these years. By the inter-war period Labour was no longer a trade union pressure group but a governing party, no longer proletarian but with a strong middle-class element. Ambitions developing in the 1920s had a different and more con®dent trajectory from those of the founding fathers. This chapter explores some of the contrasts and connections within this theme as it involves the party's tax policy, and in so doing pays particular attention to two individuals, Philip Snowden and Hugh Dalton. For Snowden, 8

Struggles within a liberal inheritance, 1906±1940

9

establishing the independence of the party and winning acceptance for it were the fundamental aims, and the project seemed to end in failure and rancour. While progress was made within the reassuring milieu of pre1914 liberalism as it was driven by the con®dent radicalism of Lloyd George, by the 1930s there seemed to have been disengagement, as the pressure of government and budgetary crisis suggested a tension between radicalism and credibility which Snowden was both unable and apparently unwilling to resolve. Finance, from being an arena in which Labour could prove itself, had become one which tore it apart, and the demon of the `iron chancellor', which was to constitute a problematic strand in Labour's governing performance, was born. Snowden's career therefore embraces both the promise and the limitations of the liberal inheritance in which he and the party had to operate, and the destructive tensions which this could unleash upon the party in time of crisis. Dalton offers a very different set of expectations and possibilities. While for Snowden the party was to be both nurtured and ultimately scorned, for Dalton it carried the expectation that power would be achieved and enjoyed. If for Snowden of®ce was precarious and the party often its own worst enemy, for Dalton time was on Labour's side as brains and talent carried Labour forward to power and reform. Finance was central to both their activities. It was a powerful instrument of government both for raising money and shaping society, and so was a clear indicator of the party's intentions; it was also a test of capacity, because it was an intricate area of administration with its own special expertise and one where reform could easily be exposed as naive and inept. For much of his career Snowden was the ®gure through whom the party sought to establish its radicalism and convey its competence in ®nance to the wider political world, and towards the end Snowden found it impossible to be both a credible chancellor and an authentic representative of his party. Dalton's position was different. Like others in the 1920s he saw professional expertise, in his case in economics, as a means of advancement within the party. He had a legitimate reputation in public ®nance and played a substantial part in the party's tax activities in the 1920s. In the 1930s he played a central role in the policy discussions which followed the deÂbaÃcle of 1931. Dalton acted as a bridge between Snowden and the success of the 1945±51 government. He maintained an interest in tax and redistribution when these might have seemed outdated and he brought new talent to the party when it was badly needed. But what exactly was the difference between the two? Did Dalton's expertise mark a signi®cant advance upon Snowden's perspective on tax in the 1920s? How far had the party gained ground when war broke out

10

Struggles within a liberal inheritance, 1906±1940

in 1940, from its earlier positions? Here, as in the 1920s, the relationship with Liberals is instructive, and damaging. Labour and Liberals before 1914 The signi®cance of taxation for the party in the pre-1914 period was set out at a conference in 1909 on `The Incidence of Taxation', chaired by Snowden. Ramsay MacDonald explained that Labour was an independent party, `not the wing of another party. When the Labour Party followed another Party it followed it as an independent factor.'1 Labour needed to show that it had a coherent ®nancial policy which conformed to its ideology and could sustain the government expenditures required by the rest of its programme. Snowden had set the tax debate in terms of the challenge of tariff reform as a means for the propertied classes to place heavier burdens on working-class consumption rather than shoulder the cost of social reform themselves. The working classes already contributed more than they should to state ®nances through indirect taxes, which in amount nearly matched the yield of the income and property taxes and death duties. The `considerations' that Labour set out as the basis for `democratic ®nance' were taxation in proportion to ability to pay and to the protection and bene®t conferred on the individual by the state; no taxation upon the means of subsistence; all unearned increment of wealth to be secured for communal bene®t; and taxation on unearned incomes `should aim deliberately at preventing the retention of great fortunes in private hands'.2 The speci®c proposals adopted were for a super-tax on large incomes, taxation of `state conferred monopolies' (drink), increased death duties and land value taxation. MacDonald summed up the proposals as the `fundamental fact of Labour ®nance ± that we wanted to divide the non-producing parasite dependent upon society from the producer and service-giver; and we wanted to direct our attention to the pockets of the person who did nothing and had much, and direct it away from the pockets of the person who might possess nothing but give much service'.3 This was not itself novel; it followed a resolution proposed at the annual conference in 1906 by Bruce Glasier that the party's tax policy should `secure for the community all unearned incomes derived from what is really communal wealth'.4 Whatever MacDonald might have said about Labour being an 1 2 3 4

Labour Party, Annual Report (hereafter LPAR)1909, Appendix II, p. 107. Ibid., p. 103. Ibid., p. 107. LAPR, 1906, p. 58.

Labour and Liberals before 1914

11

independent party, it was operating within the context set by a radical liberalism in which taxation was a key element and where propertied opinion was more fearful of Lloyd George than of Snowden.5 There has been academic debate about the nature of British socialism and its links with liberalism. Those dealing with the electoral success of the party have pointed either to organizational or the class bases of its growth, rather than any distinctive programmatic appeal it might have had.6 By its nature, taxation was unlikely to clarify the division between liberals and socialists; for some it was a stopping point, for others simply a preface to more thoroughgoing change achieved by the state ownership of property. Snowden recognized this when he argued that: Whether we were socialists, or for the time being were content with the more modest title of social reformers, we were all agreed, he [Snowden] thought, that the work to which parliament should direct its attention was that of bettering the social condition of the people, and the instrument of taxation was one of the two chief means by which that improvement could be brought to pass.7

Certainly, there was nothing that Labour was proposing that could not be found in the ideas of progressive liberals, or that departed in any signi®cant way from the existing framework of tax policy. Harcourt's development of death duties in 1894 paved the way for the development of inheritance taxation,8 while key features of a progressive income tax ± graduation, differentiation and the separate taxation of high incomes ± all ¯owed from the pre-1914 Liberal governments. Moreover, the social divisions upon which Labour's tax policy fed were hardly in advance of what any liberal might have offered. References to socially created wealth, to the `non-producing' parasite, and the stress upon the minority of the rich who were being targeted were familiar features both of liberal thought and the Labour programme. There was a common radical heritage which stretched back well into the nineteenth century, now supplemented by the notions of socially-created wealth and surplus from J. A. Hobson. Certainly the statements of the new liberalism were, at their most practical, arguments about the necessity and acceptability 5

6

7 8

See Avner Offer, Property and Politics, 1870±1914. Landownership, Law, Ideology and Urban Development in England (Cambridge, 1981), p. 362, citing Walter Long to Arthur Balfour in 1909. Martin Pugh, The Making of Modern British Politics, 1867±1939 (Oxford, 1993, 2nd edn), p. 216, and Ross McKibbin, most clearly in his review of Michael Freeden, The New Liberalism. An Ideology of Social Reform (Oxford, 1978), in English Historical Review, 94 (1979), pp. 613±15. LPAR, 1909, p. 104. Snowden did not specify what the other instrument, besides taxation, was. Dalton, who was very keen on attacking the rich, thought Harcourt his favourite of the Victorian radicals. British Library of Political and Economic Science, Dalton Papers, II C 9/9, `Notes of a Speech to Oxford University Labour Club', 13 October 1950.

12

Struggles within a liberal inheritance, 1906±1940

of a heavier tax regime. In L. T. Hobhouse's Liberalism, for example, the stress upon the limits of what could be understood to be individually created wealth, the possibility that a ceiling of £5,000 a year on incomes might be compatible with free enterprise, and the view that only a few would have their freedom jeopardized for the good of the many, were all ways of adjusting attitudes to a high-tax regime.9 The emphasis upon the community and the common good required at a practical level that the rich were prepared to hand over a part of their incomes to the rest, and that property owners of more modest means understand that such a process was not a threat to their interests. The achievements of the Asquith government and its chancellor, Lloyd George, were formidable. E. R. Seligman, the eminent American tax economist, believed that their reforms put `the English system in advance of that found in any other country', because they were `attempting to realize the more modern social ideals in taxation'.10 The historian of progressive taxation has also seen the pre-1914 period as crucial, when it was driven by a coalition of expert opinion and popular demands towards `the higher taxation of the rich in order to ameliorate the inequality of income distribution, and to procure optimum welfare'.11 By 1914 England had a graduated income tax through the super-tax on incomes over £5,000 (but paid on the amount over £3,000, once the £5,000 threshold had been reached), graduated death duties and an effort in place to solve, through land value taxation, the previously favoured position of landowners. What could Labour achieve in this context, when the Liberals were carrying out all that they would have wanted to do themselves? A guide to Labour's relations with the Liberals over tax is provided by the Select Committee on the Income Tax chaired by Sir Charles Dilke, which examined the possibility of graduating the tax by levels and kinds of income. By reporting favourably on the possibility of taxing higher incomes more heavily than others and treating earned income more tolerantly than unearned, it encouraged the development of the tax in a quite fundamental way.12 Snowden, who was one of the witnesses examined by the committee, con®rmed its importance in his pamphlet 9 10 11 12

L. T. Hobhouse, Liberalism and Other Writings, ed. James Meadowcroft (Cambridge, 1994 [1911]), especially chap. 8. E. R. Seligman, Essays in Taxation (New York, 1913), p. 495. F. Shehab, Progressive Taxation. A Study in the Development of the Progressive Principle in the British Income Tax (Oxford, 1953), p. 209. Keir Hardie was a committee member, and his biographer has commented how `The Committee helped to broaden the appeal of the new Labour Party and to give Hardie himself a platform for expounding the ®nancial implications of the radicalism for which he stood': K. O. Morgan, Keir Hardie, Radical and Socialist (London, 1975), pp. 158±9.

Labour and Liberals before 1914

13

The Socialist Budget, published in 1907: `The report of Sir Charles Dilke's committee concedes everything the socialist could wish for as to the practicality of carrying out the socialist plan of taxation. The principle and the practicality admitted, the rest becomes a question of details and degree.'13 One of the problems facing the committee was the considerable ignorance about the numbers of taxpayers enjoying certain levels of income, and therefore of the possible yield of the income tax if set at certain rates. According to the most expert and acknowledged nonpartisan witness, the statistician Arthur L. Bowley, `whenever a scienti®c observer wishes to bring the test of statistics to the effect of a proposed reform in taxation, some essential information is found lacking'.14 The chairman's draft report noted that in the 1890s `materials were wanting for calculating the number of people in the country with incomes exceeding £5,000 per year, or for arriving at the graduation of smaller incomes', and `Even now, according to Sir Henry Primrose, these are perplexing and baf¯ing questions.'15 Although there was very broad agreement about the total income of those earning over £5,000 per year, the estimates varied from Primrose's at £121 million to Sir Leo Chiozza Money's at £250 million. The committee came down in favour of a ®gure around £200 million, believing that those which the Inland Revenue had supplied `failed to show the advance in large incomes which is notorious, and may be held to err on the side of understatement'.16 The problem arose from the organization and administration of income tax. Pitt's income tax of 1799 had required returns from individuals showing their total income from all sources, from which liability could then be estimated. Later, the tax was broken up into various schedules according to kinds of income (from property, salaries, pro®ts, government stocks and so on), and where possible the tax was levied at a standard rate at source, without reference to the individual's total income. Only if the taxpayer subsequently wanted to claim relief did he return his total income.17 If tax rates were uniform over a large part of the population, taxation at source was an ef®cient way of collecting tax. But it was insensitive to individual circumstances and 13 14 15

16 17

Philip Snowden, The Socialist Budget (London, 1907), p. 45. Report from the Select Committee on Income Tax, P[arliamentary] P[apers] 1906, ix, draft chairman's report, xix (hereafter S. C. on Income Tax). S. C. on Income Tax, xix, para. 26. £5,000 was the point at which reformers proposed a separate super-tax might begin; Sir Henry Primrose was head of the Board of Inland Revenue. S. C. on Income Tax, xx, para. 28. J. C. Stamp, British Incomes and Property (London, 1916), p. 330.

14

Struggles within a liberal inheritance, 1906±1940

gave no information about individuals' total income; only an obligatory tax return, with penalties for deception, would have ful®lled that function. But this raised wider issues about the individual and the state which went beyond matters of tax administration. The Inland Revenue thought the obligatory return for working out net personal income `must necessarily enter into details in regard to individual and family obligations of the most intensely personal and private nature'.18 Conservative interests were certainly against the intrusiveness of a personal tax return. Felix Schuster, a banker, while admitting the valuable information which a tax return would bring, felt none the less `that such information could hardly be obtained unless the return was of such a complicated and inquisitorial character as to make it repugnant to the feelings of the community'.19 On both fronts ± information about the scope for the heavier taxation of higher incomes and on the administration of income tax ± Leo Chiozza Money was an important and forceful witness. He had produced ®gures for total incomes at various levels as well as estimates for total wealth. Because Money was a radical Liberal MP, there was a tendency to place more weight upon the calculations of Bowley because, in Dilke's words, `he came to us as a statistician animated by his love of science and disinclined to argue in favour of any particular view of income tax reform'.20 But such judgements should not hide the fact that Money was recognized as a serious and reliable investigator by tax experts.21 What Money laid before the committee was a scheme for a graduated tax on incomes and property for those earning over £1,000, which was dependent upon a personal tax return and rooted in the support of the majority of taxpayers below £1,000 a year. Against the fears that higher taxes would reduce savings and drive capital abroad, Money provided the argument that the state, through its spending of tax revenues, might contribute more to economic welfare than if the money remained in private hands for `luxurious and harmful expenditure'. Alongside other witnesses, especially T. A. Coghlan, the Australian government statistician for New South Wales, who was able to report practical experience of graduated taxation, Money presented powerful and reassuring evidence for tax innovation. What sort of contribution did Snowden make to this committee? His expertise in tax, gained as a surveyor with the Inland Revenue, was not the same as Bowley's or Money's. He was not a statistician, but had 18 19 20 21

S. C. on Income Tax, H. W. Primrose, appendix 13, p. 254, para. 17. S. C. on Income Tax, subsequent modi®cation of Schuster's evidence at p. 176. S. C. on Income Tax, draft report, p. 43. Stamp, British Incomes, p. 404.

Labour and Liberals before 1914

15

been a minor functionary (like Sidney Webb) in the charge of the tax affairs of a locality, and had, as a result, been able to peer into the ®nances of many citizens, including those of the rich.22 His was the most likely kind of tax experience to emerge in the early days of a proletarian party, derived as it was from a lowly but signi®cant bureaucratic of®ce entered through modest educational quali®cations.23 Snowden drew upon his experience to defend the practicality of his proposal for a super-tax on those earning over £5,000 a year. Discovery of such incomes would not be dif®cult because surveyors `knew approximately every person in their districts likely to have an income of over £5,000 a year', and the administrative load would be manageable.24 Because Snowden was anxious to retain taxation at source as far as possible, and to focus on a very small group of taxpayers in order to minimize opposition, his proposal for a super-tax began at £5,000 per year. His scheme did look more modest than Money's. Money began his graduated income tax at £1,000 a year, considerably lower than Snowden's starting point, and the rates he proposed were stiffer than Snowden's up to £25,000 a year.25 What caught the eye in Snowden's proposal was the rate of 6 shillings in the pound on the top incomes over £50,000 a year. But the idea of a super-tax which Snowden was advancing was not new. It had been discussed at the time of Harcourt's modi®cation of the death duties in 1894 and in 1902 Charles P. Treveleyan had proposed an additional graduated super-tax on incomes over £5,000 a year, which required a personal income tax return as its method of assessment. At ®rst sight Snowden's contribution might seem to have been both derivative and modest, but this would be too academic a judgement. The high rates he proposed on the very high incomes drew the ®re of conservative interests on the committee, and more generally he won a place for Labour in the history of the graduated income tax even though the scheme was not entirely novel.26 This is what Labour required of him. There was no need to add to what the Liberals were doing since in 22

23 24 25 26

The `very considerable jealousy' aroused by the surveyor's knowledge of, and interference in, the ®nancial affairs of local individuals was remarked upon during the sittings of the Royal Commission on the Income Tax after the war: Royal Commission on Income Tax. Minutes of Evidence, PP 1919, xxiii, part 1, q. 552, p. 25. Later on both Douglas Houghton and James Callaghan were tax of®cials and drew upon this in their careers in the Labour Party. S. C. on Income Tax, q. 1766. Snowden's ®gures come from his evidence at q. 1761, and Money's from his paper presented to the committee and printed in the appendices, pp. 257±61. Literally so, in that Snowden's scheme appears in Richard Hopkins's `Historical note on graduation' as appendix seven of the ®rst instalment of evidence to the R. C. on Income Tax, PP 1919, part one, pp. 51±3.

16

Struggles within a liberal inheritance, 1906±1940

tax terms this met Labour's needs; what Labour wanted was an authentic and recognized voice within the stream of radical tax ideas, and this is what Snowden had achieved and reinforced on Dilke's committee. The impact of war on the tax environment In giving his evidence before the Dilke Committee Snowden had tried to be both cautious and prophetic in his proposal. When he stressed how limited the opposition might be to his idea for a super-tax he also indicated that he was `looking forward to a time when the tax will be much higher than anything I have suggested here'.27 In his autobiography, published in 1934, he wrote that `When I look back on my proposals in the light of later developments I am amazed at the modesty of my suggestions.'28 The application of higher rates was nothing to do with Labour; it arose partly from further tax increases by Liberal governments prior to 1914 but more signi®cantly from the impact of the First World War. It is important to establish how narrowly Labour interpreted the opportunities offered by war ®nance. These were seen to lie entirely within the area of personal taxation, even though the prospect of translating wartime experiments in company taxation into a peacetime instrument was actively considered, and was justi®ed in terms entirely compatible with Labour's ideological inheritance from new liberalism. The excess pro®ts duty had provided the opening. True, it was a war tax like no other, and this was one of the powerful reasons advanced for its repeal after 1918. It had been part of the political bargain with the trade unions to ensure that business did not `make money' out of the war. Two factors, however, made it a live issue in the discussions which took place about the nature of taxation after the war. First, it had generated a very high revenue ± £200±300 million a year, a quarter of wartime revenue ± and the pressing need for revenue after the war brought any successful tax into play; secondly, it had proved to be feasible, requiring only the addition of clerical assistance rather than more full-time staff. As one perceptive American observer noted in 1920: The British Excess Pro®ts Duty, if not the ®rst of these special pro®ts taxes, is certainly in many respects the greatest and best of them all. Its future place in the British ®nancial structure constitutes one of the most acute problems confronting the British government today.29 27 28 29

S. C. on Income Tax, q. 2167. An Autobiography, Vol. 1, 1864±1919 (London, 1934), p. 147. R. M. Haig, `The Taxation of Excess Pro®ts in Great Britain', American Economic Review Supplement, 10 (1920), pp. 1±33 at p. 3.

The impact of war on the tax environment

17

The excess pro®ts tax itself could not easily be retained in peacetime: through its use of pre-war pro®ts levels as the standard by which `excess' pro®ts might be judged, it would have worked against ®rms employing new capital as compared with those older ®rms which had a higher prewar standard and therefore a more favourable benchmark from which to assess subsequent earnings. But while it was not practicable to regard excess pro®ts duty as a permanent peacetime tax, there was considerable interest in having some kind of tax on pro®ts. The Board of Inland Revenue had a graduated pro®ts tax under discussion in November 1918 and in the Commons in May 1919 Joseph S. Holmes, a Liberal, argued that `if taxation were so enacted that surplus pro®t would come to the state and to the common good, then I suggest that much of the prevailing discontent would disappear'.30 The notion of `surplus' pro®t as a target for taxes was straight out of new liberalism, thanks to J. A. Hobson, and this was as much in the of®cial mind as in the liberal outlook. Josiah Stamp, who had been largely responsible for the success of excess pro®ts taxation during the war, pointed out how closely a business pro®ts tax he outlined in the Economic Journal in 1919 came to ®nding Hobson's `surplus'.31 Later, before the Colwyn Committee on the National Debt, Stamp pointed this out to him: s t a m p : Can you suggest any other scheme than that which I put forward of making your surplus a practical way of taxation? h o b s o n : No, I do not think I can. I think that was a good way to approach it.32

In the 1920s Hobson was a member of the Labour Party's Advisory Committee on Trade and Finance, but neither he nor the Labour leadership seem to have taken any substantial interest in pro®ts taxation. It had been anticipated within the Treasury that the opposite was going to be the case: Labour has no doubt more ambitious schemes for dealing with the pro®ts of industry, but it is dif®cult to imagine that the representatives of this class would not welcome the proposal, except perhaps a few extremists who will be satis®ed with nothing short of state ownership. It may well be that Labour more than any other class will feel that the principle of the state taking a share of excess pro®ts should not be allowed to fall into abeyance.33 30 31

32 33

Parliamentary Debates (Commons) (hereafter, H. C. Deb.), 116, cols. 334ff., 19 May 1919. J. C. Stamp, `The Special Taxation of Business Pro®ts in Relation to the Present Position of National Finance', Economic Journal, 29 (1919), pp. 407±27, esp. pp. 421±3. Stamp believed that trying to use income tax to extract the `surplus' was doomed to failure because of the opportunity to turn high income into tax-free capital gains. Committee on the National Debt and Taxation. Minutes of Evidence, 2 vols. (1927), vol. I, p. 127, q. 1649. N. Warren Fisher to chancellor of the exchequer, Austen Chamberlain, Public Record Of®ce, London (hereafter PRO), Budget Papers, Treasury [T] 171/162.

18

Struggles within a liberal inheritance, 1906±1940

But the Labour Party and trade unions showed no interest in proceeding along these lines. It is true that the Labour MP Willie Graham, speaking in 1920 on the corporation tax introduced in that year's budget, suggested that `it may be necessary in future for governments with a large social outlook to extend this tax', but such pronouncements were rare.34 Snowden was primarily interested in death duties and income tax, and repealed the corporation tax in his 1924 budget, by which time there was, admittedly, little sign of any `surplus' pro®ts. Hugh Dalton, too, thought the tax set up inequities between the property holders, penalizing the ordinary shareholder whose earnings ¯uctuated with pro®ts, and favouring those with ®xed interest and safer investments.35 As far as personal taxation, Labour's chosen ground, went, the war raised the level of extraction quite fundamentally, principally through increases in direct taxation. Total government receipts went up from 12.4 to 20.9 per cent of gross domestic product from 1913 to 1920; taxes on income increased from roughly 2 to 10 per cent of the same ®gure.36 While there was some containment of expenditure post-war, the tax demands of government never signi®cantly retreated because of servicing the national debt and meeting social expenditure in the 1920s and ®nancing rearmament in the later 1930s. While the structure of taxation had been put in place before the war its levels increased dramatically as a result of it. In 1913/14 the standard rate of income tax had been 5.8 per cent; this peaked at 30 per cent in 1920/1 and never fell below 20 per cent in the later 1920s. In 1913/14 income tax and super-tax combined produced £47.2 million, but £398 million in 1939. Changes in the main rates of direct personal taxes were as shown in table 1. The impact upon particular groups was also impressive. Some higherwage members of the working class paid income tax during 1916±20, whereas before the war their inclusion had been thought to be administratively impracticable. The public discussion of the tax changes brought about by the war was guided by Herbert Samuel's address to the Royal Statistical Society in 1919, `The Taxation of the Various Classes of the People'. According to his ®gures the working and lower 34 35

36

H. C. Deb., 128, cols. 477±8, 21 April 1920. Hugh Dalton, Principles of Public Finance (London, 1922), p. 99. The issue of wartime ®nance and its implications for the post-war period is thoroughly and incisively explored in Martin J. Daunton, `How to Pay for the War: State, Society and Taxation in Britain, 1917±24', English Historical Review, 111(443) (1996), pp. 883±919. Roger Middleton, Government versus the Market. The Growth of the Public Sector, Economic Management and British Economic Performance, c. 1890±1979 (Cheltenham, 1996), table 3.7, p. 101, pp. 338±9.

The impact of war on the tax environment

19

Table 1. Increases in the rates of certain direct personal taxes, 1913/1914±1919/1920 Income tax Super-tax Estate duty (top rate)

1912/13

1919/20

1s. 2d 6d 15%

6s. 4s. 6d 40%

Sources: Reports of Commissioners of Inland Revenue, PP 1913, xxviii; 1919, xxiv; 1921, xiv.

middle classes (that is, those earning up to £500 per year) had seen their tax burdens doubled as a result of the war; those on more solidly based incomes of £1,000 had suffered a threefold increase, while those in the £2,000±£5,000 range of upper middle-class incomes had `suffered the most heavily in proportion', having faced an increase of between four and ®ve times the pre-war level.37 In the face of these across-the-board increases, the question of whose interests were to be served in the 1920s was an important one. The increases in tax did not give a speci®c guide, since everyone had suffered, and even if the rich were now taxed the most heavily this was perfectly consistent with the progressive principle laid down before the war. By 1920 it was clear that the working class was not going to be centrally involved in post-war issues which revolved around direct taxation, even though during the war the exemption level had come down from £160 to £130 a year to embrace the better-paid industrial workers.38 When Snowden had protested at this development of war ®nance, Lloyd George argued that money could not simply be raised from the rich.39 The inclusion of such wage earners had doubled the number of income tax payers and had provoked some considerable opposition, chie¯y amongst the miners of South Wales. There was understandable interest in establishing after the war just how easily this new taxpayer had been absorbed into the system. It was argued that the working man was a wholly different kind of taxpayer compared to the ones traditionally dealt with by Inland Revenue of®cials: `they do not always appreciate the difference of this new type of taxpayer as compared with the farmer, professional man or trader who previously 37 38 39

Herbert Samuel, `The Taxation of the Various Classes of the People', Journal of the Royal Statistical Society, 82(2) (1919), pp. 143±82 at pp. 179±80. I have explored this further in `Taxation and the Working Class, 1915±24', The Historical Journal, 33(4) (1990), pp. 895±916. Philip Snowden, Who is to Pay for the War? (London, 1915), pp. 6 and 13.

20

Struggles within a liberal inheritance, 1906±1940

received the bulk of their attention.'40 The workers had to respond to a quarterly assessment from the tax authorities rather than having their tax deducted by their employer, as was to be the system when wages were taxed in the Second World War. While the Inland Revenue of®cials reported themselves happy with the way tax collection had worked, George Carter, who represented the Labour Party at the Royal Commission on Income Tax, had also co-written an article in The Economic Journal in 1918 which argued that `the Government has not realised the extent of the unrest nor its nature'.41 The feature of the tax to which Carter devoted some attention was the variability between districts of the allowances granted for tools and clothing which were regarded as necessities of working-class life, allowances for dependants other than the taxpayer's own children and some exemption of small amounts of unearned income. It was to be expected that workers would have a strong sense of the traditional concept that basic living costs, and the expenses incurred in generating an income, should be free of tax. The theme of Carter's article in The Economic Journal was that many of the grievances arose from the distinctive conditions of working-class life. Thus of the claim that allowances should be paid for dependants who were not necessarily the taxpayer's own children, Carter wrote that: `This expense is one of the outstanding features of the wage-earner's budget. His home has ties and affections deeper than those of any other class in the matter of support to relations.'42 There was a sense, however, that workers were arguing about features of the tax in much the same way that other taxpayers did, over the dividing line between what the Revenue regarded as an allowable expense and what was not; in other words, in much of the opposition there was not a signi®cant class dimension. Trade unions representing the workers affected did not take a leading part in opposition to the tax, the Amalgamated Society of Engineers, for example, regarding it as a non-industrial question. Indeed, trade union leaders were sometimes frustrated that there was a more lively sense of grievance over income tax, which was a lighter and fairer burden, than over the indirect taxes to which the Labour movement had long been opposed.43 But in South Wales the miners' federation took an active part in opposing the income 40 41

42 43

R. C. on Income Tax, PP 1919, xxiii, part 2, evidence, q. 20160, p. 989 (George R. Carter). For the Inland Revenue view see the evidence of Thomas Collins, the chief inspector of taxes, R. C. on Income Tax, evidence, part 1, q. 574, p. 26; G. R. Carter and H. W. Houghton, `The Income Tax on Wages by Quarterly Assessment', Economic Journal (March 1918), pp. 30±42. Carter and Houghton, `Quarterly Assessment', p. 40. Whiting, `Taxation and the Working Class', pp. 906±9.

The impact of war on the tax environment

21

tax, and there were many cases of tax forms not being returned. The introduction of the wife's allowance in 1918 increasingly turned it into a tax on the working-class bachelor and the reductions in wages from 1920 largely removed workers from income tax. Thus one of the most vociferous movements against the income tax changes of the war was essentially off the agenda from 1920 onwards. But this ®rst experience of the working class with income tax in any signi®cant numbers had indicated the problems of legitimating tax burdens through factors internal to the tax in question. Income tax was usually reckoned to be legitimate because it was fair, in terms both of horizontal and vertical equity. In terms of the former, the allowances given to the married man should have distinguished his interests from those of the bachelor, but according to one trade unionist `the married man and the single man, as far as we are concerned, always go together'.44 For vertical equity to be a factor in consent, the higher rates charged on larger incomes also had to be acknowledged, but according to the following exchange between Robert Shirkie of the TUC and Sir William Maclintock of the Royal Commission this may not have been so: m a c l i n t o c k: You are aware of the fact that more than 10s. in the £ is taken from large incomes now by the state in income tax alone? s h i r k i e : No, I am not aware of that. m a c l i n t o c k: Well, you should be.45

If members of the Royal Commission found some of the working-class representatives obtuse the most alarming proposition came from the Board of Inland Revenue, which identi®ed the lower middle classes as the key group deserving relief under the new tax regime. According to Richard Hopkins, `while continuous efforts have been made to graduate the tax fairly according to the subject's ability to pay, yet there is probably a general feeling that the pressure is hardest upon taxpayers in the lower portions of the scale and that some fraction of their burden might be transferred to the wealthy taxpayers'.46 Hopkins had in mind the range between £500 and £2,000, that is the lower middle and middle classes. An increase in the super-tax, which came in above this level, `would mitigate the disproportion in the comparative severity of the tax between medium and large incomes'.47 Some members of the commission were astonished at this judgement. 44 45 46 47

R. C. on Income Tax, evidence, part 1, q. 2576, p. 123 (Charles Edwards, South Wales Miners' Federation). Ibid., evidence, part 1, qs. 9214±15, p. 443. Ibid., evidence, part 1, q. 3997, p. 192. Ibid., evidence, part 1, q. 4007, p. 193.

22

Struggles within a liberal inheritance, 1906±1940

According to one, `I just want to have it on record that in spite of the very heavy burdens which are proposed under the present resolutions, the department still feels justi®ed in recommending additional taxation of this character upon their [the wealthy] incomes.'48 It was suggested that Hopkins was giving evidence not as a Revenue of®cial but as a member of the middle classes. Snowden's views were broadly similar to those of the Inland Revenue. The working class did not deserve further relief from tax beyond that which had already been provided by the allowances for wives and children. The working class, in Snowden's view, had to recognize that it ought to make some contribution to the costs of the state. Some of the claims by workers and unions that the income tax exemption level had to be raised and indirect taxes removed were indefensible: `The working classes, like every other class of the community, must bear taxation upon any surplus of income where it exists.' The claim of the South Wales miners to have the ®rst £400 of income exempted `brings ridicule upon the Labour Movement'.49 It was acknowledged that the main tax question was the pressure of income tax on the middle class and this brought in another legacy of the First World War around which Labour was to organize its approach to taxation in the 1920s, namely the national debt and capital taxation. Snowden's views during the war had certainly moved towards capital taxation and the national debt, but only in a limited way; the vigorous promotion of the issue had come from the Liberals. Snowden's approach was derived as much from his general views about tax and capitalism as from particular features of war ®nance. Whereas Treasury ministers were alive to the dangers of excessive purchasing power (and therefore of the need for heavier taxation of the people), Snowden's line was that the workers' standard of living should not be reduced by additional taxes.50 Instead, there should, argued Snowden, be draconian taxation of the rich, because they wasted their money on luxuries.51 He did propose a capital tax in 1915 with a top rate of 10 per cent (when the top rate of estate duty was double that) but it was presented rather perfunctorily.52 He also believed that the level of borrowing used to ®nance the war was presenting unnecessary bene®t to the rentiers, but he had nothing to offer that was comparable to the Liberal MP Sydney Arnold's scheme for a capital levy to pay off the debt so as to relieve 48 49 50 51 52

Ibid., evidence, part 1, q. 4189, p. 206 (Marks). Philip Snowden, Labour and National Finance (London, 1920), pp. 102±5. H. C. Deb., 74, col. 1410, 13 October 1915 (Reginald McKenna, chancellor of the exchequer), and 71, cols. 1705±6, 12 May 1915 (Snowden). H. C. Deb., 62, col. 506, 7 May 1914. H. C. Deb., 74, cols. 1323±4, 13 October 1915.

National debt, expert opinion and tax strategy

23

income tax from meeting the interest payments.53 Snowden was guardedly in favour. He was keen to underline that he did not support a capital levy as a part of the normal tax system and `In ordinary times I should have opposed such a proposal.'54 But times were far from ordinary, and so the scheme had merit. But this very point ± how far could Labour draw upon a legacy of the war in its peacetime tax strategy ± was to be one of great dif®culty for the party. The national debt, expert opinion and Labour's tax strategy The debt issue arose because of the funding of the war partly through borrowing; most attention was devoted to the internal debt because it seemed to require a judgement about class interest. The internal debt was assumed to be costly because it represented a transfer of resources within the population from the economically active producers to the more passive rentiers, since income tax levied on the former went to pay the interest on the debt in the 1920s owed to the latter. With a lessening of the debt charge, income tax could be reduced, with bene®cial effects upon incentives. Moreover, debt interest took up a large proportion of the budget, and chancellors must have found it galling to see so much revenue pass through the accounts to so little apparent purpose. Debt interest never became large enough to exceed direct tax payments, although at £273 million in debt interest compared to £293 million in direct tax in 1925/6 it was a close thing. The discussion of the debt always assumed that the transfers involved were between individuals, when in fact a number of organizations (such as charities and trade unions) had holdings of the debt. Interest payments to individuals were estimated to be about £100 million per year.55 This meant that the debate was conducted, as it were, within the con®nes of the direct tax 53 54 55

H. C. Deb., 105, cols. 896ff., 23 April 1918. H. C. Deb., 106, col. 253, 14 May 1918. Provided by Walter Layton, editor of The Economist, to the Colwyn Committee on Taxation and the National Debt, evidence, para. 9, p. 175. These were rough estimates. An investor might have bought holdings in more than one issue of the War Loan, and his total holdings might have been spread amongst the several registers kept by the various agencies which dealt in War Loan. The only way of knowing about individual holdings was to examine the passage of War Loan at death through estate duty records. Harry Campion published a table giving the share of `British government securities issued since 1914' (which included War Loan) in estates of various sizes from £100 upwards, for 1936. This showed that estates at all values had such securities in a range 10±15 per cent share of total assets. Rich people's holdings were therefore larger in amount than poorer people's, but War Loan was not just con®ned to the rich but spread within the middle classes: H. Campion, Public and Private Property (Oxford, 1939), table 11, p. 104.

24

Struggles within a liberal inheritance, 1906±1940

population.56 Had the debt interest been so large as to exceed the proceeds of direct taxation and entrench upon the revenue from indirect taxation, to which the working class was heavily exposed, then it might have been presented as a question for the working classes too. The one solution of the debt issue which engaged public discussion ± a levy on capital, which would ®nance repayment of a signi®cant slice (perhaps 50 per cent) of the debt in a once-and-for-all operation ± generated an interesting question for middle-class taxpayers because it seemed to set against each other two core attitudes, one being attachment to property (violated by a levy) and the other a desire for low taxes (ful®lled by the levy). It might be argued that attachment to property was the core value from which a keenness for low taxes ¯owed, and this would always remain of prime importance. But the fact remained that the debt issue brought together a radical solution to meet the consequence of orthodox actions. The orthodox strategy for restoring `normalcy' to the 1920s was a de¯ationary policy, after the socially disruptive in¯ationary conditions of 1918±20. As prices fell and the nominal value of the debt remained the same, `the taxpayer has the prospect of repaying two loaves for every one that he has borrowed'.57 Or as Keynes put it rather more sharply, `I think those people suffer from a certain confusion of mind who simultaneously hold we must indubitably restore sterling to par, in all circumstances we must respect contract, and in no circumstances must we have a capital levy.'58 As well as the levy being a challenge to conventional thought it was also possible to make an appeal to the generally cautious middle classes, as Sidney Webb did: There is an extraordinary delusion among the middle class ± a delusion fostered by the wealthy as one of their means of defence against being made to contribute equally to the taxes ± that the project of a tax on capital is put forward in the interest of the wage earners, in order to spare the mass of the people from paying any taxes at all. But, as a matter of fact, it is not as a substitute for the taxation of wage earners that the Capital Tax is proposed. It is proposed as a substitute for a crushingly heavy Income Tax on the whole body of professional and businessmen. The alternative for the doctor, teacher or minister of religion to consider; for the farmer or shopkeeper or manufacturer or merchant to ponder over; for the man or woman living on an annuity or on the proceeds of scanty savings to re¯ect upon, whether it is better to go on for all time paying an Income Tax at a nominal rate of 15s in the £ without a Capital Tax; or to have a

56 57 58

Maurice Cowling, The Impact of Labour, 1920±24 (Cambridge, 1971), p. 290. Josiah Stamp in The Times, 4 November 1922. The Collected Writings of John Maynard Keynes, vol. XIX, ed. D. Moggridge (Royal Economic Society, 1981), p. 64.

National debt, expert opinion and tax strategy

25

properly graduated Capital Tax once-and-for-all, in order to get income tax down to something like its pre-war rate.59

Labour's project for the 1920s, therefore, was to segment the propertied interest into the rich and the middle classes, rather in the way that the Liberals had done before 1914. But the context was now different. While the `bondholder' might possibly have ®lled the shoes of the urban landlord, the middle classes were, in the early 1920s, shaken by the experience of the First World War and its aftermath, which had seen an in¯ationary alliance between mobilized labour and the emerging state.60 In the light of his pamphlet on national ®nance and the levy cited above, and his involvement during the war in the `conscription of riches' proposal as part of the War Emergency National Workers' Committee's opposition to conscription, Webb seemed to be poised to make a substantial contribution to tax policy in the 1920s. However, he declined to be examined before the select committee on the taxation of increases in wealth during the war which reported in 1920 because he declared that the scope of the enquiry was too narrow, and his evidence before the Royal Commission on Income Tax in 1919 was supercilious rather than considered. He seemed to be more preoccupied with the work of the coal commission, which was going on at the same time and which, since it dealt with the issue of national ownership, might have seemed more weighty compared to taxation. Webb's absence from tax discussions in the 1920s broke the connection between taxation and social policy which was not renewed until Richard Titmuss's work on income tax in the 1950s. In the intervening years the economists monopolized discussions about tax. Labour had a number of MPs interested in tax questions in the 1920s. Hugh Dalton and Frederick Pethick-Lawrence both came from the same intellectual background, created by Alfred Marshall and Arthur Pigou, which was sceptical about the necessity for large aggregations of wealth but anxious to protect the activity of saving.61 Although Pethick59

60 61

Sidney Webb, National Finance and a Levy on Capital (London, 1919), p. 15. The standard rate of income tax at this time was 6s in the pound; super-tax was at 15s in the pound. For a perceptive analysis of the middle-class experience at this time, see Ross McKibbin, Cultures and Classes. England 1918±1951 (Oxford, 1998), chaps. 2 and 3. For books or pamphlets speci®cally on the levy, Dalton wrote The Capital Levy Explained (Edinburgh, 1923), Will Capital Leave the Country? (1924), and PethickLawrence, A Levy on Capital (1918), The Capital Levy (1920) and The National Debt (1924). Both gave evidence before the Colwyn Committee on the National Debt at proceedings in 1925. Because one of the originators of the levy idea, Sydney Arnold, was not appearing, Dalton wrote to Pethick-Lawrence that `it is all the more important that you and I should both weigh in': Trinity College, Cambridge, Pethick-Lawrence papers, letter from Dalton, 26 January 1925, box 1, f. 178.

26

Struggles within a liberal inheritance, 1906±1940

Lawrence had set out in the early years of the war what was to become the essential case for the levy ± that internal borrowing `allows richer classes to secure a lien on future prospects of the country out of all proportion to the sacri®ces they have made during the war' ± it was another Liberal MP, Sydney Arnold, who ®rst elaborated a scheme in the Commons.62 Another ex-Liberal, H. B. Lees-Smith, also wrote on tax questions and was to be prominent in the surtax discussions of the later 1920s. He served as a member of the Colwyn Committee. Josiah Wedgwood, who had joined the Independent Labour Party in 1919, came from the Henry George single tax background but made something of a speciality of inheritance taxation, publishing in 1929 The Economics of Inheritance. Henry George's idea of a single tax on land had some in¯uence upon the early Labour Party, although a contrasting preference for land nationalization and the insistence that capitalism as well as landlordism had to be controlled marked off some Labour thinkers from the `land value' liberals. But the sense that there was a mass of assets called `capital' which was detached from production and was not the outcome of current enterprise and therefore could be attacked through the tax weapon with relative impunity, and a corresponding lack of interest in taxing corporate earnings, was a common feature of both. Willie Graham, the MP for Edinburgh and Snowden's deputy at the Treasury in 1924, made his mark through taxation less because it was a dimension of a broader ideology but rather a subject to be mastered in detail by an assiduous but self-effacing individual who could therefore earn approval and regard. Dalton was different from the other Labour MPs who had an interest in ®nance in coming from a Conservative rather than a Liberal background.63 He came from that particularly detached form of Conservative family, one based in the Church, since his father had been a canon of St George's Chapel, Windsor. He joined the Fabian Society while at Cambridge and then went to the London School of Economics where, under the supervision of Edwin Cannan, he prepared a dissertation on the inequality of incomes, subsequently published in 1920 as Some Aspects of the Inequality of Incomes in Modern Communities. In the same 62

63

Pethick-Lawrence, `War Economics', Economic Journal, 25 (1915), pp. 512±20; Arnold in H. C. Deb., 105, cols. 894ff., 23 April 1918. Dalton thought favourably of Arnold, a stockbroker who joined the Labour Party in 1922: `He has a good deal of useful knowledge on this [the capital levy] and on other ®nancial questions and is helping the party in the House': H. Dalton, The Political Diary of Hugh Dalton, 1918±1940, 1945± 1961, ed. Ben Pimlott (London, 1986), 10 March 1923, p. 34. The converts to Labour from Conservatism ± interpreted to mean family as well as personal background ± have recently been explored by Martin Pugh, ` ``Class Traitors'': Conservative Recruits to Labour, 1900±1930', English Historical Review, 113 (1998), pp. 38±64.

National debt, expert opinion and tax strategy

27

year he published a more technical article in the Economic Journal on `The Measurement of the Inequality of Incomes', which much later contributions from Amartya Sen and Tony Atkinson have developed. Dalton's monograph not only discussed the study of inequality in the economics literature but also set out what were to be his enduring views on the subject. He stressed his critical attitude towards Marx ± `If no better arguments for socialism could be found than those contained in his pages, it would indeed be a lost cause' ± and the inadequately recognized signi®cance of inheritance for perpetuating and augmenting the transmission of inequality across generations.64 There were also suggestions for speci®c measures to deal with these questions, in particular support for the Italian economist Eugenio Rignano's scheme for differentiating between lifetime accumulation and inheritance from an earlier generation in the taxation of an individual's estate, as well as the capital levy which would reduce the public debt by wiping out a large number of property rights and their income.65 Dalton's intellectual interests, coupled with his `conversion' from a conservative background, indicate that, like others, his inspiration came from hating his own class rather than drawing upon the con®dence which such a background might have given to engage in reform from above. As his biographer has commented, `Tories felt, and they may have been right, that for all the intellectual sophistication of Dalton's utilitarianism, emotionally he was less interested in helping the poor than in hurting the rich.'66 This distinction was not only of interest for an assessment of Dalton individually; it certainly shaped a good part of Labour's outlook in the 1920s and 1940s when hostility to the rentier informed the levy and surtax policies as well as `cheap money' under the Attlee government of 1945±50.67 It may also have contributed to a view of taxation as an end in itself in its connection with equality ± that is, for what it might take away ± rather than for its contribution towards the ®nancing of social reforms which served equality through improving the lives of the poor. Had social reformers continued to have an interest in taxation in the 1920s it is unlikely that the Labour Party would have had such an approach to inequality as Dalton; it might have deployed a more instrumental, and more productive, view of tax as a result. Whatever the ultimate consequences for the Labour Party of Dalton's 64 65 66 67

Dalton, Some Aspects of the Inequality of Incomes in Modern Communities (London, 1920), pp. 83 and 271. Ibid., pp. 131±2 and 212. Ben Pimlott, Hugh Dalton (London, 1985), p. 144. Ursula K. Hicks, British Public Finances. Their Structure and Development, 1880±1952 (London, 1954), p. 200; Jim Tomlinson, Democratic Socialism and Economic Policy. The Attlee Years 1945±51 (Cambridge, 1996), p. 11.

28

Struggles within a liberal inheritance, 1906±1940

perspective, it was to his advantage that his emergence from academic research into a political career during the 1920s coincided with one of the decades when there was particular interest in wealth and its taxation (only in the 1970s was there comparable focus). Dalton fought unsuccessful contests for a parliamentary seat in the early 1920s before becoming MP for Peckham in 1924. His general judgement of the Labour Party in 1918 was that it needed an `in¯ux of brains and middle class non-crank membership' and in 1920 he was lecturing to audiences on the capital levy.68 By 1921 he felt, with some justi®cation, that he was beginning to be accepted as one of the recognized authorities on ®nancial questions.69 He was subsequently a member of a policy group looking at land taxation, another which considered the ILP's `living wage' proposal. His reputation as an academic economist had been made in 1922 with the publication of the ®rst of many editions of Public Finance, which he introduced `as one of those subjects which lie on the borderline between economics and politics'.70 The levy campaign did not give full rein to Dalton's instincts for penalizing the rich. Labour was anxious throughout to present it in as thoroughly respectable a light as possible, as a solution to an annoying budgetary problem rather than as a means of redistribution. Because of the ignorance, already noted, about the holdings of War Loan there was uncertainty about the transfers involved. Dalton, however, believed that property owners were `practically certain' to lose more under the levy than they were to receive in their War Loan being repaid.71 But the greater emphasis was upon `good housekeeping', as if the nation, in much the same way as an individual, was going to get rid of a troublesome debt.72 Recent tax innovations also warned against some of the alarmist talk about the destruction of property. Pigou recommended `the comparatively well-to-do' to `remember that only a few years ago a graduation of income tax and death duties on anything approaching the present scale would have been thought a certain harbinger of ruin; to observe that ruin has not in fact come; and to re¯ect, in consequence, that the limits to which graduation may be safely, and therefore wisely carried, may even yet not have been reached'.73 And, as Dalton told the 68

69 70 71 72 73

Dalton, Political Diary of Hugh Dalton, 29 December 1917, pp. 5±6. `Diary', 31 March 1920. `Diary' indicates manuscript material not included in the printed version, held at the British Library of Political and Economic Science, in the Dalton Papers. Dalton, Political Diary of Hugh Dalton, 22 October 1921, p. 22. Dalton, Principles of Public Finance (1922 edn), p. 3. Dalton, Inequality of Incomes, p. 206. This was how J. R. Clynes presented it during the 1922 election. The Times, 4 November 1922. Pigou, letter in The Times, 4 November 1922.

National debt, expert opinion and tax strategy

29

readers of one of his pamphlets on the levy, `real capital' ± factories, coal mines and machines ± was what mattered, not mere titles to property.74 Baldwin warned Conservatives that there were no easy pickings from the levy issue. It could not be turned into a vote winner `by merely saying it is a form of robbery', since it was in fact a `legitimate form of taxation'.75 Whatever the emphases given to the levy, Labour still had to test its own grasp of the scheme against the tax experts, principally Josiah Stamp. Stamp's interests followed Dalton's quite closely.76 He had entered the Inland Revenue during the war and developed considerable expertise not only in the workings of the tax system but in the implications of the war for government ®nance. Stamp's ®rst and most substantial book, British Incomes and Property (1916), explained the conventions of the tax system as they affected the statistics generated by it, and provided estimates of the various categories of income as they were brought into the tax net. It was a work of careful and empirical analysis. Once he had left the Revenue at the end of the war he developed into a major ®gure in public ®nance, becoming, according to the Cambridge economist Dennis Robertson, a `theorist, practician, savant and man of affairs'.77 Stamp's political views were mildly liberal.78 He was interested in the possibility of Rignano-style death duties which protected an individual's accumulation at the expense of what he received from inheritance and, because he wanted to make the distribution of wealth more fair but to retain the conventional incentives upon which he ®rmly believed that capitalism depended, he was in the mainstream of liberal thought. He was certainly prepared to be publicly sceptical about some of the claims made for the economic signi®cance of the private ownership of capital. One of the main opponents of Labour's tax policies in the 1920s was William W. Paine, chairman of Lloyds Bank. For the wealthy the logic of the levy involved reduction in future income tax in exchange for present surrender of property under the levy. For Stamp this seemed a perfectly 74 75 76

77 78

Dalton, Will Capital Leave the Country?, p. 7. Quoted in Cowling, The Impact of Labour, p. 299. For an absorbing study of Thomas S. Adams, a tax expert rather similar to Stamp who worked for the United States government in the same period, see W. Elliott Brownlee, `Economists and the Formation of the Modern Tax System in the United States: the World War I Crisis' in Mary O. Furner and Barry Supple (eds.), The State and Economic Knowledge (Cambridge, 1990), pp. 401±35. In a review of Stamp's Studies in Current Problems in Finance and Government (London, 1924) in the Economic Journal, June 1925, pp. 260±1. Stamp participated in Liberal summer schools during the 1920s and Michael Freeden includes him amongst the liberal economists in his study Liberalism Divided. A Study in Political Thought (Oxford, 1986), pp. 85, 103 and 106.

30

Struggles within a liberal inheritance, 1906±1940

rational choice, because the value of capital was re¯ected in the income which arose from it, and when Paine argued that `That is a very narrow view of capital. Some people regard capital as a trust possession which they are bound to turn to the best advantage of the community', Stamp thought this to be `a purely psychological view'.79 Tax expertise could be as corrosive of the conservative case as it was potentially challenging to the radical one. Although there had been reassuring noises of support, or at least tolerance, from respected quarters, the levy scheme faced two obstacles, one speci®c and one general. The speci®c issue was typical of tax issues where bold schemes were often spoiled by the details and involved the net as opposed to the gross yield of the levy. The effect of a levy was frequently expressed as a saving of £140 million off the budget because of the disappearance of interest payments following redemption of about half of the outstanding debt. Given that expenditure on the civil services as a whole took £460 million in 1921 such a saving was signi®cant, whether it eventuated in reductions in income tax or more expenditure on social services. However, this saving was at least halved in net terms once the level of tax from those who paid the levy (that is, the income tax, super-tax and death duties lost because, after the levy, those who had paid it would necessarily have reduced income and wealth which could be taxed) had been subtracted. As Stamp put it, `We should have made a certain small section perform a valiant operation which will prevent these few from giving us the same proportionate help in the future.'80 The more an estimate reduced the net saving on debt interest, the greater the redistributive element being assigned to the levy; subsequent progressive taxes would have a reduced yield because, as a result of the levy, high incomes and wealth had been reduced. But redistribution was not the dimension of the levy that Labour wanted to emphasize in the 1920s.81 A number of estimates had been made, including one by Dalton that roughly halved the gross saving on the budget to around £70 million, which still seemed a worthwhile ®gure. Stamp's contribution, in a lecture delivered in 1923, reduced the net yield still further, to between £42 and £50 million. This de¯ated the scheme considerably; at least as a debt-relief procedure, what had seemed to be a sweeping `once-andfor-all' measure to give relief from a rather sti¯ing burden of debt began to look like a disruptive effort for not much reward. 79 80 81

Colwyn, evidence, vol. 2, qs. 5199±201, p. 379. In Stamp, Studies in Current Problems in Finance and Government, p. 267. See Dalton's reply to Stamp: `You would not advocate a capital levy for the purpose of the redistribution of wealth?' [Dalton] `No.' Colwyn, evidence, vol. 2, q. 6958, p. 501.

National debt, expert opinion and tax strategy

31

Some in¯uential witnesses before the Colwyn Committee found Stamp's contribution of great signi®cance in swinging the argument against the idea. When it was suggested to Keynes that Stamp's estimate reduced the gain to £50 million at best, or a saving of 1 shilling in the pound in income tax, he commented: `I am very much impressed by the argument you have just outlined, which I think was ®rst elaborated by Sir Josiah Stamp, that a capital levy approximately of such a magnitude as you have mentioned would have very disappointing results.'82 It became accepted that a net saving of £50 million was the minimum which would be worthwhile under a levy. Such estimates as Stamp's and Dalton's were inevitably conjectural, especially regarding the relationship between the loss of capital from the levy and the impact on super-tax of the income that remained and on death duties of the capital that was left intact, given the vagueness of information about capital holdings. Stamp's estimate also included the impact on death duties at a second stage of inheritance when the levy-hit estate would, under the graduated duty, attract a lower rate of tax. To extend the calculation of the effects of the levy to the second stage of an inheritance was bound to involve guesswork and taking for granted stability of economic conditions and constancy of individual judgement which was unrealistic, yet it was over the future yield of death duties that Stamp's estimate was considerably more pessimistic than Dalton's.83 Stamp's ®gures held sway, perhaps in part because of his prestige in tax questions legitimately established during the war and the post-war period, and also because of the very singular kind of expertise ± part economic, part statistical and part administrative ± which tax affairs required. One of the few records in the TUC archive on the levy from this period is Stamp's assessment of the net saving from the scheme, and the TUC had not used Dalton's own study, which was the most detailed produced on the Labour side.84 Stamp liked the quasi-academic atmosphere which surrounded tax discussions but he had no regard for Dalton. He had reviewed Dalton's Public Finance unfavourably in The Economist, casting doubt on its legitimacy as a textbook in the light of support given to the levy and the Rignano tax schemes: `it would have been safer if the text had shown clearly where the of®cially accredited teaching of the London School of Economics ends and Dr Dalton's personal adventures begin'.85 When Dalton gave his evidence to the 82 83 84 85

Colwyn, evidence, vol. 2, q. 7558, p. 535; Stamp, Current Problems, pp. 250±68. Dalton's estimate was set out in The Capital Levy Explained, pp. 80±5. Colwyn evidence, para. 22, p. 588, qs. 3356, 4948. The Economist, 3 February 1923, p. 216. This is also discussed in Pimlott, Dalton, p. 144.

32

Struggles within a liberal inheritance, 1906±1940

Colwyn Committee he began by regretting that Baldwin's gesture of tearing up his War Loan had not been followed by others, so producing a sort of voluntary renunciation of their claims upon the state; Stamp felt that this `savours a little of cant'. When Dalton later suggested that estimates for the net impact of the levy would have carried more weight if they had drawn upon the unpublished information held by the Inland Revenue, Stamp took some trouble to show that this was too pessimistic a view, and that the necessary material was available from printed sources.86 Although Dalton was to ®nd his standing as an economist useful within the party he was never going to acquire the same status in tax discussions, however well equipped technically he was in relevant areas of economics.87 Partly this was due to the simple fact of his being an MP, even though many `experts' based their views on what were essentially political judgements. Partly, too, it might have arisen from the relationship between progressivism and the Labour Party. `Progressive' economists of a liberal nature ± Henry Clay, Hubert Henderson and Josiah Stamp ± had similar interests to Dalton, in that they were keen to modify the distribution of wealth. According to Henderson, death-duty taxation was a very signi®cant development for increasing equality ± more so than the `municipal tramways and national post of®ces in which so many have detected germs of a new social order'.88 But they were very different in political outlook from Dalton and Labour, and here the common ground disappeared. It is hard not to think that Keynes's judgement ± that Labour was the party of brute class interest and the Liberals were the party of brains ± was widely held. Although the speci®c issue of the net yield of the levy was useful for de¯ating some of the claims for the tax, it was as a test of Labour's political standing that the levy proposal was the more signi®cant. Could Labour be trusted with adding the levy to the state's armoury of taxes? More speci®cally, was there any way of guaranteeing that the levy remained a once-and-for-all device? Reginald McKenna cut through all the discussions about the possibility of a guarantee by pointing out that it would either be a success and therefore likely to be repeated, or a failure and subsequently abandoned.89 The only reason this aspect took 86 87

88 89

Colwyn, evidence, vol. 2, qs. 6844, 6875±94, pp. 494±7. Meghnad Desai has described one of Dalton's pieces on inequality as `perhaps the most technical of any written by anyone who later became the chancellor of the Exchequer!' in the reprinted essays he edited, LSE on Equality (London, 1995), p. 5. Dalton's essay was `The Measurement of the Inequality of Incomes', Economic Journal, 30 (1920), pp. 348±63. In Inheritance and Inequality. A Practical Proposal (London, 1926), p. 13. Colwyn, evidence, vol. 2, para. 17, p. 481.

National debt, expert opinion and tax strategy

33

so much attention was the possibility of Labour forming a government. In the light of this possibility the levy could be been seen as an instrument for regular use to make steady inroads into property, whereas if the Conservatives were responsible its character as a device for solving a budget problem would be clearer. According to Ralph Hawtrey, `if the proposal were put forward as a de®nitely Conservative measure and taken on its merits, it would be regarded as a transfer of burdens from future savings to existing savings'.90 Although the rationale for the levy was strengthened as prices fell through the 1920s, it was increasingly dif®cult to keep the potential gains from the scheme in the public eye because the core connection, between heavy interest payments to debt holders paid for by a high income tax, was weakening at the same time. The standard rate had come down from 6 shillings in the pound in 1921/2 to 4 shillings by 1925/6, which was possible because of the sharp decline in defence spending.91 There was little possibility of mobilizing the income tax payer in favour of debt redemption in the way that Webb had envisaged in 1920 because taxes had come down without it. In these circumstances the fact that interest payments on the debt still consumed a large part of the budget actually became a good thing from a conservative perspective, because it prevented more money going on social spending. The report of the Colwyn Committee, the thrust of which was that the debt problem did not require a desperate remedy, noted that `it is open to doubt whether the economic situation in its evident aspect is such as to justify the increased social expenditure at present. [Lord Bradbury] regarded the effect of the debt charge as an incentive to economy of other public expenditure as a most valuable in¯uence. We think there is considerable force in that view.'92 The bearing of the levy proposal upon the legitimacy and standing of the Labour Party caused a split within it from at least 1923 onwards between those who wanted to drop it as a vote loser and those who wanted to press on with some kind of solution to the debt problem. The leaders of the party ± MacDonald, Snowden and Thomas ± belonged to the ®rst camp; Dalton, Lees-Smith and Pethick-Lawrence belonged to the second. Anxieties about the levy as Labour policy were fed through 90

91 92

R. G. Hawtrey, The Economic Problem (London, 1926), p. 373. Stamp had made the same point to Pigou: `Would you agree that if, in ten years' time, you had a very low level of prices it is quite possible that big taxpayers and business men and bankers might get together and reintroduce something of this sort, being careful not to call it a capital levy?' [Pigou] `Yes, that would be admirable': Colwyn, evidence, vol. 2, q. 6045, p. 443. Middleton, Government versus the Market, p. 332. Report of the Committee on National Debt and Taxation, PP 1927, xi, para. 861.

34

Struggles within a liberal inheritance, 1906±1940

the general elections of 1922 and 1923. Snowden told Dalton that the levy had caused dif®culty in 1922, while Clynes acknowledged publicly that it was unpopular and likely to cost them many votes.93 The Times thought that the leadership's discussion of the levy betrayed `the nervousness and apprehension of the electoral consequences of the issue'.94 After the 1923 election MacDonald told Dalton that he felt the levy had cost them ®fty seats and that to have campaigned on socialism and nationalization would have been vaguer and less damaging.95 By the time Labour took of®ce the leadership was determined that it was not going to introduce a levy and J. H. Thomas reassured the king of this.96 By 1923 the Liberals had abandoned any interest they had in the levy and gave no support to Labour in a debate on the scheme during the 1924 government.97 Dalton, after a promising start, had begun to share some of the problems of campaigning with the capital levy proposal. In 1921 and 1922 he gave a number of talks about the scheme, and campaigning unsuccessfully in a by-election in Cambridge noted `much interest in the levy and many questions on it'.98 At the general election, again standing unsuccessfully at Maidstone, he found the `Capital levy here, as elsewhere, the most obvious issue. This suits me very well on the platform.'99 However, at a meeting in Newcastle he confessed that `the subject is astonishingly fertile of misunderstanding on what is proposed and how it will work'.100 The surtax, social spending and party divisions The Colwyn Committee, which sat between 1925 and 1927, was intended to settle the capital levy and debt issues for good.101 The 93 94 95 96 97 98 99 100 101

The Times, 2 November 1922. The Times, 13 November 1922. Dalton, `Diary', 8 December 1923. Cowling, Impact of Labour, p. 364. Ibid., p. 345. Dalton, `Diary', 30 January 1922 to 15 March 1922. Ibid., 15 November 1922. Ibid., 19 January 1923. This was generally recognised by interested parties: according to Bernard Mallett, the committee `is no doubt inspired of a desire to strengthen themselves against the extremists and I hope it will be welcomed as such in the City': Bodleian Library, Oxford, Brand Papers, Mallett to Brand, 15 February 1924. For this very reason the committee had to be quite wide-ranging in its consultations, as MacDonald explained to Snowden: `we must bring these people with us [those in favour of a levy], and not enable them to say that they were never consulted at all': PRO, MacDonald Papers 30/ 69, 1169, f. 249, MacDonald to Snowden, 14 February 1924. As a result, the committee's proceedings were as thorough and useful a survey of opinion as if it had been guided by more innocent motives.

The surtax, social spending and party divisions

35

majority report argued that taxation was not a burden on industry, nor upon the population more widely. By 1928 one of those who had been a key witness before the committee declared that the levy idea was `as dead as Queen Anne'.102 But this strategy was not wholly successful, in that a minority report written by Labour members ± Barbara Wootton, Lees-Smith and J. W. Bowen ± reiterated the seriousness of the debt burden and linked its solution with taxation of the rentier class not through a capital levy, which it recognized was no longer practical politics, but through a surtax on investment income. This idea went to the party conference and became party policy. This surtax idea posed precisely the same problems as the levy had done, over the competence of the party to dabble in tax policy and the realism of the political appeal which underlay the proposal. It also hardened the division between the leadership ± especially Snowden ± and the party, which helped to determine the outcome of the crisis of 1931. But this time the party was more exposed on the surtax issue than it had been on the capital levy. The latter had been embedded in a much wider discussion in the early 1920s about the implications of war ®nance. By the later 1920s there was nothing like the same interest in the national debt. This was not because the budgetary signi®cance of the debt had weakened; it had in fact worsened with the fall in prices. Whereas repayments had absorbed 27 per cent of tax revenues at the beginning of the 1920s they were taking nearly 37 per cent in 1925/6. More signi®cantly, interest payments as a proportion of national income were also rising. And even though public discussion about the debt was much less than in the earlier 1920s, politicians and civil servants were still toying with possible solutions which would ease the burden of debt without troubling the ordinary taxpayer. Churchill, the Conservative chancellor, saw the debt and its cost as a `vast wet blanket across the whole process of creating new wealth by new enterprise' and was worried that a `really well argued political campaign' to get rid of the debt would be dif®cult to answer.103 Churchill's chief civil servant, Otto Niemeyer, was considering an annual capital tax to deal with the debt, but Keynes's mind was turning to something less disruptive: `I am against an annual capital tax because I think we can get all the same results by differentiating further against unearned or investment income.'104 102 103

104

W. H. Coates, `The Labour Surtax', The Banker (March 1928), pp. 405±26 at p. 405. In a letter to Otto Niemeyer, controller of ®nance at the Treasury, 26 January 1927 in Martin Gilbert, Winston S. Churchill, 1922±29. A Companion: the Exchequer Years (London, 1979), pp. 924±6. Niemeyer's views, where he confessed he was frightened at the `political and psychological' reactions to a capital tax, were set out in a letter to Richard V. N. Hopkins of 12 November 1925 in Niemeyer Papers, PRO, T176/39. Keynes's were in

36

Struggles within a liberal inheritance, 1906±1940

Labour's surtax was meant to fall on unearned income above £500 a year and to yield £100 million annually, which would be devoted to debt repayment. From Dalton's standpoint, problems emerged on two fronts, one with Snowden and one with the ILP, both of which shed light on the place of taxation in Labour's broader strategy. The challenge from the ILP was about the purpose of the tax, which produced an argument between Dalton and Oswald Mosley in the ILP paper the New Leader. Mosley and the ILP wanted the whole of the tax revenue to go on social expenditure, as a way of ful®lling the `living wage' policy through the introduction of family allowances. This yoked together social improvement with economic regeneration because of the view that weak working-class consumption was a cause of unemployment. For Mosley, paying off the debt was uninteresting, and merely put money into the pockets of the bondholders. At the Labour party conference in 1927 Mosley launched an unsuccessful amendment for all the proceeds of the tax to go on social expenditure and he referred to ways in which, in building the socialist commonwealth, `they had ready to hand the great instrument of taxation, the power to tax the rich in order to ameliorate the conditions of the working class'.105 The idea of using the surtax to fund cash allowances for children, which was at the core of the ILP proposal, was a particular development of the living wage strategy. The scheme had the more speci®c merit of putting the working class, most of whom did not pay income tax, on the same footing as those that did, in the sense that they got some recognition from the state for their family responsibilities. Income tax payers received allowances for children to re¯ect the diminution of their taxbearing capacity. The bene®t that workers received from these allowances was usually indirect. At best the allowances excluded them from income tax altogether, if they were earning enough to cross over the exemption limit. But for those who did not the allowance had no effect and was wasted. A cash allowance for children paid directly to their mother was compensation for this. In Dalton's mind cash allowances were useful but debt redemption also remained a priority for the surtax revenues.106 The stumbling block with family allowances arose with the trade unions, which had been involved with the party in a joint study group on

105 106

a letter to Pethick-Lawrence, 10 May 1925, in Pethick-Lawrence papers, box 2, f. 202. LPAR, 1927, p. 247. The episode is described by Dalton in a section entitled `Re¯ections on Previous Year ± 1927' in his diary, and in the New Leader, `End Capitalist Finance' (1 October 1927), `Mosley and the Surtax' (7 October 1927) and `The Surtax ± What For?' (28 October 1927).

The surtax, social spending and party divisions

37

the idea. Although a majority were in favour of the idea, because `no public authority can spend money better than mothers', the trade unions as a whole sided with the minority who had reservations, partly because of the likely effect of cash allowances on wage negotiations.107 Dalton's impatience with Mosley was based in good part on personal suspicion.108 Like Dalton, Mosley had come from a Tory background and similarly regarded himself as expanding the horizons and stiffening the courage of a party that had started out as a trade union pressure group. There may have been some jealousy from Dalton at the attention which Mosley was receiving in the party, but there was also genuine distrust of Mosley's policies and thought. Mosley shared the ILP's outlook that the working class and the economy would bene®t from an injection of spending power. Dalton was convinced in the 1920s that working-class interests suffered more from a rising than a falling price level. Although he was a supporter of child allowances, Dalton was more interested in the budget and ®nance than Mosley and found his intervention annoying.109 Dalton, along with the rest of the Labour Party, also had problems with Snowden, who was both aloof and dismissive about the tax, largely because Labour appeared to have been wrong-footed about it, in much the same way as it had been about the yield of the levy. The problem as publicly discussed arose from the threshold which Labour had chosen for their tax, and its incompatibility with the amount it was expected to raise. Labour set the tax to exempt those who received less than £500 a year investment income. However, it became clear that the party also wanted to exempt the ®rst £500 of all investment income, even of those who would be liable to the tax. The Nation, the journal of progressive liberal opinion, made much of this, because if this exemption was applied it would reduce the yield from £85 million to £65 million. This was a chance to gloat over the party which had rudely supplanted them; the miscalculation was `typical of the extraordinary slovenliness which characterizes much of the professedly careful research work of the Labour Party'.110 Keynes observed that this was a piece of `bad propaganda' for the party.111 The party claimed the ®gures had been veri®ed 107 108 109 110 111

TUC, Annual Report (1930), pp. 217±21. There is an incisive treatment of Dalton's relations with both Mosley and Keynes in Pimlott, Dalton, chap. xi. `He (M) talked a lot of arrant nonsense, bad arithmetic and bad economics, and played hard to the gallery': `Diary', 1927. The Nation, 23 August 1927, p. 680. Keynes, Collected Writings, vol. XIX, p. 703, reproducing an article in the Evening Standard.

38

Struggles within a liberal inheritance, 1906±1940

by the Board of Inland Revenue, but this did not stop a sense of panic and disarray. To revive the viability of the tax Labour decided to include undistributed company pro®ts in the tax. This was a signi®cant change. One aspect which had made the levy easier to defend had been the fact that corporately held assets were exempt, whether of trade unions, companies or charities. This had meant that the most dynamic area of saving would have been untouched by the levy. The Conservative case had little purchase in these circumstances on economic as opposed to political criteria. Indeed, Labour had shown little interest in taxing company savings at all, and had abolished the corporation tax in 1924. To include the taxation of company reserves was therefore a signi®cant development. In fact the position was worse than this, because the original Inland Revenue estimates had already included company savings in the total unearned income of the country that would be liable to the tax.112 So the scope for increasing the yield was not as great as at ®rst appeared. Labour was not helped by Snowden's public disapproval of the scheme. The Nation reported a letter he had written claiming that he had nothing to do with the scheme and that if the yield was going to be below £85 million then it would break down.113 Dalton's diary comment shows that Snowden was in splendid form: Arnold and L-S [Lees-Smith] were sent down to see him [Snowden] in Surrey at the beginning of October on surtax and found him very intransigent. He didn't care a rap for the party conference. What did they know about ®nance etc. The proceeds must all go to debt reduction and he wouldn't consent to including undistributed pro®ts. And the yield was wrong anyhow.114

Snowden believed that The Nation won the argument, but the party wanted him to be brought into line, to support the policy agreed at the party conference.115 The executive of the parliamentary party had lengthy sessions with Snowden where it was shown that he had been consulted over the proposal and as a result Snowden committed himself to a speech in the country to indicate that agreement had been reached.116 Snowden's exposition of the surtax idea was as lucid and coherent as anything produced by the main proponents of the idea. Practically the whole of the yield of direct taxation went on debt interest; 112 113 114 115 116

PRO, Inland Revenue Papers (IR), 113/21, `The Sur Tax', 22 November 1927. The Nation, 27 October 1927. Dalton, `Diary', 1927. MacDonald Papers, PRO 30/69/1172, pt. 1, Tom Johnston to MacDonald, 31 October 1927; NEC minutes 21 December 1927. LPA, Parliamentary Party, Executive Committee minutes, 7, 8 and 30 November 1927.

The surtax, social spending and party divisions

39

the rest of government expenditure was paid for by indirect taxation, most of which was contributed by the working class; the debt interest was preventing a more active use of the budget for social services and reorganization of the mining industry. The capital levy had been a perfectly reasonable solution to the problem and should have been implemented in 1920. Its time had passed but debt reduction was by far the most important ®nancial problem there was before the country. It was right that property should bear the brunt of repayment because the burden of debt was long lasting and property was also permanent. He then gave some home truths about the surtax affair: No party conference can go into details ± the surtax is more an expression of principle than a de®nite proposal and, indeed it would be folly, it would be an absurdity on the part of the Labour Party to go into exact details now as to the rate of such a tax and to try and make an estimate as to what the likely yield would be. The Labour Party goes further than other political parties in stating its policy in advance, but it must not, at this early stage, de®nitely commit itself on particular problems in connection with taxation proposals.117

Willie Graham, Snowden's ally in the party, took exactly the same line in an article in The Banker where he admitted that `compared to other political parties, Labour probably gives too much detail of its programme in advance', that the tax might not reach the right amount, and that company savings would not be touched by the scheme.118 The New Leader was not overly impressed: Snowden `took great care to put himself formally right with the party, but the whole effect was to send the enemy into raptures of delight and to cast doubt on the decisions which had been reached after a keen and well-informed discussion at the Blackpool conference'.119 One of the reasons the party had gone into the details of the proposal was its anxiety that those on modest incomes would be frightened off the tax, which was intended to hit the richer members of society. Labour was keen to attract the lower middle-class voter, and had believed that on tax issues it had much to offer. Snowden had commented that `the black coat and the fustian jacket [were] not the mark of class distinction'.120 Therefore the party was keen to set out a detailed scheme which would show that those on modest investment incomes would not suffer as much as those on higher ones. By the end of 1927 the party was

117 118 119 120

Philip Snowden, The Surtax Proposal (London, 1927), pp. 4 and 6. In `Labour and the Surtax', The Banker, January 1928, pp. 44±50. `Snowden and the Surtax', 16 December 1927. Cited by Mary Short, `The Politics of Personal Taxation: Budget-making in Britain 1917±1931' (Cambridge University Ph.D., 1985), p. 177.

40

Struggles within a liberal inheritance, 1906±1940

demanding more publicity about the scheme because statements about the rate and incidence of the tax were not doing the trick: The constant reference to `an average of 2s in the £ on unearned incomes exceeding £500' gives an exaggerated idea of the weight of the new taxation on small incomes and conversely does not convey an adequate idea of the heavier taxation which will be imposed on larger incomes.121

Labour speakers were instructed to stress how the tax would fall on a small number of wealthier taxpayers whose resources did little to bene®t society: `The great mass of the people, and the great mass even of the income tax payers will be untouched by the surtax.'122 It seemed bizarre for the NEC to be worrying about the effect on the lower middle-class attitudes of a tax on incomes of over £500 derived solely from investment or savings. Such an income, assuming 5 per cent interest, would have required £10,000 of capital to produce it. Property holdings of £10,000 accounted for 55 per cent of total wealth and were owned by 1 per cent of the population.123 These capital amounts were, of course, well outside the experience of most of the middle classes. One survey noted that: `The possession of, say, £500, £1,000 or more, usually implies a fairly high standard of living and relative security from certain kinds of occupational risks and diseases.'124 In the mind of the liberal economist Henry Clay, these amounts of capital marked a real division within the population: `If I were a capitalist, I should feel a little insecure about my capital, since a capital levy on all estates over £1,000 would leave 95 per cent of the electorate untouched.'125 Yet the Labour party was feeling squeamish about those who had £10,000 behind them. Henry Brailsford, the brilliant editor of the New Leader, knew why Labour was in such a ®x. Not one in ®ve would register the fact that the ®rst £500 was exempt, because `rich men live in terror, but their fears are merciful nightmares compared to the hags and the hobgoblins which bestride the pillows of the timid little men who are not yet rich but hope one day to count their pile'.126 The Conservatives' tax strategy, under Churchill's chancellorship, had increased death duties (an established tax) and reduced super-tax as a way of meeting the needs of the middle 121 122 123 124 125 126

NEC minutes, 21 December 1927. Manchester, National Museum of Labour History, Labour Party Archives (LPA), Speaker's Notes, 9 December 1927. Campion, Public and Private Property, p. 109, table 13. Ibid., p. 6. Henry Clay, The Problem of Industrial Relations, and Other Lectures (London, 1929), p. 304. New Leader, `Spending the Surtax', 6 January 1928.

The surtax, social spending and party divisions

41

classes without setting them against the big property owners.127 The answer for Labour, according to Brailsford, was to mount a vigorous campaign to link the tax with family allowances and forget `sound ®nance'. He doubted `whether the average labourer, in daily terror of unemployment, feels much zeal for ``sound ®nance'' and it probably leaves the woman voter on the cottage doorstep extremely cold'.128 With the lower middle class lost to Labour's appeal, however carefully it was couched, the only way forward was to mobilize the working classes to spend the money on social welfare. This strategy was blocked because of the time the trade unions were taking to make up their minds about the family allowances. The question of what the surtax was going to be spent on was the crucial fact for those opposing the tax in the wider world, just as it had been in the case of the capital levy. Although the surtax did not generate the widespread debate that the levy had done there was an equivalent dialogue between `expert' opinion and party views, this time conducted by W. H. Coates, who, like Stamp, had worked in the Inland Revenue (as director of statistics) before going into private industry. His objections to the tax were as much political as economic. The effects on private industry, he judged, were likely to be minimal, because businesses tended to be run by salaried managers rather than their owners and `it was one of the good features of the tax that it touches but lightly the incentive to add to the communal production of new wealth', and the transfers involved, because the tax was restricted to investment income, remained within the group of `non-producers'. But for Coates all these positive features were dependent on the revenues being recycled into savings through debt redemption. To spend the money on social services would have a lamentable effect on savings and upon the character of the population: `Poverty and unemployment must indeed be attacked but from an end which, by ensuring the worker employment, preserves and strengthens his self-respect, and not from the end which, because it merely gives him charity, saps at the very root of his pride.'129 This was an example of the widespread views which tended to be critical of both parties for raising social expenditure and imperilling the budget. But the `debt redemption' strategy to which Dalton had been committed during the 1920s was looking very threadbare by the end of the period. However much he may have wanted to take away the wealth 127 128 129

Martin Daunton, `Churchill at the Treasury: Remaking Conservative Taxation Policy, 1924±29', Revue Belge de Philologie et d'Histoire, 75 (1997), pp. 1063±83 at p. 1071. New Leader, `Spending the Surtax'. W. H. Coates, `Labour's Surtax ± II', The Banker (April 1928), pp. 29±47.

42

Struggles within a liberal inheritance, 1906±1940

of the rich, it remains the case that both the levy and surtax schemes were closely linked with debt reduction rather than redistribution.130 For Labour's own supporters, merely adding to the sinking fund did indeed look like `good housekeeping' or `sound ®nance' rather than anything more exciting, judging by the jeers which greeted John Wilmot's claim that `the war debt redemption levy converted more people to the Labour Party than the whole of the rest of their programme put together'.131 However, especially when the tax effort was linked with paying into the sinking fund, as the surtax was, it lacked a proper radical rhetoric. This is shown by the way in which, even in the later 1920s, Labour speakers were being urged to argue that the surtax was a way of redressing the wrongs of wartime ®nance, by hitting those who had made money out of the war.132 But by this time the effects of the war had been dissipated by the passage of time. However much Labour took the line of debt redemption it was insuf®cient to overcome distrust of Labour's motives and identity. But to take a more adventurous route was also dif®cult because the party was unsure about the social programme to which these tax innovations might be linked. Snowden and the middle classes In conditions of the 1920s the approach pursued by Snowden and Graham ± to drop any pretensions which Labour might have to radical ®nance ± had some obvious merits. At the beginning of the 1920s Snowden's writings were of a piece with the radical view of what tax policy should be in the post-war world; that is, they reiterated progressive liberal views about the way large fortunes represented the appropriation of community values, the need to reduce the national debt through a capital levy and a stricter limitation on inheritance. The regressive effect of local rates was to be eased and the shortfall made up through national exchequer grants and the taxation of land values.133 His stance began to shift from these views when experience of electioneering on the capital levy showed that it was a liability, and Snowden was one of those in the party who wanted to drop it. How far he had already gone was shown by the debate he initiated in the Commons in 1923 on socialism, when he castigated capitalism for producing misery amidst plenty, criticized its predilection for trusts rather than competition, and 130 131 132 133

The report of the Colwyn Committee noted that, of redistribution, `little evidence of a de®nite nature has been put before us on this point': para. 830. LPAR, 1927, p. 250. LPA, Speakers' Notes, `Hard facts', 24 June 1928. See Philip Snowden, Labour and National Finance (London, 1920) and Labour and the New World (London, 1921).

Snowden and the middle classes

43

claimed that co-operation was the only way forward for society. But Snowden's status now was such that many saw an instrumental rather than ideological purpose behind his speech, namely to maintain some sort of standing with the left in the context of an increasingly moderate stance overall.134 During 1924 the discrepancy between what served Labour's interests as a government and what it stood for became more evident and it was particularly apparent in Snowden's chancellorship. It was anticipated that he would be competent and safe. Bernard Mallett, the budget expert, thought that `Mr Snowden knows more about public ®nance than most of his immediate predecessors and that he will prove an interesting chancellor of the exchequer. One is told he is all moderation now.'135 His budget, as is well known, was studiously moderate: `The reception of the budget by the press of the country was everything I could have desired. It relieved the feelings of the rich, who had feared that there might be drastic impositions upon their class.'136 The cabinet was pleased, with no new taxes and no tax increases, and some reductions on indirect taxes. It placed on record `a strong expression of satisfaction with the chancellor of the Exchequer's proposals for the ®rst budget of a Labour government'.137 As well they should have done: it was the ®rst budget of a minority government that had taken of®ce by surprise, with a parliamentary party that was not well-disciplined and facing one of the more demanding tests of the parliamentary season, and Snowden had got them off unscathed. Even the Webbs were impressed, although they were also concerned at the signi®cance of this positive feeling: `the budget itself was extremely skilful and the explanation of it was Snowden's masterpiece. We worry about Snowden. In so far as a minority government is concerned, compelled to follow free trade lines he has turned out to be the best available chancellor.'138 For Snowden the budget lay the foundations of an effective minority government working with Liberal support which was only brought down by MacDonald's irresolute handling of the Zinoviev letter and the McVitie affair.139 A further con®rmation of Snowden's position came with his silence in 134

135 136 137 138 139

Snowden's reminiscences are in his Autobiography. Vol. II, 1919±34, chap. xliii; the contemporary interpretation is in Beatrice Webb, The Diary of Beatrice Webb. Vol. IV, The Wheel of Life, 1924±43, eds. Norman and Jeanne Mackenzie (London, 1986), p. 36. Brand Papers, box 67, Mallett to Robert Brand, 15 February 1924. Autobiography, Vol. II, p. 647. PRO, CAB 23/48, minutes of meeting of 29 April 1924. Webb, Diary, 2 May 1924, pp. 24±5. Autobiography, Vol. II, p. 696.

44

Struggles within a liberal inheritance, 1906±1940

a debate on the capital levy which Conservatives had initiated, leaving Pethick-Lawrence, Gillett and Clynes to defend the proposal.140 Snowden's behaviour con®rmed the lack of interest which the Labour government had in radical taxation. It was a political success in that the `¯ight of capital', which had been the frequently predicted reaction to any leftwing government coming to power, was regarded by City authorities as foolish to the extent that it occurred at all. Noting liquidation `on a considerable scale' the Stock Exchange Gazette remarked that the fuss about a Labour government was `chie¯y con®ned to minor politicians, the gossips of West End clubs and the timid class of investors who are obsessed with fears of a capital levy in the immediate future on quite inadequate grounds'.141 In February both MacDonald's comment that a levy would require a clear majority in the Commons and the setting up of the Colwyn Committee led the Gazette to conclude that `it appears highly probable that this course will mean the inde®nite shelving of the capital levy'.142 Snowden's role as guarantor of Labour's moderation continued after the minority government fell, and was con®rmed by the surtax affair.143 In his speeches in 1928 and 1929 he contrasted his own record as a prudent chancellor who was able to keep to his estimates of income and expenditure with the more lax regime under Churchill. He also underlined the debt repayments as a block upon reductions in government expenditure rather than as an obstacle to further spending on the social services.144 This was a thoroughly conventional approach to the budget, and his speech to the Labour party conference reassured The Times that he had ruled out any signi®cant expenditure for the ®rst session of parliament at least. In Snowden's words, `He [Snowden] sometimes ran cold when he heard statements made on the possibility of increased taxation.'145 A good indication of the trust which Snowden inspired was that public opinion took almost no notice of his continuing interest in the land question. This had been consistently in view throughout the 1920s. In his Labour and the New World (1921) he had written that `land 140 141 142 143

144 145

Snowden's silence was commented upon by Neville Chamberlain. H. C. Deb., 171, col. 2306, 2 April 1924. Stock Exchange Gazette, 10 January 1924. Stock Exchange Gazette, 21 February 1924. `Anyone whose only object was to raise revenue to ®nance good causes would never dream of proposing the surtax. That is why Mr Philip Snowden . . . and Mr Graham ± two good radicals, two bad revolutionaries ± have, so far, had nothing to do with it.' Keynes in The Evening Standard, 22 November 1927, reprinted in Keynes, Collected Writings, vol. XIX, pt. 2, p. 701. The Times, 19 and 21 January 1928. The Times, 5 October 1929, `Financial note'.

Snowden and the middle classes

45

nationalization is the fundamental economic and social question', at least in reference to agricultural land.146 However, land value taxation was also in play, especially for urban land. In the 1924 budget, so noted for its moderation, he brought the Land Valuation Department back into the ambit of the Inland Revenue: `I want my hon. friends on this side of the committee to take my assurance that the government attaches the greatest importance to this question. We regard it as important from the point of view of unemployment, housing and other reforms.'147 Right down to 1929 Snowden continued in the same vein. He linked land value taxation with reduction in local rates which pressed heavily upon businesses. According to Snowden, in Labour's election programme `the biggest proposal which could be transferred into socialism was land'. Taxation of site value by central government with local authorities able to levy a ¯at rate on any property would depress land values and facilitate eventual acquisition by public authorities.148 Snowden reminded audiences that Labour was now the only instrument for ful®lling this essentially Liberal proposal. Churchill was now unlikely to tackle land value taxation, `though he had in the past been a very eloquent advocate of that reform. It was hardly likely that a Tory government, controlled very largely by the landed interest, would permit Mr. Churchill to deal with this matter.'149 Even though Snowden's continual reference to land value taxation was completely consistent with Labour policy, it was an attachment to a policy that had been tried and found wanting by the Liberals. Resistance from taxpayers had made it inoperable. But Snowden's continuing interest in it did not diminish his reputation as Labour's sound man of ®nance. It did, however, exasperate his colleagues and appear as utterly irrelevant to the problems of 1931.150 The horrendous experience of 1929±31 proceeded along lines already set out in the 1920s. Snowden's aversion to tax innovation affecting the rentier, the desire to avoid increases in government expenditure, and the rift between himself and the rest of the party were well established. Earlier accounts of the crisis in 1931 have focused on Labour's inability to grasp the opportunity provided by Keynes's ideas for dealing with 146 147 148

149 150

Labour and the New World, p. 132. H. C. Deb., 172, cols. 1608±9 29 April 1924. Josiah Wedgwood, The Land Question. Taxation and the Rating of Land Values (London, 1925). Report of a TUC and Labour Party advisory committee, initially chaired by Snowden and then by Wedgwood. The Times, 26 January 1928. Short, `Politics of Personal Taxation', pp. 281 and 284; Philip Williamson, National Crisis and National Government: British Politics, the Economy and Empire, 1926±1932 (Cambridge, 1992), pp. 237±8.

46

Struggles within a liberal inheritance, 1906±1940

unemployment and so relieving the budget of the most visible and apparently indefensible component of its weakness, namely unemployment bene®t.151 David Marquand, drawing upon the fact that there was agreement within the cabinet on the need to balance the budget as a way of saving the gold standard, saw the subsequent division as arising from different interpretations about the role of the Labour Party, either as an instrument of government in the national interest or of the working classes. The most detailed study has made little reference to Keynesianism and has cast 1931 as turning upon the details of balancing the budget and the brokerage between the three parties to achieve this.152 This makes the failure of the Labour leadership its inability to make the case for heavier taxation and lighter expenditure cuts as a way of balancing the budget.153 A stiffening of the treatment of unearned income to yield, say, £65 million (the more modest of the estimates of Labour's surtax proposal) would have made a fundamental contribution to a budget de®cit of £120 million. The striking point about the settlement which Labour attempted was the heavier use of expenditure cuts compared to tax increases. There was a perfectly decent case for spreading the cost of the emergency through taxes, but the proposal for a rentier tax never made much headway against the opposition of the Inland Revenue.154 Williamson has convincingly argued that the depression from 1929 onwards had created a large movement of ®nancial, business, rentier, direct tax-paying and rate-paying opinion in favour of public expenditure retrenchment, with which Snowden showed no sign of being in fundamental disagreement.155 Snowden's attitudes before 1929, both in terms of his views on particular policies and his disdain for the party generally, accurately pre®gured his stance in 1931. To have listened to alternative views, and to have accepted taxes previously rejected, would both have broken with past trends. In addition to the negotiations between the three parties and the divisions within the Labour government which provided the day-to-day drama of the 1931 crisis, there lay a larger problem for Labour's tax 151

152 153 154

155

See Robert Skidelsky, Politicians and the Slump (Harmondsworth, 1967) and Ross McKibbin, `The Economic Policies of the Second Labour Government, 1929±31', Past and Present, 68 (1975), pp. 95±123. Williamson, National Crisis, p. 517. Robert Skidelsky, Interests and Obsessions. Historical Essays (London, 1993), pp. 154±60. Hugh Armstrong Clegg, A History of British Trade Unions, vol II, 1911±33 (Oxford, 1985), p. 506. See also Williamson, National Crisis, p. 301, where he cites a Treasury and Inland Revenue view that much tax evasion would occur unless there were substantial expenditure cuts to show that the cabinet programme appeared to be `a fair and just plan demanding equal sacri®ces from all sections of the community'. Williamson, National Crisis, p. 519.

Snowden and the middle classes

47

strategy, which was the dif®culty of placing any effective tax upon the lower middle classes. It has been remarked already how, at the beginning of the 1920s, the Inland Revenue thought that the middle classes ought to be spared higher taxes which instead should be placed upon the rich. Those in the £500±1,000 bracket were indeed lightly treated during the 1920s and, even though they were brought back into income tax in 1929±31, the increases were removed in 1934 and 1935.156 When ®gures were produced for the Colwyn Committee showing the burden of taxes upon different income levels, the minority report of the Labour group commented that `taxation on the lower ``middle class'' income of about £500 is moderate in comparison with that levied on incomes of a wage earning level. In view of the widespread belief that existing taxation presses with exceptional weight upon the middle class, we wish to call special attention to the somewhat unexpected result shown by the ®gures.'157 What the ®gures showed was that those in the income range £500±1,000 paid only 6 per cent of their income in tax in 1925/6 compared to 10±12 per cent for those below £500. It was only when incomes went above £1,000 that taxation became heavier than it was for the working classes. Snowden knew that the lower middle class was one of the most taxsensitive groups in the population: `Probably no class in the community feels the burden of taxation to be more onerous than the lower middle classes. They have risen into a position where their reasonable desires exceed their means.'158 Because Labour expected to appeal to the blackcoated worker it had to rely upon the tax approach set out by Lloyd George, namely concentrating the heavy taxation upon the rich. Yet this strategy could not be legitimated by the details of the particular taxes such as their rates and their starting points. Because Labour stood for everything that had threatened the middle classes after the war there was little chance of the details of particular taxes winning them over. The point where the labour movement and the lower middle class came into sharpest con¯ict was over the tax treatment of the Cooperative Society, because the shopkeepers felt the co-op was using an essentially bogus claim to be a mutual society to avoid taxation on its pro®ts and so gain an unfair advantage over smaller traders. Although the co-op had a rather ambiguous status within the labour movement, being as much capitalist as socialist, its success was a challenge to the small shopkeeper. Certainly, families with any connection to shopkeeping usually had strong feelings about the co-ops. Stamp's father was 156 157 158

McKibbin, Cultures and Classes, pp. 60±1. Colwyn, report, para. 68, p. 371. Labour and the New World, pp. 136±7.

48

Struggles within a liberal inheritance, 1906±1940

a shopkeeper, and his biographer has remarked that he approached the subject of their taxation with a `deep-rooted and emotional antipathy'.159 Within the labour movement, Willie Graham, who was also brought up in a household where, according to his brother, `individual enterprise was exempli®ed', was never able to defend the co-ops with any great enthusiasm.160 The Co-operative Society thought that it was in a fundamentally different position from any other conventional retail organization, because of its mutuality: that is, a group of people exchanging goods amongst themselves with no reliance upon intermediaries and without any obvious pro®t to anyone. The essence of co-operative selling was the generation of a surplus, because goods were sold to members above cost price. This surplus was then returned to members either in the quarterly `divi' or retained as an undistributed sum that none-the-less `belonged' to the members. It was certainly a distinctive way of doing things. The chief bene®t to the working class arose from the way the system corresponded to a form of compulsory saving, rather than to an enclave of socialism. To receive a lump sum every quarter was a tremendous boost to a working-class budget, and impossible to achieve voluntarily. John Hilton, one of the most robust and sympathetic analysts of the working-class economy, wanted the poor to make more use of the co-op for this reason, and was disappointed to ®nd that, in a small survey, only one tenth did so: `These one tenth have the inestimable advantage of being able to draw, once a quarter, a lump sum in the shape of the divi. Call it if you like a veiled form of compulsory saving. I will allow you that and still call it a priceless boon.'161 In the debates on the issue, the nature of mutuality seemed to be determined partly by scale. According to one judgement, ` ``Mutuality'' is most marked where the services can be withdrawn from the ordinary economic sphere, and rendered more or less independent of competitive prices and business conditions.'162 The analogy of a club, frequently used to give a concrete example of mutuality, reinforced the sense of an 159 160

161

162

John H. Jones, Josiah Stamp. Public Servant (London, 1964), p. 133. Thomas N. Graham, Willie Graham. The Life of the Rt Hon. W. Graham (London, 1948), p. 123. However, Graham did sign a reservation (along with Warren Fisher of the Treasury, A. C. Pigou and C. W. Bowerman, the Labour MP) to the report of the Royal Commission on Income Tax opposing the removal of the co-ops' mutual status in regard to taxation. R. C. on Income Tax, report, reservation to part v, section xii, pp. 163±4. John Hilton, Rich Man, Poor Man (London, 1944). Hilton had been a director of statistics at the Ministry of Labour, and then professor of industrial relations at Cambridge University. Josiah Stamp and William McLintock, reservation to the report of the R. C. on Income Tax, pp. 166±7.

Snowden and the middle classes

49

intimate set of exchanges where everyone knew each other. Thus while it was possible to agree that co-operation in the early days corresponded to the ideal, the change of scale seemed to have eroded it. The surplus that an individual received was increasingly divorced from the speci®c transactions he had engaged in, so that the diversion of the exchanges into a more impersonal economic relationship between members had become clearer. This linkage between scale and market relations underpinned the case against the co-ops: `where the aggregation of individuals serving each other is very large, and they are for the most part unknown to each other, commercial methods and tests must prevail, and the element of mutuality becomes less dominant and too diluted to justify alone an exemption from taxation'.163 Given the size of many mutual undertakings, especially in the ®eld of insurance, size was perhaps not the dominant consideration it appeared to be. Moreover, most of the society's transactions took place with their own members, very few of whom, being working class, were liable to taxation. Therefore any attempt to tax the `divi' as if it were a shareholder's dividend would merely have produced a large number of claims for repayment. Although the co-operatives had corporate status, this did not change their tax position. In the absence of a tax speci®cally on corporate pro®ts (except for the corporation tax of 1920±4) pro®ts put to reserve were still regarded as the property of individual shareholders. So again, the special nature of the membership gave some protection under existing law in addition to the question of mutuality. The campaign against the co-ops, which had started in the later nineteenth century, became stronger in the 1920s and 1930s. Although the co-ops were never as successful as the chain stores, they accounted for one ®fth of the national sales of groceries and provisions in 1920.164 While they had an impressive membership and clear economic success, co-operators did not ®nd a place within the mainstream of the labour movement. They were never as centrally placed as the trade unions, for example, in the defence of working-class interests, nor was their activity elevated enough to carry the broader aspirations of the movement. Attitudes to them tended to be rather patronizing. Dalton came across them at a demonstration in London and found that `it is dif®cult to understand how they do as well as they do. But no doubt they have a certain shrewdness in business matters.'165 The co-operators made up 163 164

165

Ibid., p. 166. Neil Killingback, `Limits to Mutuality: Economic and Political Attacks on Cooperation during the 1920s and 1930s' in Eileen Yeo (ed.), New Views of Co-operation (London, 1985), pp. 207±28 at p. 211. This is a very useful study of the challenge to the co-op in this period. Dalton, Political Diary of Hugh Dalton, 3 May 1919, p. 12.

50

Struggles within a liberal inheritance, 1906±1940

for this relative isolation by being forceful in the defence of their interests. Raymond Streat, the representative of the northern textile employers, saw this at ®rst hand in the Commons in April 1933: `I arrived at the house at 5.30, to ®nd the whole place overrun by a couple of thousand, more or less, enthusiastic co-operators, bent on impressing their respective members of parliament with their determined opposition to the taxation of co-operative societies, a project which the government have seemed to be contemplating.'166 Although the revenue involved was small, Neville Chamberlain pressed ahead with the removal of the co-operatives' mutual status in 1933, ranking them similar to joint-stock companies with their trading surpluses equivalent to the pro®ts of a private business. However, as a practical outcome, the surplus put to reserve was taxed as pro®ts, but the `divi' remained free of tax. Therefore the crucial component of the co-ops' operations for the working class consumer ± the element of forced saving ± remained intact.167 Keynes, Labour and the onset of war After defeat in 1931 a new generation had to plot Labour's future. Dalton was the key ®gure in these discussions, and his Practical Socialism for Britain, published in 1935, was the outcome. This policy-making was largely concerned with how to remedy Labour's inadequate control over money ¯ows in the economy and also with working out how a socialized economy might operate ef®ciently. Opinions have varied about the effectiveness of this work and its contribution to the post-1945 government. Pimlott has seen this period (and Dalton's book) as a positive achievement, involving both a commitment to planning and also moves towards Keynesian economics as a servant of that process: `Before the end of the decade, and unknown to the vast majority of its members, the Labour Party had quietly adopted an expansionist approach to economic policy that was at least semi-Keynesian.'168 Alan Booth has taken a more critical view, on the grounds ®rst that since much of the work was applied to fully socialized systems it did not have much bearing upon an economy with a substantial private sector, and, more importantly, much of the discussions about planning did not prove to be of much value in the post-1945 period.169 Some of the traditional concerns 166 167 168 169

Raymond Streat, Lancashire and Whitehall. The Diary of Raymond Streat. Vol. I, 1931±39, ed. Marguerite Dupree (Manchester, 1987), p. 230. Killingback, `Limits to Mutuality', p. 224. Pimlott, Dalton, p. 224. `Despite all the time spent on economic planning, the mobilization of experts and the preparation of countless position papers before 1939, when Labour came to of®ce its

Keynes, Labour and the onset of war

51

remained in this new activity. Both Dalton and Jay emphasized the importance of capital taxation in general and death duties in particular for the pursuit of equality, especially if owners of nationalized industries were compensated for the loss of their property.170 What is of greater interest here is not so much the value of the work in the 1930s for the subsequent Attlee governments, but the degree to which it gave Labour an entreÂe into the problems of public ®nance associated with the war. When war broke out Labour's economists showed just how far away they were from the ideas and priorities of Keynes, who was the key ®gure in the process. For Labour the problem was essentially one of distribution, and the need to stop the rich from pro®ting from the war by lending to the government. Dalton proposed an annual capital tax,171 and this was also the theme of Douglas Jay's party pamphlet, Paying for the War, which was published in 1940. Keynes's perspective was different. Like Labour he was concerned with in¯ation, but his interest was not in the ®rst instance directed at the way the wealthy might exploit problems of war ®nance, but rather with devising suf®ciently palatable forms of direct taxation to absorb excess spending power so that in¯ation was as low as possible. This meant taxing working-class incomes which had got off lightly in the First World War, whereas the lost opportunity of 1914±18 that Labour wanted to revisit was the failure to implement a capital levy. The difference was best conveyed by an interview of Keynes by Jay in the Daily Herald about Keynes's plans for taxation in the form of compulsory savings (post-war credits as they became). Keynes's theme was the danger of working-class spending power, increased by war work, producing damaging in¯ation: `Much better that the working class should have savings than that they should be deprived of the value of their earnings by in¯ation, even if the in¯ation is temporary.' Jay was interested solely in preventing the growth of rentier incomes arising from government borrowing. In his summing up of the discussion Jay latched onto a point which Keynes had made in passing (and had indicated that it was of secondary importance), about not paying interest on the compulsory savings of surtax payers: `I am glad Mr. Keynes is now prepared to wipe out all interest on the

170 171

leaders were clueless about the principles and purpose of its central policy': `How Long are Light Years in British Politics? The Labour Party's Economic Ideas in the 1930s', Twentieth Century British History, 7(1) (1996), pp. 1±26 at p. 25. See Dalton, Practical Socialism, p. 337 and Douglas Jay, The Socialist Case (London, 1937), pp. 237 and 275. Dalton's ideas were contained in a speech in the Commons in April 1939. H. C. Deb., 346, cols. 1527±30, 26 April 1939.

52

Struggles within a liberal inheritance, 1906±1940

compulsory savings of the surtax class. This latter point is surely vital.'172 The gulf between the Labour economists and Keynes about what the key issue of war ®nance was can also be grasped by the way in which Keynes sought out the views of the working class on taxation, saving and in¯ation through the enquiries of the sociologist Charles Madge in a number of English towns rather than through the Labour Party. In those reports Madge himself drew a distinction between the almost instinctive suspicions of those in the labour movement towards schemes for savings, and the more positive attitude of the ordinary workers. Keynes also had fruitful discussions with the TUC, but the Labour Party was unsympathetic to his proposals, fearing that such use of taxes might lead to evasion and be disruptive of the existing administration.173 So for all the acquaintance with Keynes's writings the Labour Party had little to contribute to the core questions of war ®nance. Labour did not ®nd in the Second World War a vehicle for their own ideas developed in the 1930s; rather, Labour was the bene®ciary of events it could only respond and adjust to rather than have a hand in shaping. The `culture' of tax politics In the inter-war period Labour seemed to have exhausted the inheritance of progressive ®nance and not replaced it with anything. But in other respects it was a time of growth and progress. The local parties had spread dramatically in the 1920s, and membership had risen to 215,000 by 1928.174 This provided a core to the party's activities along with the steady increase in the popular vote. It meant that the fundamental sense of an inevitable progress was not destroyed by the experience of the MacDonald government of 1929±31. A new generation was active in the policy-making of the 1930s for whom politics was not shaped by the relationship with the Liberals but by the expectation that power was to be achieved and enjoyed. But in terms of what the Labour Party was to do with power, how it was to turn its broadly de®ned aims into speci®c policies which might give meaning to that philosophy, there seemed much to be done. However, the inter-war years had provided 172

173 174

The interview was in the Daily Herald (of which Jay was the City editor) of 7 December 1939 and is reprinted in Keynes, Collected Writings, vol. XXII (London, 1981), pp. 87±9. See the statement of the Labour Party policy committee of April 1940, `Prices, Taxation and Saving', which had an appendix on Keynes's plan. As Pimlott has written, `the mushroom growth of local party organization was not luck. It was one of the most remarkable political achievements of the twentieth century': Labour and the Left in the 1930s (Cambridge, 1977), p. 137.

The `culture' of tax politics

53

some valuable insights into the way tax politics worked, that is the kind of problems and demands which the party would face in using a major area of government in order to develop its political appeal. How far intellectual effort paid off in tax matters was an open question. According to Keynes, `Bright ideas in the realm of taxation are rarely worthwhile.'175 Certainly, Labour speakers had plenty of experience of the dif®culty of explaining their tax policies in the popular domain. Labour's approach was to reassure audiences that the impact of its tax plans would be con®ned to the wealthy few. But this was hard to achieve. Pethick-Lawrence remarked: I know that in the course of political campaigns elderly ladies who have got £1,500 altogether, have been told that a capital levy would take it all away ± which of course is wholly without foundation. That has been spread about very largely and, of course, if this is to be misrepresented in that way you will get a very large psychological objection to it. I think it is not an objection on the facts, but on that misrepresentation of the facts which has been put before these people.176

As Jarvis has rightly pointed out, it was the achievement of the Conservatives to `spread its defence of vested interests to encompass the whole community' and nowhere was this more sharply evident than in the tax issue which had frustrated Pethick-Lawrence.177 But Labour did not suffer alone in facing an uphill struggle to combat what it saw as a wilful misunderstanding of its proposals. The Conservatives got into trouble with de-rating in 1929, when exemption of businesses under that policy coincided with a new assessment of property values under the 1925 Rating Act. It appeared to many that the consequent increase in rents was actually caused by de-rating of business, and no amount of explanation could alter that: `As a result, any reference to de-rating at Conservative meetings has produced vigorous charges from people in the audiences that the government scheme, while giving a substantial present to prosperous industrial ®rms, has raised the rents of the poor.'178 These experiences showed that tax policies were not legitimated internally: it was not the precise details of a tax and its impact which would determine its acceptability, but the wider trust in the political group putting that proposal forward. As Brailsford had understood, it was no use specifying particular thresholds at which a tax might operate 175 176 177 178

Keynes, Collected Writings, vol. XIX, pt. 2, p. 688. Colwyn, evidence, vol. 2, q. 6925, p. 458. David Jarvis, `British Conservatism and Class Politics in the 1920s', English Historical Review (1996), 111(440), p. 82. The Times, 17 May 1929.

54

Struggles within a liberal inheritance, 1906±1940

if the broader intentions of the party were suspect. Labour had also tried to solve this problem by arguing that the capital levy was not in itself an act of socialism; it was a tax device to solve a budget dif®culty. As MacDonald tried to reassure his audience in the 1923 general election, the levy idea `had come from businessmen and economists like Cambridge professors'.179 But because of the uncertainty about Labour's larger purpose, it was a very different project in the public mind than one that a Conservative government might have carried out. It was therefore not surprising that there were those who found the going easier in the other arena of tax politics, namely the of®cial investigations through royal commissions and committees of enquiry. Lees-Smith, a member of the Colwyn Committee, `was bound to say that they found that the ordinary electioneering argument which had been used against it [the capital levy] on the platforms did not stand the test of cross examination over the table'.180 The quasi-academic atmosphere suited Labour well, because in its exploration of policy issues it mimicked government activity. It believed in investigation and discussion to `solve' problems; it liked to involve `expert' witnesses and produce memoranda and reports. In 1920 the Parliamentary Committee of the Labour Party and the TUC had organized an enquiry into the cost of living, bringing in appropriate outsiders to give expert evidence, including Josiah Stamp. Although some of the reports had mixed receptions, the process indicated the way ahead: `our experience in this enquiry has con®rmed us in the view that social investigations are of the greatest value to the Labour Movement and that adequately equipped research is one of the most important needs of organized Labour'.181 For the similar Joint Committee of the Labour Party and the TUC on family allowances set up in the 1920s, W. Milne Bailey of the TUC envisaged that the proceedings should be like a royal commission, with the taking of evidence from important experts.182 The proceedings of the of®cial enquiries often showed a large gap 179

180 181

182

The businessman was William L. Hichens of Cammell, Laird and Co. in The Observer, 8 February 1920; the Cambridge professor was Arthur C. Pigou in A Capital Levy and a Levy on War Wealth (Oxford, 1920). LPAR, 1927, p. 245. `Report of the work of the committee' in Bodleian Library, Greenwood Papers, MS. Eng. c. 6192, f. 18. Not everyone agreed. Amongst Greenwood's papers at this point is a clipping from the Railway Review giving the splendidly forthright views of a Councillor Tom Kirk in an article headed `The Cost of Living Report ± A Criticism': `The Labour movement suffers today from an invasion of high brows. These intellectuals come out from quarters like the London School of Economics, and consider themselves privileged to show Labour how to do it. The workers are impressed by their ``time'' but later on discover their shallowness.' Susan Pedersen, Family Dependence and the Origins of the Welfare State (Cambridge, 1994), p. 197.

The `culture' of tax politics

55

between popular and expert understanding of tax issues. During the Colwyn Committee proceedings the TUC had to be led by the Labour representatives in drawing out the wider implications ± how a levy would hit accumulation of wealth without diminishing incentives ± and was at sea over the important question of the yield of a levy. Its spokesmen admitted: `we approached the matter de novo as a representative body of working people. We did not study anyone else's theories at all; we came straight to it ourselves in our own way.'183 Charles Edwards, of the South Wales Miners' Federation, also found that some of the beliefs which sustained their outlook in that region ± the burdens on sons keeping house after the death of the father, for example ± were not seen as being unique to miners and were therefore treated with some scepticism.184 But working-class organizations were not alone in ®nding their often intuitively-held views on tax dif®cult to sustain against expert questioning. The shopkeepers, for example, who had an axe to grind over the co-op, found it hard to make much headway against Stamp, who showed that their case foundered on the low earnings of many cooperators that secured their practical exemption from tax. And the narrowness of view which strengthened working-class beliefs was evident at the other end of the scale. The Vestey family has become well known for their avoidance of tax on their meat empire. An example of the family thinking which became well known in tax circles came from Sir William Vestey when he was complaining that he had to pay much higher tax as a British citizen importing meat from South America than an American businessman also exporting to Britain. The commission members found it hard to come to terms with Vestey's thinking, which was, essentially, that he did not want to pay any tax: Question 9550: Is the only suggestion you can make for getting out of this dif®culty that where we ®nd an English resident has an income derived from an import business he should be free from income tax? [v e s t e y :] If you put it in that way it does not sound right. Question 9551: It does not, does it? [v e s t e y :] No.185

Which was the more important, the easily ridiculed but ®rmly held popular prejudice, which had to be weighed so carefully at election time, or the more forensic examination of tax proposals and systems, which some in the labour movement seemed to ®nd a more congenial setting for their thinking? Rarely did the commissions and enquiries produce 183 184 185

Colwyn, evidence, vol. 2, para. 22, p. 588; vol. 1, q. 3356, p. 242; vol. 2, q. 4948, p. 361. R. C. on Income Tax, evidence, part 1, q. 2626, p. 124. R. C. on Income Tax, evidence, part 1, qs. 9550±1, p. 455.

56

Struggles within a liberal inheritance, 1906±1940

results in the form of speci®c recommendations then acted upon. Often they were attempts to come to grips with tax changes which had already taken place through the urgent necessity of war, or were there to absorb and de¯ate interest in certain schemes. In the light of these points, and the dif®culties noted earlier in winning consent for taxes, Snowden's approach in the 1920s served Labour well, even if it was rather sterile. It was one thing to propose a super-tax with hitherto unconsidered high rates in 1906 when a Liberal government had taken of®ce at a time when ®nance seemed to provide opportunities as much as suggest constraints; it was quite another to do so in the 1920s when the Liberals had fallen by the wayside and the state's power to tax had been vividly demonstrated by the war to be a potentially dangerous phenomenon for the peace. Snowden's presence as chancellor defused anxieties to the extent that Labour was able to take of®ce twice. Does this mean that the efforts of Dalton and the others who thought of themselves as ®nancial experts within the party were largely wasted? Certainly there was little to show for their efforts in terms of positive achievement, and sometimes the dabbling in tax policy had actually served to discredit the party, as in the case of the surtax. It looked as if the ideas had not been that bright. Moreover, while it was one thing to be an expert in party circles it was quite another to be so regarded more widely. Dalton never had Stamp's authority and it was clear that being an economist, even if specializing in an area similar to the policy issues of the 1920s, was not enough. Tax required a willingness to be involved in the administrative details to carry weight. But the assessment should not be too negative towards the `intellectual' side of tax politics. To take the role of the royal commissions and parliamentary enquiries ®rst. Although their tangible results may have been slight, they were an important area of government in which the Labour Party had to participate effectively. These enquiries created a body of ideas and expertise which were drawn upon well into the future. Some of the discussions at the Royal Commission on Income Tax were still being discussed on a similar commission in the early 1950s. Labour had to make its mark in this material if it was to be taken seriously as a party of reform, and it needed ideas and suggestions to do so. There was a further reason why the party had to develop ideas of tax reform, which was to do with the character of the tax administration. British tax administration was highly regarded. This encouraged innovation because it meant that administrative problems would rarely be insuperable. The case of property ownership is instructive. English property was complicated by tenures which were far removed from

The `culture' of tax politics

57

individual, absolute ownership. About 16 per cent of property was held in settlements or trusts. These posed considerable problems of valuation for graduated taxes on wealth. To give an obvious example, a life tenant would have found it dif®cult to value his interest because his likely duration was clearly unknown. According to an Inland Revenue memorandum, `Where the patriarchy owned cattle, the modern man owns a lease on a cowshed and an option to purchase cattle from abroad; in the complexity of society the wealth of individuals comes more and more to be represented by limited or contingent rights and shares ± the title deeds of wealth ± which have to be followed in all the convolutions they assume.'186 Yet in the case of the capital levy and the war-wealth levy (the latter more complex than the former in its need to measure changing values) questions of valuation were not regarded as insuperable and did not constitute blockages to reform. Alongside this expertise went a conservatism, which was such an obstacle. A dimension of this conservatism was itself the product of the very sophistication of the tax machine itself. Tax of®cials were unhappy about compromising existing standards by any new measure that was at all approximate in its assessments and about diverting resources from well-established taxes in the pursuit of further change. But, as was noted in the case of the 1906 Select Committee on Income Tax, the Inland Revenue was conservative in a more straightforwardly political way, too. As an example, its commentary on Hubert Henderson's proposal for a reinheritance duty (which attempted to distinguish, aÁ la Rignano, between the wealth an individual created himself and that which he inherited), pointed to the excessive burdens being placed upon the rich evident from the tax evasion already taking place. On one reading it appears to be a perfectly reasonable warning about the consequences of extending the tax on inheritances, but the straightforward political message cannot be missed: This growing tendency to legal evasion is evidence that cannot be ignored that there is not much further scope for increases of death duty taxation in a country where the payment of taxation to the state is generally acknowledged as a duty. A general tendency on the part of taxpayers, especially those of social standing, to evade a particular tax at least raises the question as to whether the tax is too heavy to be regarded as a fair apportionment of the national burden and is at least a warning that an addition of taxation not to meet increased national needs but to carry out an anti-rich policy may be attended by unexpected results in the direction of evasion.187 186 187

`Case against the Capital Levy ± Practical Aspects', 1919, in PRO IR 75/110, `Memoranda of Board of Inland Revenue'. `Note by Inland Revenue Department on Mr H. D. Henderson's Re-inheritance Duty', PRO IR 64/62, November 1926.

58

Struggles within a liberal inheritance, 1906±1940

The in¯uence of the tax administration was felt not merely over the details of policy but also exerted more widely. In a seminal analysis of taxation and politics in the post-war period, Daunton has argued that the state was not the servant or victim of any particular interest, either from right or left, but determined tax policy in the light of its own established de®nitions of fair treatment.188 The Revenue felt that it was crucial that taxes should be seen to be justi®ed in ®scal rather than in political terms: `successful administration of any large tax requires that the great majority of persons called upon to pay it should be able to feel that it is a ®scal, as distinguished from a political, measure and therefore their assent can be reasonably expected and given'.189 This equity, argues Daunton, was pragmatic in being based on the balance of established interests rather than upon their modi®cation.190 If Labour was going to modify the tax settlement it would have to be able to launch a reasoned case before it could do so. With a tax administration which was both well developed and capable of supporting tax reform, but which was run by of®cials who were conservative in their attitude both towards tax administration itself and to the distribution of income and wealth, there was a need for the Labour Party to have clearly reasoned views on tax promulgated by individuals who felt, through their expertise, to be con®dent in pressing their case. Dalton's record in the 1920s may have been ¯awed, but his activities were vital if the party was to ful®l its own expectation of how it was to function in the development of reform. But Labour reformers had the broader problem to address in the 1920s that support for tax changes was hard to achieve on the basis they sought it. They did not feel they were asking for any particular act of faith, merely trust that Labour could discharge a policy which had received support from beyond the party. Yet time and again, Labour had to deal with suspicions and anxieties from those who, according to Labour, had little to fear. Tax questions especially, perhaps because they were so central, seemed to raise general issues of trust which were hard to resolve by reference to the speci®cs of taxes themselves. It was how Labour was going to use the revenue, rather than ¯aws in the tax ideas themselves, which seemed to cause such unease. This was not helped by the way in which Labour's tax policy seemed rather exposed by the later 1920s, because the anticipated connection between the burden of the 188 189 190

Daunton, `How to Pay for the War', pp. 915±19. Board of Inland Revenue, `The Practicability of a Capital Levy', app. xxii, para. 3, Report of the Committee on the National Debt and Taxation. For a discussion of the use of `equity' in tax questions ± and the view that it has inhibited the exploration of what might be desirable post-tax distributions of income and wealth ± see Brian Barry, Political Argument (London, 1965), pp. 155±8.

The `culture' of tax politics

59

debt and popular feelings ± namely a burdensome income tax ± had not materialized. At times it appeared, as The Nation suggested, that the party was starting with a tax and then looking for ways to spend it.191 This impression of Labour as a `high tax' party had been validated for many of its opponents by what had happened at local level. Where Labour controlled Boards of Guardians they provided relief for striking workers, while the motto of `Poplarism' was, according to its leader, George Lansbury, `decent treatment for the poor outside the workhouse and hang the rates'.192 Other local Labour leaders were critical of supporting the unemployed without reference to the rates; Herbert Morrison, then leader of Hackney Council, thought it would put unreasonable rate burdens on the working- and lower middle-class taxpayers.193 Such a strategy `roused intense passions, largely because the guardians were rate-®nanced, so that ``lavish'' relief policies seemed to involve the taxation of one class to ®nance the idleness of another'.194 The association of Labour with higher rates was not con®ned to Boards of Guardians providing relief for the unemployed or for strikers, but extended to local councils more widely. Morrison was ®ercely criticized for his council's lavish expenditure, while Ernest Simon drew on his own experience from Manchester City Council when he noted that one of the few areas of party difference lay in the way that Labour instinctively supported new expenditure while the Conservatives resisted it. This was bound to have an impact in a context where, according to Simon, `there is a great deal of truth in the saying that the chief thing a voter wants to know is: ``If you are returned, shall I have to pay as much as I do now?'' '195 One solution for the party nationally was to do as Snowden did, which was to damp down any hopes of tax reform and ride upon the expertise of the bureaucracy, as had happened in the 1924 budget. But except in the special circumstances of the ®rst Labour government, that was not a very inspiring approach for a party aiming to change things in one degree or another. Labour only saw being a high-tax party as a problem in the strictly practical sense of frightening off the voters, and 191 192

193 194 195

The Nation, 27 August 1927, p. 680. Cited in John Rowett, `The Labour Party and Local Government: Theory and Practice in the Inter-war Period' (Oxford University D.Phil. thesis, 1979), p. 141. Rowett provides a useful exploration of the issues surrounding local government ®nance in the 1920s, pp. 117±76. Bernard Donoughue and G. W. Jones, Herbert Morrison. Portrait of a Politician (London, 1973), p. 47. Patricia Ryan, `The Poor Law in 1926' in Margaret Morris (ed.), The General Strike (Harmondsworth, 1976), pp. 358±78 at p. 361. Donoughue and Jones, Morrison, pp. 56±7; E. D. Simon, A City Council from Within (London, 1926), p. 198.

60

Struggles within a liberal inheritance, 1906±1940

this was hardly going to be an overriding priority for one which aimed at aligning the population's conception of its responsibilities to the common good. A different way forward, glimpsed by the ILP, was to link taxes with a practical function of immediate appeal to working-class interests, such as social reform and especially family allowances. To have given tax a more explicit instrumental purpose would have shifted questions of trust and legitimacy to a wider ®eld. But the connection could not be made because the social policy component was blocked within Labour's policy-making efforts by the trade unions. Because tax questions were so sensitive with the electorate they tended to be resolved by issues beyond the tax itself. Once the war was over and the budget stabilized, Labour's problem was that it could not ®nd a new rationale for its tax proposals devised at the end of the war to carry them through into the later 1920s. Labour had to ®nd a wider justi®cation for its tax strategy within which it could be embedded, otherwise its conception of tax consent would continue to be unhelpful.

2

The changing balance of tax interests, 1940±1954

Many of the broader political dif®culties which had dogged Labour's tax strategy in the 1920s appeared to have been removed by 1945. The doubts about Labour's capacity and purpose, which had shown through in criticisms of the party's tax policies, had been swept away by participation in the wartime government and electoral triumph. Because the Second World War had, domestically, been a more stable experience than the First, it encouraged the translation of its methods of government into peacetime.1 The possibility of controlling the economy, which was at the heart of Labour's thinking, had been strikingly con®rmed by wartime government. But, as in 1914±18, the taxing strength of the state had increased far more in wartime than would have been conceivable in peace. A party pamphlet commented in 1940, `the limit of taxation is what you can get away with ± in the atmosphere of war the task is much easier'.2 By 1941/2 incomes at all levels were facing higher taxes. Even those on £500 a year only retained 69 per cent of their earnings after tax, whereas they had kept 86 per cent in 1937/8. Higher up the effects were greater still, and at its simplest it was impossible to earn a post-tax income of £5,000 even at a salary ten times higher. These tax increases were especially dramatic in terms of income tax. By 1941/2 the standard rate had doubled from its peacetime level of 5s in the pound, and with surtax the top incomes were taxed at 19s and 6d.3 These brutal increases also improved the equity of the tax system, in the sense that the dip in tax liability that occurred above the lowest level of incomes (under £200 per year) and bene®ted those on earnings going up to £1,000, had largely been corrected. At incomes above £200 a year the curve for tax payments became more progressive, and then con®scatory at the highest levels. The Economist concluded its analysis of 1

2 3

Even though these may have been, in the longer term, to England's disadvantage. See K. O. Morgan, `England, Britain and the Audit of War', Transactions of the Royal Historical Society, 6th ser., 7(1997), pp. 131±53 at pp. 146±50. Prices, Taxation and Saving (1940), p. 15. G. F. Shirras and L. Rostas, The Burden of British Taxation (Cambridge, 1942), tables 12B and appendix to pt II, table 1.

61

62

The changing balance of tax interests, 1940±1954

wartime taxation by arguing `Whatever else may be its defects, substantial equity has been achieved. This is not the least of the social triumphs of the war; and it is one that should be retained when the war is over.'4 It was not only a question of the rates but of the structure of taxation. If the aims of wartime ®nance were to be ful®lled ± namely that the power of all classes to consume had to be reduced without, as a consequence, those groups pressing for compensation in higher pay ± then the instrument for this had to be a blend of cost-of-living subsidies and direct taxes. Indirect tax increases would have threatened the stabilization of the cost of living. This in itself was a break with the past. As Keynes noted at the time of the 1941 budget, it had been assumed before the war that the only way to get signi®cant amounts of tax out of workers was to tax their consumption, but `There are now strong indications that public opinion, especially in labour circles, is opposed to further indirect taxation and prefers direct taxes.'5 The 1941 budget was the critical one of the war because of its determined attempt to close the in¯ationary gap.6 This required further taxation of lower incomes beyond that achieved in the earlier war budgets. The chancellor, Kingsley Wood, and his advisers gave considerable thought to the form this additional taxation should take. There was a strong view that to use the existing income tax would be a mistake. Wood was afraid that the public would `recoil' from an unimaginative budget.7 Keynes proposed a war surcharge, to be levied on the net income after other taxes had been taken off. Rather than simply intensifying the existing workings of the income tax it would be a fresh tax, which would thereby identify it as a war mechanism: `It is politically easier for the very fact (of which Sir G. Canny complains) that it is, in form, distinct from income tax and is a war surcharge, carrying therefore on its face more prospect of abolition after the war.'8 But the Inland Revenue was a match for Keynes's novelties. As a point of principle it felt that once the appropriate levels of income tax had been set, there should be nothing left which should bear a further burden; there could be no further taxable capacity in the residue left after income tax. This was in contradiction to the whole theme of the budget ± namely that there was still more to come from the average taxpayer ± and the argument which weighed more powerfully with the Treasury was the danger of `serious breakdown in the tax machinery' if the war surcharge 4 5 6 7 8

`The Burden of Taxation', The Economist, 24 October 1942, pp. 504±5. `Pre-budget Papers', J. M. Keynes, `Note on Budget IV', PRO T 171/355. R. S. Sayers, Financial Policy 1939±45 (London, 1956), p. 23. Note of Kingsley Wood to Horace Wilson, PRO T 171/355. J. M. Keynes, `The Potential Yield of Direct Taxation', 29 December 1940, PRO T 171/ 355. Canny was chairman of the Board of Inland Revenue.

The changing balance of tax interests, 1940±1954

63

went ahead.9 This had signi®cance for the post-war period. As Keynes had argued, a special wartime addition to income tax would have been more acceptable during the war because its removal at the end of the war would have been more likely. The persistence of a peacetime structure without a special wartime addition therefore removed some of the pressure for a straightforward restoration of peacetime taxes. This was an important, but unintended, contribution to Labour's ambition to maintain the momentum of wartime egalitarianism, even though, when that time came, the Inland Revenue, in the interests of tax equity, wanted to revert as far as possible to pre-1939 conditions across the whole range of taxpayers. The incorporation of the working class into income tax demanded a set of administrative arrangements to conform to the facts of their lives, which made use of conventional methods inef®cient. Deduction at source was required to prevent frequent job migration from taking the worker out of touch of the tax of®ce, while the tax demand had to stay in rough balance with an income that often ¯uctuated. Although employers had refused to deduct tax at source during the First World War for fear of damaging industrial relations, they were persuaded to do so during the Second, and tax was paid up to 1943 on the earnings of the previous six months. Some trouble was taken introducing the heavier weight of taxation to the workers, with broadcasts on the subject from Kingsley Wood and John Hilton. Hilton was chosen because he was, according to R. V. N. Hopkins of the Treasury, the `supreme broadcaster from the point of view of possessing the con®dence of the working classes'. The BBC was of the same mind, helped by their own view of the workingclass mentality: `we are seeking to catch the interest and win acquiescence from masses of simple people who have never read a closely reasoned column of a newspaper in their lives'. Hilton's talk stressed the general argument that taxation was better than high prices, and that wage increases should not be pursued as a remedy for having to pay more tax.10 Because it was based on the average of a six-month earning period there was also no reason to hold back from doing overtime for fear of incurring heavier tax, which was a foretaste of the kind of arguments that developed after 1945. The last part of the jigsaw was put in place in 1943 with the introduction of pay as you earn, initially intended only for manual workers but extended to salaried staff as well. This deducted tax week 9 10

`Note by the Inland Revenue on a Surcharge on Net Taxable Income', 5 December 1940, PRO T 171/355. `Broadcasts about Income Tax by the Chancellor, J. M. Keynes and John Hilton, 1941', PRO T 172/1978.

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The changing balance of tax interests, 1940±1954

by week from current earnings according to allowances received for earned income and family responsibilities, so that at the end of the year, as long as pay had been roughly stable, the tax liability was discharged. This was especially attractive when workers were worried that, at the end of the war when trade might slacken, they would be faced with a tax bill re¯ecting a previous year's higher earnings when they were unemployed or on lower pay. It was widely regarded as a triumph of administrative ingenuity by the Board of Inland Revenue.11 This outcome was important because in the extreme circumstances of war the attractions of having a simple ¯at-rate tax on pay were substantial. To have allied current tax payments deducted at source with full recognition of the different family responsibilities of the mass of new taxpayers was not only a formidable achievement but also a further element in ensuring that wartime tax arrangements could be continued into the peace. Important questions still remained about how the balance of tax interests was going to be struck in peacetime. Partly this would turn on how Labour interpreted its post-war role. Would the greater weight given to working-class interests be used aggressively to tax the earnings and property of the rich; or would the taxing power of the state be presented as operating more in the pursuit of full employment and stable prices, ignoring particular class advantage? These were the two sides to Labour's outlook: on the one hand the pursuit of an oppositional style which took advantage of the ebbs and ¯ows of power to press home an advantage as part of the continuing competition between interests, and on the other the achievement of a more integrative appeal where these interests would accept the greater good being achieved by the state for all. Certainly, the familiar contrast between Cripps and Dalton, the former the super-administrator planning the socialist society from above and the latter the `anti-rich' egalitarian, has a resemblance to this dual identity in Labour's approach. In part, too, the outcome was going to be determined by the changing role of the state in the economy as peacetime became established. While controls over the economy were an essential part of the transition to peace, it was on private industry and the conventional motivations of a private economy that the Labour government was going to depend. It was widely recognized that in such conditions high taxation could be self-defeating, in sti¯ing the incentive to work and produce. While there was no agreement about what this meant in terms of speci®c tax policies it was clearly going to shape the changes made by chancellors after 1945. 11

`Income Tax (Employment) Bill, 1943. Papers leading to the Introduction of the Pay as You Earn Scheme', PRO T 171/366. Keynes thought that `The Revenue deserves to be congratulated on a very ingenious scheme', and the trade unions were also grateful.

The changing balance of tax interests, 1940±1954

65

The position of the working class in the tax system and in the economy was very different during and after the war from what it had been earlier. Then, working-class consumption had been interesting chie¯y for its de®ciency. Policies to boost working-class spending power, such as family allowances, were supported both for the ®ght against poverty but also as a stimulus to the economy. During the war and its aftermath, working-class spending power became one of the forces of in¯ationary pressure on the economy. The spending and saving of working-class incomes were part of the balance between consumption and production which determined the existence and dimensions of the `in¯ationary gap'.12 In order to sweeten the pill of higher wartime taxation, part of it was taken in the form of compulsory saving, which, it was promised, would be paid back at the end of the war, as a post-war credit. But after 1945, when the anticipated depression failed to materialize and instead in¯ationary pressure was the main condition of the economy, these credits were not repaid. What had originally been conceived as an instrument of saving was now feared to be a means of spending. The failure of the government to repay the credits was frequently criticized during the 1950 election.13 Spending from savings was taken as seriously when it was practised by the lower paid as it was when it was done, perhaps more conspicuously, by the rich: `the extent to which the rich were able to maintain a high standard of life by capital gains was a fruitful source of discontent; but from an economic point of view, the high ®gures of withdrawals of small savings had also been very signi®cant.'14 To use the budget as a means of containing in¯ation had distributional signi®cance. Labour's budgets generated regular surpluses in order to reconcile full employment with stable prices. These surpluses, to which non-working-class taxpayers contributed a disproportionate amount (under progressive taxation), were an important contribution to working-class standards of living. The innovation of the budget as an instrument of economic management therefore contained advantages that were not necessarily captured by analyses of bene®ts received for taxes paid.15 But how would this be communicated to the working-class 12

13

14 15

There is a useful treatment of this in Ian Little, `Fiscal Policy' in G. D. N. Worswick and P. Ady (eds.), The British Economy, 1945±50 (Oxford, 1952), pp. 159±87 at pp. 161±3. S. B. Chrimes (ed.), The General Election in Glasgow in 1950 (Glasgow, 1950), p. 43. The issue ran on into the 1950s. In 1958 the Bromsgrove Trades Council noted that `we regard the non-payment of post-war credits as one of the worst con®dence tricks of all time'. TUC archive, 411.13, `Post-war Credits'. Comment in the economic policy committee of the cabinet, 10 October 1949. PRO CAB 134/220. Little, `Fiscal Policy', p. 175.

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The changing balance of tax interests, 1940±1954

taxpayer? The dif®culty of getting taxpayers to look at the details of particular taxes, to understand the impact of taxes taken together and to appreciate the burdens being carried by others had all been evident in the tax enquiries of the 1920s. There is no sign that this became any easier in the 1940s. When government ministers were trying to convince workers of the need for restraint in pay they implored their audiences to remember the large slice taken in taxes from higher incomes and pro®ts. In 1948 the cabinet's economic policy committee noted that `There was a widespread failure to appreciate the practical dif®culties of limiting pro®ts and the high rates of tax already imposed on pro®ts and dividends. The TUC might be asked to assist in educating trade union members on these points.'16 The outlook which ministers wanted workers to adopt was set out by Herbert Morrison in connection with wages policy: The workers must be persuaded to abandon the mentality of 19th century capitalism, to realise the social consequences of the blessings of full employment, and to recognize that in our fairly advanced stage of transition to a new social order the ®rst economic duty of each man and woman is to the nation as a whole.17

The position was additionally complicated by welfare. The growth of the state had been underway in the 1930s, and welfare bene®ts, though they may have developed rather erratically, were part of this.18 Colin Clark, one of the economists who helped the Labour Party in its policymaking in the 1930s, showed that while the taxation of the working class increased during the inter-war period they were receiving more by way of social bene®ts in the 1930s than they had been before 1914. In the earlier period they had contributed more to the cost of the social expenditure that bene®ted them, but by 1935 they paid for only 79 per cent of what they received from the state.19 The development of the welfare state after the war increased dramatically the bene®ts in cash and kind received by the poorer groups. Transfer payments, particularly sickness bene®ts, family allowances and payments for school services, increased by 49 per cent between 1946 and 1950.20 But these payments 16 17 18

19

20

Meeting of 10 February 1948 in PRO, CAB 134/216. Cabinet memorandum by Morrison on wages policy, in PRO CAB 129/20, CP (47), 202, 14 July 1947. Roger Middleton, Government versus the Market. The Growth of the Public Sector, Economic Management and British Economic Performance, c. 1890±1979 (Cheltenham, 1996), p. 468. Colin Clark, National Income and Outlay (Oxford, 1937), pp. 147±8. For Clark's career and connections with Labour groups see Elizabeth Durbin, New Jerusalems. The Labour Party and the Economics of Democratic Socialism (London, 1985), esp. p. 103. Dudley Seers, `National Income, Production and Consumption' in Worswick and Ady, British Economy, pp. 35±61 at p. 55.

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ran through complex channels, inasmuch as healthy lower-income families containing drinkers and smokers transferred some of their income (through heavy drink and tobacco taxes) to other working-class families who drew more heavily upon welfare services. The general picture seemed to be that working-class taxation could pay for the welfare state. `The approximate taxes, rates and social insurance contributions paid by lower income group families ± a group covering 80 per cent of the population ± were larger than the whole of current social expenditure.'21 The bene®ts of the welfare state were not meant to be class based, but shared more widely. While the cash bene®ts tended to go to the poorer families, the services provided by the state ± principally in health and education ± were also used by the middle classes. In the 1920s, as has been shown, Labour had faced a major challenge in the psychology of the lower middle classes who saw their own advancement, and the factors that might thwart it, in the same individualist terms held more appropriately by the rich. The appearance of groups within the middle classes more at ease with the state and aware of the bene®ts it could bring had been a phenomenon of the 1930s.22 By creating an interest in welfare there was a chance this dif®culty could be reduced. The war therefore enmeshed the working class more fully in a tax and welfare system which was also more egalitarian than it had been before 1939. To exploit these changes and opportunities the war required Labour not only to show the compatibility between high taxation, high expenditure and an economy where 80 per cent of production was through the private sector, but also to develop the possibilities of achieving a more equal society in those areas of taxation more to do with distribution than economic management. The rich Dalton was, according to his biographer, `the most socialist Chancellor of the Exchequer Britain has ever had'.23 This judgement was based upon Dalton's willingness to push the achievement of equality further than other Labour chancellors were prepared to go. Certainly, as Labour's ®rst post-war chancellor, Dalton publicly advertised that one of his aims was to continue the trend towards a more equal society, 21 22 23

Asa Briggs, `The Social Services' in Worswick and Ady, British Economy, pp. 365±80 at p. 373. Ross McKibbin, Cultures and Classes. England, 1918±1951 (Oxford, 1998), pp. 67±9. Ben Pimlott, Hugh Dalton (London, 1985), p. 452, and chaps. 26±7 for a thorough analysis.

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The changing balance of tax interests, 1940±1954

which the war had indicated was possible. What did it mean, then, to be a socialist chancellor? It meant having a fairly speci®c and intense interest in certain aspects of taxation. From this focus Dalton carved out a niche for himself and paid rather less attention to other, more conventional, aspects of the budget. Dalton was able to exploit an interlude in the budgets of the Labour government between 1945 and the autumn of 1947 when the transition to peace appeared to be smooth and none of the agonies over policy (how to defend the domestic programme at a time of Britain's precarious status internationally) nor over administration (how to organize a planning and budgetary process) had made an impact on government as a whole. As one experienced observer noted in 1952, `Looking back now one can see that many Ministers and senior of®cials showed undue satisfaction, even smugness, during the ®rst year of the Labour government. Everything looked set fair.'24 As resources were transferred from war to peace Dalton was able to reduce taxes and increase spending on social services. At this stage there was no great interest in the use of the budget for longer-term planning. At the time of the 1947 budget, James Meade, the director of the Economic Section based in the cabinet of®ce, sent in a paper on `The Economic Crisis and the Budget for 1947', which discussed not only the immediate issues of the budget ± the need for a surplus to reduce in¯ationary pressure ± but how demand might be regulated through national insurance contributions and the importance of a ®nancial plan looking ahead to future years. Sir Bernard Gilbert, a Treasury of®cial, commented that `My own feeling is that global planning is under a cloud at the moment. There was certainly a good deal of demand for a forward plan in recent debates, but I feel sure that the demand was primarily for a physical plan.'25 Dalton showed no real interest in it either, and in the ®rst three of his budgets the drive for a surplus came largely from his of®cials. So `planning' and `in¯ationary gaps' did not absorb much of Dalton's attention in shaping his budgets.26 What he really spent his time on was drawing up tables of appropriate rates for surtax and aiming at smooth curves of progression in this 24 25

26

D. N. Chester, `Machinery of Government and Planning' in Worswick and Ady, British Economy, pp. 336±64 at p. 341. Meade's memorandum and Gilbert's note of 14 March 1947 are in PRO T 171/389; Meade's ideas are discussed in Alec Cairncross and Nina Watts, The Economic Section, 1939±61: a Study in Economic Advising (London, 1989), pp. 242±3. K. O. Morgan, Labour in Power, 1945±51 (Oxford, 1984), p. 130. See also Pimlott, Dalton, pp. 470±5, for an incisive treatment of Dalton's relations with professional economists in government and the tension between Keynesianism and socialism. See also Alan Booth, British Economic Policy, 1931±1949. Was there a Keynesian Revolution? (London, 1989), pp. 158±63 for the very limited in¯uence of Keynesianism over Labour ministers in the early years of peace.

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area.27 As his private secretary, Burke Trend, explained to the head of the Inland Revenue: `The chancellor is, as you know, fond of graphs, and nothing would please him more than that I should return to you those which you sent him some time ago showing the effect of the ®rst two budgets and that you should let him have them back with a whole series of new hypothetical lines drawn on them.'28 Dalton was as involved with Revenue of®cials calculating the effects of changes in income and surtax and was as dependent on Arthur Cock®eld, the director of intelligence and statistics, as on his own Treasury of®cials.29 Dalton's interest in surtax comes through in his ®rst budget of October 1945 and his third of April 1947. In the ®rst he reduced the standard rate of income tax from 10 shillings to 9 shillings in the pound but clashed with the Inland Revenue over the treatment of the surtax payer. The Revenue view was that all taxpayers should be treated equitably where reductions were concerned; that is, if the income taxpayer was going to get relief after the heavy wartime impositions, so should the surtax payer: `The rule of justice which governed the charge in time of extreme national necessity ought equally to govern the measure of relief when that necessity has passed and a return has to be made to peacetime conditions.'30 This was not Dalton's view at all. He felt that the rich surtax payer would bene®t more than most from a reduction in the standard rate of income tax and that this advantage should be clawed back through raising the rate on surtax payers; he saw no need to act `equitably' in tax reductions. Dalton's annotations to the Revenue's memorandum on surtax show the way his thinking was at odds with theirs: In the history of the income tax there never has been an increase of supertax or surtax at a time when the standard rate of tax was falling and it would be particularly dif®cult to defend such a course in the ®rst post war budget which is looked forward to as one to give relief from exceptional burdens imposed in wartime. [Dalton places a ? at this point]; an increase in a surtax scale already at peak rates would, it is believed, be resented as unfair. [Dalton: by how many?] It would certainly be very damaging to incentive. [Dalton: ?] Damaging to partnerships. [Dalton: the remedy is to become a company].

Dalton was returning to the battles of the 1920s. Lowering the standard rate was misleading because it helped the surtax payer more than the average middle-class income tax man towards whom its bene®t seemed 27 28 29

30

Surtax was the additonal graduated rate on incomes over £2,000. Burke Trend to Cornelius Gregg, 16 December 1946, PRO T 171/389, 181. Douglas Jay has recalled that `with a ®rst class mathematical brain, Cock®eld, aged barely thirty, knew nearly the whole direct tax system in his head, and in Budget discussions would ¯atly contradict ± and silence ± Stafford Cripps and Edward Bridges with a self-con®dence that took my breath away': Change and Fortune. A Political Record (London, 1980), p. 173. Cornelius Gregg, `Income Tax', 13 September 1945, PRO T 171/372.

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The changing balance of tax interests, 1940±1954

to be directed: `This is objectionable both on economic and political grounds (as I pointed out in several speeches in the 1924±29 parliament).'31 In his proposals, Dalton was recommending that the rates for surtax actually be stiffer than in wartime in order to claw back the advantage gained from the reduction in the standard rate. Dalton's view of what was just and equitable was clearly very different from the Revenue's, as it had to be if he was going to transfer the egalitarian trends of war into peace. A variant on the equity approach was that of ef®ciency and consent. An argument which was used frequently against Labour's tax measures (and had been deployed over the capital levy in the 1920s) ran that `The main factor in the success of the British Income Tax administration, and we can claim to be far more successful than any other country, is the ``willingness to pay'' of the taxpayer.' If a genuine grievance was felt, there would be resort to legal means of avoidance.32 This consideration did not weigh heavily with Dalton; it was a reason, instead, for trying to improve the administration of the surtax. A further argument brought into play by the Revenue went to the heart of the identity of the surtax payer. For many in the Labour Party, the surtax payer was synonymous with the rentier, someone who lived off a surplus and did not contribute directly through work to the national economy. This was a crude association, and one not in accordance with reality. Those who depended on investments for 80 per cent of their income ± the rentiers ± made up about one sixth of the total number of surtax payers, and a strong claim was made for the `earners' in the surtax class from the professional and commercial groups in the £5,000±10,000 bracket. In the 1945 budget Dalton's increases only started at the £10,000 a year point and this eliminated over 90 per cent of surtax payers from their effects. Dalton returned to the surtax issue in 1947. It was the item on which he was most categoric, to increase the rates on incomes above £3,000.33 The revenue implications of surtax were insigni®cant. The sort of changes Dalton was contemplating raised about £10 million in a context where the budget surplus was to be around £150 million and where many of the income tax changes involved revenue losses of £50±60 million. Again, it was the Treasury of®cials, and especially Trend, who kept an eye on the surplus that the budget was intended to produce. One of the key aspects of the budget was also developed by the of®cials rather than by Dalton. Dalton had told the Treasury that he 31 32 33

Dalton, `Income Tax and Surtax', 9 September 1945, PRO T 171/372. Gregg to Trend, 29 September 1945, PRO T 171/372. In discussions with his of®cials, 12 February 1947, PRO T 171/389.

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wanted a `direct taxation' budget, but one of the ways in which room for manoeuvre on income tax was created came from an increase in tobacco duty. This was introduced to Dalton by Trend as a way of covering the gap between revenue and expenditure with a measure which could be presented as a solution to Britain's dollar de®cit ± `distinctly attractive; please pursue', noted Dalton.34 In his 1946 budget Dalton also turned to reform of death duties, and this was hardly surprising. It had been a strong interest in the 1920s and was shared by Douglas Jay whose The Socialist Case (1937) had placed a heavy emphasis upon taxation as a way of achieving greater equality. Jay concentrated upon taxing inheritances ± `taxation of inheritances must remain the crux of socialist policy' ± and he also noted that `the tendency of socialists lately to think less of the dispossession of property and more of ``organization'', ``planning'', ef®ciency and so on is in many ways unfortunate. What society fundamentally needs is not so much planning as socialism.'35 Both were also quite happy with the state taking property in payment of duties, especially land.36 This was where the Labour view on inheritance differed from the liberal one. The liberal version was interested in reforming inheritance in order to improve economic ef®ciency and freedom. Parents should be discouraged from hanging on to their estates until their deaths when their children might also be coming to a less active stage in their own lives, but should rather disperse them earlier. This had few attractions for the Labour view, where the aim was not merely to reduce inheritances but also to increase the property at the state's disposal. As particular illustrations of this attitude, Dalton was surprised when visiting the Tennessee Valley Authority in 1946, the jewel of the New Deal, at how little land the Authority owned and how uninterested it was in acquiring any. It also shows through in his strong preference for the nationalization of land, rather than taxation of land values: `The agitation for the taxation of privately owned land values followed a false scent. It led away from public ownership and made even some socialists forget socialism.'37 In the 1940s the Rignano scheme, which Dalton had publicized in his book on inequality published in 1920, resurfaced.38 The purpose of this 34 35 36 37

38

In a note of Trend to Dalton, `Budget', 18 January 1947, PRO T 171/389. Douglas Jay, The Socialist Case (London, 1937), pp. 275 and 237. Hugh Dalton, Practical Socialism (London, 1935), p. 341. Hugh Dalton, The Political Diary of Hugh Dalton, 1918±1940, 1945±1961, ed. Ben Pimlott (London, 1986), entry for 5 October 1946 at p. 387, and Practical Socialism, p. 152. See, for example, the comment by Evan Durbin to Dalton at the time of the 1947 budget: `I hope you will get around to a simpli®ed Rignano scheme before you leave the Treasury.' In `Budget Suggestions by Outside Bodies', 21 February 1947, PRO T 171/ 389.

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The changing balance of tax interests, 1940±1954

was to try to reconcile the severe diminution of inheritances with incentive to earn and the political acceptance of equalization. It did so by taxing with increasing force the passage of estates across second, third and fourth generations. Although Dalton's interests were associated with the Rignano scheme they were, in fact, far more brutal. His proposals as set out in Practical Socialism were threefold: to stiffen the rates of the existing estate duty (which was the principal component of death duties and was levied on the estate itself ); to replace the legacy and succcession duties by an inheritance duty, so-called because it was to be graduated according to individual inheritances in the hands of the recipient (this was important, because what caused inequality was large inheritances rather than large estates); and thirdly, the introduction of a supplementary inheritance duty for those estates where a substantial amount (£50,000) was still left after the foregoing duties had been paid. For this extra duty the taxpayer would receive a terminable annuity for twenty years, a very unpopular form of property. Dalton was clearly intending to put a cap upon the total value of an inheritance. This was far more brutal and immediate than the Rignano plan. In 1946 Dalton reformed death duties on two fronts: there was a stiffening of the rate on the larger estates and the exemption of those under £2,000; and the National Land Fund was set up. This was to encourage the settlement of death duties in land which would then pass to the National Trust, with proceeds from the Land Fund being used to replace the revenue that the Treasury would have received had the duty been settled in cash.39 The latter was popular, as was the exemption of small estates; the idea of an inheritance duty was also looked at seriously, probably because it had a history of support which was in no sense leftwing, but it was eventually discarded. The problem with trying to modify the legacy and succession duties arose over establishing the value of property only conditionally bequeathed, since it then had to be traced for the bene®ts it gave to successive inheritors as they enjoyed their particular interest in it. Where Meade was helpful to Dalton was in suggesting a simpler version where an inheritor was taxed on the total amount received whenever there was a bene®t.40 Dalton put this on one side for a later budget, and although it was considered again in 1947 it was not implemented.41 The main opposition to Dalton within the budget discussions came 39 40 41

Pimlott, Dalton, pp. 455±6. `Inland Revenue Note on Taxation of Inheritances', 18 January 1946, PRO T 171/388. The Conservatives' introduction of an inheritance tax in 1986 as a replacement for capital transfer tax was a misnomer, since it followed tradition and based the tax on the value of the estate rather than on the ®nancial condition of the bene®ciary.

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with the stiffening of the rate of estate duty and the idea for annuities. Keynes expressed a view shared by others when he argued that any increase would encourage more evasion, the revenue gain would not be worth the effort, and `this element of ``hate'' in what could, and should, be a moderately cheerful and reassuring budget would be, psychologically, a false move and would spoil the tone of the rest of the budget message'.42 `Hate' was what Dalton was interested in, and therefore some of the arguments used against his annuity idea (now applying to estates with a net amount after death duties of £250,000) were points which he thought worked in its favour. When the Inland Revenue commented that `the yield is relatively so small that the surcharge could with dif®culty be defended as a revenue proposal', Dalton added: `or resisted as a social proposal. It would be the thin end of a wedge, and a debt reducer.'43 In Dalton's view, the compelling political reason why death duties could be developed further was the fact that Conservatives had never reduced them when they had been in of®ce, and the wealthy had never made a signi®cant agitation for their reduction in the twentieth century.44 Dalton was right, and for an example it is necessary to jump ahead brie¯y to the preparations for the 1960 budget. Edward Boyle, the Conservative ®nancial secretary to the Treasury, received a deputation from property-owning groups (the Country Landowners' Association and the National Federation of Property Owners) complaining about the effects of Cripps's stiffening of death-duty rates on the middle ranges, which meant that an estate worth £100,000 was facing duty of 50 per cent. The period was one where socialist interest in inherited wealth was muted and therefore the time might have been suitable for some sort of reduction in estate duty. But while Boyle acknowledged the weakening interest in equality he still gave no ground: There had much less feeling about inequalities of wealth in recent years and this was largely due to the substantial increase in wage earners' real incomes in the last ten years; but [Boyle] felt that there was a real danger that a sharp cut in the estate duty rates on bigger estates would revive ill-feeling, not only amongst wage earners but also in the executive and managerial grades.45

To return to the 1940s, it was clear that Dalton was attached to his annuity policy because it put (evasion aside) a pretty effective cap on any large estate; it really was getting at the rich. It ceased to be taxation 42 43 44 45

`General Presentation' (Dalton with Bridges, Keynes, Hopkins and Gilbert), 20 February 1946, PRO T 171/386. `Estate Duty ± Note by Inland Revenue', 8 February 1946, PRO T 171/388, 210±11. Dalton, Practical Socialism, p. 340. PRO T 171/506, Budget Committee minutes, 14 March 1960.

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The changing balance of tax interests, 1940±1954

and become appropriation, and as Dalton's of®cials pointed out, `Public opinion has hitherto been apt to draw a sharp distinction between taxation, even when levied at very high rates, and any form, even a quali®ed form, of expropriation.' They went on: The social and political effects of inheritance are matters outside our scope. Nevertheless, we think that we are not exceeding the terms of our brief if we point out how many forces are already operating to reduce the power of any individual to hand on large sums to his heirs . . . So long as these rates [of income tax and surtax] are maintained, it is impossible for any man, however hard he works and however high his earnings, to accumulate any substantial fortune by savings.46

In the future Labour was to be disappointed about the ability of taxation to reduce inequalities of wealth and in the 1950s surtax receipts also turned out to be disappointing. But there was some force in the point that the kind of development which Dalton proposed would damage incentives: `It may well be the case that, as more industries are socialized, the factor of incentive on the part of this section of the community will become less and less important from the public point of view. But we have not yet reached this period.'47 In other words, Dalton, by operating against both income and capital, was pushing taxation further than it would go under an economy where most of industry was in private hands. Sir John Anderson, opposing Dalton's 1946 budget as an Independent MP, urged Dalton to follow Churchill's example from his 1925 budget and reduce surtax as a balance against increases in death duties: `I know of no reason, except socialist theory, for not taking the same course today.'48 It was usually assumed that reform of death duties might be pursued in the knowledge that it did little harm to, or might even bene®t, the motivation towards pro®t and income in the economy. Inheritances were property in a rather inert form, a bonus received comparatively late in life by children sometimes well established in their careers. To remove a slice of this property was not considered likely to be too harmful, especially if this went hand in hand with easing taxes on income. Jay, who had been especially keen on inheritance taxation as part of his case for socialism in 1937, thought it might be introduced simultaneously with reductions in the standard rate of income tax, to `emphasise the point that the whole scheme was intended to reward work and penalise idleness'.49 But Dalton's scheme went much beyond this, and therefore 46 47 48 49

`Limitation of Inheritance ± Report from the Budget Committee', B(46) 9 revise, PRO T 171/391, pp. 159, 162. Ibid. H. C. Deb., 421, col. 1950, 10 April 1946. Jay, The Socialist Case, p. 274.

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75

may well have been practicable only with an economy in which national ownership was much further advanced than it was in Britain at that time. Dalton was keen on national ownership because it ®tted in with his highly adversarial style of socialism.50 It was a necessary precursor, more than he may have been prepared to admit, to the kind of developed tax plans which he had in mind. The less fundamental changes he eventually had to accept for his budgets, namely increases in rates of estate duty, were therefore more consistent with an economy where industry was still essentially in private hands. When he presented them in 1946 he stressed how few estates were going to be affected by the increases in rates, approximately 10,000 out of 50,000 under his exemption of all up to £2,000. For Gaitskell this was not enough: `Before he stops being Chancellor of the Exchequer I ask him to bring in a major reform, and strike a really hard blow at inheritances for the sake of social justice.'51 As it turned out, it was Cripps who made further reforms of estate duty in 1949. Another of Dalton's preoccupations from the 1920s, the capital levy, re-emerged in 1945. It was discussed at the National Debt Enquiry, a committee of of®cials that had been suggested by Attlee in 1944 and had its ®rst meeting in February 1945.52 Its membership was drawn from the Treasury, the Economic Section of the cabinet and the Inland Revenue. Although Meade prepared a memorandum on the capital levy it was hard to make the case on the same grounds of debt relief as had been used after the First World War. The report that was eventually produced concluded that `so long as taxation remains at anything approaching the present high level and the rate of interest on the National Debt remains low, the game is not worth the candle'.53 The factor which had diminished the attractiveness of the levy in the 1920s, namely the much smaller net yield after taking into account the loss of tax revenue, applied even more strongly in 1945 because of the higher rates of tax on those who would be subject to the levy. The optimism that the cheap money policy which had been pursued since 1932 and maintained during the war might be continued after it, so reducing the annual charge of the debt upon the budget, was also a reason against the scheme. In addition to these arguments connected with the instrumental purposes of a levy, the familiar ones about the damage to con®dence and fears of repetition also emerged in the paper. Under the coalition 50 51 52 53

Pimlott, Dalton, p. 497. H. C. Deb., 421, col. 2001, 24 October 1946. The work of the committee is discussed in detail in Susan Howson, British Monetary Policy, 1945±51 (Oxford, 1993), pp. 45±54. `The Capital Levy', 13 June 1945, PRO T 171/395.

76

The changing balance of tax interests, 1940±1954

government in the last year of the war there was, therefore, no momentum in favour of a levy. In the committee the opposition was more dismissive than could be explained by the investigation of the scheme, as Meade found to his cost: `the atmosphere of the meeting was most disconcerting. It consisted of a series of facetious remarks (or what K[eynes] called Capital Levity) from the assembled heavyweights ± Bridges, Eady, Keynes, Gregg et al. Thus all my pet arguments were swept away in a tide of laughter.'54 For reasons which were in line with left-wing views ± low interest rates and high progressive taxes ± the levy was out of the picture before Labour even took of®ce. There had been doubts within the party, too. Gaitskell had produced a paper, `Notes on Post-war Taxation Policy', for the party's post-war ®nance subcommittee, which came out strongly against the levy, not only for the same technical grounds as the national debt committee, but also on wider grounds: The real case against the levy is political. It would give the Conservatives a great opportunity to terrify the electorate as they have so often done in the past. Moreover, the value of small savings is now so much larger than before the war ± possibly to the extent of some £2,000m. Further, the most powerful political counterblast ± the feelings about pro®teering and war wealth ± is much less in evidence this time than it was after the last war.55

It was not just the lessons of the 1920s which Labour had to bear in mind, according to Gaitskell, but also the changed condition of the mass of the population where small savings were more signi®cant than they had been before the war. However varied the motives for saving across the classes, the attachment to capital was widely spread, and there was nothing in the developments since the 1920s which would have weakened this in favour of a levy. Douglas Houghton, one of Labour's MPs with a consistent interest in tax and expertise derived from his leadership of the Inland Revenue Staff Association, made the same point which Gaitskell had done some years later. The capital levy, he argued: which for years attracted the Labour movement, was never received enthusiastically, even by those who would have been exempt . . . The sanctity of capital runs strongly in the British tradition. The reluctance of people to `touch' capital (even though they know some undeserving relative may inherit it) is well known. Nothing upsets folk more than being told by the National Assistance board to draw on capital if they want to qualify for National Assistance.56

The fact that a levy after 1945 would have had to delve deeper into 54 55 56

S. Howson and D. Moggridge (eds.), The Collected Papers of James Meade. Vol. 4, The Cabinet Diary, 1944±1946 (London, 1990), entry for 3 June 1945, p. 91. LPA, RDR 222/June 1943. LPA, `Capital Gains Tax', RD. 222, March 1962, p. 10.

The rich

77

moderate holdings of capital in order to raise enough revenue would have con®rmed these popular instincts. Before the 1945 election, then, the levy had been largely ruled out as an instrument of post-war taxation, despite the view in the pre-war discussions that if the debt increased during the war, this time the opportunity to implement a levy on capital should not be missed. These wartime judgements were hardly altered by any post-war conditions. While Labour's victory in 1945 was on a scale which might have eased Gaitskell's anxieties about Conservative opposition, the whole drift of ®scal policy was to emphasize the containment of consumption, and the levy was not necessarily appropriate for that. The levy therefore could only have been used to redistribute property, the economic arguments in its favour having been weakened by war and post-war changes. Yet the levy emerged in a modest form as the special contribution in Cripps's budget of 1948. How did this happen? While the debt issue had disappeared as a peg on which to hang the levy proposal, chancellors had to deal with the presence of in¯ationary pressure, balance of payments dif®culties and the dollar shortage. These problems brought the idea of some kind of capital tax back into play. It was slipped in partly under the cover of economic policy but was more a political device connected with the growing in¯uence of the trade unions. The convertibility crisis of 1947 revealed not only the unrealistic terms of the American loan at the end of the war but also a deeper and more widespread lack of con®dence in the British economy. Disin¯ation was needed to reduce costs at home and to cut down on dollar imports. Dalton, initially unconvinced that a supplementary budget was necessary, eventually agreed, and was determined that its aim would be to `lessen the in¯ationary pressure by ``mopping up'' some purchasing power, and at the same time illustrate the government's intention that there should be ``equality of sacri®ce'' as between different sections of the community'.57 It was in the same vein that Douglas Jay, the economic secretary, wrote to Dalton that `The present is the ideal moment for a Capital Levy, both politically and economically. Politically, if Conservatives are crying out for de¯ationary taxes, they can't object to this one.'58 The levy was not proceeded with in 1947, and Dalton resigned immediately after on the occasion of his leak of budget details to John Carvel, but with wider concerns about his capability surrounding his departure.59 However, a fresh assessment of the levy was underway and examined 57 58 59

Dalton to Sir Edward Bridges, 11 August 1947, PRO T 171/392. Jay to Dalton, 10 October 1947, PRO T 171/392. Pimlott, Dalton, chap. 29.

78

The changing balance of tax interests, 1940±1954

during Cripps's budget of 1948. There was encouragement from the ®nance group of the parliamentary party, who believed that the capital levy would be of `psychological value and as an advantage, not as a revenue saving, but as an anti-in¯ationary measure'. In the same order of ideas Crossman thought it would help head off any tendency to industrial unrest.60 The of®cial view was as hostile as that of 1945, and in two respects the position was less favourable. Income tax, surtax and death-duty rates were higher than those on which the 1945 assessment had been based. Moreover, now that counter-in¯ation had become the main priority (compared to limiting the cost of the debt), the levy would have had to impinge upon the savings of the middle classes as well as the rich: `If the levy is to be an effective weapon against in¯ation, it is impossible to leave outside its scope the £6,000 millions of small savings which to-day constitute a most important part of the in¯ationary threat to consumer prices.'61 Because it was likely that one result of the levy would be the sale of securities and the liquidation of Treasury bills as taxpayers tried to maintain some of their cash holdings, the prices of these would fall so producing a rise in the rate of interest, which in turn would destroy the government's cheap money policy. Two further arguments were brought forward. The general climate was thought to be unsuitable. Because the responses to the levy and its effect on different kinds of property holders was so unpredictable, a levy sat uneasily in the mood of planning and economic control which the government was trying to maintain: `In general, measures of this kind have been used in extreme in¯ationary conditions, when the economic system was badly dislocated, so that disturbance caused by the measures themselves is small compared to the disturbance which it is sought to remedy.' The levy would also have made heavy, and perhaps insuperable, demands upon the manpower of the Inland Revenue, especially in the area of land valuation. The government's policy on land and town and country planning was already being carried out by an inadequate number of valuers, and there would have been no possibility of recruiting the extra staff.62 Although Cripps found the paper overly pessimistic ± `he was not convinced that as much weight had been given to the ``pros'' for a levy as to the ``cons'' ' ± he conceded that the implications for the staf®ng of the 60 61 62

Finance group of Labour Party, minutes of a meeting of 11 February and summary note of 14 February 1948, PRO T 171/394. `Note on Capital Levy', Budget Committee paper 13, 14 January 1948, PRO IR 63/ 178, p. 3. James Callaghan, who had been a tax of®cial, gave a clear picture of the hard-pressed conditions under which Revenue staff were working at the end of the war during the budget debates of 1945: H. C. Deb., 414, col. 2289, 25 October 1945.

The rich

79

levy were serious, and it was these which carried weight with him rather than the wider political considerations brought forward by the Treasury and Revenue of®cials. In fact he saw the political context working the other way, and was not prepared to give up on the idea of some kind of heavy tax on the rich: `it must not be forgotten that the political pressure for a capital levy would be extremely strong, and he was, therefore, in favour of imposing some sort of non-recurrent anti-in¯ationary impost. Such a charge might take the form of doubling the surtax or income tax payment, for one year only.'63 Hopkins pointed out some of the ¯aws in the idea from the point of its de¯ationary effect. It would be, he thought, `a tiresome but only incidental impost, which he [the taxpayer] could discharge by surrendering some of his securities, whereupon he would go on spending his current income as merrily as before'. But Cripps was resolute, believing that its psychological effect would be de¯ationary and it would, from the political view, offset the increases in indirect taxation which were also part of the budget.64 Cripps got his way: the special contribution was levied on all investment income above £250 a year, as long as the individual's total income was more than £2,000. Because it produced an overall rate of over 20 shillings in the pound on higher unearned incomes it counted as a capital tax, even though it had used income to point the way to the assets to be targeted. The fall in the gilt-edged market which was anticipated did not materialize, nor did the rash of court cases predicted over the treatment of property held in trust. It met its revenue target. Perhaps more important was the fact that opposition raised by the Federation of British Industries (the precursor of the Confederation of British Industry) to the contribution was principally a matter of form, and more in the way of a token gesture than anything else.65 The signi®cance of this is that of®cials were always keen to stress that surtax payers were not only the `rentiers sitting at Bournemouth but the far greater class of businessmen who have invested their own capital in their own businesses'.66 They had also argued that anything like a levy would have severe consequences for business con®dence. The failure of business to respond in any kind of aggressive way showed how personal taxation could be differentiated, to Labour's advantage, from corporate interests. Does the special contribution indicate that any changes had taken 63 64 65

66

`Notes of Preliminary Budget Discussions', 20 January 1948, PRO T 171/394. `Discussions at Roffey Park', 14±15 February 1948, PRO T 171/394. Modern Records Centre, University of Warwick, Confederation of British Industry Predecessor Archive, Taxation Committee Minutes of the Federation of British Industries MSS, 200/F/1/134, meeting of 27 April 1948. Note by Edwin Plowden of the central economic planning staff on the special levy, 31 March 1948, PRO T 171/395.

80

The changing balance of tax interests, 1940±1954

place in tax politics during Labour's time in of®ce so that the obstacles of the 1920s had been overcome? Some of the conditions which explain the success of Cripps's measure might suggest that nothing much had changed since the 1920s. In that earlier period one of the principal anxieties had been that, once attempted, a levy might be repeated; also, the very name `capital levy' had suggested socialist depredations of helpless property owners. In 1948 great care was taken not to offend such susceptibilities. Both its name and Cripps's description of it in his budget speech established that this was not the beginnings of a new tax instrument: `I would emphasise that this is not an annual tax, but a special contribution for a special purpose. I recognize fully that regular taxation of this kind would have a marked disincentive on saving, which is certainly not what we want.'67 This approach had been urged upon Cripps by Sir Edwin Plowden, who had been appointed chief planning of®cer in March 1947. Plowden's argument was essentially about the need to maintain con®dence in the government: My reasons for suggesting this are really psychological. During the last six months you have done what no other man in the country could have done, and that is to secure the general support of industry and commerce for a Labour government. This is a priceless asset and one without which there is no hope of our surmounting our economic problems. So long as you could present the special levy as a general `once-and-for-all' sacri®ce, in which all members of the community participated, I was not particularly impressed by the arguments of those who foretold a lack of con®dence.68

Cripps's stature in 1948 as chancellor has been commented upon by a number of historians, and this is a further dimension to the unusual circumstances connected with the special contribution.69 A further 67 68 69

H. C. Deb., 449, col. 72, 6 April 1948. `Note for Central Economic Planning Staff', Sir Edwin Plowden, 31 March 1948, PRO T 171/395. See also Howson, British Monetary Policy, p. 218. In alphabetical order: David Marquand has commented that `The Pitts, Lloyd Georges and Churchills come to the fore in times of crisis, not because they make wiser decisions than their rivals, but because they are able to communicate to others their own intense belief in themselves. Such self-con®dence usually comes from ambition. In Cripps's case it came from religion': `Stafford Cripps' in M. Sissons and P. French (eds.), Age of Austerity (London, 1963), pp. 169±87 at p. 179. K. O. Morgan judges that `At the Treasury he was always a commanding, inspiring ®gure' and that this dominance `was the triumph of a powerful will over a ¯agging government': Labour in Power, pp. 360 and 362. A. F. Thompson provides a similar judgement: `he presided, despite his shortcomings as an economist, with great managerial skill and unrivalled moral force, over the dramatic revival of a war-shattered economy with suf®cient success to ®nance the inauguration of the latter day welfare state': `Winchester and the Labour Party. Three ``Gentlemanly Rebels'' ' in Roger Custance (ed.), Winchester College (Oxford, 1982), pp. 489±503 at p. 496.

The rich

81

indication that this was a `one-off' both in its timing and scope comes from Dalton's contribution to the Commons debate where he welcomed the measure and recommended that Cripps keep the idea of a larger levy on his list of possible taxes for the future. As Pimlott puts it, `The Tory Right fulminated and the Labour Left applauded.'70 This reaction shows how a qualitative shift in the kind of levy proposed brought a similar sea change in the reaction, perhaps in part associated with Dalton's reputation. All these considerations point to the special contribution not as harbinger of new possibilities but in requiring the stewardship of a chancellor of unusual qualities supported by emphatic assurances of its `non-repeatability', shows how limited had been the extension of tax politics. But there is another side to the argument. Beyond the realm of taxation there had been a fundamental shift in favour of working-class interests as a result of the war and Labour's victory.71 This was a signi®cant change from the inter-war period where the middle classes had shaped the operation of the democracy. The Labour leadership, especially those in the Treasury responsible for the budget and taxation, interpreted this as strengthening their long-held commitment to reducing the assets of the rich. But there was a more speci®c reason for implementing the same policies, namely the closer relationship between government and the trade unions. Cripps's special contribution followed his Statement on Personal Incomes, Costs and Prices delivered in February 1948.72 This called for a voluntary freeze on wages and incomes, including rents and dividends, and had been developed since the convertibility crisis of the previous year. While the special contribution was meant to diminish the spending of capital assets that sustained in¯ationary pressure, it also addressed the `psychological' necessity of demonstrating to the trade unions that the government was serious about dealing with property incomes. Because government was now having such a signi®cant effect on standards of living, as shown by the gap between gross and net pay for many groups in the population, it could not regard incomes policies as resting solely upon factors in the industrial economy. The state had to show that it was being fair across the whole range of rewards. `Equity' in tax was now not only a set of arrangements and standards which had evolved within the tax authorities and which determined the boundaries between what was acceptable and what was 70 71 72

In Pimlott, Dalton, p. 552 and note. McKibbin, Cultures and Classes, pp. 532±6, where the limits of this transformation are also indicated. Russell Jones, Wages and Employment Policy 1936±1985 (London, 1987), pp. 36±7.

82

The changing balance of tax interests, 1940±1954

not, between what might be regarded as sustaining the public compliance towards taxes and what might threaten that consent.73 Labour had pushed those limits, in the increases to surtax and death duties, beyond what the Revenue thought acceptable, but now there was a further requirement ± that tax policy had to serve the interests of incomes policy and respond, therefore, to the needs of the trade unions. In his memoirs, Douglas Jay saw the special contribution and increases in death duties the following year as responses both to Labour's ability to put long-held aims into practice, but also to use taxes to help incomes policy: `These measures were partly a short-term support for the successful pay restraint policy of 1947±51, but they also followed the argument of my 1937 The Socialist Case that large inherited fortunes should be the prime object of direct taxation.'74 There may have been some self-deception on Labour's part about the extent to which it was representing, in its death-duty or surtax increases, something which the working class `wanted'. As has been shown, some Labour politicians believed, and discovered, that workers held views on capital which were not necessarily different from those of the rest of the population. However, in the case of incomes policies it was clearly thought that a necessary accompaniment to any demands that might be made upon wage earners was a demonstration that property as well as pro®ts would pay its share, and this required taxation. From the trade union side such measures as the special contribution would never have been of pivotal signi®cance in the success or failure of incomes policies. The rising cost of living, for example, was a major blow to Cripps's effort, and, more generally, there is little evidence that trade unions believed that the state could achieve a generally satisfactory distribution of rewards in society to which their particular interests should be subordinated.75 But even if such tax measures were not at the heart of pay restraint they probably sustained the loyalty of the trade unions to the Labour government on which such policies depended. They were necessary rather than suf®cient. Incomes policies therefore opened up taxation to a new dimension which was bound to extend the limits of what was thought desirable or politically practicable by way of tax changes. Certainly these same interests were at work in the area of company taxation.

73 74 75

See Martin J. Daunton, `How to Pay for the War: State, Society and Taxation in Britain, 1917±24', English Historical Review, 111 (443) (1996), pp. 883±919 at p. 919. Jay, Change and Fortune, p. 184. G. D. N. Worswick, `Personal Income Policy' in Worswick and Ady, British Economy, pp. 313±35 at p. 331, and Robert Currie, Industrial Politics (Oxford, 1979).

Taxation and industry

83

Taxation and industry The Conservatives had responded shrewdly to Dalton's surtax proposals. Because Dalton was hoping they would cause surprise and outrage on the opposition benches, Boothby played down their signi®cance in the 1945 budget: `The yield of £7,000,000 from this impost, by comparison with the total size of the budget, is negligible.'76 Company taxation was far more central to the success or failure of Labour's management of the post-war economy than Dalton's `anti-rich' interests. Since by far the greater part of the economy was to remain in private hands, Labour could not be cavalier towards private industry. The loss of overseas earnings during the war required Britain to achieve a surplus on foreign trade, a radical departure from past performance. Industry had to be encouraged to export rather than ®nd refuge in easier pro®ts in the home market. Taxation was part of the picture, as George Benson, chairman of the ®nance group of Labour MPs, argued in the Commons in 1946: In the next ®ve years it is not the Labour government, it is not socialism that will be on trial. It is private industry that will be on trial, because we should have to demand from it a standard of ef®ciency, enterprise and initiative which it certainly never showed in the inter-war years. I am not sure we are going to get that with the present colossally high rate of taxation.77

Business pro®ts had never ®gured largely in Labour's pre-1939 tax perspectives; if anything, the broad aim had been to encourage dynamic pro®t-making at the expense of passive, unearned income and especially inherited wealth. If it would be possible to prevent or reduce the transmission of wealth across generations, then high earnings or pro®ts became a just reward for enterprise. Moreover, when the party thought about industry in the 1930s it concentrated upon questions relevant to a socialized industrial sector, rather than addressing how it should treat the private sector and its pro®ts. The war itself had not created guidelines for peace. Whereas personal taxes had been pushed to new thresholds from which Labour could make peacetime adjustments, company taxes in wartime were recognized to be unsuitable for peacetime use. The excess pro®ts tax, which reached 100 per cent in the war, was widely regarded as a candidate for abolition once the war was over. The dif®culty of establishing what was a fair baseline for judging what were `normal' pro®ts became increasingly dif®cult as time passed, and the high rates were regarded as an excuse for extravagance rather than ef®ciency. Moreover, tax paid out 76 77

H. C. Deb., 414, col. 2218, 25 October 1945. H. C. Deb., 421, col. 1955, 9 April 1946.

84

The changing balance of tax interests, 1940±1954

for `excess' pro®ts had to be refunded if they dipped below the normal line, and this was clearly unattractive to a chancellor as peacetime conditions became established and the possibility of more modest pro®ts loomed. The national defence contribution, established in 1937, was rather different, being a ¯at-rate tax of 5 per cent on company pro®ts. Income tax was paid on company pro®ts at the standard rate, both on the dividends distributed to shareholders and on pro®ts put to reserve. Within the party the wartime measures were not seen as having much relevance to the post-war period; Gaitskell's memorandum of 1943 assumed that both NDC and EPT would be repealed after the war and not replaced.78 The FBI also hoped that the speci®cally antiin¯ationary taxes on pro®ts of the war would not be needed in peace.79 The Board of Inland Revenue was also against continuing taxes on business which it argued would have a `vicious economic effect' through falling either upon reserves or upon the equity shareholders. Its general line against any new taxes, which had been deployed against Dalton's surtax measures, was repeated in very similar words as far as business taxes were concerned: it is not the moment to add new taxes of a troublesome and contentious kind to the ®scal code. The war should have seen the limit of taxation and the taxpayer will resent new taxes and not approach them with that `willingness to pay' on which the success of direct taxation in this country so largely depends.80

A pro®ts tax was continued into peacetime. From January 1947 the NDC was renamed the pro®ts tax, but it was signi®cantly modi®ed in the 1947 budget to differentiate between pro®ts distributed to shareholders and those put to reserve. In 1947 pro®ts put to reserve were taxed at 5 per cent and those distributed to shareholders at 12.5 per cent. These rates were doubled at the supplementary budget in November 1947. The yield in the full tax year of 1948±9 was £199 million, nearly 10 per cent of direct tax revenues, and the yield of income tax at the standard rate on companies was £280 million. The introduction of this tax reform can be explained by the new claims of economic management rather than through the political aims of Dalton, the chancellor of the time. James Meade had submitted papers on `Stabilization and Company Pro®ts' and `The Differential Taxation of Company Pro®ts' to the Budget Committee in December 1946.81 Meade intended the tax to be used as an in¯uence upon 78 79 80 81

LPA, `Notes on Post-war Taxation Policy', RDR 222, June 1943. FBI Taxation Committee Minutes, 3 April 1945 and 19 September 1945. Board of Inland Revenue, `Notes on Pro®ts Tax and Capital Gains Tax' and a covering note by Cornelius Gregg, 1 November 1946, PRO T171/391. PRO T 171/391, BC(47)9, BC(47)13.

Taxation and industry

85

consumption. At times of in¯ationary pressure the tax on distributed pro®ts ± which went to shareholders as dividends and contributed to their spending power ± should be higher than those put to reserve, and in conditions of depression and inadequate demand the relationship should be reversed. This was part of Meade's larger interest in the budget as an instrument of economic management, and of his exploration of the effectiveness of different tax instruments (including social security contributions) for this purpose. Labour ministers gave strong support to the tax for the way it served the movement's general hostility to shareholders as much as for its function in the management of demand. There was a good deal of feeling against the distribution of pro®ts as dividends to `non-producers' and a greater acceptance of them being ploughed back into the company to help `the producers'. Meade's preference for pro®ts put to reserve was strictly related to the level of demand in the economy; Labour's preference was a deep-rooted instinct unlikely to alter with the degree of in¯ationary pressure in the economy. Since in¯ationary pressure was a constant companion of the Attlee governments, this potential incompatibility in these approaches was never revealed. Labour ministers were therefore willing to press the pro®ts tax into service as a support for pay restraint. Douglas Jay was in favour of the increase in rates for the November budget of 1947 because `it is the ideal complement, by way of social justice and political practicability, for any sacri®ces that might be asked for from the wage earners as a whole. It also partly meets the case for a capital gains tax which in my view is too complex.'82 Jay was right that the differentiation in the pro®ts tax only partly made up for the lack of a capital gains tax. The more lightly taxed undistributed pro®ts still belonged to the shareholders and, over time, were likely to emerge in the increased value of shares which would then yield an untaxed capital gain. But in the short term the tax had value in suppressing dividends, and Ernest Bevin highlighted the value of pro®ts when they were ploughed back in the discussions about pay in 1947 that prefaced Cripps's appeal for voluntary restraint the following year: `I want you [the TUC] to take a sensible view about pro®ts. Some of your best ®rms are the ®rms who pay the highest wages and make the biggest pro®ts and they very often adopt the method of putting those pro®ts back into improvements.'83 It was a theme of speeches by Labour leaders that over half of company pro®ts went in taxation, although this required fairly constant emphasis. At the party conference in 1948 Dalton had to `beg delegates, in quoting statistics, always to distinguish, 82 83

`Memorandum by Douglas Jay', PRO T 171/392, 10 October 1947. `Discussions with the TUC', meeting of 17 November 1947, PRO T 172/2033.

86

The changing balance of tax interests, 1940±1954

and to make clear to their audience, the difference between ®gures for distribution on the assumption that there are no taxes at all to be paid, and the actual ®gures for distribution when the taxes imposed by us have been met.'84 It was not always easy to make this message convincing, especially when trade unionists got hold of academic research that modi®ed the picture. Tibor Barna's article of 1949 told trade union of®cials that pro®ts were excessive and taxation was merely shutting the door once the horse had bolted.85 There was also always the feeling that reduction of dividends would be temporary and restored in the future, whereas a wage demand suppressed by pay policy had to be fought for afresh. But clearly pro®ts taxation had a political function which went beyond its suitability for the purposes of economic management: the question is, how did business respond? While business organizations opposed the pro®ts tax on the grounds that it was unfair to single out industry for an additional burden to income tax, it was not easy for the FBI to press for abolition of the tax at a time of in¯ationary pressure.86 In the autumn of 1947 the case for a budget surplus was accepted to be overwhelming and there was `in addition the psychological aspect that if the workers were to be asked for longer hours some contribution from employers' pro®ts would be demanded'.87 The same conditions obtained through 1948 and 1949. While provincial opinion could seek an outlet for frustrations by blaming the swollen bureaucracy of post-war government and demanding cuts in public spending, those businessmen closer to government knew that they had limited room for manoeuvre and that there was little mileage in such suggestions.88 Opposition to the pro®ts tax was, in fact, quite muted. Sir John Anderson, speaking after Anthony Eden in the 1947 (spring) budget debates, regarded the levels of the new tax as more moderate than had been expected, while at the time of Dalton's ®rst budget Robert 84 85

86

87 88

Labour Party, Annual Report (LPAR), 1948, p. 150. Barna's article was entitled `Those ``Frightfully High'' Pro®ts', Bulletin of the Oxford University Instititute of Statistics, 11 (1948), pp. 213±28. It was referred to by J. Mortimer in The TUC and Wages Policy (London, 1950), p. 14. An example of business opposition comes from Paul Chambers's article in the Lloyds Bank Review for 1949: `At the present time, when so much depends upon enterprise, it is almost incredible that income from enterprise should be more heavily taxed than any other form of income. There should be no question of ®ddling about to trim bits off the pro®ts tax and altering its incidence; it is in every way a thoroughly bad tax and should be abolished': `Taxation and the Supply of Capital for Industry', Lloyds Bank Review ( January 1949), pp. 1±19 at p. 16. FBI Taxation Committee minutes, 23 September 1947. For an example of provincial views see Brotherton Library, University of Leeds, Leeds Chamber of Commerce minutes, 30 November 1948; for `London' opinion see FBI Taxation Committee minutes, 21 December 1950.

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Boothby had trailed the possibility of a tax similar to the one Dalton was to introduce eighteen months later. He argued then that pro®ts should be ploughed back into industry `and the best way of doing that might be to have a differential rate of tax designed to secure not only the modernization but the expansion of industrial plant'.89 Moreover, while the pro®ts tax may account for some of the lag in dividends against company pro®ts, there is little doubt that companies were conservative in their distributions.90 There were other elements in business's strategy for tax relief which shed further light on the part played by trade unions in tax and also show what business was really scared that Labour might do. The campaign was based on the argument that the pro®ts tax was not falling on real but on money pro®ts. Because of in¯ation the replacement of assets was costing far more than the original equipment on which the depreciation allowances were based. Businesses were having to devote increasing proportions of pro®ts to replace assets at higher prices. The proposition was that industry was unable to maintain its capital base because of the cost of maintaining capital assets and the pressure of taxation on pro®ts which re¯ected changes in money values. The argument was launched as a major point of principle by some of the leading ®gures in British industry. Representatives of major companies sitting on the FBI's taxation and home policy committees prepared memoranda and devised appropriate solutions to recognize the effect of in¯ation. Frank Bower of Lever Brothers drew up the most sustained argument in favour of in¯ation allowances, and he was supported by Paul Chambers who had moved from the Inland Revenue to ICI. Company meetings were frequently devoted to the inadequacy of depreciation allowances, with the plea that they should be based not on the historic cost of the exhausted asset but on the cost of the new one.91 Although this was at times a rather technical discussion about accounting principles, it was in this aspect that some of the main protagonists saw the advantage. It took the argument from the political to the technical domain of taxation. In explaining this aspect of trying to seek allowance for in¯ation, Bower gave a striking account of the way tax issues connected with pay policy. In¯ation was likely to persist: `the policy of full employment and the political strength of the trade unions were a guarantee that wages would rise more than any real increases in 89 90 91

H. C. Deb., 436, cols. 210±11, 16 April 1947 (Anderson); and 414, col. 2220, 25 October 1945 (Boothby). Seers, `National Income', p. 52. Lever Brothers company meeting, The Economist, 28 August 1948, pp. 356±7.

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The changing balance of tax interests, 1940±1954

output.' The trick for businesses was to locate tax relief in that part of the tax system which had not been politicized by pay restraint: Industry's hope of relief of taxation depends not on equity, or on charity or on argument, but on politics. The government proposals for a standstill on wage demands and limitation of incomes was a state of uneasy truce . . . If industry went forward with a plea for the reduction of taxation on the grounds that it could not stand the present level and government agreed, the TUC would immediately feel free to advance claims for higher wages. The argument in favour of in¯ation allowances provided a method of getting a reduction of taxation which would not start a new wave of wage demands. It was an argument which the TUC could accept without appearing to have conceded relief of taxation.92

As long as relief was buried in technical questions over re-equipment allowances it could not emerge into the more highly charged arena of incomes policy which affected a good deal of taxation at this time. In the budgets of 1945 and 1949 the government had tried to give incentive for re-equipment through granting 20 per cent and then 40 per cent initial allowances. Because these increased the amount allowed for depreciation at the beginning of an asset's life they provided an incentive to undertake new investment. However, there was opposition to the FBI's campaign for further allowance for in¯ation. Barna's article in the Oxford Bulletin had poured scorn on the claim for higher allowances and others argued that company savings were quite adequate.93 But there were also reservations from inside the business community which showed differences of opinion about what business might legitimately ask for as well as their anxieties that a Labour government might introduce capital gains taxation. The FBI's Taxation Committee was divided between those who thought business had every right to claim some preferential treatment and those who did not, that `industry had no right to contract out of the effects of a general trend of rising prices'.94 But seeking tax relief on the changing values of assets might have left businesses vulnerable to a capital gains tax. J. E. Davies of ICI argued that `the replacement cost solution was unsatisfactory in that it implied additional controls and eventually capital increment taxation', and Bower admitted that if revaluation of assets was accepted `then there would appear to be no logical reason why capital gains should not be taxed'.95 By seeking tax relief that required the recording of the changing value of assets they might be encouraging a tax to which businesses were strongly opposed. 92 93 94 95

FBI Taxation Committee minutes, 8 November 1948. Barna, `Those ``Frightfully High'' Pro®ts'. FBI Taxation Committee minutes, 24 August 1948. FBI Taxation Committee minutes, 5 August 1948 (Davies); 30 June 1949 (Bower).

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Although discussion of capital gains taxation was usually concerned with the way in which it trapped personal wealth, the Board of Inland Revenue had little doubt about the opposition of businesses to it: `the charging of pure capital gains on business assets would weigh very heavily on some industries. It would be resented by industry and would certainly not help that re-equipment and modernization that is so essential for the development of British industry.'96 Capital gains taxation was another area in¯uenced by the trade unions. It was not a new idea, having been examined by the Royal Commission of 1920, and the American precedent of operating such a tax since 1913 was often urged in favour of a British government following suit.97 In 1951 the TUC also referred to `its useful effect on the psychology of the working people'.98 Such a tax did not materialize under Labour, largely because the government accepted Inland Revenue arguments that it did not have adequate staff. Although business organizations complained bitterly about the burden of taxation, it is hard to see how it seriously impinged upon industrial performance. Pro®ts and company savings were adequate for post-war recovery, which was hampered more by shortages of supplies than heavy taxation. A study made in the early 1950s concluded that the increase in taxes paid by companies had been met by shareholders rather than by consumers (in the form of higher prices) or by pro®ts put to reserve, which was the source of company savings. But the same paper also suggested that company directors `appear to regard the shareholders more as creditors who deserve a steady return upon their loans than as owners entitled to the pro®ts'.99 So the degree to which dividend distribution was determined by attitudes inside companies, rather than by government taxation, put a real question mark over the force of the pro®ts taxes. When the bene®ts that industry received from investment allowances are added to the picture, then it was quite possible to regard the pro®ts tax as a purely political instrument which caused limited economic damage.100 96 97 98 99

100

`Capital Gains Tax', PRO T 171/391, 17 November 1946. `Budget Suggestions by Outside Bodies', letter of Evan Durbin to Dalton, 21 February 1947. Modern Records Centre, University of Warwick, TUC archive, Economic Committee minutes 560.1(7), 14 February 1951. David Walker, `Some Economic Aspects of the Taxation of Companies', The Manchester School of Economic and Social Studies, 22 (1954), pp. 1±36 at pp. 15 and 28. The Accountant journal noted in 1949 that `this renewed tinkering with an already highly complicated tax is not for the purpose of raising revenue, it is simply to induce the mass of the workers to refrain from making higher wage claims': leading article, 8 October 1949.

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The changing balance of tax interests, 1940±1954

While Labour might claim that industrial recovery was possible in the face of stiff pro®ts taxation, it is not clear that this is to be explained by the sustainability of that tax regime or by the way corporate strategies of their own accord produced the intended effects. There was, too, the wider issue of whether or not the interests of industrial ef®ciency were in fact served by encouraging retention of pro®ts in a business and discriminating against the shareholder. In a sense it turned the equity shareholder from a risk-taker into a rentier, and encouraged investment by those companies with substantial reserves. Those who had to secure funds from the stock market were possibly at a disadvantage; it hampered new entrants as against established ®rms, and sided with the status quo against dynamic change. As Nicholas Kaldor described it, this was `the socialist version of Baldwinism'.101 The advent of separate company taxation was therefore characterized by some uncertainty as to its impact on companies as an economic force, but on the other hand by its very visible place in the political arguments about the distribution of incomes. The people The general problem of how far the wartime tax regime had to be modi®ed for peacetime applied as much to the people as it had done to the rich or to business, whose positions have already been considered. In the case of the rich the numbers involved had been small; in the case of business the very fact that it was the taxation of corporate, impersonal entities may have diminished some of the intensity with which the issue was perceived by the general population. This was not so, obviously, with the taxes ± indirect and direct ± which fell upon the greater part of personal incomes. In the case of surtax, it has already been shown how Dalton pushed on one side considerations of equity and incentives as put forward by the Board of Inland Revenue. But it was going to be much less easy to do the same with regard to indirect taxes and income tax. Politicians were as much in ignorance about the effects of such taxes as everyone else. There was a great deal of talk about incentives, and a sense that a tax regime must have lower limits of capacity in peace than in war. But there was little idea about what those limits might be. Moreover, what started out as a discussion about the effects of taxes on economic behaviour ± did they discourage people from working ± which was essentially an empirical problem, became as much a political judgement about the impact of taxes on the popularity and electoral 101

`A Positive Policy for Wages and Dividends', 27 July 1951, reprinted in Nicholas Kaldor, Essays in Economic Policy, vol. I (London, 1964), p. 127.

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strategy of the party. Thus it became a matter of electoral analysis and calculation as well as of political philosophy. During the war the party recognized that the working-class interest in the tax system would be more complicated than it had been before 1939 when income tax had been largely con®ned to the middle classes. Again, Gaitskell's wartime memorandum provides a useful guide: Income tax is now paid by such a large proportion of the population that it will not be wise politically for the Labour Party always to oppose indirect and favour direct taxation. More discrimination will be needed. It will be more appropriate for the party to press for certain indirect and certain direct taxes and to oppose others. It should, for example, support indirect taxes on luxuries such as the present purchase tax modi®ed in certain directions.102

Although there is evidence of the approach which Gaitskell recommended coming through in the 1945±51 budgets, perhaps what is more striking is the way the chancellors adopted a fairly segmented approach to direct and indirect taxes and, in so doing, tended to favour one particular sector of the interests they represented, namely the better-off workers at the expense of the lower paid. Partly this may have been due to the varying characteristics of the tax information they dealt with. Income tax lent itself to precise adjustments to take account of different incomes and family situations. It could be manipulated to serve quite detailed ends because of the tinkering with rates and allowances which was possible. The level of income at which tax began to be paid, and the marginal rates of tax, could be examined and adjusted in speci®c ways. Indirect taxes were much cruder. Budget calculations about the effects of indirect taxes were not grouped by income, but only in much more general categories of rich and poor. As one economist commented in the early 1950s, `Ideally we would want to study the distribution of real incomes, which include the effects of indirect taxes. But there is no way of ®nding the contributions to indirect taxation of income receivers, grouped by size of gross money income.'103 But the preoccupation with direct taxation ¯owed from a particular understanding, not necessarily a correct one, about the effect of different taxes on behaviour. The yields of the main taxes can be set out for the tax year 1948±9: Purchase tax £139 million Beer and tobacco £767 million PAYE £197 million These ®gures contain some simplifying assumptions that economic historians may ®nd alarming. The purchase tax ®gure is the yield from the lowest of the tax bands established that year, which was intended to 102 103

LPA, `Notes on Post-war Taxation Policy', RDR 222/June 1943. Worswick, `Personal Income Policy', p. 316, note.

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The changing balance of tax interests, 1940±1954

cover the majority of goods involved in household consumption. The ®gures for purchase tax and beer and tobacco have been reduced to 86 per cent of the totals, the ®gure for the number of incomes below £500, a rough upper limit for the working classes. This is a way of trying to apportion the share of the taxation under those heads to working-class incomes, and assumes that tax payments were spread evenly throughout the income scale. This may understate the working-class contribution to beer and tobacco (where working-class consumption may have been higher) and overstate it for purchase tax. The ®gure for PAYE is the 45 per cent of the total which the Board of Inland Revenue believed was accounted for by working-class incomes. What is missing from the ®gures, and what was never discussed at any budget meeting, and what was never remarked upon in any survey of popular views about taxes, was the growth in what amounted to a regressive tax, namely national insurance contributions, which went up from 5 per cent of total tax revenue in 1946 to 10.6 per cent in 1950.104 The main conclusion of the ®gures is the weight of indirect taxation on working-class incomes. Overall, taxes on expenditure went up from 40.8 per cent of total tax revenue in 1946 to 46.4 per cent by 1950; income tax had gone down as a share of revenue from 37 per cent to 32 per cent over the same period. When Dalton looked back over his own period as chancellor he recognized how far he had departed from Snowden's views, in that he aimed at reductions in direct rather than indirect taxes: `it represented a complete reversal of the old-fashioned views of Philip Snowden, accepted by an earlier generation of the Labour Party, that indirect taxation should be done away with, and all necessary revenue raised by graduated direct taxes.'105 Before Gaitskell's `Korean War' budget of 1951, Labour never increased income tax, and usually reduced it in some form; by contrast, tobacco duty was doubled in 1947 (April), beer duty was increased in the supplementary budget of the same year, both were increased again in Cripps's 1948 budget and, to break the trend, beer duty was reduced in 1949. Purchase tax, an invention of the war that Labour decided to continue into peacetime, did have progressive elements in it since it differentiated 104 105

Central Statistical Of®ce, National Income and Expenditure 1946±53 (London, 1954), Cmd. 8203, table 20. Hugh Dalton, Principles of Public Finance (London, 1954), p. 230. Douglas Houghton, secretary of the Inland Revenue Staffs Association and subsequently a Labour MP, remarked before Cripps's 1948 budget (which reduced income tax and increased indirect taxes) that `It rather looks as if his ®scal policy is going to make Philip Snowden turn in his grave, and shift the whole emphasis from direct to indirect taxation': Modern Records Centre, University of Warwick, TUC archive, MSS 292. 411.14/2, `PAYE' (1948).

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goods by the duties charged between those items of popular consumption and those which corresponded more obviously to luxuries. The exemption of certain goods, such as children's clothing and basic household cooking and cleaning equipment, also enabled the effect of the tax to be skewed in favour of the less well-off. This was an indirect tax with which Labour was quite happy. When the schedules of the tax were reorganized in 1948, Cripps overruled the suggestion from his of®cials that the general run of household goods ± `pots and pans' ± be shifted from the exempt category to one of the rate bands as `not politically defensible'. But `he did not see the same objection to raising the rate on luxuries and inessentials, particularly in cases where an increase in prices could not reasonably be made the basis for compensating increases in wages'.106 The imperatives of ®scal policy required Labour to run surpluses on its post-war budgets as a means of containing in¯ation. Because the aim was to contain consumption there was no scope for tax cuts in total. Reductions in income tax therefore had to be balanced by increases elsewhere which still kept the lid on working-class consumption. But this was not a straightforward swap of one form of taxation for another. Because the threshold for income tax (for a married man with two children) was roughly equivalent to the average industrial wage, a signi®cant number of lower earners did not pay income tax at all, but were still liable to indirect taxes. The combined impact of these taxes was considerable: If to the weight of direct taxation there is added that of indirect taxation which makes the net earnings go such a little way towards satisfying quite simple wants such as to smoke a little, drink a little, or buy a small gift for a wife, or a girlfriend, the total burden becomes very heavy. Two hours extra work at 3s. an hour will yield gross earnings of 6s. which, less tax at 7s. and 6d., becomes only 3s. and 9d., of which more than half will go in indirect taxation if spent on something liable to purchase tax at a high rate, or on a packet of cigarettes or a very small round of drinks.107

The burden of taxation undoubtedly affected perceptions of the welfare state. Labour speakers often referred to the welfare bene®ts and subsidies as valuable additions to the wages workers received and which deserved to be weighed in the balance when standards of living were being assessed. Attlee suggested in the 1951 election campaign that `to 106 107

`Discussions at Roffey Park', 14±15 February 1948, PRO T171/394. S. P. Chambers, `Taxation and Incentives', Lloyds Bank Review, April 1948, pp. 1±12 at p. 2. Ian Little commented in his assessment of Labour's ®scal policy that `A worker whose marginal expenditure was largely on beer, pools, tobacco, and entertainment might easily be paying as much as 60±70 per cent of his gross marginal earnings in taxation': `Fiscal Policy', pp. 183±4.

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The changing balance of tax interests, 1940±1954

current wages must be added the value of social service bene®ts'.108 The purpose of this was not only to show the bene®ts which a Labour government could bring but also to encourage wage restraint, since it was telling the workers they did not have to rely upon take-home pay for their standard of living. But this assumed that these social bene®ts were in some way `free' and paid for by a redistributive tax system, and this was not readily accepted. The Amalgamated Engineering Union's (AEU) Monthly Journal told its members that the social service bene®ts equalled `a real wage of considerable signi®cance for each family', but it also noted that `It too is an earned income. The subsidies and the cost of social services come out of revenue obtained from taxation.'109 The working class contributed to that taxation. It was James Callaghan's estimate that `in 1947±8 the lower income groups ®nanced the social security schemes through their own direct and indirect tax payments, and that in the redistribution of incomes that took place the transfer from rich to poor was much smaller in size than the transfer of income inside the lower income groups themselves'.110 Labour could claim that government was doing something more ef®ciently with their own money than individuals could do with it themselves, but not that it was a gift, arranged by the state, from the rich. The concept of a `social wage' was therefore hazy at best. Because the burden of taxation was understood by the working class, social bene®ts were not a gift, but, like a wage, had been earned and could be examined critically. Indeed, the National Executive of the Labour Party (NEC) noted in its post-mortem on the 1950 general election that while social bene®ts had been popular, `possibly there was just the beginning of some degree of anxiety on the ®nancial cost; this last aspect was broadly associated with the general one of the level of taxation'.111 108 109 110

111

The Times, 11 October 1951, 6d. AEU Monthly Journal, April 1949, editorial. James Callaghan, `The Approach to Social Equality' in D. Munro (ed.), Socialism the British Way (London, 1948), pp. 127±52 at pp. 139±40. The empirical basis of Callaghan's judgement is not apparent from his essay, although a similar ®nding was published by an American observer, Findlay Weaver, in `Taxation and Redistribution in the United Kingdom', Review of Economics and Statistics, 32(3) (1950), pp. 201±13 at p. 201. Herbert Morrison, `The Recent General Election and the Next', Labour Party NEC minutes, 22 March 1950, emphasis in the original. An editorial in the AEU Monthly Journal, while acknowledging that the burden of direct taxation had been eased in the 1950 budget, none the less felt that `direct taxation on workers' earnings above a very low limit is a matter of very serious concern, and it is by no means the case that the wage earner, or the trade unionist taxpayer, is unduly favoured as against other taxpayers': May 1950. It depends rather on the weight attached to `unduly'. The majority of workers kept a far larger share of their pre-tax income once direct taxes had been extracted than those above them. National Income and Expenditure, Cmd. 8203, PP 1950±1, xxi, table 12, p. 22.

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In the case of food subsidies a more direct relationship between bene®ts and taxes was struck. They were no different from other bene®ts, in the sense that it was not possible to establish how much the workers were paying for the subsidies themselves. The economist John Jewkes, no enthusiast for the state, put forward `the strong presumption that the working classes paid, in the form of consumption taxes, the whole or the greater part of their food subsidies'.112 The arguments in favour of food subsidies were not solely about redistribution, but about restraining wage demands by keeping the cost-of-living index from rising. Moreover, on paternalist grounds subsidies which ensured that food was cheaper than it otherwise might have been could still be justi®ed if they were paid for out of the proceeds of the duty on tobacco, for example.113 To many economists and Conservatives food subsidies which bene®ted everyone but were paid for out of everyone's taxation looked like unnecessary `churning' of state receipts and bene®ts. This became one of the main ways in which the two became connected. Reduce the subsidies and so reduce taxation, the argument ran, and you would improve the incentive to work, which was what the economy needed.114 The interest in incentives was attached almost exclusively to income tax. George Benson, reporting to Dalton that the ®nance group of Labour MPs had been concerned with the effects of high taxation upon incentives, went on, `Our main conclusions therefore relate to income tax.'115 To discuss incentives almost solely in terms of income tax has puzzled economists. In Ian Little's view, `A reduction in the incidence of indirect taxation upon the working classes, apart from being less regressive, may be almost as effective in increasing incentives as a reduction in direct taxation.'116 The apparently misplaced popular attention on income tax had certain damaging consequences. Because those earning less than the average industrial wage (who were also married with children) did not pay income tax they could not receive any bene®t from the intense concern with incentives and income tax. They were also vulnerable to any reduction in food subsidies and, since this was usually 112

113 114 115 116

The Times, 18 October 1951, 7e. For the view from a supporter of subsidies that they could never be tied to a particular form of taxation, and therefore the redistributive effect would always be dif®cult to determine, see T. Balogh, `Food Subsidies', Bulletin of the Oxford University Institute of Statistics, 10 (1948), pp. 322±40, esp. p. 335. As argued by Hugh Gaitskell in the 1946 budget debates: H. C. Deb., 421, col. 1995, 10 April 1946. See W. A. Lewis, The Principles of Economic Planning (London, 1949), p. 32. Letter from Benson to Dalton, 21 February 1947, PRO T 171/389. Little, `Fiscal Policy', p. 184. For a recent discussion along the same lines, see John Kay and Mervyn King, The British Tax System (Oxford, 5th edn, 1990), pp. 120±3.

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The changing balance of tax interests, 1940±1954

linked as a policy proposal with reducing income tax, they would not necessarily receive any compensating bene®ts. The income tax threshold divided the well- from the moderately paid worker. A railway driver or a miner at the coal face was consistently subject to income tax throughout the period 1945±52 even if married with two children. A railway signalman in similar family circumstances would have hovered on the margin, while the less well paid in both industries ± surface worker in mining or a railway porter ± were well below the tax threshold. Once family obligations are removed from the picture, the lower paid get closer to income tax. The tax de®ned three groups to whom Labour might respond. First, there were the higherpaid workers, sometimes close to or overlapping with the lower middle class in earnings, and in exceptional cases (such as the coal miners) paying the standard rate of tax at the top of their pay. For these groups, who were essentially mainstream taxpayers, the crucial elements in tax changes were the rates charged (and the bands of income to which they applied) as well as the earned income allowance which reduced their taxable income. In Labour budgets until 1950 there were improvements in the earned income allowance in 1946, 1947(April) and 1948, as well as improvements in the rates (either for standard or the reduced rates for lower incomes) in 1945 (October), 1948 and 1950. For those who just crept into income tax the crucial factor were changes in the allowances for single, married and family adults, since these had the most effect on the threshold. Allowances were improved (not all round, but for particular categories) in 1945 (October), and 1947. As a result, the threshold fell from 1948 onwards, and in addition to the effects of wage increases, this brought more back into tax. In 1947±8 the tax threshold for a married man with two children was 109 per cent of manual workers' average earnings; by 1951±2 it had fallen to 97 per cent.117 Cost-of-living subsidies, which was a `negative' tax bene®ting especially those below the tax threshold who received no bene®t from income tax concessions, were held at a ®xed level from 1949 onwards so that consumers had to bear any future increase. Whereas in 1948 subsidies stood at 19 per cent of consumers' expenditure on food, by 1951 this had fallen to 13 per cent.118 The main pressure upon Dalton was to provide relief through the earned income allowance. The bene®ts of this stretched well into the middle classes, because it applied to the ®rst £1,200 to £2,000 of 117 118

H. C. Deb., 830, col. 220, 14 February 1972, written answer from Patrick Jenkin, chancellor of the exchequer, to Michael Meacher. Central Statistical Of®ce, National Income and Expenditure 1946±53, table 19(i), and Ministry of Food trading accounts.

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income, depending on the degree of relief being given and the total amount which could be removed from tax.119 The Inland Revenue and Treasury of®cials pressed Dalton in 1947 to improve this component of the tax because it eased tax on additional earnings and so improved incentives.120 This was also the view of the Labour Party's ®nance group: The increase in salaries and the pro®ts of small businesses consequent upon the rise in prices and the fall in the real value of money have, in our opinion, rendered the present ceiling [£1,200] obsolete. Not only do technical and managerial elements contribute very considerably to industrial ef®ciency, but to the Socialist there is a fundamental difference between earned and unearned income, which the present relief only inadequately marks.121

Dalton had been criticized during his ®rst budget of 1945 for not giving more earned income relief, but his chief interest seems to have been in removing those at the bottom end from income tax altogether, which meant raising personal allowances, as well as introducing an additional reduced-rate-band, again to help the lower-paid income tax payer. In 1947 his main action was to increase the earned income allowance, with only the child allowance being improved as well. But throughout the budget preparations he had, against the preoccupation with lightening tax on incentive grounds, still pursued the possibility that changes in allowances would exempt more from tax altogether. Since the exemptions made in 1945, more had come back into tax because of rising wage levels. Moreover, the improvement in personal allowances tended to help juveniles and single women, rather than the less well-off families. Because of the expense of improvements in all elements of the tax, choices had to be made and the loudest voices were those crying for incentives rather than speaking for the lower paid. Concerns about incentives involved both the amount of tax and the method of collection. PAYE was particularly transparent in the way it revealed the extra tax attracted by additional earnings. It had been designed in wartime to prevent a dif®cult adjustment to lower pay being accompanied by taxes demanded on the previous year's (and therefore higher) wage; the relationship between the system and increasing earnings had not been investigated. Even the system's architect, Paul 119

120 121

For example, the ceiling of income to which the relief applied was raised in 1948 `as a deliberate measure to bene®t administrative, professional and scienti®c workers with salaries above the £1,500 level': Board of Inland Revenue, `Note on Various Proposals in the Inland Revenue Field', 15 March 1950, PRO T 171/400. See the note of Edward Bridges to Dalton, 19 January 1947, and Gregg to Trend, 29 January 1947, PRO T 171/389. Benson to Dalton, 21 February 1947, PRO T 171/389. Dalton wrote on this letter, `Rather intelligent, but I must not even tell them this.'

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The changing balance of tax interests, 1940±1954

Chambers, had misgivings about the effect of PAYE on incentives: `In these days most wage earners know enough about their income tax to realize how much of their overtime pay goes in income tax, and there is no doubt that this discourages extra effort.'122 Although there was to be some disagreement about how far the knowledge of taxes affected economic behaviour, there was plenty of support for Chambers's view about the workers' awareness of taxes under the new system: `The workers are, in fact, very much alive to the arithmetic of the tax tables, but it does not require any intimacy with the tax tables to make the worker conscious of the fact that the marginal rate is greater than the overall rate.'123 The AEU Monthly Journal noted in 1946, before the public discussions of incentive intensi®ed, the resentment felt at the effect of tax on overtime and argued that the tax at its existing level `amounts to withholding from the worker a substantial part of the reward due to his increased efforts'.124 The miners provided the necessary focus for this issue because their level of pay carried them into the standard rate beyond the reduced rates of tax into which the majority of tax-paying workers fell, so exposing them to a sharp rise in marginal rates. As the Inland Revenue reported: we are told that in the collieries the wages of the man working at the coal face range a lot from one ®eld to another, and in some coal®elds runs at about £10 to £12 a week. This is above the ®gure of wages corresponding to reduced rate zones, and it would need considerable extension of the zones to reach such people as to reduce the standard rate on the marginal pound.125

Gaitskell, as minister of fuel and power, was under pressure to improve coal output. He discussed the matter with Ernest Bevin: `I said PAYE and income tax standard rate was really the root cause of a lot of the trouble. It was so close to our noses that we all overlooked it and argued that it did not really count. To my surprise, instead of saying that he disagreed, he said that he had been talking to the chancellor about this that very morning.'126 Bevin produced a scheme that only basic pay should be taxed, with any earnings arising from extra output to be free of tax. Repeating the basic incentive argument, Bevin wrote that the policy would give `what the cabinet has been looking for for a long time ± a wage policy which improves the standard of living without increasing 122 123 124 125 126

Paul Chambers, `Taxation and Incentives', Lloyds Bank Review (April 1948), pp. 1±12 at p. 2. C. J. Gregg, `Note on Income Tax and Incentives', 6 December 1947, PRO T 171/ 395. `Production and Manpower', AEU Monthly Journal, April 1946. Gregg to Trend, 12 March 1947, PRO T 171/389, p. 263. Philip M. Williams (ed.), The Diary of Hugh Gaitskell, 1945±56 (London, 1987), entry for 22 October 1947, p. 39.

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the costs.127 He used the government's interest in taxation, and the prospect of changes, in discussions with the TUC about wage restraint: `I do not want this mentioned in public. If you mention taxation it is dynamite, but all these things, PAYE, incentives, taxation of pro®ts, are being worked on at heat.'128 The objections to exempting overtime or incentive payments from tax had been rehearsed in the First World War and rested on the distortion of wage bargaining which such a development might encourage and the inequity done to those who had no scope for overtime or incentive earnings. However, as a result of Bevin's stimulus, changes were made to try to ease the position of the better-paid worker. Below the standard rate of income tax (at 9 shillings in the pound) were two reduced-ratebands, the lower one at 3 shillings in the pound for the ®rst £50 of taxable income, the higher one at 6 shillings in the pound for the next £75. In his budget of 1948 Cripps extended the range of the higher of the two to cover £200 of taxable income rather than £75. The purpose of this was to keep the higher earners amongst the working class from reaching the standard rate, which was seen as particularly damaging for incentives. According to Cripps, `it is very generally agreed that the incidence of income tax upon the medium paid wage earner and lower salaried members of the management and technical staffs is such as to act as a disincentive to greater efforts in production'.129 The taxpayer they had in mind was the miner at the coal face; since the lower of the two reduced-rate-bands remained unchanged, the measure did nothing to help the lower-paid worker.130 A broadly similar exercise was repeated in the budget of 1950, when an increase in petrol tax was used to create scope for reductions in income tax. Douglas Jay, the economic secretary, had pressed for these concessions on the grounds that they might improve the incentive for workers to increase their earnings through higher productivity even though, as he acknowledged, `we got singularly little gratitude for doing this before'.131 Just as the possibility of increasing allowances to remove people from tax had been rejected in 1948, so it was in 1950. The judgement of the Board of Inland Revenue shows why: 127 128 129 130

131

His memorandum of 15 October 1947 is in Bevin Papers, Foreign Of®ce 800/493/PE/ 47/28. `Discussions with the TUC', 17 November 1947, PRO T 172/2033. H. C. Deb., 449, col. 74, 6 April 1948. `Although it [the measure] would give no relief to those on small incomes, it would give considerable relief to those wage earners who were just inside, or just on the edge of, the standard rate zone': `Discussions at Roffey Park', 14±15 February 1948, PRO T171/394. Since these reliefs were compensated for by increases in beer and tobacco duties, the lower-paid worker who drank and smoked was even more severely treated. Note by Douglas Jay, 2 March 1950, PRO T 171/400.

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The changing balance of tax interests, 1940±1954

There would be a great deal to be said for doing this [increasing personal allowances] if there was plenty of money available for relief and the problem were simply one of equitable distribution. The objection to the proposal at the present time is that its effect on incentive is very small. So far as the majority of people are concerned it merely reduces the tax on basic wages and leaves the tax on overtime or additional earnings the same as at present.132

Against the weight attached to the interests of the skilled worker (and the scienti®c and technical grades) that responded to one brand of socialism (the emphasis upon work and earned income) should be put the other commitment to food subsidies, which represented another version of socialism (looking after the poor). Subsidies were defended by all three Labour chancellors, against the advice of economists and of®cials within the Treasury and the planning system that they be scaled down as a wasteful source of public spending. They had originated in the war as a way of maintaining peaceful industrial relations. To do this they had to keep the cost-of-living index stable. This instrumental purpose was the principal function of the subsidies, rather than to help working-class expenditure ± that is, to respond to the weights given to various foodstuffs in the cost-of-living index. But they also became an item of social expenditure because they undoubtedly helped the less well-off, especially pensioners and those with large families. Inevitably, they therefore embodied a sense of political commitment to the poor.133 At the time of Dalton's 1947 (April) budget he was looking for the establishment of a new cost-of-living index that would give less weight to basic foods than the existing index, which was based on working-class expenditure in 1913. Great care was exercised at the ministry of food over the timing of price changes so that the older index did not rise in such a way as to trigger wage demands. The index established in the summer of that year was meant to give Dalton greater freedom in reducing cost-of-living subsidies because it would be less sensitive to rises in food prices. At this point the government and of®cial opinion was moving in harmony, with both sides recognizing that drastic cuts in subsidies were out of the question, but that some containment of their cost in the future was desirable. It was in the supplementary budget of November 1947 that Dalton clashed with his of®cials over the subsidies. The idea of an autumn 132 133

`Note on Various Proposals in the Inland Revenue Field', 15 March 1950, PRO T 171/400. In the words of The Economist: `The subsidies are among the most formidable of our modern economic esoterica. They began as a defence against wartime in¯ation; they were extended after the war as an instrument of social policy; now they are held in some circles almost as an article of religion': `Arithmetic of the Subsidies', 15 April 1950, p. 845.

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budget was urged upon Dalton as a way of tackling in¯ationary pressure and also to convince American opinion that, after the convertibility crisis, Marshall aid would be going to countries fully in control of their ®nances: `If we now take a lead by taking a ®rm grip upon the in¯ationary position, the effect upon US opinion would be very great indeed.' Because, in the Treasury view, taxation could not close the gap suf®ciently, there had to be reductions in expenditure. Since cost-ofliving subsidies were the largest in¯ationary element, their reduction was the `one absolutely essential feature'.134 Reduction of subsidies did not in fact require a budget, and was essentially a purely administrative measure. But the Treasury of®cials thought a budget would be the best way politically of cutting food subsidies.135 This was reminiscent of the 1929±31 crisis where the need to produce a particular budgetary outcome was linked with cuts in a speci®c item of social expenditure. Then Snowden had accepted and supported the approach being urged by the Treasury and the Inland Revenue. In 1947 Dalton both achieved the desired disin¯ationary effect in the budget, and therefore paved the way for Cripps's `austerity' ± and resisted the pressure for cuts in subsidies. The Treasury case was weakened by the admission that, to minimize the threat of demands for increases in wages to make up for subsidy reductions, there would have to be compensating expenditure on family allowances. When pressed by Dalton as to why subsidies were any more in¯ationary than any other kind of expenditure, Hopkins admitted that the main reason was that they distorted the economy. To reduce subsidies would be to create a genuine surplus, since there was no longer the clumsy process of returning people's taxes to them in the form of subsidies.136 But the subsidies did have a practical advantage in permitting the increased dependence on home-grown food at prices the consumer could pay, so helping the balance of payments. Dalton, supported by Douglas Jay, was adamant. There was no real economic argument in favour of reducing subsidies, except that it might make workers work harder through hitting their consumption at a more sensitive point than, say, tobacco duties. But there would be `the maximum political commotion', it would make wage restraint very dif®cult, and `all the wrong people have been advocating cuts in food subsidies'.137 134 135 136 137

Edward Bridges to Dalton, `Autumn Budget', PRO T 171/392. Dalton's meeting with of®cials, 8 October 1947, PRO T 171/392. Dalton's meeting with Bridges, Hopkins, Eady and Gilbert, 30 September 1947, PRO T 171/392. Dalton responding to a note of Sir Edward Bridges, 22 October 1947, PRO T 171/ 392. In the same note Bridges left no doubt as to the strength of feeling on the part of the Treasury of®cials: `We have not, I hope, underrated the serious political dif®culty

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The changing balance of tax interests, 1940±1954

Jay found that he had to encourage Cripps against the cuts in subsidies pressed for by his of®cials, and the outcome was that subsidies were held at a ceiling with consumers therefore having to carry the burden of any further increase in prices.138 This in itself provoked opposition within the labour movement in 1949. According to the AEU Monthly Journal the budget `came as a real shock to labour and trade union feelings', and J. N. Figgins, general secretary of the National Union of Railwaymen (NUR), wrote in his union journal of the `widespread disappointment among workers at the budget proposals'.139 It was commonly thought that the budget explained some of Labour's losses in the London County Council elections in the following May, and although Cripps won support for his budgetary strategy at the party conference a delegate reported that `after the chancellor's budget statement I had the door slammed in my face again and again, with people saying, ``We don't want to know you. You are taxing the people's food.'' '140 By 1950 these questions were subject to the pressure of electoral imperatives. The budget, on Cripps's insistence, followed rather than preceded the election, which was held in February and was much to Labour's cost.141 With a small majority of ®ve there was scrutiny of the outcome and consideration of what sort of budget should be introduced if they were forced to go to the polls again in a short time. The analysis of the election which found favour with the mainstream of the party focused on the loss of seats around Greater London ± the `dormitory' constituencies ± where there was a strong lower middle-class presence and where taxation was identi®ed as an important factor. Morgan Phillips, the party's general secretary, noted that `the weight of taxation appears to have been most keenly felt among the lower and middle ranks of the salaried and professional groups, especially the teachers, who are also aggrieved by the salary question'.142 According to Anthony Cros-

138 139 140 141

142

which you and your colleagues see in any drastic treatment of subsidies on these lines; and we do not propose to trouble you further with this question if we are told that your considered view is against such action as we recommend. But we should, as I know you will agree, be failing in our duty if we do not tell you frankly the very strong views which we have all formed on the merits of this vital question at this crucial moment.' Jay, Change and Fortune, p. 184. Editorial, AEU Monthly Journal, May 1949; Railway Review, 15 April 1949. LPAR, 1949, p. 318. Douglas Jay argues in his memoirs that the election might reasonably have been delayed until later in the year, by which time the post-devaluation conditions would have improved. Had Labour been returned with a bigger majority then there would have been no need for the subsequent election (and defeat) in 1951. Against this is the demonstrable failure of the party to renew itself for another long stretch in of®ce. Jay also admits that the government had run out of reforms: Change and Fortune, p. 193. Labour Party NEC minutes, `Notes on the Election', 22 March 1950. See also H. G.

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land, proteÂge of Dalton and newly elected for South Gloucestershire, `the most important single issue which caused these people to swing Tory was probably the weight of taxation', and `the only way we can quickly bene®t them is by taxation relief, and this must be attended to in the coming budget'.143 The advice to Cripps from key ®gures in the party was that the forthcoming budget should focus on tax reductions rather than improving the food subsidies. This was certainly Gaitskell's view and Dalton, who had defended the subsidies so stoutly in 1947, took the same line: It is worth considering whether, to offset prospective increases in the cost of living following devaluation, you should not increase the total of food subsidies. That would help those who are now below income tax level, and so would gain nothing from income tax reliefs. But on balance, I prefer a concentration of available relief on income tax reductions, particularly if, as I anticipate, we have another election within 6 months.144

This was the outcome of Cripps's 1950 budget, with income tax reductions being preferred over increases in food subsidies. Given the belief within the Budget Committee of of®cials that in¯ationary pressure had to be contained yet taxation was already dangerously high (and therefore cuts in expenditure had to be found), it was a sign of a battle won in earlier years that they accepted that any cuts in food subsidies would be impracticable.145 There was an alternative view from those around Bevan, helped by the economist Dudley Seers, which argued that there was more scope than conventionally assumed for help to the lower paid and for restoration of cuts in the capital investment programme which had been made after devaluation in 1949. An editorial in the Tribune also announced some disappointment with the budget: `the last budget has uncovered the problem again in its most dramatic form. It was a budget which gave no concession to the lowest paid workers.'146 This corresponded with an electoral analysis which stressed the importance of winning more votes

143

144 145 146

Nicholas, The British General Election of 1950 (London, 1950), p. 296 and Morgan, Labour in Power, p. 403, where Herbert Morrison is reported as emphasizing the party's appeal to the middle clases in his marginal seat of Lewisham. `The People Who Didn't Vote Labour', Tribune, 10 March 1950. See the judgement of John Turner about the importance of the `lower scale' middle classes in Labour's defeat in 1951: `though there were few of them, their defection was critical': ` ``A Land Fit for Tories to Live In'': the Political Ecology of the British Conservative Party 1944±1994', Contemporary European History, 4(2) (1994), pp. 189±208 at p. 196. Dalton to Cripps, 10 March 1950, PRO T 171/400. For Gaitskell's view see Morgan, Labour in Power, p. 410. The election did not, of course, come until October 1951. `Draft Memorandum by Budget Committee', BC(50)12, in PRO T 171/400. Editorial, `Subsidies, Wages and Society', Tribune, 5 May 1950.

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The changing balance of tax interests, 1940±1954

from within the working class, rather than focusing upon the middle classes.147 The value of food subsidies and their signi®cance for Labour's appeal was debated more fundamentally in preparations for the 1951 budget. With the demise of the pay policy, John Edwards, the new economic secretary, thought their position deserved examination. On the grounds that `many people shared the view that food subsidies were an inef®cient form of social service in that they bene®ted equally, and without regard to need, rich and poor alike', he proposed what the Conservatives had set out in their manifesto in 1950 and what was to prove a remarkably close anticipation of what R. A. Butler was to do in his budget of 1952, namely a halving of the food subsidies compensated for by increases in family allowances and national insurance bene®ts, and further tax reductions. Jay continued his opposition to any change: `subsidies were part of the long-term policy of the government for the permanent redistribution of current income, and they were therefore desirable in themselves.'148 The line taken by of®cials was that even on redistributive lines the subsidies were wasteful, because so many people bene®ted from them who did not need to.149 But Jay had the answer to the suggestion that subsidies be replaced or compensated for with other social service bene®ts, namely that these would tend to bene®t particular groups, such as pensioners or those with large families. He argued that `the practical dif®culties of ensuring that all people who had to pay more for food would get at least some other monetary bene®t, would be insuperable as there was a ®eld between social service bene®ciaries and the lowest level of income tax payer which could not be dealt with'. Subsidies were clearly important to Labour although their precise function was contentious. Even though Labour's pay policy was over, the prospect of subsidy cuts leading to wage claims remained unpalatable; equally their transformation into a social service and a means of maintaining a minimum standard of living meant that they `had become 147

148

149

Tribune's recommendations for the budget can be found in its editorial `Wanted ± a Challenging Budget' of 31 March 1950, and its electoral analysis in `The Danger of Compromise', 24 March 1950. Dudley Seers's contribution was in `The Flaws in the Survey', 7 April 1950. Disappointment that the budget had not done enough for the lower paid within the working class can be found in `Was it a Good Budget?', 21 April 1950. `Discussion at Roffey Park', 17±18 February 1951, appendix A, pp. 2±3, PRO T171/ 403. These discussions are also treated in Howson, Monetary Policy, pp. 279±80, while the signi®cance of subsidies in Labour's budgets is analysed in Neil Rollings's important paper `British Budgetary Policy: a ``Keynesian Revolution''?', Economic History Review, 41(2) (1988), pp. 283±98, esp. pp. 286±92. According to Edwin Plowden: `There could surely be no argument about the food subsidies as being other than a wasteful form of redistributing wealth.' `Discussions at Roffey Park', appendix A p. 5.

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105

part of an edi®ce which was thought dangerous to dismantle, even partially'.150 But on the other hand, to increase subsidies to neutralize price rises implied a substantial increase in taxation which Labour chancellors were unwilling to contemplate. Indeed, it was this point ± that Cripps had already put a limit on subsidies ± which Conservative speakers drew upon to counter the charge at the 1950 election that a Conservative government would cut the subsidies.151 The main piece of social investigation brought to bear upon the issue was Rowntree and Lavers's study of poverty in York in 1950.152 This study showed that food subsidies were an important element in the prevention of poverty. Without food subsidies 17.7 per cent of the working class would have been in poverty compared with the 2.8 per cent who actually were. But this ®gure, striking in itself, was of little value for public debate because it was always assumed that there would be compensation, in the form of social service bene®ts and tax reductions, for any cuts in food subsidies. Gaitskell's decision to keep the limit on food subsidies because of fear of wage demands if prices rose, and the request for an analysis of the impact of a reduction in subsidies, was a clear indication of the prevailing thinking on the subject in Labour's Treasury group. Taxation and the party Gaitskell's only budget of 1951 has been called a `political and economic disaster'.153 The essential features of the budget and the storm it provoked are well known. It was a rearmament budget to deal with the Korean War, committing the government to spending a sum on war production which was unrealizable because it was not at all clear that the real economy was ¯exible enough to change direction in the way the ®gures assumed. Yet the need to increase military spending put other components of government expenditure under critical scrutiny, and this included the National Health Service. Gaitskell's decision to levy charges on dentures and optical services being dispensed under the NHS ± which were to raise £13 million ± provoked the battle with 150 151 152 153

Briggs, `The Social Services', p. 374. Anthony Eden in The Times, 7 February 1950, 4a and b. B. Seebohm Rowntree and G. R. Lavers, Poverty and the Welfare State (London, 1951). Morgan, Labour in Power, p. 456, and pp. 422±61 for an acute treatment of the whole episode. Pimlott, Dalton, pp. 592±603 is also perceptive on the way social class and attitudes towards government and power were revealed by the Bevan/Gaitskell dispute.

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The changing balance of tax interests, 1940±1954

Bevan which led to the latter's resignation and the reappearance of serious disunity in the party throughout the 1950s. Health expenditure had been de®ned as a `problem' before the battle in 1951 between Bevan and Gaitskell. In the budget in 1949 Cripps had canvassed opinion on adding one shilling to the weekly national insurance contributions to meet the increasing costs of the NHS. In the end nothing came of this, with Jay in particular arguing that such a charge would be particularly regressive and dif®cult to defend.154 In April the following year Cripps tried to impose charges on dentures and spectacles, having failed to institute prescription charges the previous autumn.155 Again he failed, although a cabinet committee was set up to examine health service ®nances, which imposed a ceiling on expenditure. It is possible to see behind these particular issues ± which at this stage did not seriously affect the overall harmony of the government ± a debate about the burden of taxation. It is apparent in Cripps's budget speech in 1949, which stressed that the limits of redistributive taxation had been reached and that health services were not to be indulged in as a free gift but had to be paid for out of taxation.156 It is there in the budget discussions of 1950, where a frequent theme was the way the wealthier classes were spending out of capital, and that the limits to the total savings that might be achieved by the tax policies of the state had been reached. Jay suggested that `taxation has been put at such high levels that it is very doubtful whether it increases national saving. Indeed, psychologically, I think we may well have reached the point where some relief at the most effective point might actually call forth more effort and at any rate some extra savings.'157 The link with taxation was also made when Gaitskell urged that priorities within the health service needed thinking about in the light of the complaints he received about the burden of income tax on wage earners.158 There were, then, real issues at stake in the debates about rearmament and health spending, which were the raw material of the Bevan/Gaitskell dispute. But there were also echoes of the old days, when Gaitskell's enemies likened him to a second Snowden.159 The budget had become a major reference point for the two camps. As Bevan, Wilson and Freeman argued in Going Our Way, a Tribune pamphlet published in 1951, `Most of the problems everyone is now discussing stem, in the 154 155 156 157 158 159

`Discussions at Roffey Park', 5±6 February 1949, PRO T171/397. Morgan, Labour in Power, p. 412. H. C. Deb., 463, cols. 2083±4, 6 April 1949. Memorandum, 2 March 1951, PRO T 171/400. Gaitskell, `Defence, the Budget and ``Tribune'' ', Tribune, 28 December 1951. The phrase was Bevan's; Morgan, Labour in Power, p. 448.

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®rst place, from the budget.' The key claim of this group, that `since the budget the rich have been growing richer and the poor poorer', had been made in an earlier pamphlet, One Way Only. What had been for so much of the period since 1945 both an instrument and an expression of Labour's coherent purpose, and a blend of both socialism and expertise, had now turned out to be once more the weapon of its self-destruction. Had nothing changed from the past? The 1951 budget was indicative of the new world in the deployment of economic expertise in its preparation. As Alec Cairncross and Nina Watts have described it, `the budget of 1951 was one of great complexity, backed by careful reasoning and a much improved economic forecasting apparatus. It is doubtful if any budget has owed more to the work of the Economic Section and in retrospect the budget judgement that additional taxation should be limited to £150 million seems entirely defensible.'160 Gaitskell himself expressed the new function of the budget and the way it rested upon a new kind of expertise when he argued that, even without rearmament, the budget would have had to guard against a general in¯ationary position. He explained to the Tribune that his critic had misunderstood the essence of the budgetary process: `Mr Foot does not seem to understand that the budget is nowadays essentially an instrument of economic policy and not just a balancing of government accounts.'161 The economist Dudley Seers, who wrote with distinction on issues of distribution in this period, produced an interesting paper for the `Keep Left' group, for which he served as economic adviser, on the degree to which the use of the budget as an instrument of economic management had distanced it from political scrutiny. Seers argued that it had such an effect: `The consequence of the new technique is that there has been a transfer of power towards economists and away from accountants and politicians.'162 The aim of the budgetary process under Keynesianism was fairly simple to grasp: the budget had to eliminate, through taxation, the spendable income that could not be absorbed by consumption or voluntary savings. The dif®culty was that following the linkages from industrial production through assumptions about private savings and the impact of taxes on consumption was inevitably tricky for non-expert outsiders. The small `Keep Left' group, and its successor, the Tribunite group, exemplify this.163 `Keep Left' copied the party within which it 160 161 162 163

Cairncross and Watts, The Economic Section, p. 256. Letter in Tribune, 11 January 1952. Dudley Seers, `Functional Finance: Practice', `Keep Left' group paper no. 25, LPA, Jo Richardson Papers. When the `Keep Left' group met to discuss the budget on 4 April 1950 it comprised Richard Acland, Fenner Brockway, Donald Bruce, Barbara Castle, Richard Crossman,

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The changing balance of tax interests, 1940±1954

was located by setting up various study groups but also recruiting Seers as an economic adviser at an early stage.164 In addition to Seers, the group also received advice from Thomas Balogh and David Worswick. The sort of critical line on Cripps's budgets which Seers provided ± that the budgets had overestimated the degree of disin¯ation necessary ± required a close analysis of the Economic Survey and, in particular, the effects upon consumption of particular taxes.165 But this did not materialize into a substantial opposition to the budget, since the group decided to offer general praise for it, tempered only by some detailed criticisms.166 Before the 1951 disaster, there was remarkably little criticism of the budgetary strategy. The possibility that budgets might have been treated sceptically as the outcome of technical expertise rather than as the product and expression of party ideology never developed. One of the reasons for this may have been the defence of the food subsidies, which was a consistent feature throughout. The earlier discussion has suggested that the arguments about food subsidies were tending to go in favour of the economists and the Conservatives in the sense that Labour chancellors had to recognize the need to keep some control over their cost and by the end of the ®rst Labour government consumers were no longer fully protected against price rises. Moreover, the justi®cation for the subsidies in terms of redistribution was still imperfectly formed. But Dalton was absolutely right when he had said during the preparations for his autumn budget in 1947 that the main dif®culty with cutting subsidies was that all the wrong (that is, non- or anti-Labour) people were proposing it. It was against the instincts of the party to reduce subsidies, so although there could be complaint that a ceiling was eventually placed upon them the refusal to reduce them was what mattered and it amounted, in the Tribune's view, to a `clear de®ance of Tory doctrine that food subsidies should be regarded as a temporary evil'.167 This common attitude clearly indicated that Labour chancellors were not merely mouthpieces for economic specialists. Yet even this dissident approach by the Labour chancellors rested upon the con®dence which economic knowledge gave them. Dalton, Jay and Gaitskell were self-consciously `economists' and characterized themselves as

164 165 166 167

Harold Davies, Leslie Hale, Tom Horrabin, Marcus Lipton, Ian Mikardo, Dudley Seers and Tom Williams: `Keep Left' group minutes, 4 April 1950, LPA, Jo Richardson papers. `Keep Left' minutes, 25 July, 27 July, 31 August, 29 September 1949. See his paper `The Trap', 3 April 1950,`Keep Left' memoranda, LPA, Jo Richardson Papers, and his article in Tribune, `The Flaws in the Survey', 7 April 1950. `Keep Left' minutes, 18 April 1950, LPA, Jo Richardson Papers. `Was it a Good Budget?', 21 April 1950.

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such, whatever differences of approach they had. Cripps was the odd one out, but he relied upon Jay and Gaitskell to provide alternative advice to that of his of®cials in the post-devaluation period in 1949, when there was considerable pressure to modify Labour's social programme in the interests of an anti-in¯ationary policy.168 This was a long way from Snowden's time as chancellor. Then, more or less inevitably, `responsible government' meant drawing upon, and following, the administrative expertise of the Treasury and the Board of Inland Revenue. While there were radical critiques of conventional budgetary strategies, these did not lie within the mainstream of the party. In 1945±51 they did. The Labour chancellors of this period had created a socialist version of good government, which owed little to the Treasury or the Inland Revenue. Developments in the role of the budget heightened the emphasis upon economic expertise, and this became a powerful bond between the key Labour ®gures of this period. While all budgets, including those from before the Keynesian period, required a level of technical mastery for sustained participation in their proceedings, the idea that a knowledge of economics in particular (as opposed to law or accountancy, two equally relevant areas of expertise) for arguing about taxes in detail was politically useful was certainly much enhanced by the post-1945 experience. Gaitskell, in his budget speech, referred to this when he said during his opening analysis that `I apologise to the Committee for bringing in economics again, but it is after all fundamental to this whole study.'169 He was, as he explained, dealing with a problem of some complexity. Deterioration in the terms of trade meant that more exports had to be sold abroad for the equivalent volume of imports. Resources, too, had to be directed towards defence to meet the military commitments undertaken for the Korean War. The use of resources for home consumption had to be discouraged. But there was a danger of overdoing the disin¯ationary force of the budget. If exports could not be raised because there was inadequate demand in overseas markets (compared to shortages of supply from home producers) then to restrain consumption at home might merely mean unemployment. The same was true of defence spending, where there was going to be heavy pressure upon the engineering industry and upon steel supplies. Again, to dampen down consumer demand in the hope of releasing resources for defence production might, in the context of a bottleneck in steel, have produced unemployment but no compensating increase in defence output. 168 169

Dalton, The Political Diary of Hugh Dalton, 1918±1940, 1945±1961, ed. Ben Pimlott (London, 1986), entries for 19 July and end of July, pp. 453±5. H. C. Deb., 486, col. 837, 10 April 1951.

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The changing balance of tax interests, 1940±1954

But Gaitskell did not assume that his `remarkable analysis of the very complex economic problem with which he was confronted', as one economist has described it, would by itself carry the day.170 There were too many uncertainties for budgets simply to be matters of economic analysis; rather, they were products of judgement more broadly conceived. They were an expression of character, too. When a chancellor made his judgements, therefore, it was `enormously important that he should do so honestly and objectively and with a very strict sense of responsibility. It is no less important that, having made up his mind, he should stick to it and not be moved by pressure of any kind, however insidious and well intentioned, into changing it.' He then went on to invoke the example of his predecessor: `I have no doubt at all ± and I am sure the committee will agree with me ± that the decisions of my predecessor were made in this spirit, and I have not the slightest doubt that because of that they were able to play a vital part in protecting us from in¯ation and creating our economic recovery.'171 Gaitskell was resting his case upon the authority of a chancellor with ultimate responsibility for every component of the budget. As Philip Williams observed, Gaitskell had already been defeated in Cabinet over pay for the armed services as part of the new defence commitments, where the amount at stake had been £15 million within an item of £200 million, itself part of a larger increase in defence spending of £1,100 million. Gaitskell had been `horri®ed by the entirely casual attitude to the £15 million'.172 So while the broad strategy of the budget rested upon the economic case which Gaitskell set out so authoritatively in his speech, this could not directly provide the support for the details of the budget which were to be so contentious. The difference in scale made this inevitable. The economic analysis of the budget was dealing in quantities which were far bigger than the sums involved in the health service element and also carried with them errors and variations which swamped the £13 million that Gaitskell was demanding as a contribution from spectacle users and dental patients as part of the containment of government spending. It was therefore not surprising that the divisions over the 1951 budget could be engaged so widely and ferociously precisely because its dimensions were easily grasped. The fact that the context for what was essentially a dispute about the ®nances of the health service was the shouldering of new defence burdens, which were themselves matters of 170

171 172

G. D. N. Worswick, `The British Economy 1950±59', in G. D. N. Worswick and P. Ady (eds.), The British Economy in the Nineteen-®fties (Oxford, 1962), pp. 1±75 at p. 11. H. C. Deb., 436, col. 840, 10 April 1951. Philip M. Williams, Hugh Gaitskell. A Political Biography (London, 1979), pp. 227±8.

The Conservative response

111

conjecture and enormity, made matters worse for Gaitskell. If the government's ability actually to spend the amount set aside for defence was in doubt ± a point of which Gaitskell must have been aware ± why the insistence upon a small but symbolic contribution to health service ®nances? And Gaitskell's friends, most strikingly Douglas Jay, were against him in thought if not in deed.173 For Gaitskell it could be said that socialist planning ± like conventional budgeting ± might require insisting upon the component ®gures rather than be seen to be trimming in the face of political considerations. But to clothe a dispute which also had personal and class dimensions to it in the legitimation of `planning' was not necessarily more convincing than to sustain the opposite case in the language of `socialism'. As John Bonham was to show in his study of the middle-class voter drawn from opinion-poll evidence, Labour voters from that class, who might have been thought the more sympathetic to the governing ethic than working-class supporters, rarely mentioned planning as the justi®cation for their party choice and instead preferred `equality, fairness and other aspects of redistribution' for which the free health service had an obvious relevance.174 For so much of the period of the Labour governments economic expertise had been yoked to the exercise of power in a way which reinforced rather than diluted Labour's message. The possibility that socialism might also mean ef®cient and able government seemed to have been ful®lled. It is therefore somewhat ironic that one of its most gifted exponents should have presided over a budget which returned ®nance to the centre of Labour's struggle to reconcile a commitment to protest and radicalism with the exercise of power. The Conservative response The tendencies apparent in Labour budgets, of responding more to the interests of the higher- than the lower-paid worker on the grounds of `incentives', were intensi®ed under the Conservatives. The recovery by the Conservatives from their defeat in 1945 was based on their view that the people were disaffected with `austerity, rationing and controls'.175 173 174 175

Jay, Change and Fortune, pp. 204±5. John Bonham, The Middle Class Vote (London, 1954), p. 88. Ina Zweineger-Bargielowska, `Rationing, Austerity and the Conservative Party after 1945', Historical Journal, 1 (1994), pp. 173±97 at p. 170. Broadly the same view was held by the Labour leadership: according to Gaitskell, `in post-war years when the goverment intervened so much there were bound to be grievances piling up especially among the lower middle class and middle class who had been offended by our words and [felt?] they had at any rate suffered considerable economic disadvantage by our actions': Williams, Diary of Hugh Gaitskell, 21 March 1950, p. 167.

112

The changing balance of tax interests, 1940±1954

They also argued that the crushing burden of taxation imposed by Labour had sti¯ed initiative as much for the worker on piece rates or earning overtime as for the professional and salaried classes. It had been acknowledged, too, during the years of opposition that the chance of achieving tax concessions through cuts in social service expenditure was far less promising than through reductions in food subsidies.176 The 1952 budget offered a perfect opportunity to demonstrate the alternative approach of the Conservatives. Within a budget that had a small impact on consumption, Butler achieved a dramatic political effect.177 The Conservatives wished to remove the assistance of subsidies and by compensation ease the burden of taxes to provide an alternative public ®nance±pay relationship to that operated by Labour. The 1952 budget offered cuts in subsidies, increases in earned income relief and allowances (that is, tax reductions), modi®cations to the reduced-ratebands and increases in family allowances. In place of the two reducedrate-bands that had existed under Labour, there was now a third which prevented a sharp increase in marginal rate as workers moved closer to the standard-rate-band of income tax. Its measures also removed 2 million lower income tax payers from tax altogether. Butler's budget was deliberately aimed at segmenting the working-class tax interest: miners, for example, were speci®ed in his opening speech as bene®ting more from tax reliefs than they would lose by reductions in food subsidies: `A miner at the coal face, doing the hardest and most valuable work in the country, may curse the cuts of which he has been told a great deal, and yet, by more production, make extra earnings under this budget which will recompense him several times over for any cuts made.'178 This again was consistent with Conservative Party tactics, where they sought votes from groups who, economically, were on the boundary between the working and middle classes. Conservatives speaking later in the budget debate emphasized the same point: one wished to `hail this budget as the ®rst post-war recognition of the supreme value to us of skill and skilled workers in this country at the present time'; another claimed that `the skilled workers are now regarded as the class enemies of the party opposite'.179 For their part, Labour MPs criticized the way 176 177

178 179

Harriet Jones, `The Conservative Party and the Welfare State, 1942±1955' (London University Ph.D., 1992), pp. 173±4. According to Sam Brittan, `the most interesting thing about the 1952 budget was how Mr Butler managed to make a budget that made no net change in the tax burden an interesting and exciting one': Steering the Economy: the British Experiment (New York, 1971), p. 191. H. C. Deb., 497, col. 1303, 13 March 1952. H. C. Deb., 497, col. 2007, 17 March 1952 (M. McCorquodale) and col. 1947 ( J. Amery).

The Conservative response

113

in which the budget bene®ted the better-paid workers at the expense of old age pensioners and those receiving state bene®ts.180 They were also keen to show that many of those on lower working class incomes ± bus workers, shop assistants and dockers ± would not bene®t from tax cuts in the budget. But it was arduous work: The Economist remarked of the opposition benches that `they grew silent, and the faces there grew glum with deep anger, as Mr Butler bestowed ± with continuing sweet reasonableness ± his bene®ts to their supporters'.181 Trade unions on both sides of the divide exploited by the budget grasped the signi®cance of what was being attempted. Abe Moffat of the National Union of Mineworkers (NUM) commented that `they are trying to win a section of the working class and not just the middle class'.182 Among the representatives of the lower paid there was an inclination to regard this not as a marked departure from earlier trends but rather one of continuity. Ted Hill of the Boilermakers' Union pointed out that even though Labour's budgets had been shaped by the need to contain in¯ationary pressures, `he [Cripps] gave increases to those in the higher wage groups by way of tax relief precisely in the way that Mr Butler has done recently'.183 The postal workers' journal said much the same thing: `although this has been a Tory budget, it has done exactly the same as the previous Socialist budgets ± hit the low wage earner. Once again the high wage earner is laughing.'184 The debate about the 1952 budget raised more explicitly the tension between different sections of the working class in the manner of tax and bene®ts as understood in contemporary thought. The `incentives' perspective regarded the worker as an individual able to increase his income by extra effort. He was not the same as a worker with a heavy average burden of tax who might well have continued to work in order to maintain a certain standard of living. The worker conceptualized in the discussions in the 1940s and 1950s was troubled rather by the burden of tax on extra earnings that might have taken him into a higher tax band than his normal wages would have attracted. He was being presented with a choice about whether to work for extra money or not. The lowerpaid worker had a very different perspective. He was left out of the discussions about income tax concessions since he did not earn enough to enter income tax at all. He had to deal not with a choice about 180 181 182

183 184

H. C. Deb., 497, col. 1993, 17 March 1952 (Houghton). The Economist, 15 March 1952, p. 631. Procedings of an NUM special conference on the extension of the hours of work and the budget resolutions, 14 March 1952. I am grateful to Mr Arthur Scargill for allowing me to consult these records in Barnsley. TUC Annual Conference, 1952, p. 492. The Post, 29 March 1952.

114

The changing balance of tax interests, 1940±1954

whether or not extra work was worthwhile net of tax, but with the necessity of maintaining his family's standard of living. The experience of his wife, faced with the dif®culties of managing a small budget and adjusting customary food habits to that, was as much a force in the wage perspective as that of her husband.185 In terms of numbers, there was no doubt where the advantage lay, since roughly 6 million lost and 14 million gained.186 There was no real argument that a married man with two children earning £500 or more bene®ted from the budget. A miner at the coal face (£708 per year) or a train driver (£527) gained comfortably. The railway porter (£377) was a loser. Below the £500 level there was a redistribution in favour of the single and childless (less damage done by cuts in subsidies and more likely to be within income tax) and those with four or more children (because of increases in family allowances). The connection between the budget and the trade unions offered a way of imposing a more simple `class' dimension to the question. The TUC, for example, was keen to draw out the contrasts between the Labour and Conservative budgets, which turned more on the signi®cance attached to the reduction in food subsidies than to tax reliefs for the better-off. It was here that the strategy of segmenting workers by tax interest might have been frustrated by more visible industrial perspectives. A group who had lost out from the budget and managed to seek recompense through pay might then have triggered wage demands from those who had already bene®ted in tax terms. In the planning of the budget the railwaymen were picked out as possible instigators of such a process, since many of them would not have felt the advantage of tax reliefs but would have suffered the effects of high prices caused by the reduction in food subsidies: `The risk is that small sections of the population who are affected in this way would lead to demands for wage increases which, if granted, would inevitably 185

186

An illustration of this is provided by the new president of the National Union of Railwaymen, J. S. Campbell, when he made their pay claim for 1953, in which the cost of living featured strongly: `I want to make it clear beyond all doubt that the alarming rise in food prices has intensi®ed the housewife's problem. It has shattered any academic conception of the cost of living': MRC, NUR archive, MSS 127/NU/4/1/41, Railway Review, 13 November 1953. Estimates were provided by Joan Mitchell, `The Number of Incomes and the Effect of the Budget', Bulletin of the Oxford University Institute of Statistics, 14(6) (1952), pp. 189±94, and by the Board of Inland Revenue. The Board's estimates appeared in response to an article in the Tribune, `Who is Really Better Off ?', 21 March 1952. The Board's estimates are in PRO T 171/410, note of 25 March 1952. The impact of the budget was also discussed in C. R. Ross, `The Food Subsidies and the Budget', Bulletin of the Oxford Institute, 14(3) (1952), pp. 65±81. Ross, through Seers, was brie¯y an economic adviser for the Bevanite MPs before joining the Cabinet Of®ce. `Keep Left' minutes, 6 May and 1 July 1952, LPA, Jo Richardson Papers.

The Conservative response

115

spread over the whole ®eld.' The budget group was therefore very keen to ®nd out the likely effect of the changes on wages. Sir Godfrey Ince, permanent secretary at the Ministry of Labour, was guarded: [Ince] did not see any reason why the government should not get the proposition put across that the increase in the cost of living was, on this occasion, being met substantially by increases in social service payments and decreases in taxation. But he emphasized that this was only likely to be achieved if the government could persuade the trade union leaders of the reasonableness of the action taken, given all the circumstances with which we are faced.187

How did this apparently provocative budget affect pay and industrial relations? There were two aspects to this question. First, there was the extent to which, in the face of its differential impact, the trade unions nevertheless made common cause and regarded the budget changes as a shared grievance. The second was how far such grievances could be incorporated into pay bargaining. The TUC opposed the budget as an example of Conservative attitudes and a change in policy from the previous government. The miners and the railwaymen were two key groups on opposite sides of the 1952 budget. At a special conference of the NUM held in March 1952, principally to discuss working hours, the leadership felt that they had to make some comment about the budget, `just for fear that somebody thought we had fallen for the income tax reductions, we considered it better to place on record our views'. These were quite straightforward: `the reduction in food subsidies in the face of the request made by the TUC to increase them, and the observations made in the recent election by important members in the government, is an affront to the people and tantamount to a reduction in wages.'188 But what effect did this have on the pay strategy of the union? The union had worked out where the net advantage lay from the budget changes: those who did not pay income tax (the surface workers) would lose by around 5s and 6d per week if they were family men, while at the top of the pay scale (but at the bottom of the pits), those on around £20 per week, would gain by about 14s per week.189 The union of®cials were also aware that their members wanted to be compensated for the budget changes. However, it was found that the budget changes were swallowed up in the size of the pay claim. While the loss of the budget was put at around 6s a week for the worst affected, the claim was for 5s per shift (or 30s per week). This fact separated the miners from the lower paid. As Arthur Horner told the delegates, `we are not like the railwaymen or the 187 188 189

Budget Committee minutes, 8 February 1952, PRO T 171/408. Will Lawther, president, NUM special conference, 15 March 1952, p. 17. Ibid., p. 19.

116

The changing balance of tax interests, 1940±1954

Confederation of Shipbuilders and Engineers'.190 The idea of passing on the costs of the budget (where that applied) had no practical dimension for the miners. But what about the railwaymen, who had ®gured as publicly as the miners in the controversy, but precisely because they were a group who would have been especially keen to `pass on' the subsidy changes? They were much more likely candidates for showing the incorporation of the budget into their pay strategy. They expressed considerable anger about the budget and had demanded, unsuccessfully, a TUC-organized campaign against it. The NUR's pay award in 1952 would certainly appear to indicate that the budget cuts in food subsidies had found a place in wage negotiations. The union's claim for a 10 per cent increase for all grades used the increases in the cost of living as one of the main planks in its argument. The award it eventually accepted, of 7s a week in the case of all adult male workers, looked like an approximate compensation for the budget, since it corresponded roughly to the increase in food prices for a family of ®ve (a married man with three children, the unit which appeared often in of®cial papers as the `normal' working-class family). Moreover, the award, being a ¯at-rate payment, gave more bene®t to the lower grades who would have gained little from the tax concessions in the budget. This outcome does not, however, give an accurate picture of the way the budget issues were regarded by the union's negotiators. For the NUR in 1952, the pay question was also to do with how far they had lost ground to other workers from the Second World War onwards, and the cost of living was wrapped up in the way wages had lagged behind prices since 1947. In these circumstances, the budget changes tended to get obscured in the pay negotiations because wider issues were seen as more important. The union's president, J. N. Figgins, gave an account to his members of how the effects of the budget factors were eventually placed on one side. The employers' side had introduced evidence about the effects of the budget in terms of the cuts in food subsidy on rationed foods and the reductions in income tax. Figgins pointed out that there had been increased prices on unrationed foods to which the subsidy and tax relationship did not apply and `workers had to have these unrationed foods if they are really to generate the necessary energy to do the work. I therefore dismiss it entirely because it is dealing with only a very limited view of the position.'191 When Figgins's successor, J. S. Campbell, looked back over 1952 he expressed disappointment that the pay award only met the increase in the cost of living `arising from the withdrawal of 190 191

NUM special conference, 7 November 1952, p. 7. Railway Review, 24 October 1952.

The Conservative response

117

subsidies by the chancellor of the Exchequer'.192 When the engineers received a similar award to the railwaymen they too pointed to larger issues at stake, `quite independent of the current increments in the cost of living' and more closely connected with the performance of the industry.193 The cost of living was clearly an important factor in industrial relations, and chancellors took it seriously. From their point of view, the cost-of-living index was the key item open to manipulation that could affect trade union attitudes. Moreover, it was a legacy of the war that index numbers of this kind were closely watched. Yet from the point of view of trade union of®cials the cost of living was not the key motivating issue, and in the case of the railwaymen the speci®c case of the subsidies had, in the end, rather complicated matters. In fact, far from stirring up wage claims, when pay bargaining was actually under way the budget items were a de¯ating factor rather than the reverse. In the across-thetable negotiations both sides seemed to have been happier dealing with industrial matters rather than with the implications of the budget. One conclusion to be drawn is that the Conservatives might have been more vigorous (or less circumspect) about cutting the subsidies in 1952 than they were. Yet Butler did not continue the process in 1953 for fear of the political reaction which might have ensued. This may re¯ect the anxiety that there was, as yet, no clear direction to domestic Conservatism in the context of an election victory in 1951 which had not been overwhelming.194 A more particular component of that may be the weight given to trade union interests in tax questions, which, as has been argued earlier, was a clear post-1945 development. The other side of the working-class tax question to which Labour had devoted much attention was that of incentives. There had been no empirical evidence to draw upon here, although some MPs reported observations from their constituencies. By 1953, however, this had changed, in that the Royal Commission on the Taxation of Pro®ts and Income, set up under the Labour government on Cripps's initiative, examined as one of its topics the impact of taxes on salaries and wages. Some distinguished witnesses followed the views of the 1940s that PAYE acted as a disincentive. Ursula Hicks, the public ®nance economist, argued that it did so not only because the tax on additional work `may be very high indeed', but also because the repayment of tax when income fell was a temptation to voluntary absenteeism. Roy Harrod, while agreeing that the incidence of income tax on manual workers was 192 193 194

Railway Review, 2 January 1953. Editorial, AEU Monthly Journal, October 1952. Turner, `Political Ecology', p. 196.

118

The changing balance of tax interests, 1940±1954

small, none the less stressed that `the marginal incidence on skilled men, and often on semi-skilled men, is not small'. He also made the grander point that `the present system by which the man who works harder, whether from greater need of money or greater sense of duty, is penalized, is a monstrous violation of justice'.195 As part of the commission's work the government carried out a social survey of attitudes to PAYE and its effects on incentives among those able to work overtime or who were paid by incentive systems. The results of the survey were made available for the 1953 budget. The two main conclusions were quite emphatic: `Few productive workers had any detailed knowledge of the way they were affected by income tax'; `there was no evidence from this enquiry of productive effort being inhibited by the income tax structure within its present limits.'196 It thus overthrew the assumptions and judgements which had guided the tax treatment of the higher-paid workers since 1948. The social survey was based on factors internal to the tax regime; that is, it stressed the lack of knowledge that taxpayers had about the effects of increased pay on their tax liability. According to the survey, taxpayers did not know what would have happened to their tax liabilities had their earnings gone up by amounts which would have increased their marginal rate of tax. Therefore they could not have known when to withdraw their labour in order to stay below the higher rates of tax. This was backed up by evidence from industrial consultants and, most tellingly given the prominence of miners in the issue, from the National Coal Board, which played down the importance of taxation in determining effort. The Board found that for periods when tax deductions would have been most noticeable, namely Sunday shifts and overtime, absenteeism was serious even for those without tax liability.197 These ®ndings did not disturb Butler's strategy in his 1953 budget of giving further reductions in the rates of income tax, `because the classic incentive effect is so well worth having'.198 This con®rms the way in which, ultimately, talk about `incentives' was a mask for political judgements about tax. While workers might not know the consequences ahead of them for the tax liability of higher earnings, and so be unable to modify their economic behaviour, the effect of tax on their pay-packets as an historical fact shaping their political views was more certain. But 195 196 197

198

Royal Commission on the Taxation of Pro®ts and Income. Minutes of Evidence (London, 1955), para. 4, p. 169 (Hicks): paras. 21±2, p. 263 (Harrod). `Comment on Social Survey on PAYE, etc.', PRO T 171/414. Details are given in the Board of Inland Revenue papers for the Royal Commission, `Documents of the Royal Commission on the Taxation of Pro®ts and Income', PRO IR 75/31. Letter to Winston Churchill, 4 March 1953, PRO T 171/413.

The Conservative response

119

the survey ®ndings were useful for a contrasting view on working-class income tax expressed by the TUC. It believed that what determined effort were judgements about employment prospects, rather than anything to do with tax. When work was thought to be scarce, then absenteeism and lack of effort prevailed; when it seemed to be secure, more effort was forthcoming. Attitudes towards work were shaped by conditions of employment, rather than by taxes.199 The TUC's line on workers' complaints about PAYE and overtime was that it was a `useful excuse, a convenient objection; no one likes paying tax'.200 The TUC drew upon this analysis to try to help the lower paid. Their proposals to increase food subsidies and to exempt more workers increased burdens on those already in tax. In both 1952 and 1953 they advocated an increase in the standard rate of income tax as a way of helping the poorer groups.201 Although the `incentives' argument had now been weakened considerably, this was only on economic criteria, and while fewer workers came close to the standard rate as a result of the changes in the reduced rates, those in the Labour Party none the less found the TUC's proposals somewhat over-simple. Douglas Houghton asked, in connection with the 1953 submission, `Should the TUC as a matter of policy make taxation proposals which are to the disadvantage of its more highly paid members?'202 This shows that income tax provided a particularly graphic illustration of the truth that Labour was a party not of the poor but of the trade unions. In tax terms the latter did not represent the poor, but responded to interests whose tax perspectives were similar to those of other income tax payers. The incentives debate showed how sensitive governments were to this group. However, the Royal Commission on the Taxation of Pro®ts and Income focused considerable attention on a problem hardly discussed in budgets (except by Dalton in 1945), namely the inclusion of less wellpaid workers in income tax, and the way that there was no mechanism for establishing a consistent level of exemption which protected subsistence income from liability. Here the theme was not the establishment of severely progressive rates upon high earners, but the way in which tax liability had increased dramatically for those at the threshold of tax in 1946, for example, compared to the pre-war period. The reservation to the commission's second report calculated that a married couple 199 200 201 202

Lincoln Evans, during a meeting of the TUC's Economic Committee with the chancellor, Economic Committee minutes, 1 April 1952, MRC, MSS 292.560.1.8. R. C. on Taxation of Pro®ts and Income, evidence, q. 2684. `Representations of Outside Bodies', memorandum of the TUC, 18 February 1952, PRO T 171/410. Note by Douglas Houghton, 2 March 1953, in TUC Economic Committee minutes 6/3, 11 March 1953, MRC, MSS 292 560.1. 9.

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The changing balance of tax interests, 1940±1954

without children earning a working-class income of £500 was faced with an increase of over 800 per cent in tax liability compared to a couple at the same income level before the war.203 Moreover, the big story was that the income tax structure contained no mechanism for solving this, because its components ± the personal allowances and earned income relief ± although having as a secondary function the exemption of lower incomes, were primarily instruments of graduation for those falling within the tax bracket. Therefore to use the personal allowances and earned income relief for excluding lower incomes as a primary aim was usually too expensive, because they provided relief as well to those already in income tax. There was no exemption limit as a discrete component of the tax. Additionally, the impact of in¯ation meant that the function of the allowances in securing some degree of exemption was eroded over time.204 When Dalton regretted that in his ®rst budget he had not left the standard rate of tax alone and instead raised the `exemption levels' (the personal allowances) and the earned income relief, he was missing the point that there was a dynamic process lowering the threshold of taxation.205 The exemption of low-income taxpayers in Butler's budget of 1952 was also a `one-off' and was not repeated. It was a common theme of this second report that in¯ation had helped considerably in the generation of large tax revenues: For, whereas it has been unavoidable that the tax burden should be increased, in¯ation had made this possible without so large a rise in the apparent rates of tax as would otherwise have been necessary . . . The great increase in the number of taxpayers, bringing into tax large classes who had previously been exempt, could hardly have occurred in just the same manner if it had been made deliberately. The strong arguments, which have always been respected in principle, in favour of exempting from tax a certain minimum of real income, must then have received greater respect in practice.206

The only dissent from this line of argument (the Woodcock and Kaldor reservation wanted a higher exemption level than the majority) came from John Hicks, but his were not grounds on which Labour would have felt happy defending the falling threshold during their period in of®ce. Hicks thought that although in¯ation had assisted in the raising of larger 203

204

205 206

Tables published at the conclusion of the reservation (signed by Vera Anstey, Herbert Bullock, Nicholas Kaldor and George Woodcock) in the Royal Commision's Second Report, Cmd. 9105, PP 1953±4, xix. The signi®cance of the commission is discussed further in the next chapter. The proportion of those relieved from tax by the operation of the personal allowances fell, as a proportion of those liable to tax, from 27.5 per cent in 1948±9 to 22 per cent in 1950±1. Board of Inland Revenue, Report, PP 1953±54, xvi, table 20. See his Principles of Public Finance (London, 4th edn, 1954), p. 230. Second Report, para. 172.

The Conservative response

121

revenues, the necessity which lay behind them was the development of social services and `it is inevitable that these bene®ts should be ®nanced, in considerable measure, by contributions from the same classes as mainly bene®t from them'.207 It was better, in Hicks's view, that part of that contribution should come through income tax, which did address ability to pay, rather than through indirect taxes or social security contributions, which did not. Both the majority and the Woodcock/Kaldor dissenters wanted to solve the exemption problem within the income tax structure. The majority report did provide a scheme which used the earned income tax relief for setting a minimum starting point of tax. The drawback of their scheme was that although the individuals whom the scheme was meant to bene®t might pay less tax in total there was a danger of high marginal rates on extra earnings. In support of the scheme they drew on the ®ndings of the social survey that marginal tax rates did not affect working-class economic behaviour; but this took no account of the political anxieties that increasing income tax for those on moderate incomes aroused in both parties. The treatment of the better-paid and lower-paid workers by both Labour and the Conservatives showed how the two parties were ®ghting the same battle as far as income tax was concerned. Labour's perspective, informed by trade unions whose members were not at subsistence level but often had incomes close to those of the lower middle class, and guided by an analysis of electoral imperatives which, in the majority view, saw the same group as of fundamental signi®cance, was driven in a similar direction to that of the Conservatives. The latter knew this. Although the majority of Labour's supporters did not pay income tax at the standard rate, there was no segmentation of interest around that boundary worth exploiting. So when Butler toyed with the idea in 1952 of balancing the cuts in the food subsidies with an increase in the standard rate of tax, he was dissuaded by the economic secretary, John Boyd-Carpenter: `It would no doubt, up to a point, satisfy the egalitarian socialist. But not, I think, to any great extent. What he likes are increases in surtax and estate duties. I do not think an increase in income tax rates would arouse any great enthusiasm even among them.'208 The Conservatives in the 1950s respected these interests and did nothing to antagonize them. Death duties remained at a top rate of 80 per cent. The case for easing surtax was pressed within the Treasury team by Reginald Maudling. The particular device he wanted to use was 207 208

Second Report, reservation by Prof. J. R. Hicks, para. 2. Letter of 18 February 1952, PRO T 171/409.

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The changing balance of tax interests, 1940±1954

to give personal allowances for surtax as well as income tax. Under existing arrangements a surtax payer was charged tax, irrespective of his personal circumstances, on income over £2,000. Maudling thought that this `would provide a great incentive to the professional and managerial classes'. However, Boyd-Carpenter's view that `the political repercussions would be serious' prevailed. He recalled how in 1952 they had been attacked for not preventing the surtax payers from bene®ting from personal reliefs awarded to income taxpayers: The opposition, and in particular Douglas Jay, argued most strongly that we should have increased surtax suf®ciently to secure that surtax payers did not even share in the gain that was accruing to those below the surtax level. I am perfectly certain that a straight concession of this sort to surtax payers only would provoke the most violent reaction in the House, and I am afraid it would not be without its repercussions on the industrial side.209

In addition, as an example of how far incentives now governed tax discussions, the Inland Revenue argued that the best way to help the managerial classes through tax incentives was to work on income tax rather than surtax; considerations of tax equity, which gave powerful support to Maudling's case, and which had been deployed against Dalton back in 1945, had now been displaced by the economic and industrial factors which had been aired so frequently in the intervening years. Taking stock The 1945±51 governments have a proud place in Labour's history, an indication for the social democrat of what could be achieved, and for the socialist the tempting vision of what might have been. For the key ®gures at the Treasury it had worked out well. Douglas Jay, looking back from the perspective of later years, claimed `That period is a refutation of the theory that progressive direct taxation is a major disincentive to national output, and that cuts in tax on high incomes are likely to stimulate growth.'210 Industrial production had risen, exports had grown and working-class living standards had risen while in¯ation had remained moderate. The tax regime had undoubtedly helped. The effects of high personal and company taxation, especially at the margin, had contained consumption and provided one of the conditions necessary for economic stability.211 It was a model of how to make the 209

210 211

Letter of Boyd-Carpenter to Butler, 28 January 1953, referring to an Inland Revenue memorandum M. 35/52 of 27 January 1953 and Maudling's note of 12 January 1953, PRO T 171/414. Douglas Jay, Sterling: Its Use and Misuse: a Plea for Moderation (London, 1985), p. 128. This must moderate Susan Howson's criticism of Dalton's cheaper money policy that

Taking stock

123

readjustment from war to peace; whether that vision could ®nd support from the electorate after a continuing period of peace when the effects of the war on attitudes and material life had ceased to be felt was quite another matter. It was an achievement wrought by people. For all the striking differences between Dalton, Cripps, Gaitskell and Jay there were some powerful similarities imposing cohesion over their tenure of government. Most obviously, they were con®dent that the time was theirs. They had planned for of®ce, they knew from their experiences in the war that they could run things, and they knew they were clever. Bevan was right on the mark when he wrote that the chief reason for the governments' success `was self-con®dence and the strength that comes from it. That self-con®dence was founded in the belief that we knew what had to be done.'212 What comes across is that this self-con®dence, at least in the case of the Treasury ®gures, came from their status as economists. The appalling doubt of 1931 ± that a Labour government would always be vulnerable to the expertise embedded in the governing machine, and ®nd its aspirations blunted or crushed because of its own inadequacies ± had been decisively dispelled. Even if Cripps was not quite of the same rank as Gaitskell and Jay as an economist, he could be protected and schooled by those who were. Power was fused with radicalism. Yet there were dif®culties here. Labour's vision of what government should attempt placed heavy burdens upon individuals and imposed a severe demand for cohesion among Treasury teams. A Labour chancellor was expected not simply to be a budgeteer, but a planner as well. He was to co-ordinate the `real' economy as well as pore over the ®gures that told him how much he could take from it in taxes. He had to be methodical and diligent, as well as able to grapple with some of the most powerful minds in the civil service. Cripps practically worked himself to death to ful®l this burdensome agenda. An experienced observer wrote, before Cripps's death, during 1946±51, the most successful minister in this ®eld [economic policy] nearly killed himself with overwork and had to resign, and many of the leading people concerned, Ministers and of®cials, ®nished up worn out and much less ®t than when they started. The more one tries to co-ordinate everything and ®t

212

it created extra in¯ationary pressure which therefore demanded more severe budgets for its containment than would otherwise have been necessary. In the light of the unpredictability of consumer's behaviour in response to taxes, to err on the side of severity, as Labour was encouraged to do, might well have been a force for stability: Howson, Monetary Policy, esp. pp. 176ff. Aneurin Bevan, In Place of Fear (London, 1952), p. 96.

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The changing balance of tax interests, 1940±1954

the economic details into a single plan the more one puts an impossible load on the central machinery.213

When Dalton told Attlee that Cripps was irreplaceable as chancellor he also said that he `had too much to do ± old Treasury + New Planning and constant travelling abroad'.214 This was, as Dalton also pointed out, a problem peculiar to Labour, because the Conservative philosophy of government would never have led one of their chancellors to attempt planning alongside the budget on such a scale. But as Dalton's career as a patron and party combatant also showed, it was not one which Labour as a party could easily solve. It demanded that jobs at the heart of the Treasury planning nexus be shared out, but not so as to damage the cohesion of outlook. This might have been possible under Cripps. Much is made of his status as a powerful public ®gure, able to convince the nation of the imperatives of economic policy. In the case of sharing out tasks in what was meant to be one seamless area of government, the high esteem felt for him by his colleagues was undoubtedly an asset. To bring in Gaitskell as a deputy was therefore to yoke one powerful ®gure with another without compromising the unity of purpose. Yet the very character of the Labour Party, let alone Cripps's rare qualities, made this an unusual concurrence. Labour organized itself around the ful®lment of an idea. But given the elusive nature of socialism, there was always more than one of these. To compete on the basis of ideas, so the chance of providing strong direction of the budget and planning process without unbalancing the competing forces within the party was bound to be slim. The challenge of bringing together the budget and economic planning has often been written as one caused by the formidable obstacle of the Treasury and its traditional conception of its functions. In fact, it was also about people, and one which Labour both created but also made dif®cult to overcome. Labour not only tested its personal resources against the structure of government but also explored the limits of taxable capacity and egalitarianism within the tax system. In so doing it raised basic questions about how it understood power and the prevailing tax culture of the society in which it operated. What it discovered in 1945±51 was, to put it in a nutshell, the jelly-like interconnectedness of capitalism. The more it pushed at one point the more there was countervailing movement elsewhere. The more Labour chancellors pressed on incomes the more taxpayers sought refuge in generous expenses, capital gains (which were untaxed) and simple evasion. Cheap money, by encouraging the rise in the value of securities on the stock exchange, and so providing capital 213 214

Chester, `Machinery of Government and Planning', p. 362. Dalton, Political Diary, ed. Pimlott, 27 January 1950, p. 466.

Taking stock

125

gains, showed the same phenomenon. What was a gain in one area of the system was a leakage in another. The problem of expenses was the granting of large allowances which went on the personal consumption of the businessman involved rather than on any activity which might have furthered the business: `They were being spent on the personal needs of the director. And another form of abuse was the provision by the company of bene®ts in kind in the form of houses, services, motor cars, and things of that kind.'215 Callaghan, speaking in the 1945 budget debates, described the small manufacturer or businessman who `does not keep books; he does not keep records. He returns a sum which is not certi®ed and the result is that I believe that evasion has reached widespread proportions.'216 Although Cripps tried to tighten up on business expenses in his 1948 budget, the parlous state of the tax service prevented this becoming effective: `we are an elderly service due to the two wars, and the rate of wastage is very great.'217 Both the capital gains tax and capital levy proposals had been fatally weakened in the eyes of the Treasury ministers by the shortage of staff. Even though the Inland Revenue was unable in the speci®c conditions of the post-war period to match Labour's needs, the party was very dependent on the bureaucracy for the implementation of its schemes, and had a high admiration for it.218 In fact, it might be claimed that this was a particular instance of the general ethos of the Labour governments of this period, which was professional rather than proletarian. It stood for the recognition of mutual obligation, the steady deployment of disinterested ability and the exercise of self-restraint. Jay, Cripps and Gaitskell were its exemplars. This ethos, though, was very different from that of capitalism, which was geared to exploiting opportunity, to acquisition and, increasingly after 1945, to consumption.219 The degree to which the two con¯icted, and the relevance of such a con¯ict to the realm of taxation, was possibly underestimated by the Labour Treasury 215 216 217

218

219

R. C. on the Taxation of Pro®ts and Income, evidence, q. 5656, Board of Inland Revenue. H. C. Deb., 414, col. 2883, 25 October 1945. R. C. on the Taxation of Pro®ts and Income, evidence, q. 5687. Callaghan, who was also assistant secretary of the Inland Revenue Staff Federation, believed that `big measures will have to be taken if this jaded and tired staff is to cope with the burdens which still have to fall on them during the years to come. There is a great shortage of experienced staff': H. C. Deb., 414, col. 2285, 25 October 1945. Douglas Jay declared after a visit to Brazil, where he saw the dif®culty of collecting taxes from the rich, `that I would in future include the Inland Revenue with Shakespeare and Parliamentary government as Britain's greatest contribution to the world': Change and Fortune, p. 234. See the extracts from Sidney and Beatrice Webb's The Decay of Capitalist Civilization in Meghnad Desai (ed.), LSE on Equality (London, 1995), pp. 184±90, where they discuss the in¯uence of capitalism upon manners.

126

The changing balance of tax interests, 1940±1954

team. The ful®lment of Labour's aspirations in the tax ®eld turned upon questions not only of administrative capacity but also of power. For all the discussion about tax pressing heavily upon the population there was also, in a lively adversarial sense, the possibility of the tax system being undermined by ingenuity and the efforts of private property holders, both industrial and personal. As businessmen turned income into capital gains, or enjoyed perks rather than money payment, and as wealthy individuals detached themselves from the ownership but not the enjoyment and use of their property, they were frustrating the intentions of the tax system. For Jay and Gaitskell this was a reason to press on and increase the effectiveness of the tax administration. For others it was an indication of the limits of state power within a private economy and therefore an encouragement to a more socialized system. It was possible that `social democracy' therefore rested upon an essential naõÈvete about power in a capitalist system. Bevan is not usually thought of as being particularly interested in tax questions, but tax evasion had an important place in the argument of his fertile and remarkable book, In Place of Fear. He suggested that, in a society where the state itself possessed little property, one of the main sources of political tension was taxation: `As modern industry produces new and attractive forms of private consumption, the individual citizen is made all the more reluctant to see his income taken away from him for remote purposes.'220 Not surprisingly, the citizen liked welfare but not the taxes to pay for it. Bevan anticipated much of the discussions of the later 1950s when he commented on the resentment between those who were not able to avoid taxes, in particular some wage earners and the salaried groups, and those who could. `The power and prosperity of tax evaders thwarts one of the main aims of socialism: the establishment of just social relationships.'221 The answer was for the state to own a large part of industry and to use the surplus for the social ends to which it aspired. Therefore the possibilities of reform within a privately owned economy were set by taxation and demonstrated by the active and intense efforts of tax evasion that resulted when tax demands were heavy. Richard Crossman was to make much the same argument in the early 1960s when he reviewed Douglas Jay's Socialism in the New Society (1962), which gave considerable emphasis to the way society could be reformed by progressive direct taxation: it seems to me obvious that, in a market economy, the amount paid in taxation is ultimately determined not by the chancellor but by the business community. 220 221

Bevan, In Place of Fear, p. 107. Ibid., p. 108.

Taking stock

127

Reading this book, I was constantly reminded of the moralistic budget speeches delivered by Sir Stafford Cripps ± and of the surrenders he constantly had to make to the capitalists he was trying to ¯eece.222

This issue was going to be highly relevant to Labour's self-de®ned tax project after 1951, which was not only to tackle tax avoidance broadly de®ned but also to make inroads on the inequality of wealth that seemed to have been lightly touched by post-war taxation.223 Dalton, as has been shown, had already grasped the point that such strategies required a broader commitment to nationalization. But others who saw the logic of such tax measures but who had rejected nationalization more generally, found their position rather tortured. Roy Jenkins wrote a Tribune pamphlet in 1951 which made the case for a capital levy on the grounds that the evidence of the rich spending out of capital showed how the wishes of a democratic government to restrain consumption might be thwarted by a wealthy property-owning minority. Yet he balked, in a way that nationalizers did not, from the state acquisition of property which a levy would have produced: `when it [a levy] has been done, everyone will be eager to protect himself against the potential inhumanity and tyranny of his previous ally, a very powerful state.' But to counter the increase in the power of the central state authority, Jenkins suggested that local government and co-operatives `have the possibility of playing a great part in these developments'.224 Jenkins's reference to two institutions which had important positions in the labour movement is rather odd because they had little signi®cance in his own career, and this points to a real dif®culty to which Labour's tax strategy led with regard to the power of the state for those who wanted to stop short of a fully nationalized economy. Jenkins had justi®ed the capital levy as a way of preventing the rich from spending out of capital and so frustrating the containment of consumption and the high direct taxes to which a democratically elected government was committed. Yet the solution increased the power of the state still further, beyond what the central government's responsibility for economic management and social welfare had already achieved. Labour's tradition had always contained a suspicion of the centralized state. Many of its key ®gures had begun their careers in local government and found there an important education in the workings of a democracy. The Attlee governments, however, had done nothing to encourage the vigorous 222 223

224

Richard Crossman, `The Taxolators', New Statesman, 23 February 1952, p. 254. `Considering the grave social inequality that exists we hardly deserve the support we have been given' was the conclusion of a conference in June 1950 to discuss future policy in the party: LPA, NEC minutes, `Summary of Discussions at Conference', R3/ June 1950. Roy Jenkins, Fair Shares for the Rich (London, 1951), p. 16.

128

The changing balance of tax interests, 1940±1954

development of local government as part of a pluralist system.225 It was assumed that the projects that de®ned that government's identity could only be delivered through central government. One of the reasons for this may have been the elevation of economic expertise as fundamental to Labour's purpose and which was deployed through central government. Local government was irrelevant to this expertise and to its practitioners. Neither Cripps, Dalton, Gaitskell nor Jay had any signi®cant experience of local government in their early lives in the Labour Party, nor did it occupy any place in their thinking. Attlee and Morrison both had such experience, but they were felt, and felt themselves to be, out of depth in the key area of economic management to which the government attached so much importance.226 This is not to argue that economic management could have been other than a function of central government. The point, rather, is that the consequences of Labour's use of taxation led towards the possibility of the state becoming more powerful than they would have wished, yet the solution to this ± an important place for local government ± lay outside their intentions and experience. As Gaitskell pointed out, `The acid test of social democracy is whether the community can have enough selfdiscipline.'227 But if `self-discipline' was not forthcoming in the payment of taxes (which Gaitskell had cited as one area where it ought to operate) then the powers of the state would have to increase. While `nationalizers' such as Dalton would have had no dif®culty with this, for others it would have represented an unacceptable accretion of power to central government. But without a countervailing interest in local government the overall effects of this for the polity would have been unpalatable. The fact that Jenkins turned in his Fabian pamphlet to a solution which was far outside his own experience in the Labour Party points to the problems caused for social democracy by a tax strategy that so augmented the power of the state. If social democrats' assumptions about people's response to the tax regime ± that taxes would be readily paid rather than avoided ± turned out to be wrong, then the consequences would be a stronger state than their general instincts would have found palatable. This was not a problem for nationalizers such as Dalton or Bevan, but it was for Gaitskell, Jay, Jenkins and the rest in that camp. 225 226

227

For a vigorous expression of this view, see William A. Robson, `Labour and Local Government', Political Quarterly, 1 (1953), pp. 39±55. This was of more signi®cance in Morrison's case since he had exercised oversight of economic management as lord president before Cripps's appointment as minister of state of economic affairs in September 1947. For Morrison's own dif®dence, see Bernard Donoughue and G. W. Jones, Herbert Morrison. Portrait of a Politician (London, 1973), esp. p. 466. Quoted in Williams, Gaitskell, p. 315.

Taking stock

129

The identi®cation of wealth as the next target showed the challenge which had faced Labour since 1945. Dalton had announced in his budget of that year that Labour's intention was to develop the equality which had been achieved by wartime conditions. It was not clear how much more Labour could do, especially regarding the taxation of income. Thanks to the war it was not at all obvious that Labour was on the threshold of great possibilities in the tax ®eld, since much had already been done, especially with regard to income. Of Labour Churchill had said in 1945, `They are no longer, as we stood in the days of the Lloyd George budget, at the ®rst frontier of a large and fertile territory.'228 In 1945±50, Labour was trying to adapt the tax regime to peacetime conditions. We have seen that this meant reductions in income tax until Gaitskell's budget of 1951, which, because of the Korean War, increased rates. Except at the very highest levels this meant that the better-off gained more in absolute terms than the less well-off from these reductions. This led Ian Little, Oxford economist and friend of the Dalton group, to conclude that the income tax structure had become less progressive between 1945 and 1950.229 The taxation of income was therefore a poor site for Labour's egalitarian ambitions because of the way tax reductions had affected the wartime picture, and because of the heavier impact of income tax at the lower levels which had been a consequence of the war and which the structure of the system, along with in¯ation, had perpetuated after 1945. This points to the kind of expertise Labour would have to draw upon in the future and suggests it might have to change from its traditional bases. It has been stressed in this chapter how the sense of purpose and con®dence of Labour's time in government rested on the proclaimed economic expertise of some of the party's key individuals. But because of the way the tax regime encouraged evasion, the party in the future would have to grapple with taxation as an administrative activity as well as an economic one. It would have to consider how the population resisted the tax system in the real world rather than to construct the graphs of effective rates of tax of which Dalton in particular had been so fond. Moreover, it would have to pay more attention to those at the bottom of the tax scale. It would need a rather different kind of expertise than that which had driven the party's thinking so far. The Attlee governments therefore brought out the ambiguities and challenges in Labour's position which were to become ever more striking in the years ahead. 228 229

H. C. Deb., 414, col. 1908, 23 October 1945. Little, `Fiscal Policy', p. 174.

3

The Kaldor era, 1951±1965

During the period 1951±65 Labour had a clear picture of the kind of tax reforms it wished to undertake. For the ®rst time Labour was not dealing with inheritances from Liberals and the First World War or the egalitarian impulse of the Second but, rather, with developments that had emerged under the Attlee governments. This effort, which culminated in the 1965 Finance Act, required considerable political and intellectual energy for its ful®lment. But, as subsequent chapters will show, it left a radical agenda still unful®lled and showed little sign of meeting challenges to reform the tax system more broadly. Labour's priorities for the 1950s were set out by Gaitskell in an article he wrote for The Political Quarterly which was published in 1953.1 The fundamental goal was the achievement of `social justice, equality, the classless society ± call it what you will'.2 While he recognized some scope for further nationalization, it was not at the centre of his programme. There would always be parts of the economy, he argued, which should be left in private hands; there might be practical problems limiting the extent of nationalization, in particular a possible shortage of competent managers; if compensation were to be paid to private owners, state ownership would only slowly deliver greater equality. In place of nationalization, Gaitskell identi®ed three areas where equality might be advanced, and two were intimately connected with taxation: tackling the abuse of expense allowances to avoid tax; education; and a better distribution of unearned income and the property from which it was derived. Gaitskell claimed of the expenses issue that `though its quantitative signi®cance may not be very great . . . [it] gives rise to irritation and cynicism among the vast majority who do not enjoy these privileges'.3 This was not a departure from the ethos of the 1945±51 governments, but a continuation of it. The task was presented as a tidying up of the 1 2

Hugh Gaitskell, `The Economic Aims of the Labour Party', Political Quarterly, 24(1) (1953), pp. 5±18. 3 Ibid., p. 16. Ibid., p. 6.

130

The Kaldor era, 1951±1965

131

great egalitarian achievement of the wartime and post-war periods. Having established, as it was thought, the limits of direct personal taxation, the main priority was to deal with the leakages: the ability of some to avoid high taxes by taking income in kind, as expense allowances, or as tax-free capital gains. Labour now had to reform the system. Having made the political commitment to a heavier tax regime (even if the momentum for that had been created by the war) the job now was to make the system workable. This might have appeared a lesser-order activity, but in fact it was to be a burdensome and ultimately insoluble one. It was one thing to announce rates of tax on incomes and property; it was quite another to reform the workings of the tax system to make those rates effective. The leadership of the party had also reaf®rmed its commitment to greater equality. This had always meant something more than taxation, and was ultimately to do with the way people treated each other in society and in the institutions which regulated economic and social life.4 But taxation had an undeniable relevance, as the means of reducing apparently glaring inequalities of wealth and income. It was also a function which seemed to be at a government's ®ngertips. Even though many in the party would have regarded taxation alone as too dry an instrument of egalitarianism, it none the less became something of a test of a government's intentions and capability. This might not have been a problem if the party leadership had been fully committed to the use of quite punitive taxes to achieve greater equality. But the depth of that commitment was perhaps less than wholehearted. Dalton had a ruthless, almost quantitative approach to equality. More taken from the rich meant more had been achieved towards the equal society. For Crosland and Gaitskell it was rather a matter of judgement and taste as to how much modi®cation and intervention society might tolerate. The savagery of the capital levy, Dalton's pet project, was a step too far. According to Crosland, a levy might have been a way of moving rapidly to a more equal society, `but it would not help towards the real objective, namely a society, which being classless and egalitarian, is also more just and more contented. Such a society can only be reached by steady and evolutionary stages.'5 The capital levy, of course, was not the only instrument for reducing inequality; but how far the issue was going to be pushed from a 4

5

During the proceedings of a party study group on equality it was objected that a particular paper submitted by the research department `was too much an essay in taxation': LPA, study group on equality, discussions of preliminary memorandum, Re.36/March 1956. C. A. R. Crosland, The Future of Socialism (London, 1962), p. 318.

132

The Kaldor era, 1951±1965

perspective such as that of Gaitskell or Crosland (as opposed to Dalton) was, in the 1950s, an important question for the future. Gaitskell's agenda therefore contained hostages to fortune: not only would it, as a reform of the tax system, test the capacity of the revenue authorities and the policy-making of the party, it would also, through the commitment to equality, test the sensibilities and priorities of the leadership in a ruthless way. At the beginning of the 1950s this all lay ahead and there was little sign of signi®cant doubts at the top. The early years of the Conservative government saw the Gaitskell group growing in a cohesion which was especially developed in economic and ®nancial affairs. They formed what Douglas Jay called `a strong harmonious team' around Gaitskell, with Crosland, John Diamond, Douglas Houghton, Roy Jenkins and, after an interval, Harold Wilson, dealing with the opposition to Conservative budgets.6 In Roy Jenkins's case this represented the central place of the budget in the parliamentary contest, rather than any innate enthusiasm for the task: Although I do not recall any particular incident which brought Gaitskell and me close, the timing suggests that ®nance bill co-operation must have been central to the process. This was in a way strange for we were both on the threshold of wanting to escape from being too politically obsessed and too narrowly economically specialised.7

At a personal level the key ®gures who had emerged at the end of the Attlee governments were now working together effectively with budget questions as the rationale for that co-operation. There was a common view that one side of the socialist inheritance ± the ownership of production, running organizations ± was to take second place to the decisive actions of central government upon society through the tax system. It was assumed that this would be both more radical in its outcome but also more tolerable electorally than the alternative of pressing ahead with the further programme of nationalization. Tax issues of the 1950s The tax problem on which Labour focused was the disappointing yield from surtax, the higher rate tax for those on incomes above £2,000 a year. By the middle of the decade it was clear that receipts from the tax were lagging behind the growth of the economy, and this was in sharp contrast to the returns from PAYE income tax. This is shown in table 2. The same was true of capital taxes, which had declined as a proportion 6 7

Douglas Jay, Change and Fortune. A Political Record (London, 1980), p. 218. Roy Jenkins, A Life at the Centre (London, 1991), p. 99.

Tax issues of the 1950s

133

Table 2. Indices of tax receipts and nominal national income, 1949±1964 1949 1958 1964

PAYE

% of national income

Surtax % of national income

National income

100 182 293

4.6 4.8 5.4

100 159 179

100 182 263

0.9 0.8 0.6

Sources: Central Statistical Of®ce, National Income and Expenditure, volumes for 1959 (London, 1959) and 1963±73 (London, 1974), table 1 in both cases; Board of Inland Revenue, Statistics, 1971 (London, 1971), tables 1 and 17.

of gross national product from 2.3 per cent in 1949 to 0.9 per cent in 1958.8 This was embarrassing for Labour. The most distinctive way in which it had ful®lled its aim of building on the egalitarian developments of the Second World War had been to increase rates of tax on higher-income earners (surtax) and death duties. Yet these were turning out to be paper tigers. Both surtax and death duties were fast becoming, for some richer members of the population, voluntary taxes. Unless Labour was able to do something about this, the tax system upon which they placed such importance was going to be a sham. But it was worse than this. Avoidance of surtax was dif®cult for those with little property and no scope for receiving part of their income as goods in kind or lump sums. These professional and of®cial groups at the higher levels were those who were being caught by surtax, whereas the businessman or property owner was able to take avoiding action,9 yet it was this section of the middle classes that the electoral analysis favoured by the Gaitskell group had rested upon. The educated, salaried and usually professional middle classes were the group thought to be most likely to vote Labour and therefore broaden the party's appeal beyond the working class, yet these were the people being disadvantaged by the tax system in that salaried income was far more vulnerable than either capital or business expenses. Robert Hall, head of the Treasury's Economic Section, observed that the members of the civil service could no longer aspire to an upper middle-class existence and noted that `the different attitudes of business and the Civil Service to expenses makes a great deal of difference', while Plowden reported that `there is a sort of class barrier among his [Plowden's] senior employees between those who can 8 9

Ian Little, `Fiscal Policy' in G. D. N. Worswick and P. Ady (eds.), The British Economy in the Nineteen-®fties (Oxford, 1962), pp. 231±300 at table 5, p. 295. As Little reported, ```It's not fair,'' a don remarked the other day, ``surtax was never meant for the likes of us''': in his review of Kaldor's An Expenditure Tax in the Economic Journal, 66 (March, 1956), pp. 116±20, p. 116.

134

The Kaldor era, 1951±1965

augment their income from capital and those who cannot'.10 J. C. R. Dow made a stab at calculating the amount of consumer spending by individuals going through business accounts and he listed `the service element in restaurant meals (perhaps £40 million); the running costs of business cars (perhaps £100 million); and expenditure abroad (perhaps £50 million); and no doubt other items besides (gold lame dresses)'. The total was equivalent to 40 per cent of disposable incomes over £1,000 per year.11 Rather than the amount of money involved, contemporaries focused on the moral implications of the spending from capital, itself lightly taxed, which seemed to be sustaining consumption in the 1950s. David Worswick remarked that `In the nineteenth century it was indeed regarded as wicked to spend out of capital. If it would be an exaggeration to say that the twentieth-century law has become ``Dissipate, dissipate'' it is certainly the case that the spending of capital to maintain standards is no longer regarded as morally wrong.'12 And, following the developments of the period since the war, this was also a question which involved the trade unions, as Austen Albu explained: `Try as we may, when speaking to trade unionists on these matters, we cannot persuade them that there is not a very much higher degree of expenditure in this country than the ®gures of the actual distribution of national income as of®cially printed and published show.'13 In Nicholas Kaldor Labour had a source of economic expertise to suggest ways of dealing with these problems. From the 1950s until the end of his career Kaldor enjoyed a formidable reputation as a tax economist. His biographer has judged that `Kaldor's appointment by Gaitskell to the Royal Commission on the Taxation of Pro®ts and Income proved to be another turning-point in his life. His immersion in tax matters for the next ®ve years turned him into one of the world's recognized experts on tax theory and policy.'14 He had many supporters of weight in the Labour Party. John Diamond, who had won his seat at the 1945 general election and who was one of the Treasury team for Callaghan's 1965 budget, corresponded with Kaldor in the mid-1950s over the way in which property incomes were not being caught ade10

11 12 13 14

Robert Hall, The Robert Hall Diaries, 1954±1961, ed. Alec Cairncross, (Oxford, 1991), entry for 7 May 1957 at p. 115; Robert Hall reporting the views of Plowden in his note of 12 November 1959, PRO T 171/506. Hall was director of the Economic Section of the Treasury, 1947±61. J. C. R. Dow, `National Income Comes of Age', The Banker's Magazine ( July 1956), pp. 128±31 at p. 131 (emphasis in original). `The Royal Commission on the Taxation of Pro®ts and Income', Economic Journal ( June 1956), pp. 370±7 at p. 377. H. C. Deb., 513, col. 1436, 28 April 1953. Anthony P. Thirlwall, Nicholas Kaldor (Brighton, 1987), p. 113.

Tax issues of the 1950s

135

quately by the tax system. Diamond was an accountant interested in tax avoidance. He wrote to Kaldor in 1955 to `congratulate you once more on your ideas on taxation ± your arguments seem to me wholly convincing and the more I think about [it], the more I am satis®ed that all one needs is ``one ®nal heave'''.15 Crosland too was a fan, and Crossman noted in 1959 how everything that Crosland said about taxation came from Kaldor.16 His book An Expenditure Tax (1955) has been described as a `classic reference'17 and he subsequently advised many governments about tax questions. One study has concluded: `Seldom, if ever, can one man, who was neither politician nor permanent civil servant, have exercised so much in¯uence on a particular aspect of policymaking over so long a period.'18 When Labour set up a working party on taxation in 1968, Callaghan recommended that Kaldor's views be sought and felt able to offer a certain amount of ¯attery: `James Callaghan insisted that only you could give us the necessary wideranging and philosophical beginning which we would need if our efforts are to be worthwhile.'19 The fundamental lesson which Kaldor drew from his examination of the tax system was that income as conventionally de®ned for tax purposes did not give an accurate representation of a person's taxable capacity. If they were a salaried or wage-earning employee then the tax de®nition of income was adequate, but anyone with more varied sources of spending power through property or other bene®ts would have been too lightly assessed. As he described the origins of his interest: `The really important and intriguing problem, as I gradually discovered, concerned the question of how to ensure equality of treatment between taxpayers drawing their income from widely different sources.'20 The implications for the party of Kaldor's perspective were ambiguous. 15 16 17 18

19 20

King's College, Cambridge, Kaldor Papers, 3/30/211, Diamond to Kaldor, 10 March 1955. The Backbench Diaries of Richard Crossman, ed. Janet Morgan (London, 1981), entry for 2 June 1959, p. 763. Thirlwall, Kaldor, p. 127. Thirlwall provides a comprehensive treatment both of the subject of Kaldor's book and its place in tax literature. Ann Robinson and Cedric Sandford, Tax Policy-making in the United Kingdom. A Study of Rationality, Ideology and Politics (London, 1983), p. 69. There are two useful essays on Kaldor and tax policy: Anthony P. Thirlwall, `Kaldor as a Policy Adviser', and Brian Reddaway, `Tax Reform in the United Kingdom' in Tony Lawson, J. Gabriel Palma and John Sender (eds.), Kaldor's Political Economy (London, 1989), pp. 121±39 and pp. 141±54. One of the most perceptive treatments of Kaldor in this collection is by John Toye, `Nicholas Kaldor and Tax Reform in Developing Countries', pp. 183±200. Kaldor Papers, 11/3, Labour Party study group on taxation, Terry Pitt to Kaldor, 2 December 1969. Nicholas Kaldor, `Introduction', Reports on Taxation 1. Papers relating to the United Kingdom (London, 1980), p. xiii.

136

The Kaldor era, 1951±1965

Kaldor was starting from the same point that those inside the party had reached as judgement on the tax policies of the Attlee governments. The political stand on rates of tax had been made, but the full impact was lost because of avoidance. However, the implication of this was that income tax as it stood was an inadequate device, yet this was the tax to which the party had long been devoted. The dif®culty which Labour had in following Kaldor to the ®nal destination of his thinking is shown by its reactions to his idea for an expenditure tax. The notion of taxing expenditure was not new, but Kaldor was responsible for giving it a full airing in the 1950s. It was designed to replace surtax as a tax on the spending power of the richer sections of society and would have been a prelude to a broader application to the income tax paying population as a whole. Although its name suggested that it was an indirect tax it still rested on income. It would have examined the sources of spending power accruing to an individual through the tax year and given relief for those not spent. It was the de®nition of spending power as any form by which that had been increased which differentiated it from income tax. The expenditure tax focused on the consumption being drawn out of the economy; it therefore had a bias in favour of saving. Given the contemporary views on the prevalence of dis-saving and excessive consumption, the device of an expenditure tax had a certain common-sense appeal to Labour. As one party member enthused: `you won't get wage restraint so long as this obscene exhibition continues on the stock exchange in this country. I am arguing in favour of an expenditure tax, as expounded by Nicholas Calvert [sic].'21 When the Fabian Society's taxation group discussed Kaldor's tax there was agreement in principle with Kaldor's scheme but some doubts as to its practicability and fears that it would be too violent a change to the tax system.22 For tax experts the administrative burdens were the most striking: Cock®eld wrote to Kaldor: if you are to catch the type of person you have in mind, effective administration would require a complete statement of all transactions affecting these assets and the production and full analysis of all bank books. It is because I feel that, particularly with a tax of this kind, a high standard of administration would be essential, that I regard the administrative problem as so formidable.23 21 22

23

Labour Party, Annual Report (LPAR), 1956, p. 120. Kaldor Papers, 11/4, Fabian Society taxation group minutes, 11 December 1951 and 2 January 1952. The `economic' talent in or connected with the party was part of the group. Crosland was the group's secretary, and Balogh, Dalton, Gaitskell, Jenkins, Kaldor, Seers and Worswick were involved in its proceedings. Kaldor Papers, 8/12, Cock®eld to Kaldor, 31 March 1955. For a recent discussion of

Tax issues of the 1950s

137

Kaldor, with the support of Crosland, had tried to get the royal commission to examine the idea of an expenditure tax but Butler, as chancellor, had refused. However, the idea of the tax came before Labour's working party on taxation in the later 1950s where there was `violent disagreement' about Kaldor's tax. While the economists were in favour, and thought any opposition `irrational', the MPs ± principally Douglas Jay ± were concerned about its probable unpopularity. David Worswick, one of the economists in the group, has recalled that: the decisive moment came when Douglas Jay made a powerful statement to the effect that ordinary people liked to have their tax payments behind them when they thought of spending, not still ahead of them. When an MP invokes the British working man or the people, the professional economist has no comeback, or did not in those days before polls on everything. My recollection is that after Jay's powerful intervention we might as well all go home.24

Jay had a strong interest in tax matters, which entailed a consistent and long-held belief that a progressive income tax should be at the heart of an effective social democracy. He had a suspicion of anything that signalled a departure from that tax, and was, in the context of Kaldor's proposal, a rather conservative in¯uence.25 Although the rejection of Kaldor's idea for an expenditure tax was a modest event, it was a de®ning moment. The expenditure tax was an elegant ful®lment of Labour's tax ambitions and political instincts. Economic power was not something which could be solely encapsulated in a single-stranded instrument such as an income tax, but was more diverse and embraced many sources by which the rich were able to continue their lifestyle almost irrespective of the political regime under which they lived. In life, work was more worthy than consumption, so it would be better to tax the latter rather than the former as long as it could be done in a way which differentiated between people of contrasting economic rank, in a way that conventional indirect taxes did not. The basic approach which underlay the expenditure tax remained intact, and guided Labour in its subsequent strategy, but it had to pursue this severally and sequentially rather than through one, albeit radical, tax reform. Therefore Labour was committed to a series of reforms, each of them burdensome not

24

25

the administrative aspects of an expenditure tax, and the suggestion that it need not be administratively burdensome, see John Kay and Mervyn King, The British Tax System (Oxford, 5th edn, 1990), pp. 108±13. Letter, 16 March 1995. Crossman recorded that Kaldor was `utterly contemptuous of the politicians' attitude to his tax proposals': Backbench Diaries, entry for 24 June 1959, p. 762. For Jay's views in the 1950s see his article `Labour and Tax Reform', British Tax Review (March 1957), pp. 16±23, esp. p. 16.

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only upon the administration (although Labour was to suffer from the exaggeration of this effect) but also upon the party's political energy in seeing reforms through the Commons. This was a re¯ection of the way Labour was going to be continually trying to grasp an essentially slippery and elusive object ± the spending power of the rich. As soon as tax tightened on income, so it changed its appearance and emerged as capital. Lifetime earnings of whatever form were being quietly sustained by inheritance, which in turn passed outside the more exposed forms of individual title and instead through the more elusive and labyrinthine network of trusts. An expenditure tax might have saved a good deal of this effort. Labour's disinclination to follow Kaldor in this direction should be set in the context of the fact that no other party did so. As a tax reform it remained on the agenda long after the 1950s. But both the Conservatives and the Social Democrats subsequently steered clear of it, largely because of the scale of change which it seemed to demand. Labour cannot, in any simple way, be blamed for not following the expenditure tax idea, but the unwillingness to do so showed how substantial Labour's task was going to be in pursuing the same aims through a shopping list of separate taxes. If Labour's decision should be understood within a similar reaction by other parties, it was probably more consequential for Labour, given its ambitions for a comprehensive treatment of economic power. With hindsight, the 1950s and 1960s provided an opportunity for institutional reform which was not to occur again in later years. The analysis of the tax system from which the expenditure tax proposal emanated was given a full airing on the royal commission and informed the memorandum of dissent (more usually known as the minority report) which Kaldor drafted, and which was signed by George Woodcock of the TUC and Herbert Bullock of the National Union of General and Municipal Workers.26 When Kaldor was trying to persuade other commission members to sign the minority report he sent them draft versions of his book on the expenditure tax which explained his philosophy in detail. The commission was set up by the Labour government to examine the impact of forms of taxation upon the economy, and to see if revenue was being raised in a way that placed burdens which were fair between individuals. It was a major assessment of the tax changes which had been introduced during the Second World War. Kaldor learned a great deal from serving on it: `Working on the Royal Commission Kaldor achieved a quite unusual mastery for any non-of®cial person of the structure and peculiarities of the United 26

Royal Commission on the Taxation of Pro®ts and Income. Final Report (London, 1956), Cmd. 9474. The minority report is at pp. 354±424.

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Kingdom's direct tax system.'27 Even though he played second ®ddle to Kaldor in the drafting of the minority report, Woodcock also gained much from the commission. With a ®rst in philosophy, politics and economics from New College, Oxford, Woodcock had unusually academic quali®cations as head of the TUC's research department. He had quickly grasped the essence of Keynes's plan for taxing wartime earnings through `forced savings' and was also an enthusiast for Keynesian economics. Serving on the commission gave him a close knowledge of the measures which were to feature in the tax politics of the 1950s and 1960s. It therefore gave his voice an added authority and he was happy to point to his role on the commission when debating tax policy with Conservative chancellors.28 Their contribution was fundamental. Had there been no minority report the commission would undoubtedly have had a far more conservative impact than it did. It would have suggested that the scope for tax reform in the 1950s was limited. Kaldor's insistence on a minority report, which embodied a different approach to taxation, ensured that discussions about tax reform in the 1950s were usually structured around the tension between the commission's majority report representing the right-wing perspective, and that of the minority's, representing the left-wing view. Certainly, when the Board of Inland Revenue presented memoranda discussing possible tax changes it tended to include both the majority and minority views to illustrate the spectrum of tax opinion. In this respect, Kaldor probably had more in¯uence on tax developments through the minority report than via An Expenditure Tax, which was highly regarded as an exploration of tax theory but one which had failed to win the minds of the tax community and remained an interesting but unful®lled essay in tax reform.29 Kaldor's approach rested upon a different conception of taxable capacity from that of the main report. Kaldor wished to include all that an individual received which contributed to his spending power over a certain period. Traditionally, capital and income were regarded as separate. A stream of regular receipts might be taxed as income, but the capital that produced them ± whether human or physical ± could not. Changes in the value of capital were not therefore seen as income, unless they fell into a special category when they were exploited as a trading activity. In the United States, where the existence of a capital gains tax 27 28

29

Toye, `Kaldor and Tax Reform', p. 185. MRC, MSS 292B 411. 171/8, TUC Economic Committee, 12 July 1961, notes of a meeting with the chancellor of the exchequer, Selwyn Lloyd, where Woodcock disputed that the need for incentives gave adequate grounds for raising the threshold for surtax. See Little, `Fiscal Policy', p. 291, and the same author's review of An Expenditure Tax in the Economic Journal.

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was urged as a reason for Britain to adopt one, the position was rather different, since capital gains were more naturally understood to be part of income. As the Board of Inland Revenue commented in 1946, `No doubt the fact that capital changes hands in the United States over a wider range than here, and the fact that many people ``get rich quick'' by exchange and other operations, help to blur the distinction that we always see between capital and income.'30 The majority report did not make any signi®cant recommendations for changing tax law on capital gains, since these were already taxed if they were being made over the short term as an item of trade. It merely returned the matter to the discretion of the tax commissioners with some elaborations on what might identify capital transactions involving trading from those which did not.31 In Kaldor's view there was no operational distinction between capital and income for tax purposes. It was therefore a far more radical, all-embracing, interpretation of `taxable capacity'. Kaldor's interpretation of taxable capacity addressed both a `fairness' and an `egalitarian' dimension. With regard to the former he was able to highlight the injustice of the existing system of taxation, `which taxes the wage and salary earner fully, whereas the man who is taxed on Schedule D or lives on investments can escape in greater or lesser degree through converting income into capital gains and through various other dodges like offsetting ``losses'' against other income'.32 But there was also a more left-wing slant. Arguing that dividend restraint had prevented `an enormous untaxed increment to the wealth of a particular group in the community', the minority report went on: `The social and economic inequalities which such a shift would have created would not have been compatible with the sense of fairness and equity of a modern democratic community.'33 It was the majority's refusal to countenance a capital gains tax which prompted Kaldor's pursuit of a minority report. As he explained to George Woodcock of the TUC, who was also a signatory: After reading part 1 of the majority report and various bits of the rest I came ®rmly to the conclusion that it would be quite incompatible with my intellectual convictions or my conscience to sign the majority report. The whole tone of this document is so biased and so carefully avoids the main issues that it would be quite impossible to deal with one's differences in the form of reservations.34

Company taxation was the other important area where Kaldor 30 31 32 33 34

PRO T 171/391, Board of Inland Revenue,`Taxation of Capital Gains', 1 November 1946. Royal Commission, Report, paras. 83±4 and 116. Kaldor Papers, 8/12, letter to Sir Harry Gill, December 1954. Minority Report, para. 104. Kaldor papers, 8/12, letter to Woodcock, 20 December 1954.

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differed from the rest of the commission. Taxation of companies was in need of reform because, in addition to income tax charged on pro®ts put to reserve, the pro®ts tax introduced by the Labour government in 1947, which had different rates between distributed and undistributed pro®ts, added a second tier of taxation. It was thought desirable to try to replace these with a single tax.35 The tax in question was not in itself a necessarily socialist or even left-wing measure: a corporation tax was a way of modernizing the tax system, but was neutral for the company sector overall. It was a reforming measure because it separated personal from company taxation, which the traditional system did not. Under existing arrangements, companies paid income tax at the standard rate on all their pro®ts, and the dividends paid to shareholders showed this tax deducted. If the individual taxpayer paid either more or less than the standard rate, the tax on the dividend was adjusted accordingly. However, the tax on undistributed pro®ts ± if regarded as a tax on what belonged to the shareholders anyway ± could not be so adjusted and was simply paid at the standard rate. As income tax had developed so as to become more sensitive to individual circumstances the application of the standard rate to company pro®ts made less sense. More practically, separation of the two would enable a chancellor to vary the rate upon companies without altering the individual's tax burden. Kaldor and Woodcock's minority report to the commission recommended the replacement of income tax on companies by a separate corporation tax, and the commitment was maintained until 1965. The tax had two real advantages for Labour. One, the idea of modernizing the tax system was itself attractive since it enhanced the wider electoral image that Labour was trying to project. Secondly, it permitted a stiff treatment of dividends. The traditional system had regarded pro®ts as essentially the property of shareholders. The corporation tax treated companies as separate entities and therefore dividends as new income for the shareholder. What Kaldor and Woodcock had proposed was that company pro®ts should bear the corporation tax and dividends be charged to income tax. Although this was not, strictly speaking, double taxation, since the same tax was not being applied twice, it looked rather like it. As the Inland Revenue had reported in 1959, `the great objection to the scheme is political. It would certainly be represented as double taxation of the same income ± ®rst in the hands of the company as pro®ts when made, and again in the hands of the shareholder when pro®ts were released to him as dividend. All the history and tradition behind our tax code could be prayed in aid of this criticism.'36 35 36

Final Report, p. 160. PRO T 171/508, `A Corporation Tax', 30 December, 1959.

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The Kaldor era, 1951±1965

Kaldor's behaviour was not simply one of academic fastidiousness, but showed a political forcefulness which had a deep impact upon the commission. He was determined to get others to support him, and when he wrote to get their support he portrayed the issue as one of left versus right at the same time as he underlined the different conceptions of equity behind the two approaches. Its chairman regretted that, by 1954, the commission members had divided into two sides after they `did get on amicably as colleagues for a number of years'.37 Kaldor was criticized for trying to get the Inland Revenue of®cials who were serving the commission to pass adverse judgement on the majority report, and in general of trying to make sure that his version had the last word. Disruptive or not, Kaldor had played a powerful role on the commission, able not only to use it as a base from which to launch a fundamental, if not entirely novel, interpretation of taxable capacity but also to act so that this difference of view structured the subsequent digestion of the commission's ®ndings. Kaldor's behaviour was similar in government, where one observer found him `endlessly persuasive (though not himself readily open to persuasion) and would cultivate anyone, regardless of grade, who had a part to play in the schemes dear to his heart'.38 Kaldor brought a forceful personality to the propagation of his tax views, and was clearly attractive to Labour at a time when their `inhouse' talent, Hugh Dalton, was coming to the end of his career. Dalton had played a crucial role in Labour's tax politics, acting as a bridge through his interest in tax from the Snowden period to its successor generation. As a political patron to many of the new talents, he had also maintained the interest in tax within Labour's ideology.39 Dalton had used the tax system largely as it stood to get at the rich, and his main reforming interest lay in the area of death duties and a capital levy. This was politically radical but not necessarily very adventurous in tax terms, since the basis for this had been laid down in the development of death duties at the end of the nineteenth century. Kaldor was possibly less politically radical than Dalton, but in tax terms wished to be a more fundamental reformer.40 A consequence both of this outlook and 37 38 39

40

Kaldor Papers, 8/12, letter of Lord Radcliffe to Kaldor, 11 March 1955. Leo Pliatzky, Getting and Spending. Public Expenditure, Employment and In¯ation (Oxford, 1982), p. 74. Dalton recorded Callaghan's thanks for getting him a place in the second reading debate on the 1952 Finance Bill: The Political Diary of Hugh Dalton. 1918±1940, 1945± 1961, ed. Ben Pimlott (London, 1986), entry for 8 April 1952, pp. 583±4. Crosland acknowledged this connection when he wrote to congratulate Callaghan on the 1965 budget: `Old Hugh would have been terribly proud': James Callaghan, Time and Chance (London, pbk edn, 1987), p. 182. Ian Little described Kaldor as `a very progressive Conservative', anxious `to make

Labour's policy-making in opposition

143

Kaldor's work on the commission was a necessarily close working relationship with J. Alexander Johnston who was to become chairman of the Board of Inland Revenue in 1963 and a key ®gure in the 1965 budget.41 Generally, Kaldor got on well with the Revenue of®cials, who appreciated his close and wide-ranging interest in tax questions. This was a marked change from the more usual situation of Labour feeling that the tax bureaucracy was unsupportive towards their reforms, and it prefaced the close relationship between Kaldor and the Revenue during the 1965 budget process. Kaldor described the linkage between the 1950s and the 1965 Act in the following terms: In particular the great reforms of the 1965 Finance Act were the result of years of preparation by the Inland Revenue ± without that it would not have been possible to prepare such radical and complicated pieces of legislation in such a short time. If I have played a role in all this, it was more due to my work on the Royal Commission of Taxation ten years earlier, the minority report of which may no doubt have in¯uenced the views of politicians and of the Board of Inland Revenue in the intervening years.42

Labour's policy-making in opposition Labour's policy-making has usually been of two kinds: establishing what it really thinks, as a process of self-education, and preparing programmes for a future Labour government. From 1955 to about 1959 the emphasis was upon the ®rst kind, and upon the second from 1961 to the election victory in 1964. Taxation found a place in both processes, in the ®rst as part of a wider interest in equality, and in the second as a support for incomes policy. Two ways of thinking about social divisions were being run side by side. There was a division created by the tax system between those falling under the PAYE system, whether as salary or wage earners, faced

41 42

consumption more equal and capitalism more socially acceptable and more ef®cient': Economic Journal (March 1956), p. 120. An illustration of the difference in outlook between the two can be found in capital gains taxation. Dalton was never keen on it, because he thought that the need to allow for capital losses would actually blunt its power as an instrument for redistribution. In his review of the Report of the Royal Commission, Dalton argued that a capital gains tax `might easily turn out to be the case ± there have been so many in our ®scal history ± of much cry and little wool', whereas `like the capital levy, death duties pick up capital gains, even if not realised, in their stride': `Taxation and Social Justice', New Statesman, 2 July 1955, p. 5. Kaldor was more enthusiastic about a capital gains tax because he found virtue in taxing what he de®ned as an element of income in the interests of tax equity, even if the capital which produced the gains was only lightly touched through the limitation of its increment. See Kaldor's obituary by Alan Thirlwall in Proceedings of the British Academy, 73 (1987), p. 649. Kaldor Papers, 2/71, notes for a talk to H.M. Inspectors of Taxes in Manchester, 31 October 1968.

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The Kaldor era, 1951±1965

with taxes they could not avoid, and those who could receive income in forms that escaped tax. This in essence did not depend upon income level, but there was an assumption that the rich did better out of this than the poor. It therefore corresponded roughly to the other, much more usual, division between the working people and the rich.43 Labour speakers therefore found themselves talking about both `fairness' and `equality', almost interchangeably. Fairness had the merit of embodying an acceptance of the broad framework of society, which chimed in with the outlook of many of Labour's supporters, while at the same time pinpointing those who disrupted this essential agreement by their deliberately malicious or anti-social behaviour. If `fairness' embodied a more conservative view of society than `equality', it did not mean it was an inferior generator of grievance and feeling; its very simplicity was a ready trigger for outrage. Again, tax was an obvious area to turn to, as a system where fairness ought to have reigned but often did not. But fairness could also mean equality because it was assumed that it was the wealthier classes who bene®ted from tax avoidance. A good example of tax addressing both perspectives is provided by Harold Wilson's presentation of a study group's report on equality to the 1956 party conference. Getting off to an uncertain start, `almost by accident he came onto the subject of tax evasion and got a resounding cheer, since the audience could bite on something concrete where they could hit the wealthier classes in this country'.44 During the debate, Wilson had referred to `a major cause of inequality in modern society ± the growth of a new system of privilege: ®scal privilege, privilege in matters of tax'.45 But the same point could be made more moderately to the non-party readership of The Statist: Many Schedule E pay-as-you-earn taxpayers at all levels of income feel that it is essentially unfair that they have to pay tax, at a high marginal rate, on every penny they earn, while others can enjoy substantial accretions to their spending power for very little effort by means of a speculative Stock Exchange ¯utter or big property deal.46

It was not surprising that a group examining tax avoidance worked 43

44

45 46

But the coincidence between the two views was only rough, because, as a party document noted, `There is a good deal of working class avoidance ± by spare time work for cash, etc.': LPA, Report of a working party on tax avoidance, Re. 602/August 1959. Backbench Diaries, entry for 26 October 1956, at p. 524. The authors of the 1964 election study reported Wilson's `evangelical castigation' of the expense account system: David Butler and Anthony King, The British General Election of 1964 (London, 1965), p. 138. It proved impossible to go as far as Wilson wanted in the tax treatment of business expenses in the 1965 budget, although restrictions were imposed on the extent to which entertainment allowances were tax-free. LPAR, 1956, p. 119. Kaldor was not a member of this study group. Harold Wilson, `Capital Gains must be Taxed', The Statist, 1 December 1961.

Labour's policy-making in opposition

145

alongside another studying the taxation of pro®ts and income, both reporting in 1959. Political parties, at least their MPs, have usually been thought of as parasitic or lightweight when it comes to policy formation, partly because of members' unwillingness to keep turning up to committee meetings, partly because they lacked the necessary expertise (as opposed to merely interest) to actually make policy.47 Policy-making in tax matters saw these tendencies in an acute form, because it was such a technically intricate topic. In fact, while taxation, and especially its reform, drew heavily upon economic ideas, it was as much an accountant's or a lawyer's domain, especially in parliament. Labour was not short of such talents. There was Harold Lever, who had successfully practised as a lawyer and had a powerful command of tax issues, while John Diamond was an accountant who went on to become chief secretary at the Treasury between 1964 and 1970. He had a clear grasp of the way companies interacted with, and worked against, the tax system.48 Crosland, Gaitskell and Jenkins had all been involved closely in tax issues in the 1950s, as had Douglas Jay and George Houghton. Many of the discussions among MPs revealed signi®cant differences of emphasis and outlook. Over a wealth tax, there was disagreement about whether it should be in the nature of a small continuous capital levy which would redistribute wealth gradually, or as a lighter tax effectively on the annual increase in value of the principal, rather than upon the principal itself. The details of a gifts tax remained elusive. With capital gains, which had long been on the agenda, while there was agreement over the uniform treatment of all realizations, short or long term, there was indecision about whether or not to incorporate the changes into income tax or to have a separate tax, and there was a further difference of opinion about the inclusion of jewellery and works of art.49 When a working group turned to company taxation there was a good deal of division about how far the party should go in the taxation of dividends. During the Attlee governments the pro®ts tax had discriminated against distributed pro®ts, and this seemed to go down well with the trade unions.50 But while some of the anti-dividend feeling re47 48 49 50

H. Drucker, Doctrine and Ethos in the Labour Party (London, 1975), pp. 82ff.; Robinson and Sandford, Tax Policy-making, pp. 66. As evidenced by his paper for the working party on tax avoidance and evasion, `Basis of the Assessment of Pro®ts', LPA, Re. 590/July 1959. This was surprising given the contemporary boom in the prices for paintings. See Bruce Millan, `The Case for a Capital Gains Tax', Socialist Commentary ( July 1961), p. 15. See R. C. Whiting, `Taxation Policy' in H. Mercer, N. Rollings and J. Tomlinson (eds.), Labour Governments and Private Industry. The Experience of 1945±51 (Edinburgh, 1992), pp. 120±39 at pp. 123±5.

146

The Kaldor era, 1951±1965

mained, some concern was expressed that the ploughing back of pro®ts that this encouraged tended to have undesirable consequences, in encouraging monopolies and prejudicing new entrants to an industry.51 In this environment, Kaldor's strongly held views were bound to have considerable force given both their synthetic treatment of a number of different tax proposals, his regular attendance at committee meetings and the difference of views and emphases among MPs. The fact that politicians tended to respond to ideas produced by others certainly seemed to give Kaldor a powerful in¯uence on Labour's policy-making. His paper `The Case for an Integrated Tax Structure', which set out the case for expenditure, gifts and wealth taxes, as well as changes to income tax, was the starting-point for the 1959 working party on the taxation of pro®ts and income.52 The party's report retained the capital gains, gifts and wealth tax as measures for a future Labour government. The discussions of a corporation tax followed the lines set out in Kaldor's minority report to the royal commission, while the capital gains, wealth, gifts and corporation taxes formed the central components of the Report on Taxation and Incomes Policy.53 The same taxes formed the basis of Kaldor's `First Memorandum on Tax Reform', which was submitted to Callaghan as chancellor in 1964.54 The report of the 1964 working party embodied Kaldor's justi®cation of taxing capital gains because they were indistinguishable from income as a guide to taxable capacity. Their proposals, it was noted, `would eliminate the arti®cial distinction between short and long term gains as well as between ``capital'' and ``income'' gains to taxable capacity, a state of affairs equally desirable from the point of view of equity and administration'.55 This formulation owed a great deal to Kaldor. What he had done was to present in tax theory the more intuitively held popular view that a lot of sharp operators were getting rich and not paying tax. but just how far these two could be reconciled was another matter. Popular views were probably more conventional than Kaldor's. Houghton, a good guide in this area, believed that `there is in the public mind a big distinction between the fruits of long-term investment and the shortterm gains from speculation'. More particularly, `What the public want 51 52

53 54 55

Discussions on this were based on Balogh's paper `Differential Pro®ts Tax', Economic Journal, 68 (1958), pp. 528±33. LPA, Re. 556/May 1959. John Toye has pointed out that Kaldor's list of self-reinforcing direct taxes was very similar to one which was put forward in 1947 by the ConfeÂdeÂration GeÂneÂrale du Travail and of which Kaldor had approved: `Kaldor and Tax Reform', appendix 1, p. 200. LPA, RD. 742/April 1964. PRO T 171/804, 29 October 1964. LPA, working party on taxation, `Report on Taxation and Incomes Policy', RD. 742/ April 1964.

Labour's policy-making in opposition

147

to see is that the Samuels, Clores, Wolfsons and others in the ®eld of capital transactions are paying tax on what are plainly the pro®ts of their trade.'56 This should not, however, disguise the fact that there was a congruence of inclination and approach between Kaldor and the party. Labour Party politicians for the most part agreed that the tax system needed cleaning up, and loopholes closing, so that the income tax payer caught in the tight net of PAYE was not disadvantaged against the businessman and the wealthy who could ®nd lighter treatment through tax-free expenses and capital gains. Patrick Gordon-Walker, chairman of the working party on tax avoidance, saw the strategy in this way: `it is important to put over the moral appeal. Tax avoidance in high places is corrupting the country and must be stopped . . . We should go out boldly in favour of those who earn their income as against those who live by speculation or who already have wealth.'57 While it was fairly uncontroversial to make a stand against tax avoidance, it was quite the opposite to frame effective proposals to deal with it. It was an area of some complexity and fairly impenetrable by a group of largely `lay' MPs and party of®cials, as Harold Lever conveyed in a paper that he submitted to the party's working group on the way in which tax relief for genuine business losses could be exploited as a taxavoidance device: We think it undesirable to set out examples of how the mechanism of computation [of losses by ®rms] can be deliberately manipulated to create these situations, although the process is more intellectually entertaining than the average crossword puzzle and provides considerably greater prizes. None of the recent legislation [the Conservatives' 1959 budget] even purports to affect the majority of these transactions. The original dividend stripping legislation could be effortlessly avoided by any lawyer of average competence.58

The areas where tax avoidance took place were well known. It was possible to use inter-company relations to trade in assets, to create investment income and trading losses, all of which were intended to avoid tax or reduce tax liability. Individuals were also able to use various devices which either removed their nominal ownership of assets while retaining bene®ts from them, or maximized family income by the dispersal of wealth. How these devices worked in detail was often a lawyer's rather than an economist's domain. It was possible for the party to draw upon such technical ability even if it was in no sense allied to the ultimate political purpose. The party's working group on tax avoidance 56 57 58

LPA, `Capital Gains Tax', RD. 222/March 1962. `Tax Dodging. Report of the Working Party on Tax Avoidance and Evasion', LPA, Re. 602/August, 1959. H. Lever, `Relief for Losses', LPA, Re. 594/July 1959. Lever himself had practised as a lawyer with a special interest in property transactions.

148

The Kaldor era, 1951±1965

was helped by a paper from G. S. A. Wheatcroft, professor of law at London University and editor of the specialist journal British Tax Review. He was also the author of a standard work on the key area where tax burdens were avoided, that is through gifts and settlements.59 His instincts were, if anything, conservative: he supported, for example, the raising of the surtax threshold in 1961, which economists of a more leftwing persuasion did not.60 With the help of such experts, the party could indicate where it wanted the efforts to be directed, but it was giving prominence to what was an ongoing process rather than a more dramatic, once-and-for-all effort. Socialism and taxation It is useful to compare the output of the party's policy-making efforts with the more wide-ranging contributions to the nature of socialism and the party ideology which appeared in the 1950s and 1960s. The principal contribution was Crosland's The Future of Socialism, published in 1956. This book provided assurance that the direction the party had taken under the Attlee governments was the right one and that with the lessons from that period it would be well armed to deal with the challenge of Conservatism in the changing society of the 1950s. The power of the state in national economic policy meant that the in¯uence of private property in the economy was much diminished. Labour should not complicate its strategy by still pursuing the state ownership of industry and property as its main aim: `a determined government can restrict property incomes [through taxation] more easily than by the collectivization of industry with full compensation'.61 The maintenance of full employment through ®scal policy was not merely sound economics but sustained the redistribution in favour of working-class pretax incomes which had been reported in the early 1950s. By running a budget surplus to contain in¯ation, through taxation which was progressive, the state was protecting the favourable distribution of incomes, which in¯ation might otherwise have reversed.62 What Labour had to do was abandon the state's association with austerity and controls which the Conservatives had exploited so successfully: `The party must recognize that its identi®cation in the public mind with austerity, rationing and restrictive controls is highly damaging, and that we are in grave 59 60 61 62

G. S. A. Wheatcroft, The Taxation of Gifts and Settlements (London, 1958). See Wheatcroft, `Surtax Cut by Half ?', British Tax Review (November±December 1959), pp. 391±409, and Little, `Fiscal Policy', p. 285. Future of Socialism, p. 89. Ibid., p. 51.

Socialism and taxation

149

danger of allowing the Tories to run away with the kudos of being the party of prosperity and high consumption.'63 Crosland believed, quite rightly, that improved living standards had important implications for Labour. Rising material standards helped to foster a sense of equality with other classes and were part of the bene®cial democratic attributes of capitalism. They softened the pressure for more vigorous egalitarian taxation, so that the disruptive effects of one of Labour's traditional aspirations, the capital levy, might do more harm than good in the furtherance of a contented society.64 Taxation still had a role to play in the limitation of inequality through property income and inheritance, but the party had to recognize its limits. While Crosland was sceptical about some of the talk in business circles about the limits to taxation, nevertheless `Socialists sometimes forget, in a natural enthusiasm for the bene®ts which higher public expenditure will bring, just how unpopular high taxation is.'65 This might have diminished the role of the state in Crosland's view, but in fact there was harmony between private and public, forged through the fact that Britain was `on the threshold of mass abundance'.66 Public spending on social services, sustained through economic growth, was a ®tting counterpart to private consumption in the achievement of equality. State services, providing high-quality education and welfare support for the population, would make a fundamental contribution to equality. As the problem of economic growth was receding, so the state had to play its part in the making of a civilized society through its cultural provision and physical planning. This was a compelling vision, and it could not fail to be, because it conveniently consigned the hard choices about public and private to the past. An indication of how far a stress on public ®nance unleavened by some wider social vision could appear rather austere is provided by Douglas Jay's Socialism in the New Society, published in 1962. Jay had been a key ®gure in relating Keynes's ideas to Labour's aims in the 1930s in his book The Socialist Case and had seen some of those aims ful®lled under the Attlee governments. Public ®nance was at the heart of Jay's later book: `a really radical approach to social justice, in terms of the actual standards of actual human beings, can unquestionably be achieved by direct ®scal redistribution out of incomes and property'.67 Taxation was the prime economic and social regulator in the social democratic state.68 Taxation also had a powerful effect on class divisions linking the manual worker and the salary earner, `well-drilled under 63 67 68

64 Ibid., p. 318. 65 Ibid., p. 403. Ibid., p. 293. Douglas Jay, Socialism in the New Society (London, 1962), p. 45. Ibid., p. 259.

66

Ibid., p. 515.

150

The Kaldor era, 1951±1965

Schedule E', and separating them from the pro®t earners and the selfemployed `sunning themselves in the Mediterranean climate of Schedule D'.69 There was a good deal of similar ground between Crosland and Jay. Both believed in the primacy of public ®nance as a socialist instrument; both believed equality was the goal to which socialists should aim; both believed that inheritance was the most important source of inequality. Jay's was a more austere book, stressing how the private market, left to itself, generated the inequalities which had to be corrected by taxation. His message was unalloyed by Crosland's references to personal consumption and cultural development, which made a rather traditional espousal of state expenditure look more appealing. Crossman exploited this when he reviewed Jay's book. Commenting that `Somewhere in his [ Jay's] breast there resides a masochistic passion for high taxation', Crossman made a more substantial point that while this was unattractive it was also undermined by taxpayer resistance.70 Crosland addressed this point in the two opening chapters of his book The Conservative Enemy, also published in 1962. This is rather more interesting from the public ®nance point of view than The Future of Socialism, because it dealt more directly with the criticisms of social democracy from both the right and the left that the power of taxation was limited because it undermined the pro®tability of the private sector upon which it rested and was ultimately dependent upon the consent of the population. The general message remained the same, but it was now buttressed by the more widely discussed sense of comparative national decline which had not been there at the time of The Future of Socialism. Public spending was now meant to revive the state of Britain rather than simply acting as a further source of equality through the provision of public services. Crosland was con®dent that the limits of taxation had not been reached. Drawing on European experience, especially that of Germany and Sweden, he argued that the public sector increased in size as economies grew, because of the way the yield from certain taxes rose with national income. But he made what was to become a familiar reservation, that Britain relied for its direct personal taxation upon high rates of marginal income tax. Rates and national insurance payments did not rise with income, and Britain did not use payroll taxes in the way that Germany and France did to generate social 69

70

Ibid., p. 341. Schedule E, which dealt with employees, had a far stricter interpretation of tax-deductible expenses than Schedule D, which catered for businessmen. The reference to `Mediterranean' refers to the conventional view of southern countries as operating laxer tax regimes than northern countries. `The Taxolators', New Statesman, 23 February 1962, p. 254.

Socialism and taxation

151

security revenues.71 Crosland accepted that high marginal rates of tax might have a damaging effect upon incentives. His solution was innovative. There were a range of taxes that had to be pursued on social and redistributive grounds ± an annual wealth tax, capital gains, and a tax on gifts ± but these would provide the political scope to develop elsewhere different taxes for revenue purposes which did not have the drawbacks of high marginal rates on income. The `socialist' taxes: should therefore enable us to consider, more dispassionately than in the past, certain elastic and high yielding indirect taxes ± a general turnover tax, a differential payroll tax, or a graduated and much higher employers' national insurance contribution (as proposed in Labour's National Superannuation Scheme). For what matters is the total progressiveness of the tax system ± and, if we want to redress its total imbalance, its total yield.72

This was an interesting way of separating the political from the revenue functions of taxes. Hitherto Labour had found that the two went hand in hand: the ideal tax from a political point of view ± a progressive income tax ± was also, thanks to PAYE, the spine of the revenue system. Now the two had to be separated. A similar conclusion was reached by Richard Titmuss's Income Distribution and Social Change, which was published in 1962 as well. This had a different purpose from Crosland's and Jay's books in that it was intended to explore what most writers had assumed to be an ineluctable trend in the equalising of pre-tax incomes. Titmuss argued that the ®gures on which such conclusions depended, particularly those produced by the Board of Inland Revenue, underestimated the degree of inequality of incomes. At the bottom end the aggregation of husband and wife's earnings hid some low single wages in a joint family income. At the top end the many ways in which income was received in kind or in non-taxable form meant that individual incomes were probably higher than those reported by the tax authorities. Although Titmuss's book was written outside the labour movement and was not discussed within it (at least in so far as the evidence from the party's tax working groups suggests), it relied upon the same kinds of material, namely Kaldor's minority report to the royal commission and technical discussions such as Wheatcroft's book on gifts and settlements. But even if the ostensible focus was on pre-tax incomes, the study chie¯y served as a re¯ection on the tax regime which generated such suspect ®gures and therefore had such an imperfect hold upon the nation's incomes. By a rather different route Titmuss 71 72

Crosland, The Conservative Enemy: a Programme of Radical Reform for the 1960s (London, 1962), pp. 21±2. Ibid., pp. 22±3.

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was led to a similar conclusion to Crosland. If the persistence of tax avoidance was undermining taxes based upon equity ± as direct personal income tax was ± then the alternative was to ®nd revenue from elsewhere. Titmuss noted that the national insurance contributions ± a regressive poll tax ± were yielding far more than surtax. The weakness of a tax which was based on moral behaviour ± to pay the tax which was rightfully owed to the state ± led to an obvious solution, `to abolish the need to be moral'.73 The extent to which these questions had become part of general tax debate was clearly illustrated by a comparative study of the British and European tax systems published in a leading tax journal: If there is a lesson to be learned at all from such comparisons, it is that when total taxes approach or exceed a level of about 30 per cent of national income, the impact of direct taxes is necessarily severe if such taxes are required to contribute more than one-half the total [as they did in Britain]. The willingness of the population to carry the same total burden would probably be greater if there were some relaxation of direct taxation compensated by an increase in indirect taxation. This kind of adjustment cannot be regarded, however, as a panacea for all ®scal maladies. It must be carried out gradually, otherwise the change itself may give rise to even greater evils, and it cannot be carried far without either raising turnover tax rates to intolerable levels or applying turnover taxes to essential goods and services with all the undesirable social consequences which the regressiveness of such application entails.74

This was a crucial challenge to Labour's social democratic mainstream. Taxation, which had a central place in economic and social policy, was not just an instrument but also an af®rmation of an effective democratic society. The consent to pay the taxes for a reforming state was seen as a legitimation of the state's functions. Douglas Houghton believed that `Willingness to pay is willingness to give, and that is the spirit in which we should look to our obligations to the community and to the state.'75 Did this mean that the Labour Party should look at other tax systems and at least weaken the centrality of direct progressive income tax to which it had been committed for so long? At a personal level there was one dif®culty in this approach, since Kaldor, who provided the expert validation of the party's tax policy, had developed his expertise on a quite narrow basis around the equitable treatment through direct taxes of those well endowed with taxable capacity.76 The forces of tradition were also 73 74 75 76

Richard Titmuss, Income Distribution and Social Change. A Study in Criticism (London, 1962), pp. 197±8. E. B. Nortcliffe, `European Tax Systems: Has the United Kingdom anything to Learn?', British Tax Review (November±December 1959), pp. 437±9 at p. 439. H. C. Deb., 261, col. 254, 5 April 1960. Toye, `Kaldor and Tax Reform', p. 185.

The impact of the Conservatives

153

supported from another direction, that of party competition. This reinforced some of the themes of the 1950s. In that period envy at the businessman's expense account and the tax-free earnings of others was widespread among the professional classes. By the 1960s, when anxieties about Britain's economic performance were encouraging what Ben Pimlott has described as a mood of `puritanical endeavour',77 tax avoidance looked out of place and seemed to be the pathological behaviour of a minority who did not belong to the classless meritocracy which would rescue Britain from the doldrums. What was new, compared to the 1950s, was the way in which Labour's 1964 manifesto linked the proposed new taxes with incomes policy, and this development, arising from Conservative strategies, requires explanation.78 The impact of the Conservatives What Labour planned to do when it took of®ce was going to be determined not only by its own policy discussions but also by the direction the Conservatives had taken in government. Between 1961 and 1964 the Conservatives moved into Labour territory through their interest in economic planning and incomes policy.79 This had a decisive effect on Labour. It restored a role for the state in the economy which enabled Labour to revive the spirit of 1945±51, but which Labour's own disenchantment with nationalization had seemed to weaken. Now they could talk about the familiar topics which had proved themselves in the Attlee administrations: industry required modernizing, the economy needed planning. Even if they could not do much about either, at least they could talk with con®dence about what they might do. By November and December 1961 the Finance and Economic Policy Subcommittee was being asked by the party to prepare memoranda on economic planning, with Jay producing one on what the last Labour government had achieved.80 This had a fundamental effect on the party's attitude to taxation. In the 1950s the party had been very defensive about the way the public regarded its position on tax. By presenting an extensive menu 77 78

79

80

Ben Pimlott, Harold Wilson (London, 1992), p. 301. `An essential support for a fair incomes policy will be a major overhaul of our tax system. Taxation must be fair and be seen to be fair. The present situation where the largest gains are made not through hard work but through the untaxed rewards of the passive ownership of stock exchange speculation must be ended': F. W. S. Craig, British General Election Manifestoes, 1959±1987 (Aldershot, 1990), p. 50. A valuable exploration of Conservative thinking can be found in Rodney Lowe, `Replanning the Welfare State, 1957±64' in Martin Francis and Ina ZweinegerBargielowska (eds.), The Conservatives and British Society (Cardiff, 1996), pp. 255±73. LPA, Finance and Economic Policy Subcommittee minutes, `Programme of Work', 1 December 1961.

154

The Kaldor era, 1951±1965

of tax reform as a result of its policy work in the 1950s, some of those involved felt that the result might be to reinforce its image as a bureaucratic, taxing party: `We must not create the impression that we are poking our noses into everyone's little affairs or that we are going to unleash a horde of tax of®cials', warned Patrick Gordon-Walker, who had chaired the working party on tax avoidance.81 The most well-known incident on this theme was Gaitskell's anxiety about income tax, which led him to claim, implausibly, in the 1959 election that Labour's social welfare proposals would not add any burden to the taxpayer. As Douglas Houghton pointed out afterwards, `It is signi®cant that we, not the Tories, had to give an assurance at the 1959 General election that income tax would not be raised.'82 The problem was that the attachment to the idea of equality as the key identity of the party did not legitimate the tax programme. Dalton, the most `tax aggressive' of MPs, had recognized that certain tax proposals could not be launched simply on the grounds that they might improve equality.83 Interest in equality may also have weakened as a result of improved living standards in the 1950s. The new interest in planning and economic modernization changed the context for Labour's tax plans in a wholly bene®cial way. The intense examination of Britain that the discussion of comparative economic growth rates had encouraged pointed to a society in need of modernization and improvement. The tax system was no longer simply required to meet criteria of fairness; it was now positively linked to bene®cial state spending. The effect can be shown in the contrast between two drafts of a party pamphlet on taxation. The draft written in November 1961 had a rather bland theme of raising `adequate' government revenue by fair and simple taxes; by January 1962 the draft was much more con®dent, stressing that increased public expenditure was needed to build a better society and that the distinction between private consumption (`good') and public spending (`bad') was based on a spurious antithesis between private bene®t and public activity.84 Another equally impressive indication of the new environment was the way that a wealth tax came into discussion, again connected with the problem of economic growth. The Finance and Economic Policy Subcommittee noted in May 1963 how a report from the National Economic Development Council, `Conditions Favourable for Faster 81 82 83

84

LPA, Re. 602/August 1959. LPA, RD. 139/April 1961. `Public support for the [capital] levy will partly depend on what you're going to do with it. To promote equality won't sound a suf®cient defence': Kaldor Papers 11/4, `Taxes on Capital', paper for the Fabian taxation group, 1 April 1952. LPA, RD. 183/November 1961 and RD. 200/January 1962.

The impact of the Conservatives

155

Growth', provided some support for a wealth tax as a way of encouraging wealth owners to put their property to work to earn higher returns. This, of course, was a different reason for taxing wealth compared to Labour's interest, but it revived a distinction that had some resemblance to Labour's traditional `producer versus non-producer' antithesis, which had never made much progress outside the con®nes of the party.85 By the early 1960s, then, the context for Labour's tax ideas had become far more encouraging than it had been in the 1950s. Party competition, in so far as it was based on the Labour Party claiming to do better what the Conservatives had acknowledged to be necessary, therefore paved the way for the 1965 budget. There was a speci®c trade union dimension, too. As they tried to contain demand through incomes policies the Conservatives felt that their best chance with the trade unions lay in convincing them that the government was being `fair', in that all forms of economic reward would be under some kind of control.86 This gave taxation considerable importance, and the Conservatives showed themselves to be responsive to the political signi®cance surrounding tax questions in the early 1960s. They made inroads on their own traditional attachment to `capital' and implemented a tax on short-term capital gains in 1962. At times the tax views of Conservative Treasury ministers came very close to those of Labour, but as far as they went they were not able to match the credibility of Labour as a government that could give the trade unions what they wanted. The importance of the TUC was as much in political as in policy terms. It introduced a new interest group in tax questions, and the ability of this interest to push Conservatives into making tax changes which were none the less insuf®cient points to its success in setting the terms for tax policy in the early 1960s. The Conservative government had little dif®culty in approaching tax reform as a question of countering tax avoidance, and Labour had to admit the measures in the 1960 budget went some way to dealing with the issues that its working party had identi®ed in 1959.87 Capital gains taxation was a more precarious issue. Despite the widespread discussion of the issue, an experienced tax observer suggested in a forecast of 1960s budgets that `it is very improbable, despite the American precedents, that we should see a Conservative government introduce a capital gains tax in this country'.88 Edward Boyle, ®nancial secretary to the Treasury, 85 86 87 88

LPA, Finance and Economic Policy Subcommittee, May 1963. This view had general currency at the time: for an academic statement, see Hugh Clegg, `A Policy for Incomes', Lloyds Bank Review (April 1962), pp. 1±16 at p. 15. Working party report of 1961, RD 139/April 1961. Arthur Cock®eld, formerly a senior of®cial in the Board of Inland Revenue, `Prospects for the Budget, 1960±65', Lloyds Bank Review (April 1960), pp. 1±13 at pp. 9±10.

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The Kaldor era, 1951±1965

assessed the position more optimistically during preparations for the 1960 budget in the following terms: while conceding that `any proposal for a capital gains tax would meet with deep hostility from a considerable number of Conservative backbenchers', he none the less reported that `to my very certain knowledge there are a growing number of Conservatives ± both inside and outside the House of Commons ± who would support it'.89 But even Boyle recognized that there were advantages in doing it surreptitiously, as a link with tax avoidance, where Conservatives were already taking the plunge. The fact that some areas of tax avoidance ± such as the dressing up of trading pro®ts as the occasional realization of investments ± could only properly be dealt with by a capital gains tax `does not scare me [Boyle] very much ± indeed I think there would be numerous advantages, both practical and political, in edging our way into the capital gains tax ®eld by tackling instances of tax avoidance that are indefensible'.90 Historically, part of the resistance to capital gains taxation had come from the Board of Inland Revenue. Usually the main line of argument had been that the Board lacked suf®cient staff to undertake the new tax, and that more would be gained by chasing the full yield of income tax than by developing new taxation of capital gains. This was the argument which stalled capital gains taxation under the Attlee governments, and it effectively doomed the proposal when it came up for discussion in the 1956 budget.91 The Board had deeper objections ± that its partial coverage might arouse criticisms of inequity, and that levying a charge on capital appreciation might deter genuine saving and investment. By the 1960 budget the Board's view had eased, in the sense that its head told Boyle `quite frankly that if a Government wished to bring in a Capital Gains tax, then the Revenue would just have to get on with it, and that would be that'.92 This admission coincided with the Board's evidence to the House of Commons Estimates Committee that the Inspectorate of Taxes was signi®cantly understaffed!93

89

90 91

92 93

Robert Hall noted that at a farewell lunch for Heathcoat Amory `we talked most of the time about how long it would take to educate the Conservative Party to accept a Capital Gains Tax': Robert Hall Diaries, entry for 28 July 1960, p. 242. PRO T 171/ 506, memorandum of 29 October 1959. Heathcoat Amory turned down the idea for the 1960 budget because he had so recently opposed the tax in the 1959 general election. PRO T 171/508, letter of Boyle to Heathcoat Amory, 24 February 1960, attached to Board of Inland Revenue `Note on Taxing Pro®ts Made from Take-over Bids', M. 262. For the Attlee period a relevant paper is PRO T 171/391, Board of Inland Revenue, `Taxation of Capital Gains', 1 November 1946; for 1956, Robert Hall Diaries, entry for 31 January 1956, p. 61. PRO T 171/506, Boyle's note of 26 October 1959. Reported, and accepted, in Titmuss, Income Distribution and Social Change, p. 184, n. 5.

The impact of the Conservatives

157

Trade union views on tax were becoming more weighty, and provided a justi®cation for the government to press ahead with some kind of legislation. By the summer of 1961 the Conservatives were aware that efforts to achieve wage restraint could be resisted easily by the trade unions if partiality could be established. Reliefs given to surtax payers in the 1961 budget, although warmly welcomed by the party, lay the government open to such a charge, and the best way of retrieving the position was seen to be a tax on short-term speculative gains. Reginald Maudling received the support of the rest of the cabinet when he argued in July that the: Government would be better able to claim that they were dealing with the economic situation on a national basis if some assurance could be given that means would be found of taxing short-term capital gains. It would be dif®cult to secure wage restraint if capital pro®ts obtained through speculation continued to go free of tax.94

The Treasury had for some time seen the intellectual force of the arguments in favour of capital gains taxation, largely in the terms in which Kaldor had expressed them. But it also made a political judgement about its value in dealing with trade unions. According to Sir Robert Hall, `If we had a capital gains tax we could be much more positive in arguing with the unions that pro®ts were already dealt with through the tax system.'95 As the preparations for the 1962 budget were under way, there was some optimism that the tax would have the desired effect: at a Budget Committee of of®cials, `Sir Lawrence Helsby had expressed the opinion (after informal talks with trade unionists) that even a limited capital gains tax would make it easier for trade unions to co-operate in the new planning exercise announced by the chancellor in July.'96 This was the tax which emerged in the 1962. It was called a tax on short-term speculative gains, and covered securities realized within a six-month period and land sales (other than owner-occupied houses) over three years. For some members of the party it was already a step in the wrong direction, and the stock exchange was strongly opposed in contrast to its support for anti-avoidance measures in the 1960 budget.97 The Treasury ministers discounted the protests of the head of 94

95 96 97

PRO, Cabinet Papers, CAB 128/35, 41st conclusions, 20 July 1961. R. A. Butler, the home secretary, supported Maudling at the cabinet meeting of 3 August 1961 (47th conclusions). PRO T 171/506, note by R. Hall, 12 November 1959. PRO T 171/ 592 Budget Committee, 8 September 1961. Helsby was permanent secretary at the Ministry of Labour. Nigel Birch thought it `an odious tax, but we must accept it': PRO T 171/597, meeting of Conservative Party Finance Committee, 8 May 1962.

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The Kaldor era, 1951±1965

the stock exchange, Lord Ritchie, and realized that the tax was the least that could be done.98 The views of the trade unions were clearly crucial, not only for the Conservative government but also for the Labour Party. The statement by the General Council of the TUC was quite straightforward: `The proposals for taxing a limited range of speculative gains would do little to promote broad equity of treatment between taxpayers, and the General Council called for its development on a more comprehensive and stringent basis.'99 This conclusion was unsurprising, given that Woodcock of the TUC had been a close collaborator with Kaldor on the minority report, which had not seen any validity in a distinction between short- and long-term gains. This took the view that whether or not an asset was sold within six months or, say, four years from its purchase did not affect its bearing upon the taxable capacity of an individual. A shortterm tax clearly ignored a good deal of capital appreciation which took place over years rather than months. Furthermore, it opened up a possibility for easy avoidance; all the taxpayer had to do was postpone realizations after the six-month period and they would be tax free, and this was an axiom of City behaviour where, as the saying went, `time is the great dealer'.100 The Federation of British Industries, in its assessment of the Conservatives' measure, recognized that `it seems a fair bet that it will be extended in due course to longer term transactions and/or to new categories of transactions'.101 In public, on the larger issues, there was a common language between Labour Party leaders and trade unionists. William Carron, president of the Amalgamated Engineering Union, told his members in 1961 how `From bitter experience we have learned that the ideals of social justice and social reform can only be translated into effect by a Labour government.'102 And when Harold Wilson addressed the annual conference of the Transport and General Workers' Union in 1963 he set out as the preconditions for an incomes policy `a spirit of social justice 98

99 100 101 102

Selwyn Lloyd wrote to Macmillan about the stock exchange's claim that great damage would be done to the market that `I cannot say that I found either the memorandum or the supporting arguments very convincing.' In this he had undoubtedly been helped by a note of the Inland Revenue which argued that `at a time when the exporter is liable to full tax on his pro®ts and all kinds of people performing public services are similarly taxed, it is impossible to argue that the stag and the short term speculator ful®ls so valuable a function in society that his pro®ts should go tax-free or be taxed at a special rate': PRO T 171/594, Note by Inland Revenue, 20 November 1961; note to prime minister, 5 December 1961. TUC, Annual Report, 1962, General Council's statement on the budget. In `Capital Gains ± the Case for Major Fallacy', The Statist, 13 April 1962. MRC, MSS 200/C/3/ECO/16/1, `Arguments For and Against the Proposed Capital Gains Tax, 1962'. MRC, MSS 259/4/3/26, AEU Journal, President's Address, June 1961, pp. 175±6.

The 1965 budget

159

inspiring every act of government, its budget and taxation policies and its social policies'.103 While the Conservatives had made some moves towards tax reform with the capital gains tax, they stopped at the reform of company taxation. They were quite happy to follow an Inland Revenue memorandum of 1959 which argued against any change in the existing system.104 Labour was far keener on the corporation tax. It advanced down the path set out by the minority report; and the Revenue's opposition to the way in which shareholders' income was taxed once as company pro®t and then as dividends was the tax's political appeal for Labour, as a means of showing the trade unions that it was serious about taxing dividends. The Conservatives' foray into tax reform both validated the Labour approach since it con®rmed the salience of tax but also laid down a line of division between the two parties, which Labour was able to exploit. A long-term capital gains tax and a corporation tax were obvious ways in which Labour could show its greater reforming energies as well as discharge the political purpose of winning the approval of the trade unions. Yet, through having to go further than the Conservatives, Labour was committed to a more dif®cult and protracted process of reform. The 1965 budget The ferocious economic conditions of a severe trade imbalance with which Labour had to deal on coming into of®ce supported rather than diverted the aspirations for tax changes which had been developed in opposition. In order to sweeten the pill of the rise in income tax in the autumn budget of 1964, and to aid the discussions that George Brown was having over incomes policy, Callaghan and Wilson decided to announce the capital gains and corporation taxes in advance.105 The corporation tax followed the principles laid down in opposition, while the capital gains tax, as expected, was to deal with long- and not merely short-term gains. Land was included, but where the gains resulted from development and change of use these eventually came under the betterment levy which was introduced in 1967. Although the essence of these tax reforms was hardly unexpected, the announcement unleashed a 103 104 105

The Times, 9 July 1963, p. 10a. See also Leo Panitch, Industrial Militancy and Social Democracy (Cambridge, 1976), p. 58. PRO T 171/508, `A Corporation Tax', Board of Inland Revenue, 30 December 1959, and note of Edward Boyle to chancellor, 27 January 1960. `Note of a Conversation between the Prime Minister and the Chancellor of the Exchequer at 8.15 p.m. on Tuesday, 27 Oct. 1964', PRO T 171/776; Callaghan, Time and Chance, p. 169.

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The Kaldor era, 1951±1965

storm of opposition, riding on the uncertainty of tax innovation.106 The economist Robert Neild, one of Labour's advisers in the Treasury, noted that `it seems clear that the fuss over the tax uncertainties is being turned into a major campaign to discredit the government, having had these seeds all along'.107 The 1965 budget proved to be extremely contentious in parliament and took up roughly twice the time of more normal budgets. It would be foolish to ignore the advantages this had for both parties. For Labour it was a way of demonstrating the radical nature of the budget even though the measures themselves were quite mild from a socialist point of view. Callaghan told the party conference in 1965 that `We had the most ®ercely contested Finance Bill in 50 years, since the Lloyd George budgets of 1909, and they were not ®ghting for peanuts.'108 This budget was a key event in Wilson's ®rst government, and Callaghan not surprisingly asked for the full support of his own party in the Finance Bill debates.109 It certainly provided Labour MPs with an opportunity to extol the virtues of tax reform. Peter Shore was glad that more tax reform lay ahead: `It is tremendously encouraging, indeed exhilarating, to hear him [Callaghan] say that there are years more to come.' Douglas Jay also accepted that they were trying to redistribute wealth: `we certainly are, and we mean to go on doing so.'110 For Edmund Dell it also blended radicalism and reform.111 However satisfying budget debates were from a party political, and symbolic, point of view, they did bring home to the government the laborious and burdensome nature of tax reform and so blunted the appetite for the further instalments which had been advertised at the outset. As Kaldor recalled, `Treasury Ministers were subjected to extreme pressure (not con®ned to the Opposition benches) for special concessions of the most variegated kind ± for farmers, for small businesses, for the holders of gilt-edged, for multi-national companies and other groups too numerous to mention', so that `the momentum of the reforming zeal was lost ± the chancellor and other members of the 106 107

108 109 110 111

See Kenneth O. Morgan, Callaghan: a Life (Oxford, 1997), p. 215. PRO T 171/804, Neild to Callaghan, 11 December 1964. Neild was a Treasury adviser, 1964 to 1967. Edward Heath, who organized the Conservatives' opposition to the budget, and who was to become party leader in August 1965, agreed with Callaghan and also saw advantage for his own party: `Observers agree that it was the most intensely argued Finance Bill in living memory. For the Conservative Party this Finance Bill provided an opportunity for acting as a coherent oppostion in the House of Commons. At last it was something into which the party could get its teeth': `Where do We Go from Here?', The Spectator, 23 July 1965, p. 115. LPAR, 1965, p. 245. LPA, Parliamentary Labour Party minutes, 7 April 1965. H. C. Deb., 710, cols. 764 (Shore) and 681 ( Jay), 8 April 1965. Edmund Dell, `A Great Act of Parliament', Socialist Commentary (August 1965), pp. 10±11.

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Government were no longer in the mood to contemplate the further stages of reform which they so con®dently foreshadowed in April'.112 Why was it so? Labour's tax policy had been developed as much as a solution to problems of tax avoidance as to further equality, and it followed in the spirit of Conservative budgets which had taken the same theme. Of course, party con¯ict could be quite intense even where the basis of division was, in policy terms, quite narrow. But some Labour speakers thought that the essence of the budget ± reforming the system in the interests of greater fairness ± was part of the explanation. As Niall MacDermott, the ®nancial secretary to the Treasury, explained in the debates: I have to stress that when we are in this ®eld of taxation and it is sought to introduce a concession, we must consider where it will end, because we must operate on a basis of principle. From the point of view of anyone who is trying to devise a reasonable and fair system of taxation this is the great dif®culty in making any kind of concession.113

In fact, a number of concessions were made. Labour's problem was that its taxes connected with the habitual practices of a well-established economy, where the realization of assets was not simply the chance to make a quick pro®t but an integral part of business activity. In other cases, such as investment and unit trusts, building societies and lifeassurance companies, there was an element of mutuality that cut across the separation of corporate and personal activity which was an important part of the budget and compromises were necessary in these cases. Vigorous opposition should not hide the fact that there were some areas where Labour had a good case and where tax reform sustained its more immediate economic policy. One instance was the way in which corporation tax removed the incentive given to overseas investment. This was valuable in the light of the balance of payments problems that plagued the government, but it was an aspect of the 112 113

Kaldor, Reports on Taxation, p. xiii. H. C. Deb., 715, col. 1451, 16 July 1965. Harold Lever made the same point in a different way: `Very often a chancellor is to be excused for not being meticulously equitable in the applications of his ®scal provisions because his main bent is to collect some revenue to pay for the running of the country so that we can enjoy battleships, schools, and the other amusements of modern society. But in the case of this tax [capital gains] the main motivation is to bring a sense of equity into the tax system and to give people the feeling that things are being more justly done. It therefore follows that any argument, as to ethics or equity, about the consequences of a tax has a force, in relation to this tax, which must be especially moving to the chancellor and he cannot resist these arguments on the basis of pure ethics as he can resist arguments in relation to so many other taxes by saying that what he is about is to practise a necessarily rough and ready method of raising revenue': H. C. Deb., 713, col. 263, 17 May 1965.

162

The Kaldor era, 1951±1965

budget to which business interests were particularly opposed.114 The rate of the corporation tax was lower than the combined nominal rates of income tax and pro®ts tax which it replaced, even though the total revenue to be gained was intended to be the same. Companies which traded in overseas countries received credit for the rate at which they paid British taxes to set against taxes levied on them by foreign governments. Because the rate of corporation tax was lower than income and pro®ts taxes combined, the exposure to foreign taxes was greater. Individual shareholders were, as a consequence, to be taxed more heavily on dividends from these companies. As a paper by Balogh and Kaldor concluded: `An important advantage of the changeover is therefore that it will discourage overseas investment. For it is bound to make foreign investment less attractive as compared with home investment than it is under the existing system.'115 The main wrangling with the companies involved was over the length of time transitional arrangements were to run, which eased the move from one tax regime to the other. What was more contentious was the preference given to retained rather than distributed pro®ts, which rested in the view that these gave greater encouragement to productive investment. It was believed that faster-growing companies distributed less of their pro®ts, but there were substantial grounds for disagreeing with this.116 A new taxes committee was established to deal with both the planning of the taxes and their passage through parliament, separate from the rest of the budget process that had to consider how severe the budget had to be to satisfy foreign opinion. Kaldor presented the `purist' interpretation of tax principles while the Treasury tended to act as a brake upon change. Callaghan was therefore able to balance the claims of both sides, which allowed a rather easier brokerage than might have been the case in Kaldor's absence. This is apparent over the rate chosen for the long-term capital gains tax. The Treasury argued for a low rate, on the grounds that this was a new tax which should be introduced gently: `it would be unfortunate if it were thought to be in 114

115 116

Meetings of the FBI's Taxation Committee, 17 December 1964, 6 January 1965 and in the brie®ng note sent to the Conservative Party Finance Committee (E. 101.65). One member of the committee, however, had to admit that `the chancellor's attitude to overseas tax had a certain crazy logic': MRC, MSS 200/C/3/ECO/16/3. `The Likely Effects of the New Corporation Tax', 20 January 1965 in Prime Minister's Of®ce Papers, PRO PREM 13/273. The best known view that `plough-back' had little correlation with company growth was that of the economist Ian Little and was drawn upon by the Conservative opposition in the Finance Bill debates: I. M. D. Little, `Higgledy-piggledy growth', Bulletin of the Oxford Institute of Statistics, 24 (1962), pp. 387±412, esp. p. 412. For its use in the debates, see H. C. Deb., 713, col. 1886, 2 June 1965 (Patrick Jenkin).

The 1965 budget

163

any sense a punitive or doctrinaire tax.'117 Kaldor's view, more consistent with the logic of the tax, was that long-term gains should be taxed at the standard rate for income tax: `If capital gains were to be taxed as a form of income they should be taxed at the same rate as other forms of income.' Callaghan eventually settled for a rate of 30 per cent, lower than the standard rate of income tax, on the grounds that anything higher would have been too harsh, but higher than that which the Treasury had suggested.118 Another example where Callaghan was willing to modify some of the principles of the tax reforms he was introducing occurred over the franking of inter-company dividends. As usual, Kaldor pressed the principled view. Franking meant that dividends paid by one company to another carried the mark of tax having been paid, and thereafter proceeded without any further tax being levied. This was the established practice. Non-franking meant that no such exemption from tax was possible and this was more in keeping with the principles of the corporation tax: `the underlying principles of the tax system were moving away from the view that income was something to be taxed at source and then allowed to ¯ow freely through to any further hands. The corporation tax was deliberately intended to encourage this development by separating company and personal taxation, and it would be inconsistent with its general purpose to exempt inter-company dividends.'119 The other side of the argument pointed to the way in which the budget threatened existing practices in the economy: `In favour of franking it was argued that a whole complex of inter-company relationships had grown up under the existing tax system. It would be extremely contentious to disrupt company ®nancial arrangements and equity markets by taxing inter-company dividends now.' But nonfranking, admitted Kaldor, `would be unpopular and might cause an uproar'.120 Kaldor was supported by Balogh, whose views had the 117 118

119 120

PRO T 171/804, `Note of a Meeting in the Chancellor of the Exchequer's Room, H.M. Treasury, Thursday 21 January 1965', NT (65), 1st meeting. PRO T 171/804, `Conclusions of a Meeting in the Chancellor of the Exchequer's Room, 31 March 1965'. Robert Neild said of the Treasury submission: `I am shocked by this paper by the Treasury. It manages to make recommendations about the level and nature of the Capital Gains Tax, without ever saying that the choices are essentially a matter of equity. Instead, in a style I thought the Treasury was abandoning, it makes conservative recommendations throughout on the basis of illogical and arbitrary points which are, I suppose, meant to rank as ``economic'' or ``®nancial'' considerations. The value judgements are all wrapped up in technical rags': `Capital Gains Tax', 1 January 1965, PRO T 171/805. PRO T 171/804, `Note of a Meeting in the Chancellor of the Exchequer's Room, H.M. Treasury, 10 February 1965', NT (65), 4th meeting. PRO T 171/807, `Corporation Tax ± Franking. A Further Note by Nicholas Kaldor', NT (65) 32, 29 January 1965.

164

The Kaldor era, 1951±1965

added impetus of coming through Harold Wilson. Balogh acted as Wilson's interpreter over the budget and believed that to exempt intercompany dividends from taxation would perpetuate inef®ciency through the encouragement to monopoly arising from cross-company shareholdings.121 But while the prime minister's of®ce pursued the matter well into March, Callaghan had taken the Revenue's advice that this was essentially a political judgement and that a major outcry would ensue if inter-company dividends were not franked, and in his view `when so much was being achieved it would be a pity to risk a major political row and to slow down the Bill in Committee, by a tough decision on franking which was not one of the issues on which it was most important to take a stand'.122 In parliament, of course, it was a wilder business. It was possible to head off criticism by making concessions in the committee stage, `and [they] should therefore appear to have been offered by the Government of their own volition rather than having been extracted under pressure from the Opposition'.123 One of the areas where concessions were made in parliamentary debates which had not been foreshadowed in the drafting of the budget was the liability of gilt-edged stock to capital gains tax. Kaldor had again argued that a vital principle was at stake: `the appreciation of a gilt-edged bond is income par excellence. It is a form of appreciation where no risk or uncertainty are involved and which therefore partake of all the character of ordinary income. It will therefore be impossible to concede this without destroying the whole basis of the taxation of capital gains.'124 But ground was conceded, to exempt part of any gain from tax. The process of attrition did not end in 1965 but continued as amendments were pressed in later budgets, and by 1969 the Confederation of British Industy (CBI) was able to get the changes in corporation tax affecting small companies and the exemption of giltedged stock from capital gains tax which it thought important for its members.125 The length and arduousness of the Finance Bill was noteworthy, and the Conservative opposition tried to exploit it as best it could. Heath certainly made the most of the possibilities of the debates for inspiring 121

122 123 124 125

Prime Minister's Of®ce Files, PRO PREM 13/273, Balogh to Wilson, 12 February 1965. Wilson had commented on a note which Balogh had prepared on the corporation tax: `Wonderfully lucid. At last I understand it.' Note of 21 January 1965. PRO T 171/804, `Note of a Meeting in the Chancellor of the Exchequer's Room on Wednesday, 10 February 1965', NT (65), 4th meeting. PRO T 171/804, `Note for Record. Finance Bill: Trouble Spots', 24 May 1965. PRO T 171/805, Memorandum of Kaldor to the chancellor of the exchequer, 18 December 1964. Robinson and Sandford, Tax Policy-making, p. 144; taxation panel of the CBI, meeting of 16 April 1969, MSS 200, C/1/1/E 216.69.

The 1965 budget

165

camaraderie amongst a group of opposition politicians. Diamond, who played a major part in the defence of the budget, `felt that he [Heath] had been very effective in Finance Bill debates'.126 But in fact the dominant ®gure outside the Treasury bench was a back-bench Labour MP, Harold Lever. His was the most authoritative voice in the debates on both the principles and details of the bill, and Conservatives frequently followed the lead his criticisms provided. Edward Heath commented at one point that Lever `had the chancellor squirming at the end of his dagger'.127 The thread running through Lever's criticisms was that the budget was too severe in certain aspects (such as the treatment of small companies), too harsh in its use of the tax administration and implausible in terms of its underlying strategy. Lever himself was not keen on a capital gains tax, which dealt with assets only when they were realized, unlike the wealth tax that was his preferred option. It therefore encouraged people to hang onto their assets to avoid the tax, rather than use them dynamically. Closer to the Conservatives were his views on the treatment of close companies as `penal, oppressive, harsh and unjusti®able'.128 Labour had long held the view that small companies were often tax shelters and were therefore keen to establish rules for the distribution of pro®ts and director's pay which meant that surtax payers could not bene®t from having much of their income taxed at the standard rate within a small company under their control. For Lever and for Joel Barnett, these clauses led the Revenue to be too severe and to give the impression that Labour was anti-business. Barnett was concerned that the power to tax was being developed to excess: `I do not want a state of affairs in which people live in perpetual fear of having to see an inspector of taxes', while Lever thought that an excessive concern with tax avoidance would produce an intolerably intrusive tax administration.129 What did this protracted parliamentary process, and the opposition from within the Labour ranks, amount to? Neither Lever nor Barnett ever voted with the opposition, and Lever's preference for a wealth tax should not hide the fact that Labour was right to stick with capital gains. 126

127

128 129

As reported in Alec Cairncross, The Wilson Years. A Treasury Diary 1964±1969 (London, 1997), entry for 13 June 1965 at p. 61. See also John Campbell, Edward Heath. A Biography (London, 1993), p. 173. H. C. Deb., 713, col. 1849. Some on the Labour side found comfort in this: `Labour should be proud that the outstanding tax expert of the whole House should be theirs': Catalpa, `Ordeal by Debate', Socialist Commentary ( July 1965), p. 12. H. C. Deb., 713, col. 1777, 2 June 1965. H. C. Deb., 710, col. 742, 8 April 1965 (Barnett); 713, col. 1769, 31 May 1965 (Lever).

166

The Kaldor era, 1951±1965

Although such a tax had been broadly discussed, leading trade unionists do not appear to have been keen, and it would probably have run into ®ercer opposition than the capital gains tax, for which the ground had already been prepared by the Conservatives' foray into this ®eld.130 As it was, Labour had got its budget through, and whatever the unease of the economists at the corruption of tax reform by party politics, the budget had proved to be sustainable and had delivered the party's expectations of a radical and reforming measure. It also enabled Callaghan to tell the TUC that the government had met its obligations as far as the tax element in incomes policy was concerned. When Callaghan met the TUC's Economic Committee he remarked that `he had been conscious of the view that even if dividends were controlled they would be paid later in the form of capital gains, whereas this did not apply to wages. This was the point of the capital gains tax. Taken together, these two taxes represented tangible evidence of the pro®ts side of the prices and incomes policy.'131 But the budget, because it was an exercise in reform, represented a major commitment by the government, and the criticisms of Lever and Barnett enable it to be regarded not only as the realization of aspirations inside the Labour Party but also as a response to issues of tax policy which were being discussed in a far broader setting. Barnett and Lever's larger point was about the approach that underlay the 1965 budget, which they had characterized as overly severe. This is best introduced with Diamond's response to the charge that the budget was being too harsh in chasing down tax liability and stopping tax avoidance: Some of the speeches that we have heard from time to time may sound perfectly well in certain establishments where right hon. Gentlemen opposite may move ± right honourable Gentlemen who say we are obsessed, that the Treasury and the Revenue are obsessed, with tax avoidance ± but I would invite them to come to a factory in my constituency, make that same speech in the canteen, and then see what the workers ± who have had every proper pennyworth of tax deducted from wages day in and day out, year in and year out ± think of the propriety of allowing a certain amount of tax avoidance, as has been said from time to time.132

The fundamental point of the 1965 budget was that high income tax, 130

131 132

For the trade unionists, Frank Cousins of the TGWU was alarmed at Callaghan's mention of a wealth tax at the 1963 Labour party conference: MRC MSS 282 (Cousins Papers), TBN 37, notebooks, entry for 1 October 1963. The government had decided not to pursue a wealth tax in 1964 in the light of `political circumstances': PRO, Board of Inland Revenue Papers, IR 63/237, `Meeting in the Chancellor of the Exchequer's Room', 2 November 1964. Congress House, report of a meeting between the chancellor of the exchequer and the Economic Committee, 3 May 1965, in Economic Committee minutes 13/4. H. C. Deb., 716, col. 238, 12 July 1965.

The 1965 budget

167

paid unavoidably through PAYE, could be made palatable by making the tax system `fairer', in closing loopholes and removing tax-free capital gains. Lever was scornful of this: `the ground for this is that if we do not realise our capital gains we cannot spend them and therefore we cannot taunt, tantalise or torment the PAYE earner in the manner which is supposed by Treasury thought to occur when people spend capital gains.'133 Lever believed that workers did not have a fundamental difference of interest from the rest of society with regard to capital and property in the way that the rhetoric of the 1965 budget assumed. The alternative approach was to try to lower direct taxation by broadening the tax base and putting more emphasis on indirect taxes; in Barnett's words, `I think this would be a more pleasant pastime for Dr Kaldor than devising fresh means of extraction.'134 Both Lever and Barnett wanted a more neutral, less intrusive tax regime. Many in the Labour Party knew the problems that had emerged in the tax system by the early 1960s, in particular the pressure of income tax on low and middle incomes and the narrow base of indirect taxation. They knew that PAYE had proved to be a marvellously successful engine of revenue extraction which had outstripped other taxes, and therefore had left the income tax payer suffering inescapable burdens. But rather than seek alternatives, Labour wished after 1965 to press on down familiar, if dif®cult, paths, by tightening the net on returns from property and restoring the progressivity of income tax by placing heavier burdens on the higher paid.135 It was not the case that the party had been caught out by the emergence of a new tax debate while it had been preoccupied with realizing old ambitions. While the 1965 budget had an internal history as the realization of much that was traditional in Labour's thinking, it also represented quite authentically the party's response to issues generated outside of it, by the development of the tax system itself. At the same time as the party was claiming to be a modernizing force in British politics, and to be using the budget `to make a vigorous start to the government's programme for overhauling and modernizing our tax system', so it was committed, in both its ideas and through the pressure

133 134

135

H. C. Deb, 713, col. 682, 24 May 1965. H. C. Deb., 710, col. 739, 8 April 1965. The income tax threshold for a married man with two children had come down from 78.1 per cent of the manual worker's average wage in 1964±5 to 56.1 per cent in 1969±70. H. C. Deb., 830, col. 220, 4 February 1972 (written answer). For evidence of Labour's thinking, including its hostility to VAT, see LPA, study group on taxation, `Memos on Tax Policies', Re. 570/January 1970. For the argument in favour of VAT as a source of ®nance for social policies, see Peter Stephenson, `Valueadded Tax ± Panacea or Monster?', Socialist Commentary (February 1970), p. 2.

168

The Kaldor era, 1951±1965

of its interests, to continue a thoroughly traditional approach to tax questions.136 The larger picture with regard to incomes policy was also ¯awed, perhaps inescapably so. While the Labour government was obligated to come up with tax reforms in the 1965 budget, these were never going to determine the success or failure of incomes policy. The strategy of the TUC was quite speci®c. It stood for the needs of workers caught up in the requirements of incomes policy and wage restraint. Tax questions were valuable as a way of switching the scrutiny from wage to non-wage issues. While, as has been shown here, there were antecedents for the trade union view on dividends, which had some connection with traditional radical distinctions between `producers' and `non-producers', the interest in these tax questions did not rest upon their authenticity as an expression of working class opinion, but had a more instrumental function. To focus on pro®ts, and on non-pay incomes, was a way of relieving the pressure from the attention on wages.137 It stretched the other side to demand that they come up with some proposals on pro®ts and dividends, to which taxes addressed themselves. These tax reforms could never affect the central issues of incomes policy, which were to do with protecting the private consumption of workers. Assessment This expenditure of effort had been directed principally at defending a tax system based heavily upon direct personal taxation. The aim was to make a reality the claim of the Attlee governments that progressive taxation of income had been carried to its limit. This was seen entirely in terms of the effective taxation of the rich. A major point made by Kaldor about the legacy of wartime income tax ± that it increased the burden on those at the bottom of the income scale far more than had been acknowledged ± had not been addressed. Indeed, the situation here had deteriorated. The income tax threshold for a married man with two children had come down from 78.1 per cent of the manual worker's average wage in 1964±5 to 56.1 per cent in 1969±70. Callaghan's had been a particularly severe tax regime compared to his predecessors'. It was not merely so for the working-class earner, but also for the middleclass professional groups to whose interest much thought had been 136 137

The quotation comes from Callaghan in LPA, Parliamentary Labour Party minutes, 7 April 1965, `Summary of the Proposals and Aims of the Budget', p. 17. Congress House, Covering note for paper `Pro®ts, Dividends and Prices', Economic Committee 3/7, 11 December 1963. `A shift in attention away from wages to pro®ts is very welcome and one which the TUC has been trying to secure for a long time.'

Assessment

169

devoted in Labour's tax policy-making while in opposition. Such an individual saw his real income reduced as a result of the government's measures in the budgets of autumn 1964 and April 1965, which had increased income tax, national insurance payments, mortgage rates, petrol and other consumption taxes.138 While part of the explanation for this was the need to protect the balance of payments by containing consumption, part of it was acknowledged to have been the outcome of political choice, attributable to `the deliberate priority given to public expenditure on the social services'.139 There was some reassurance that this trend was not at the heart of the disaffection amongst Labour supporters. Mark Abrams's survey of voter opinion reported views that the government had handled social services well and that the Conservatives would not necessarily gain much advantage from promising to reduce taxes if this meant cutting social services.140 But this could not hide the fact that Labour's tax policy had lost momentum after, and as a result of, the 1965 budget, for both general and speci®c reasons. In the general sense, the connection made between the budget and economic planning, thereby forging a larger legitimacy for taxation, had not worked as well as it had done in the Attlee period. The relationship between the new Department of Economic Affairs under George Brown did not function well, the national plan evaporated, and Brown distanced himself from a budgetary strategy designed to meet a balance of payments problem without devaluation. He wrote a vigorous note of dissent before the 1965 budget: The most likely outcome is that if the man in the street feels this package presses too harshly on him he will meet it by making bigger wage demands on some pretext or other; and far from contributing to our policy aims it will do precisely the opposite. I prefer to have no hand in the business other than as an acquiescent but dissenting member of the collective team.141

The coherence of outlook and mutual regard which had sustained the economic ministers under the Attlee governments was missing in the Wilson era and so, therefore, was that sense of self-con®dence to which Bevan had rightly drawn attention as being one of the reasons for the success of that earlier administration. This is apparent in the party's predominant reaction to the impact of the 1965 budget on society and upon government. It was widely viewed as a burdensome budget that 138 139 140 141

Memorandum of Callaghan to Wilson, 25 March 1965, PRO T 171/802, 66. LPA, RD. 228/January 1972, `A Public Expenditure Programme', a paper prepared for the Finance and Economic Affairs Subcommittee. Mark Abrams, `The Lost Labour Voter', Socialist Commentary (February 1970). Note by George Brown of 19 March 1965 in PRO T 171/801.

170

The Kaldor era, 1951±1965

exhausted the capacity for further reform; what is especially interesting is the way in which this attitude lodged within the party. It was noted that a vast number of transactions would now be affected by the new taxes: `Few laymen will be able to take ordinary investment decisions in future without expert tax advice and practically every transaction in relation to property will now raise tax problems.'142 There was also alleged to be an effect upon business ef®ciency, too. Two tax lawyers reported that the authors, who have had considerable experience in the past year in trying to explain the implications of both taxes [capital gains and corporation taxes] to numerous and well-attended conferences of highly skilled people, have no doubt that part of the lack of productivity suffered by the country in that twelve months has been due to the large amount of time spent by business men and their advisers trying to understand the new taxes and adapt their business practices to them.143

These views were, not surprisingly, frequently expressed in discussions at the CBI.144 But the sense that the tax changes had put the party on the defensive with economic interests and had, moreover, ruined the opportunity for subsequent reforms also appeared in Socialist Commentary, the journal of the social democrats within the party.145 Trade unionists who represented staff within the Revenue took the same view: You are aware of the dif®culty I have got with my members at the moment . . . the work burden in the Revenue now is the worst in living memory. At our monthly count of post over seven days old this week we had 1,076,000 pieces of post. This is over 400,000 more than this time last year.146

In some of the party material contemplating further developments of tax reform along the lines of wealth and gift taxes the burden on the Inland Revenue from the 1965 reforms, which meant that no new taxes could be absorbed in the immediate future, was reported as a major obstacle to be overcome.147 Reforms of the tax system in 1965, however much they were `correct' in following the logic of developments since the war, therefore encour142 143 144

145 146 147

G. S. A. Wheatcroft (assisted by A. E. Park and John E. Talbot), Capital Gains Tax (London, 1965), p. 212. G. S. A. Wheatcroft and A. E. Park, Wheatcroft on Capital Gains Taxes (London, 1967), p. 457. MRC, MSS 200/C/3/ECO/16/4, joint meeting of Economic Committee and taxation panel, 13 June 1966, E.228.66 and meeting of taxation panel 5 July 1967, `which discussed the problems arising from the present system which caused considerable work to the taxpayer and his advisers and yet brought very limited amount of revenue'. Kenneth Munro, `Labour and the City', Socialist Commentary (December 1965). MRC, MSS 292B, 410. 2/4, letter of C. T. H. Plant, general secretary of the Inland Revenue Staffs Federation, 20 January 1970. LPA, Social Policy Advisory Committee records, `Summary of Questions Arising from Re. 109, ``The Distribution of Income and Wealth''', n.d.

Assessment

171

aged an outcry about new burdens and disruption to business. It was not clear how long this was going to last, or whether accountants and the Revenue would adjust to the new procedures and the requirements for keeping records of investment activity so that the changes would eventually be absorbed. This was an important question, because the demands for reform from within the party, and those generated by the tax system more widely, far from diminishing after 1965, actually increased. The major challenges to Labour in the tax ®eld after 1965 were as much intellectual and political as administrative. The 1965 budget had tried to restore the legitimacy of a direct tax system by widening the scope of what was de®ned as income. It had not tried to redistribute wealth in the traditions of some of Labour's earlier tax ideas. While the capital gains tax might have sounded like a radical, egalitarian measure, its true nature was more as an anti-avoidance device. As interest in wealth distribution gathered momentum in the later 1960s, the question was going to emerge as to what might be done to make wealth distribution more equal, and the degree to which the tax system itself was capable of making such changes. As the left became more impatient with the lack of radical change achieved by the Wilson governments and increasingly encouraged by the perceived failure of `social democracy', such questions became of considerable importance for the leadership of the party. But important problems were requiring resolution within direct personal taxes themselves. The dif®culties of low-paid workers facing income tax were becoming part of a wider debate about the Labour governments' record on poverty, while the possibility of shifting the structure more towards indirect taxes ± especially value added taxes of a European kind ± was also ®rmly on the agenda. The challenge to Labour's leadership to be both radical within the traditions of the party but also to be able to respond to externally generated issues of tax reform intensi®ed rather than abated in the years that followed the 1965 budget. Two lines of investigation have therefore been pursued in connection with the 1965 budget. First, the kind of reforming and radical budget Labour wished to introduce, and the demands it placed upon the party to deliver it, have been established. There was much that was entirely traditional in the budget, evident in its links back to 1945±51. Cripps and Gaitskell lived on in Wilson's `evangelical castigation' of ®scal privilege. This was underwritten by Kaldor's academic understanding of the tax system in the 1950s. A further powerful in¯uence on the 1965 budget had been the trade unions and their requirements for a tax component in incomes policy. But this again was a re¯ection of the

172

The Kaldor era, 1951±1965

party's historic identity as a trade union pressure group. This budget was not without political advantage, as the experience of the Conservatives ± pressed into reform yet unable to take it far enough ± had illustrated, but it had absorbed a considerable amount of political energy to bring it to a conclusion. Secondly, there was the extent to which the budget ful®lled the need to address wider tax issues, especially the dependence on income tax as a major source of revenue. Labour had their own response to this, by attempting to match the taxation of property income to the pressure of PAYE, but some of its own MPs had doubted the wisdom of this strategy. Both `reform' and `politics' in Labour's budget, therefore, were rooted in a traditional approach where the main priorities were fairness, equality and redressing the balance between rich and poor. The aim had long been to extract from the wealthy few to give to the many. The new world in which Labour had to operate, and which the income tax increases of 1964±70 helped to advance, was one where the mass of taxpayers had to give up increasing amounts to the relatively few below them. It was necessary for the party to address this dimension alongside the more conventionally de®ned egalitarian projects that came naturally to the labour movement.

4

Social democracy examined, 1965±1970

As far as the Labour Party was concerned, the reforms of 1965 were only the starting point for more serious inroads on inequality and redistribution. The capital gains and corporation taxes had addressed the workings of the tax system in the light of the substantial investigations and assessments of the 1950s. They did not deal explicitly with equality, in that they would have had little impact on the distribution of wealth, although a capital gains tax at a time of in¯ation had some effect in this direction because it fell on money rather than real gains. A tax agenda for the labour movement still had to be ful®lled. Following a protracted and acrimonious budget in 1965 the Labour government was therefore faced with fresh demands for more action. The TUC's submission for the 1966 budget caught the mood when it asked Callaghan: to initiate ®scal action to reduce the glaring inequalities in the distribution of wealth and thus promote the social justice on which emphasis was laid in the statement of intent and the succeeding declaration on incomes policy. To this end the General Council wish to recommend for the Government's consideration the desirability of action to tax large gifts `inter vivos' and to institute an annual tax on capital wealth.1

But equality was now a matter not only of removing wealth from the rich but redistribution to the poor. Labour had always been quite clearly a trade union party, but its relations with the poor were becoming more ambiguous as the overlap between the working class and the poor became smaller. Poverty could no longer be conveniently labelled as a class question. The cash bene®ts that were the principal mechanism of redistribution had to be funded by taxes paid by many trade unionists. The poverty question was also in¯uenced by the explosion of social science knowledge within which the study of social policy had a considerable part. While many of these academics had a general sympathy for Labour, their support was by no means uncritical. If the ideological dimensions of taxation had become more complex, 1

PRO T 171/818, `Representations from the TUC', 14 February 1966.

173

174

Social democracy examined, 1965±1970

the same was also true of tax reform. In the 1950s it had been possible to encapsulate tax reform within a language of fairness, of which the party could approve. However, in the 1960s tax reform involved indirect taxation about which Labour had been less than enthusiastic because of its adverse effects upon lower incomes. The broader support for tax strategy coming from economic management was also showing signs of strain. Whereas in the 1940s any challenge to the severity of Labour's budgets was muted (with the notable exception of 1951), by the later 1960s much of the trust in the chancellor and the Treasury had evaporated, as a plan for growth was quickly replaced with restraint of consumption and defence of the balance of payments. This chapter explores the searching examination of Labour's capacity to govern within this demanding tax framework. Economic and social policy analyses The information available for assessing Labour's performance was more plentiful and revealing than it had been for the Attlee period. The best source for examining the impact of taxes and bene®ts was the Family Expenditure Survey, which was carried out regularly from 1957. This gathered information not only on expenditure but also on all forms of income received by households. Analysis of the material was published in the Central Statistical Of®ce's publication, Economic Trends, usually in February, two years after the survey had been carried out. Its merit was that it provided evidence of the actual impact of state ®nance on households. The ®gures available from 1945 had given a `top-down' picture of the shares of income going to wages, salaries, pro®t and property, while information about tax again delineated the broad categories but left the individual experience a matter of estimation. While the impact of direct taxes on particular pay levels was available through Inland Revenue reports, the effect of indirect taxes was harder to establish. Estimates had also been made about the relationship between contributions to state ®nances and bene®ts received through the social services, which had been fairly pessimistic about the degree of redistribution involved.2 Figures from the Family Expenditure Survey gave more precise information about the actual impact on families of varying composition and earnings levels of a range of social service bene®ts and taxes. The size of the sample was small, but by statisticians' standards, adequate. Up to 1966 3,000 households co-operated in the survey, but from 1967 this was increased to 7,000. Even so, at the lower income 2

See above, p. 67.

Economic and social policy analyses

175

levels especially, only a small number of households contributed to the results.3 However, one of the key protagonists in the debate about Labour's record on inequality believed that these ®gures from the Family Expenditure Surveys `are the best we have'.4 It was not just the material but the academic disciplines brought to their interpretation which had changed by the time of the Wilson government. The Attlee regime had been largely assessed by economists. By the 1960s social policy and administration had developed signi®cantly as an academic discipline and its practitioners had a good deal to say about the Wilson governments. Although a clear dividing line should not be drawn between the two disciplines there were some obvious differences of orientation, at least in the way in which they operated in the 1950s and 1960s in Britain. Economists were primarily interested in the way taxes distorted economic performance through their impact upon the supply of enterprise, work and savings, rather than as a function of government.5 Taxation was a test for the compatibility of social democracy with private enterprise. Attention was therefore directed at the impact of taxes on the suppliers of capital and business talent, and, to an extent, upon the better-paid workers. The economically active, rather than the economically marginal, caught the eye. This, of course, chimed in with the prevailing views of Labour leaders. They were primarily interested in the relationship between taxation and economic progress, and the political acceptability of taxes among the population as a whole. The poor were only one of the interests they had to address. Economists were not uncritical of Labour. David Worswick's and Peter Ady's The British Economy 1945±50 had been broadly approving, but Ian Little and Dudley Seers had both pointed out how the redistributive element in taxation had weakened from 1948 onwards, when the peacetime character of the government was more ®rmly established. But economics remained the discipline that Labour leaders shared with each other and with their intellectual supporters. 3

4 5

As the CSO noted in its comments on the 1968 results, which were based on the bigger sample, `this is still a relatively small sample to support such an elaborate analysis and most of the information about each householder covers only a short period of time . . . the intention is to give a broad picture of the incidence of taxes and bene®ts and too much attention should not be paid to results which refer to a small number of households in an income range': `The Incidence of Taxes and Social Service Bene®ts in 1968', Economic Trends, 196 (February 1970), p. xvi. Peter Townsend, `Inequality and the Labour Government', The Listener, 27 April 1972, p. 559. Kaldor's case proves rather than disproves this point, for his practical and detailed knowledge of the tax system was derived from his membership of the Royal Commission on the Taxation of Pro®ts and Income, rather than from his academic background.

176

Social democracy examined, 1965±1970

The study of social administration and social policy, on the other hand, had at its core the process of government and the provision of welfare. It was focused on the poor, and the experience of the low-paid and state-dependent population. The questions it dealt with were at one level intensely practical or empirical. The practical and empirical dimension ¯owed from the way the welfare regime had become more complicated since Beveridge. The simplicities of a system of standard bene®ts paid for by ¯at-rate contributions to meet anticipated contingencies had become mingled with an increasing resort to national assistance meanstested bene®ts, which dealt with cases where a shortage of income had already arisen.6 By the later 1960s the welfare system was also complicated by the fact that the income tax threshold had fallen well below the level of average manual worker's earnings, so that an extra pound in earnings might yield only a small fraction of that after taxes and the withdrawal of bene®ts.7 To study the effects of the welfare state required the patient unravelling of a part of government every bit as intricate as the tax system. But at another level, social policy analysis focused on the ethical issues arising from income distribution. The focus of attention was on the very poor, inevitably a minority of society ± `inevitably' because the de®nition of poverty as marking an inability to participate in the conventional activities of society meant that only a minority could be poor. This minority was also marginal to the main economy, although it included some wage earners, and therefore it did not claim attention because of its contribution to national wealth. It was therefore dependent upon an agreement that those who were not poor ought to transfer resources to the poor, not because of any economic contribution they might make but because it was morally right to do so. This is linked with the second aspect of the moral commitment. Poverty was not selfpublicizing. The poor did not force themselves upon public attention; they were discovered by social policy academics.8 In The Poor and the Poorest, the publication most closely associated with the `discovery of poverty' in the 1960s, Brian Abel-Smith and Peter Townsend reported that in 1960 7.5 million lived below a standard of living determined by the national assistance scales. What was most shattering was that 41 per cent of these lived in households dependent upon earnings rather than 6

7 8

Two of the clearest accounts of these trends can be found in A. W. Dilnot, J. A. Kay and C. N. Morris, The Reform of Social Security (Oxford, 1984), chap. 1 and Alan Deacon and Jonathan Bradshaw, Reserved for the Poor. The Means Test in British Social Policy (Oxford, 1983), chaps. 3 and 4. Deacon and Bradshaw, Reserved for the Poor, p. 151. Keith Banting, Poverty, Politics and Policy (London, 1979), p. 68.

Economic and social policy analyses

177

state bene®ts.9 How far the poor grasped the precise details of their plight may be open to doubt. Certainly, when the investigations took place into the `poverty trap' in the 1970s, it was recognized that the process whereby bene®ts were withdrawn only to be replaced by more severe income tax demands was probably obscured by the time lags between the increase in earnings and the consequential loss of bene®t. When ignorance of the impact of taxes had been uncovered by a social survey, it had been incorporated into explanations as to why personal taxation did not necessarily damage incentives to work; when ignorance of the high marginal rates of tax on the poor was publicized this was seen as a moral problem requiring a remedy. Although it would be foolish to disregard the political element in conventional economics, it can be argued that it was more explicit in the case of social policy analysis, where the focus was less upon what could credibly be regarded as an impersonal market system and more upon the deliberate outcomes of government policy. Social policy academics were aware that they were studying a section of the population especially deserving of support yet probably the least able to secure it for themselves. According to one writer, not especially radical within the social policy world, `In a pressure group society it is eminently desirable that the few who speak for the poor shall continue to press hard on behalf of that ®fth of the population who are least able to care for themselves. Unless that happens this group might become relatively poorer at an ever accelerating rate.'10 Certainly, the social policy academics were more likely to question the prevailing social democratic assumption that the state was an instrument for good, perhaps because they had given some attention to the way the poor actually came into contact with the state. In Brian Abel-Smith's view, `Users of public services, even more than those of private services, have got to complain more and be helped to do it. Only thus can the authoritarian tendencies of headteachers, consultants, wardens and matrons be kept sharply in check.'11 If the social policy academics focused their attention on the poor, this was not to neglect the social structure as a whole. There were two reasons for this. One was to destroy any idea that society was divided between those who depended upon the state for their standard of living and the rest who `stood on their own two feet' and, in essence, won their living from the market. In fact, the non-poor received considerable 9

10 11

Brian Abel-Smith and Peter Townsend, The Poor and the Poorest. A New Analysis of the Ministry of Labour's Family Expenditure Surveys of 1953±54 and 1960 (London, 1965), p. 49. Peter Kaim-Caudle, `Financing of Social Services' in Peter Townsend and Nicholas Bosanquet (eds.), Labour and Inequality (London, 1972), pp. 143±61 at p. 161. Brian Abel-Smith, Freedom in the Welfare State (London, 1964), p. 14.

178

Social democracy examined, 1965±1970

bene®ts from employment and from the tax system (`occupational' and `®scal' welfare in Titmuss's description) and so received assistance to their standard of living in much the same way as the council-house tenant or the recipient of a state pension. The second was to argue that it was the structure of society as a whole, especially its hierarchical and inegalitarian features, which determined the plight of the poor. As Peter Townsend described it, `The social polarization which lies behind growing poverty is ultimately due to the excessive power of wealthy and af¯uent people in the key institutions of state and market.'12 To provide the necessary resources for the poor to have not only adequate housing and medical services (for example), but also some choice over which house they occupied or where they sent their children to school was believed to require a very particular political commitment: `Only socialists can enable consumers to lord it over both councils and private landlords, as only socialists could stomach the drastic reduction of inequality which would be a prerequisite of such a plan.'13 Some Labour politicians in the social policy ®eld found that they worked well with its academic specialists. Richard Crossman was involved in devising plans for state pensions which were intended to provide earnings-related payments which also gave better provision for the lower paid. This plan was a major part of Labour's campaign. Although later in Labour's opposition period Crossman was to become disillusioned with the capacity of a social democratic party to develop policy, largely because of tensions amongst the politicians, in the 1950s he found the academics valuable and the political process useful in giving shape to ideas. Crossman reported that `We have merely taken the ideas of Titmuss, Abel-Smith and Townsend' but also added `by making them members of the working party, one has accelerated the development of their thought by about ten years. Without their sitting on this working party, they just wouldn't have had to solve all these problems because, as academics, they haven't got to provide a ®nished working plan.'14 Like everyone else, social policy experts had high expectations for reform on the eve of Labour's victory in 1964. They believed that Britain's social services had been stagnating under Conservative rule, in that the proportion of the national product devoted to welfare had not improved signi®cantly. Moreover, to increase the amount spent on 12 13 14

In his foreword to Michael McCarthy, Campaigning for the Poor. CPAG and the Politics of Welfare (London, 1986), n.p. Abel-Smith, Freedom in the Welfare State, p. 10. Richard Crossman, The Backbench Diaries of Richard Crossman, ed. Janet Morgan (London, 1981), entries for 17 May 1961 at p. 948 and 3 May 1957 at p. 584.

Redistribution

179

welfare as a percentage of the gross national product was not seen in itself as especially left-wing. As the composition of the population changed to include a greater dependent element, as the costs of certain services increased because of their internal development (as in health care) and as a reduction in inequality was seen as an important contribution to economic growth, so the willingness of a government to spend an increasing proportion of output on welfare was regarded as a re¯ection of ineluctable forces at work in modern societies, rather than the outcome of a courageous left-wing orientation.15 It was assumed that a Labour government would be able to achieve higher rates of growth than had been possible hitherto; it was in part the consequences of that growth not being achieved which fuelled the arguments about how effective Labour had been in the area of social policy.16 Redistribution Two contrasting analyses emerged of the performance of the Wilson governments, each of which posed very clearly the limitations at the heart of social democracy. One, The Labour Government's Economic Record: 1964±1970, a collection of essays by economists under the editorship of Wilfred Beckerman, argued that the failure to devalue in 1966 was the main mistake of the government's economic policy and imposed great strains upon its relations with the trade unions in particular.17 However, the chief problem Labour grappled with was not aspects of economic policy but contradiction between its fundamental aim of achieving a more equal society and its own historical development in which the trade unions had played such a major role. It was impossible for the party to achieve equality when the aims of the trade unions were essentially to defend an inegalitarian wage structure: `One of the problems of the Labour Party is that of being a pro-equality party relying heavily on support from an organized pro-differential element.'18 15 16 17

18

Abel-Smith, Freedom in the Welfare State, pp. 3±4. `I assume that, during the next decade or two, there will be rapid economic growth which will make possible higher standards of welfare than ever before': ibid., p. 1. Andrew Graham and Wilfred Beckerman, `Introduction: Economic Performance and the Foreign Balance' in Wilfred Beckerman (ed.), The Labour Government's Economic Record, 1964±1970 (London, 1972), pp. 11±27 at p. 12. Wildred Beckerman, `Objectives and Performance: an Overall View' in Beckerman (ed.), Labour Government's Economic Record, pp. 29±74 at p. 41. He observed that interest in equality seemed to come mainly from the middle classes, who might have lost out materially as a result, rather than from the working classes: `It is not surprising that the middle class element in the Labour Party has tended to be regarded with some suspicion by their working class colleagues; one can hardly rely on people who, when it comes to the crunch, are quite capable of putting morality before expediency.'

180

Social democracy examined, 1965±1970

The government had managed to achieve a measure of redistribution, according to Michael Stewart in his conclusion to his essay on income distribution: `To have promoted a measurable improvement in the distribution of income against the background of the deplorably slow rate of growth of output permitted by its macro-economic policies was one of the Labour government's main achievements ± though, ironically, one that has received very little recognition from many of Labour's own supporters.'19 Because of the trade unions' role in sustaining in¯ation through wage push, especially in the 1969±70 period, the gains in income received by the poorest sections of society in the earlier years of the Labour governments were eroded. The key relationship, therefore, was between the mass of wage (and salary) earners on the one hand, and the poor, state-dependent groups on the other; it was not between the rich and the poor in a way which might have bypassed the salary and wage-earning groups altogether. Labour in 1964±70 had therefore ful®lled as much as it could one of its most important self-proclaimed aims, only to see its efforts frustrated by the sel®sh regard of its institutional bedrock, the trade unions. A wholly different view (for the most part) was taken by the authors of Labour and Inequality, a collection edited by Peter Townsend and Nicholas Bosanquet and published by the Fabian Society. Instead of pointing to a tension at the heart of the labour movement between party and trade unions it argued that there had been a failure of conviction at the heart of the government. Not only was the record of spending less impressive than it might have appeared at ®rst sight, but the government lacked an overall plan for social service spending. Therefore, `most of the authors have failed to ®nd evidence of marked changes in the direction of ful®lling socialist objectives. Their analyses present a gloomy picture. They con®rm the inability of the government to use its power on behalf of the weaker members of the community.'20 It also portrayed the party as rotting from within, with some of its keenest supporters unwilling to help the party at critical moments because they `did not believe any longer that the government was capable of introducing really radical change'.21 And this was at the heart of the problem with the trade unions, rather than their own narrow perspective: `The failure to redistribute incomes may therefore underlie the Labour 19 20

21

Michael Stewart, `The Distribution of Income' in Beckerman, Economic Record, pp. 75±117 at p. 111. Peter Townsend and Nicholas Bosanquet, `Introduction: the Need for Radical Policy' in Townsend and Bosanquet, Labour and Inequality, pp. 5±11 at p. 11. The exception to the generally pessimistic interpretation was Peter Kaim-Caudle's essay, `Financing Social Services', to which attention will be given below. Townsend and Bosanquet, Labour and Inequality, p. 7.

Redistribution

181

government's failures in its industrial relations, prices and incomes policies.'22 The `pro' case for Labour improving equality had a number of elements. First, at the aggregate level, spending on social services increased faster than the growth in gross national product, by 65 per cent (excluding housing) as against 37 per cent for GNP. This was a substantially better record than that achieved by the preceding Conservative governments.23 Within this overall performance the chief contribution came from improvements in cash bene®ts. Increases in national insurance bene®ts in 1965, 1967, 1968 and 1969 meant that those dependent on state bene®ts saw their spendable incomes rise faster than those of manual wage earners.24 While the plight of pensioners had been a feature of policy discussions in the 1950s (as shown in Labour's pensions plan for the 1959 election), the `rediscovery of poverty' centred on the problems of large families dependent on a low-income wage earner. For this group, family allowances were of great help, but their cost to a government was daunting, and family allowances for all children were only increased in 1968. The bene®t was restricted to poorer families by `clawing back' through the tax system the bene®t going to the non-poor.25 Alongside the improvements in cash payments to the poor, the principal means of redistribution, went a heavier use of direct as opposed to indirect taxation in that the yield of the former increased twice as much as that of the latter.26 The outcome of this, according to ®gures from the Family Expenditure Survey, was that all those with a low income (below £676 a year) did well between 1964 and 1969 in that their income was increased by the effect of taxes and bene®ts, while all those on higher professional earnings (£2,000 a year in 1960 and £3,000 a year by 1969) faced a worsening in their position. The differences between various income levels also improved (that is, narrowed) under Labour. The material published in Economic Trends showed that the difference between the line of the lowest quintile (that is, one ®fth have incomes below this level) and the median, after all bene®ts and taxes were taken into account, narrowed over 1965 to 1968, as did that between the median and the highest quintile.27 22

23 24 25 27

Peter Townsend, `Inequality and the Labour Government', The Listener, 27 April 1972, p. 559. This was a critical review of the Beckerman collection, focusing particularly upon Michael Stewart's essay, and which prompted a long interchange between the two in the correspondence columns of The Listener. Kaim-Caudle, `Financing Social Services', pp. 144±5. Stewart, `Distribution of Income', pp. 99±101. 26 Ibid., p. 95. Ibid., pp. 101±2. Central Statistical Of®ce, `The Incidence of Tax and Social Service Bene®ts in 1968', Economic Trends, 196 (February 1970), pp. xvi±xlviii at p. xxiii.

182

Social democracy examined, 1965±1970

The critical view of this performance questioned the scale of this achievement. Figures of aggregate spending in relation to national output were less impressive when the effects of certain changes in demography (more old people) and social circumstances produced by government policy (unemployment) were taken into account. The amount of increased spending that went into reducing inequality was therefore much less than it appeared at ®rst sight. The same was true of the take-up of means-tested bene®ts provided under national assistance (replaced by supplementary bene®ts in 1966), where the apparent increase masked a rise in numbers eligible.28 A broader issue, as far as Labour's critics saw it, was the failure to devote suf®cient thought to the planning of social provision, particularly in relation to economic growth. It was a basic point of this outlook that more resources proportional to national output had to be devoted to welfare, and that the scale of the problem was such that even under quite generous expectations of economic performance a rigorous ordering of priorities would be necessary. Because there had to be shifts in relative shares, this had to take place whatever the level of growth: The basic mistake would be to assume that economic growth alone can offer the means to secure social objectives, without making changes also in the `structure' of the institutions and the system of incomes and taxation of society. For at times when there was little or no growth the impression would be created that there were no social objectives that could be pursued.29

Financing better social services from economic growth allowed the shift of resources from the majority of the non-poor to the minority of the poor to be masked by improved take-home pay, even though a greater proportion of earnings would be taken in tax. To argue that such a shift might take place in conditions of low growth made the transfer more explicit and painful. This was not just an argument pursued through two books examining the Wilson governments retrospectively but had been focused during the life of the 1966±70 government by the activities of the Child Poverty Action Group, which had been founded in 1965. Although this group, of which Peter Townsend was the chairman, suffered a loss of momentum by 1968 as the government's improvements in family allowances reduced some of the intensity of the poverty issue, it bounced 28

29

A. B. Atkinson, `Inequality and Social Security' in Townsend and Bosanquet, Labour and Inequality, pp. 12±24 at pp. 13±14 and 19±23. Atkinson also argued that the reliance on ¯at-rate national insurance contributions and increasing vulnerability to income tax reduced the gain to families of the improvement in family allowances in 1968. LPA, Re. 173/June 1967, Peter Townsend, `The Need for a Social Plan', 30 June 1967, p. 2.

Redistribution

183

back into the headlines during the 1970 election. The group wanted to move money away from child tax allowances and concentrate it on a taxfree child bene®t, but it was less this idea than the implication of its publicity that under Labour governments the poor had become poorer which really caught the eye.30 This position was hard to sustain, and the memorandum from the group that seemed to imply this `did not contain the evidence to support this conclusion'.31 The material from the Family Expenditure Survey also did not support the case for a deterioration in the position of the poor. When Townsend examined the Labour government's record on reducing inequality in the correspondence columns of The Listener his conclusion was much less damning than the public understanding of the CPAG's position at the time of the 1970 general election: `The whole question is complex and the most reasonable conclusion is still that the data so far available fail to show that signi®cant progress towards equality of income distribution was achieved between 1964 and 1970', whereas the CPAG had seemed to be arguing that the Labour government left the poor worse off than they had been.32 The discrepancy between the publicly understood message from the poverty lobby and what the ®gures showed was re¯ected in the divisions which developed between the social policy academics. Titmuss and Abel-Smith, along with David Piachaud, refused to support the CPAG's hostile approach to the Labour government at the 1970 general election.33 But by then the damage had been done.34 When so much else was happening to weaken the self-con®dence of the government, the criticisms of the CPAG made an impact. When three leading social democrats ± David Marquand, John Mackintosh and David Owen ± published a critique of the Wilson government in October 1967 and outlined the way it had to change, they endorsed the CPAG's proposal to increase family allowances.35 And the view that under the Labour government the rich had got richer and the poor poorer had some currency within the PLP and undoubtedly added to the sense of 30

31 32 33 34

35

This period of the CPAG's activity is covered in McCarthy, Campaigning for the Poor, chaps. 4±6 and with some candour by Frank Field, Poverty and Politics. The Inside Story of the CPAG Campaigns in the 1970s (London, 1982), chaps. 2 and 3. Field, Poverty and Politics, p. 34. The Listener, 11 May 1972, p. 625. McCarthy, Campaigning for the Poor, pp. 121ff. For comments on the destructive nature of Townsend's views during the life of the Labour government, that inequality was getting worse, see Thomas Balogh's letters to The Listener of 18 May 1972, p. 654 and 1 June 1972, p. 722. `Change Gear. Towards a Socialist Strategy', Socialist Commentary, October 1967, p. viii.

184

Social democracy examined, 1965±1970

disillusionment when the party lost power in 1970.36 Townsend and Bosanquet were also right that the heart had gone out of the Labour Party in the government's ®nal years; more so than at other times of party division, the resolutions to party conferences attacking Wilson came from constituencies where there was a Labour MP. 37 Ambivalent attitudes towards Wilson's leadership were at the heart of the disenchantment of Labour supporters with their own government, but a key theme of this was the way in which it had seemed to lose contact with anything which could be called a socialist purpose. If the amelioration of poverty and the reduction of inequality were at best debatable rather than clearly established, then this reinforced the sense of unease. The view about the poverty/inequality issue became essentially a matter of judgement. If the improvement in conditions for the poor was accepted, had enough been done? Had the increases in family allowances and the use of `clawback' been the most that could be expected, or too modest? Taxation was at the heart of the assessment. The dif®culty for the Labour government was that the poor ± those who bene®ted from increases in welfare payments ± were at a much lower level of income than even the unskilled working class. Whereas the poor had seen their original incomes improved by the addition of welfare bene®ts, those in the working and middle classes had suffered a deterioration. They had a smaller proportion of their income left after taxes and bene®ts were taken into account. But it is also true that everyone paid higher taxes (and the regressive national insurance contributions) over the life of the Labour governments.38 Table 3 shows how for levels of very low income there was a positive effect from bene®ts so that recipients ended up with a higher income at the end of the process, whereas for those in any kind of `normal' work the outcome was a lower ®nal income, and one proportionately less by 1970 compared with 1965. It was the transfer between the mass of taxpayers in the moderate income levels (where Labour hoped to ®nd the majority of its voters) to the poor that exercised Labour politicians. The unpopularity of family allowances amongst working-class taxpayers was well established, and their resentment at income tax appreciated. This issue was especially important in connection with clawback. This was the method, as has already been explained, whereby the potentially intimidating cost of increasing family allowances for everyone was in fact limited by reducing child tax allowances, so that the standard-rate income tax payer was left 36 37 38

LPA, PLP minutes, 29 October 1970. George Jones, Socialist Commentary, October 1968. CSO, `The Incidence of Tax and Social Service Bene®ts in 1968', p. xxiv.

Redistribution

185

Table 3. Income after all taxes and bene®ts as a percentage of original income for 1965 and 1970 for the poor, unskilled manual and skilled manual workers, and professional and administrative employees Poor Unskilled worker Skilled worker Prof. admin.

1965

1970

157 95 85 83

227 89 81 78

Notes: `Poor' means an income range £260±315 in both 1965 and 1970. `Unskilled worker' represents unskilled engineering workers' earnings of £782 in 1965 and £1,044 in 1970. `Skilled worker' represents skilled engineering workers' earnings of £1,099 in 1965 and £1,402 in 1970. `Prof. admin.' represents earnings of administrative, technical, professional and clerical staff in national and local government, including the National Health Service, of £1,340 in 1965 and £1,872 in 1970. These ®gures were linked to the nearest income band given in the FES tables; for example, the ®nal earnings ®gure of £1,872 for professional staff was linked to the income range £1,752±2,122 used in the FES material to give a result of 78 per cent of original income remaining after all bene®ts and taxes were accounted for. Sources: For earnings: Department of Employment, British Labour Statistics 1970 (London, 1972), tables 19 and 25. For income after taxes and bene®ts as a percentage of original income at various income ranges: CSO, `The Incidence of Taxes and Social Service Bene®ts in 1968' (and 1970), Economic Trends, 196 (February 1970), table 4(i) and February 1972, table A.

no better off from the process and a surtax payer worse off. It was a very attractive way of helping the poor, because it blended an automatic, non-means-tested payment with selectivity. The problem was that the reduction in the child tax allowance lowered the tax threshold, so that more people were brought into income tax. It is not dif®cult to understand why this aspect of the device troubled the Labour government. The income tax threshold in relation to the average manual wage fell substantially during the time of the Wilson governments, showing particular falls after the 1965 budget and after the introduction of clawback in 1968, as shown in table 4. The problem of the threshold was used by David Ennals, the social security minister, at a meeting with the CPAG in 1970: `We have never heard a word from you about the effect that the income tax thresholds were having on low wage earners as earnings rose . . . CPAG members seem to live in an abstract world where there is no income tax.'39 This was right. Field, who had drafted the memorandum submitted to the Labour government in 1970 as part of the budget representations and 39

BLPES, Titmuss Papers, 2/208, speech by Ennals to CPAG, 19 April 1970.

186

Social democracy examined, 1965±1970

Table 4. Income tax threshold for a married man with two children, as a percentage of average earnings of adult male manual worker, 1964±1970 Year

Threshold (%)

1964±5 1965±6 1966±7 1967±8 1968±9 1969±70 1970±1

78.1 71.9 69.4 66.0 57.4 56.1 57.6

Source: H. C. Deb., 830, cols. 219±20, 4 February 1972, written answer of chancellor of the exchequer to Michael Meacher.

recommending a major increase in family allowances, later recalled: `The effect on the tax threshold of the Group's previous success in promoting the idea of raising family allowances and clawing back the increase from taxpayers, had been completely overlooked in the 1970 memorandum. Indeed, I cannot recall a time either during the drafting stages of the document or in the Executive Committee when the issue was discussed.'40 The impact of income tax on the low-paid worker was perhaps more striking than on the better paid. This does not mean that the lower-paid worker paid a higher percentage of his increase in earnings between 1965 and 1970 in tax compared to the average earner; it does mean, however, that he had faced the biggest percentage increase in income tax compared to those higher up the income scale. This is shown in table 5. The 1970 budget had abolished the reduced-rateband of income tax and by way of compensation had increased some personal allowances, but the main bene®ciaries of these had been single men and married women rather than the low-paid married man. It is interesting that the least critical of the Fabian essays in Labour and Inequality was that by Kaim-Caudle, which dealt with the ®nancing of the social services. He argued that the Labour government had gone to the limit of increasing social service expenditure in a stagnant economy: `Some might argue that given public attitudes they went beyond the limit and thereby lost the general election.' His general conclusion was remarkably similar to that of the Beckerman collection, except that the tension which Labour's espoused aim of greater equality generated was

40

Field, Poverty and Politics, p. 36.

Redistribution

187

Table 5. Percentage increase in income tax for married man with one child, 1964/1965±1970/1971, at various proportions of average earnings % increase between 1964/5 and 1970/1 75% of average earnings Average earnings 150% of average earnings

330 172 101

Source: Peter Kaim-Caudle, `Financing Social Services', in Peter Townsend and Nicholas Bosanquet (eds.), Labour and Inequality (London, 1972), pp. 143±61 at p. 150.

not merely with trade unions and their leaders but with attitudes held more widely within the population: A progressive social policy is hardly possible with a huge de®cit in the balance of payments or a stagnating economy slipping into unemployment. The reasons for this cannot be blamed on the banks or the Treasury Knights but is caused by the unwillingness of doctors and dockers, of dustbinmen and teachers, or printers and seamen to pay more taxes, whether directly or indirectly, out of incomes which do not rise suf®ciently fast to give them the higher standards of living to which they consider themselves entitled. The `passion for equality' is a minority creed.41

The features of income tax that had been discussed in the early 1950s with the concern about `incentives' had now appeared with greater force because of in¯ation. The effect on increases in pay, themselves vital because of the impact of in¯ation, was open and unpopular. It linked up with dislike of family allowances among the non-poor to create a real problem for transferring resources to the poor. There was a similarity in the behaviour and outlook of the public-sector middle classes and the working class but one which ran in the opposite direction to that which Labour wanted. This outlook was individualist rather than organic in its view of society, anxious to protect its living standards and aware that income tax was just as much of a problem as lags in pay and wages. The sort of problems Labour's social spending was creating for its support were spelled out in a letter to Len Murray of the TUC's research department: From a TUC and Labour Party point of view it taxation so high that it is being severely criticized supporters (quite apart from others) when in fact being incurred unnecessarily on social grounds. 41

Kaim-Caudle, `Financing Social Services', p. 160.

is quite ludicrous having and evaded by their own substantial expenditure is There is not even any

188

Social democracy examined, 1965±1970

satisfaction to be gained for the Labour movement from this unnecessary expenditure because it is simply taken for granted and no credit given to the Government for it.42

Those who saw the limitations this imposed upon Labour's pursuit of equality thought that one of the answers was to try and get across `the spirit of Tawney' so that attitudes might change.43 The provision of public services, and of cash bene®ts, which served the purpose identi®ed by `poverty' studies of helping even the very poor to participate in the conventions and customs of the society rather than merely meet a subsistence level of physical needs, was clearly an important part of the striving towards a more equal Britain. The frustration of these ends by more acquisitive and sel®sh behaviour amongst Labour's own supporters was something which left Labour politicians at something of a loss. They had been told, of course, by trade union leaders, that social service provision was not an argument for wage restraint because of the irreducible signi®cance of take-home pay.44 But there was more to it than just the anxiety of trade union of®cials to maintain the pay differentials which justi®ed their positions in the eyes of their members. Private consumption was itself a potential leveller of social distinctions. For the workers to participate in the kind of consumption familiar to the middle classes was an important and direct way of breaking down class differences. Robert Currie, in his study of labour ideology, has suggested that the growing popular af¯uence of the 1950s and 1960s did not necessarily present a new challenge to its social theory. Had Labour believed that people ought to follow collectively established norms against which their private interests had no appeal, then af¯uence should have been despised; alternatively, `given an honest and selfcon®dent individualism, it would have simply noted that the prizes of perfect competition had increased'.45 Labour politicians tended to meet their own acquaintance with `sel®sh consumerism' with a sort of grudging recognition that this was 42 43

44

45

MRC, TUC archive, MSS 292B 411. 25/2, C. T. H. Plant, Inland Revenue Staff Federation, to Len Murray, 20 January 1970. Kaim-Caudle used the following quotation from R. H. Tawney's classic in his Fabian essay: `while they [men] differ profoundly as individuals in capacity and character, they are equally entitled as human beings to consideration and respect, and the well-being of society is likely to be increased if it so plans its organization that, whether their powers are great or small, all its members may be equally enabled to make the best of such powers as they possess': `Financing of Social Services', p. 143, citing Equality (London, 1964), p. 46. MRC, TUC papers, MSS 292, 560. 1/15, `Report of a Meeting between the Economic Committee and the Labour Party Study Group on the Control of Industry', 23 January 1958. Robert Currie, Industrial Politics (Oxford, 1979), p. 180.

Redistribution

189

the way of the world which any hard-boiled MP had to expect and the acceptance that the relief of poverty would no longer be rooted in class interest but be instead a moral issue, rather as Kaim-Caudle suggested.46 But there was more to it than that: money could be a powerful leveller of social distinctions. In the way that people were regarded and treated by others, money to spend was an important assertion of a place in the market for goods. A quantitative increase in spending power was therefore of some qualitative signi®cance, allowing some workers to move on from traditional kinds of consumption to something more elaborate. This point was made particularly forcefully by Peter Stephenson in 1970. Noting that the lesson of the 1960s was that the industrial worker expected his earnings to increase regularly `and if that is not happening he acts to make it so, regardless of conventional socialist objectives', he went on to point out that: In so far as we have a more generally materialistic society, we also have a society where the worker, when he gets money to spend, can come much nearer to enjoying an equal role with people from other social classes than ever before. Social provision does not have the same impact. Inevitably, it comes from the hands of those who run society, even though they may have impeccable social motives.47

So the pressure on social spending via income tax was fuelled by an enhanced emphasis upon consumption which may have been qualitatively signi®cant. One way of raising more revenue outside income tax that had emerged in the discussions about poverty, both from the social policy academics and from the Marquand/Mackintosh/Owen manifesto, was a wealth tax.48 This had merit because at the revenue level it seemed to provide an alternative to squeezing more money out of income tax, while politically it returned to the traditional target of the rich rather than the more ticklish problem of the sel®sh worker who had recently come to the fore. Moreover, it tested the Wilson government where it seemed to be most vulnerable, namely the apparent ebbing away of its socialist conviction and resolve. The widespread interest in the wealth tax from 1963 was one of the most obvious indications of the powerful impetus towards tax reform in the early 1960s. It was a widely examined proposal, and attracted 46 47 48

See Denis Healey, `Socialism in a Changing World', Socialist Commentary, November 1969, pp. 5±8. Peter Stephenson, `Money to Spend on Himself', Socialist Commentary (September 1970), p. 9. LPA, Re. 173/June 1967, `Need for a Social Plan' (Peter Townsend), p. 5; Marquand, Mackintosh and Owen, `Change Gear', p. viii.

190

Social democracy examined, 1965±1970

interest not only on the left but also in the Conservative Party.49 The breadth of interest and discussions served to show that it was not a piece of wild socialism but had less partisan sources of support. Indeed, one economist con®rmed that `Generally speaking, and abstracting from the administrative problems associated with it, the net wealth tax gets high marks from economists when viewed in terms of the commonly accepted objectives of economic policy.'50 The fact that a wealth tax not only addressed socialist concerns but also received some legitimacy from more specialized opinion may have led to the disappointment that the Wilson governments did not introduce such a measure while they were in power. Part of the earlier discussion of the debate over Labour's social policy considered the different views of two assessments of Labour's record, The Labour Governments' Economic Record and the Fabian collection, Labour and Inequality. Over the wealth tax question their verdicts were strikingly similar. While Michael Meacher in Labour and Inequality followed the critical tone of that volume in entitling his essay `Wealth: Labour's Achilles' heel', Michael Stewart, who had defended Labour's record on income distribution, believed that in the case of the failure to introduce a wealth tax, `Conviction, rather than feasibility, [was] the missing link.'51 Stewart had been involved in some of the discussions about a wealth tax within the Labour Party in 1963 and a paper published the same year had concluded, `The remarkable thing is not that someone is proposing it, but that we don't already have it.'52 The wealth tax had been on Labour's `shopping list' of new taxes from the 1950s and had been aired by Callaghan as shadow chancellor at the beginning of 1963 in debates on British economic policy following the collapse of the Common Market negotiations. The sort of arguments which were brought forward in support of such a tax were numerous. A core argument without which the proposal was pointless was that equity and equality were both served by the tax. From the point of view of equity it seemed wrong that a fundamental aspect of a person's economic capacity and social power ± his or her capital ± should go untaxed, whereas income was treated severely. From the equality angle it seemed only necessary to point out that 1 per cent of the population owned 49 50 51 52

C. T. Sandford, `Capital Taxes ± Past, Present and Future', Lloyds Bank Review, 150 (1983), pp. 34±49 at p. 42. See Alan Peacock, `Economics of a Net Wealth Tax for Britain', British Tax Review (1963), p. 365. Stewart, `Distribution of Income', p. 85. For his correspondence with Callaghan, see Kaldor Papers, 3/16; the paper was `The Proposed Tax on Wealth', The Banker's Magazine (April 1963), p. 297.

Redistribution

191

about a third of the country's private wealth to make the case.53 These arguments pointed to two different kind of taxes. The former required one with a low threshold but low rates to provide a parallel taxation of capital to income in the middling ranges; it might even have necessitated that owner-occupied houses be taxed as an important aspect of middleclass property ownership. The equality requirement could be served by a wealth tax with a fairly high threshold but rates which were progressive and, at 3 per cent rather than 1 per cent, could only be paid out of capital rather than income. The implications for the practicability of the tax were different, too. A version with a low threshold which met demands for tax fairness, and so involved a greater number of individuals, would have placed a greater strain on tax personnel and been a greater change for the tax administration to absorb, even though it was the more politically `neutral' of the two. The `socialist' version, with a higher threshold but targeting the wealthy, would have meant far fewer cases for the Revenue to deal with but would have been politically far more provocative. The economic function that a wealth tax might have ful®lled rested on the view that many wealthy people were `lazy' in their choices, preferring low-yielding but secure investments rather than riskier but more productive ones. A tax would encourage a shift from the former to the latter in order to protect the value of assets.54 This chimed in with the pervasive view of the early 1960s that one of the reasons the British economy was failing was because of the stagnation of its society where too much wealth was functionless and merely serving individual rather than collective purposes. The additional value of the wealth tax in this context was that it might be substituted for other taxes, such as surtax, which might have had a severe effect on enterprise and effort amongst the business classes. This was the reason why it was discussed in some of the tax and economic journals, and also the grounds for Labour's Harold Lever preferring it to the capital gains tax in the 1965 budget debates. Because the capital gains tax taxed realizations it had the potential to encourage holding onto assets irrespective of their economic return, in order to avoid tax. A wealth tax, which was simply tied to the value of assets and was not triggered by realization, did not suffer from this possible drawback. A more common interest on the left was for a tax which was added to 53 54

Both arguments appear in Stewart, `Proposed Tax on Wealth', p. 294. The later experience of a wealth tax in Ireland showed that this hunch was false: the tendency rather was to search out tax-exempt assets irrespective of their yield. See Cederic T. Sandford and Oliver Morrisey, The Irish Wealth Tax. A Case Study in Economics and Politics (Dublin, 1985), p. 139.

192

Social democracy examined, 1965±1970

Table 6. Percentage of personal wealth owned by the top 5 per cent of the population Year

%

1911±13 1938 1954 1960

87 79 71 75

Source: LPA, Re. 109/March 1967, `The Distribution of Income and Wealth', citing J. R. Revell, `Changes in the Social Distribution of Property in Britain during the 20th Century', paper presented to 3rd International Conference of Economic History, Munich, 1965.

the existing system, rather than substituting for some component of it. This case was sustained by an assumption on which later research has cast doubt. It was assumed that the ®gures usually quoted in support of the `egalitarian' case ± that, say, 1 per cent of the population owned about 33 per cent of total wealth, or that 5 per cent owned 75 per cent ± re¯ected a trend of growing inequality. Moreover, it was also assumed that any reduction in the share of the very richest simply re¯ected dispersion of their wealth to those in the immediately lower levels, and sometimes simply to younger members of their own family. The kind of ®gures that were used to sustain these beliefs appeared in a table in a Labour Party document of 1967 and drew upon research by Jack Revell of Cambridge University, and are shown in table 6. A rather different picture emerged from later research by Atkinson and others, which showed a pronounced shift to greater equality from the Second World War that continued into the 1950s and 1960s. Moreover, this was not a change con®ned to transfers within the upper echelons of the wealth-holders, but represented a substantial increase in wealth-holding within the middling ranks. Commenting on the decline in share of the top 1 per cent, Feinstein has written: This [the loss of wealth of the richest 1 per cent] had not simply been transferred to the next wealth groups: the shares owned by the top 5 and 10 per cent had also fallen sharply, from over 75 per cent before the Second World War to under 40 per cent in 1976±80 for the former, and from 85 per cent to 50 per cent for the latter. The offsetting changes among the four-®fths of the adult population with the lowest wealth meant that their stake in society had increased from a negligible 8 per cent in the 1930s to some 35 per cent in the 1970s.55 55

Charles Feinstein, `The Equalizing of Wealth in Britain since the Second World War', Oxford Review of Economic Policy, 12(1) (1996), pp. 96±105 at pp. 102±3. The same phenomenon, of a trend towards greater equality from the Second World War deriving from an increase in middling wealth-holding rather than transfers con®ned to the rich,

Redistribution

193

This evidence of growing equality (caused partly by the operation of estate duty but also by the growing home ownership among the middle classes), which might otherwise have complicated the simplicities of the socialist case, was also unavailable to the opposition. The Economic Directorate of the CBI produced a paper for its members in 1968 which admitted that `The taxation of wealth is . . . a very topical subject.' The CBI had developed its thinking on tax questions largely as a result of the reforms of the Labour government in 1965, setting up working parties on the capital gains taxes and on the impact of marginal rates of taxation. Its general line through the 1960s was that public expenditure was too high and that what it took to be the excessive reliance on direct taxation was damaging incentives and impeding economic revival. It wanted a switch from direct to indirect taxes. But when it was confronted by two articles by Peter Jay in The Times in May 1967 which argued that the complaints against excessive public expenditure and taxation were unfounded, the CBI's director-general confessed that they did not want to respond directly to Jay: Both ®elds of public expenditure and taxation are ones about which we make a considerable outcry here, but about which, in verity, we are not deeply knowledgeable. We have been hesitating on the brink of launching ourselves in major research efforts in both ®elds for over a year now and the only thing which has restrained us from doing so is the charge which such work would make on our resources.56

Against the wealth tax, the CBI was able to make the point that the economic argument pointing to the way such a tax might encourage riskier, and therefore more `enterprising', investment was wrong. Since the levels of wealth most likely to be affected by a wealth tax were held by those over ®fty-®ve, it was more probable that they would wish to maintain their consumption or pass their assets to their children rather than to seek out higher returns on their savings in order to protect their capital.57 It therefore concluded, rightly, that `a wealth tax must in the end be accepted or rejected for its socialist qualities as a transfer of assets from the richer taxpayers to the state'.58 This was the approach that the TUC had also taken in their wide-ranging review of the tax

56 57

58

was also reported in Henry Phelps-Brown, Egalitarianism and the Generation of Inequality (Oxford, 1988), pp. 380±4. Phelps-Brown served on the Royal Commission on the Distribution of Income and Wealth from 1974 to 1978. MRC, CBI Papers, MSS 200/C/3/DG1/8, papers of director-general, John Davies to Kenneth Keith, 5 June 1967. MRC, CBI, MSS 200 C/1/1/E. 408.68, `Wealth Tax', 13 November 1968. The same point had already been made by Peacock in `Economics of a Net Wealth Tax for Britain', p. 307, although there is no evidence that this is the source of the CBI argument. CBI, `Wealth Tax'.

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Social democracy examined, 1965±1970

system which they made in 1969. In their view, `The ownership of large concentrations of wealth conveys very great power, both economic and political, which the recipient may have done nothing more to earn than being born in the right bed.' They wanted a tax on wealth that would hit inheritors rather than savers, at progressive rates above £20,000 worth of assets. They assumed that such a tax, along with the gifts tax which they also proposed, would be paid out of savings rather than income. Part of the proceeds would go to the Redundancy Payments Fund and to supplementing workers' pension entitlements.59 Because the socialist purpose behind the tax was so apparent, the CBI felt that the administrative arguments against it ± problems of valuation, the need for additional Revenue staff ± would not be decisive: `The administrative arguments against a wealth tax are powerful. Nevertheless it must be recognized that if the introduction of such a tax is strongly supported on other grounds, these dif®culties are unlikely to be decisive in preventing its imposition.'60 Yet these were the reasons which Jenkins advanced for not pressing ahead with the wealth tax. His special contribution measure of 1968, a charge on the investment income of surtax payers which followed Cripps's version of 1948, was introduced with a theme that Jenkins had developed in his pamphlet of the 1950s on the capital levy, namely that the expenditure of the rich was outside the control of democratically approved ®scal policy and therefore special measures were justi®ed to redress the balance.61 But he rejected the idea of going on to an annual wealth tax because of problems of valuing assets which did not produce a price in the market place, and more generally argued that the need was for stability after the 1965 reforms, a view repeated the following year: `Two major and worthwhile changes were a heavy meal to digest, and the process is still not complete.'62 He told the TUC the same thing when they met to discuss the TUC's Economic Review for 1969, namely: the limited capacity of the Inland Revenue for administering a new tax, following the introduction of Corporation Tax and Capital Gains Tax in 1965. The Capital Gains Tax was now producing a large revenue in relation to effort, after a slow start, but the immediate yield from a new tax would probably be small 59

60 61 62

MRC, TUC archive, MSS 292, Economic Committee 2/2, 12 November 1969, `Taxation ± a Review of Certain Features of the British System', p. 16. This paper also foreshadowed later interest into capital sharing by pointing out that workers would expect a share of the increase in capital values produced by industrial concentration, since many workers `suffer increased insecurity in their work through the very process of change which produces this growth'. MRC, CBI, MSS 200, C/1/1/E. 469.68, Economic Committee meeting, 7 January 1969. H. C. Deb, 761, col. 300, 19 March 1968. H. C. Deb, 781, col. 1016, 15 April 1969.

Tax reform

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and its advantages would have to be set against the effects on standards of tax assessment and enforcement which would result from increasing overstrain on Inland Revenue staff.63

This wording is reminiscent of the usual reasons advanced by the Revenue over many years against the introduction of new taxes, and there were those who found it unconvincing.64 But even if the particular argument advanced by Jenkins may look less strong than it does at ®rst sight, there were problems which had to be dealt with of a substantial kind. These included the treatment of property held in trust, small companies, gifts and valuation of assets for which there was no obvious market value. In other words, Jenkins might easily have anticipated facing the same kind of long battle over the passage of a wealth tax which had accompanied the capital gains and corporation taxes, both of which were less socialist than the wealth tax. Even though the government's majority was more secure than it had been in 1965, there was not the sense of freshness at the battle to be undertaken, or even naõÈveteÂ, upon which Callaghan could draw. By 1969 the national plan was long gone, there were major problems of economic management and the sense of con®dence had evaporated. Without these assets, tax reforms of the kind involved in a wealth tax might well have failed through a lack of conviction, however understandable that may have been.65 But tax reform involved not merely issues at the heart of the labour movement, but wider and equally challenging matters to which attention must now be given. Tax reform The analysis of this and the preceding chapter has focused upon the development of tax strategy within the context set by the party's own aspirations and ideology. Because the party wished to present an identity of reform as much as of socialism, improvement of the tax system had an equal status with the achievement of more redistributionist aims. 63

64

65

MRC, MSS 292B, 411.120.443, Economic Committee 6/5, 8 January 1965, `Report of a Meeting between the Economic Committee and the Chancellor of the Exchequer, held at the Treasury on Friday December 13, 1968'. See below, p. 213. In 1946 the Revenue had argued that: `If we had the requisite strength of Inspectors of Taxes we could get more revenue by gathering in the full fruit of Income Tax than ever we would get by chasing capital gains': PRO T 171/891, Board of Inland Revenue, 1 November 1946, `Taxation of Capital Gains'. The sense of caution which accompanied the cabinet discussions of the 1970 budget, rooted in a belief that the population was already heavily taxed, and which informed Jenkins's opposition to a wealth tax and its inclusion in the election manifesto, is conveyed in R. H. S. Crossman, The Diaries of a Cabinet Minister. Vol. III, Secretary of State for Social Services, 1968±70 (London, 1977), pp. 625, 851 and 927.

196

Social democracy examined, 1965±1970

Callaghan had told the PLP that he had wanted to make the 1965 budget `a vigorous start to the government's programme for overhauling and modernizing our tax system'.66 But the capital gains and corporation taxes had satis®ed the party's political ambitions and had been at least in part developed within a party framework. There was a world outside the party, however. Tax reform in the 1960s also embraced issues which had been generated outside the Labour Party, and very often in a European as much as a British context. How the Labour governments responded to these questions was as important a test of its capability as the implementation of what had been internally developed ideas. There was much talk about the need to `widen the tax base'. This usually focused on the fact that government revenue was especially dependent on direct personal tax, which fell especially heavily on marginal earnings at both the lower and higher income levels. There was a sense that there was not much scope for increasing the yield from income tax, since any heavier treatment of high incomes would not bring in much revenue, while the fall of the tax threshold had the undesirable result of too many poor people being liable to income tax. The preceding section has shown how `widening the tax base' could also blend in with socialist aspirations when it took the form of a wealth tax. However, discussions outside the party also embraced tax ideas which would not only provide alternative sources of revenue but which might also improve industrial performance, and these were not in any sense `socialist'. How well could the party and the labour movement handle these? The agenda for tax reform generated outside the labour movement was set principally by value added tax (VAT), and subordinately by the idea of stimulating industrial ef®ciency through payroll taxes. VAT was a multi-stage sales tax which was to prove to be a remarkably buoyant source of revenue.67 There were two routes to VAT. One was entirely outside the British experience and lay in the desire of some countries ± principally France and Germany ± to modify existing cumulative or `cascade' sales taxes, which, by taxing each sale between companies, 66 67

LPA, PLP minutes, 7 April 1965. Useful discussion of VAT can be found in Alan Tait, Value Added Tax (Maidenhead, 1972), esp. p. 120; Douglas Dosser, `The Value-Added Tax in the UK and the EEC' in A. Peacock and F. Forte (eds.), The Political Economy of Taxation (Oxford, 1981), pp. 118±30 at p. 127; David Stout, `Value Added Taxation' in B. Crick and W. Robson (eds.), Taxation Policy (Harmondsworth, 1972), pp. 183±200 at pp. 187±93. John Kay has recently called VAT `the tax innovation of the century' in `Taxation: the Issue that Matters too much to be Talked About', Times Literary Supplement, 25 April 1997, p. 15. However, the dif®culties which surrounded its possible implementation in the latter 1960s, especially from the point of view of trade union leaders, are referred to in John Kay and Mervyn King, The British Tax System (Oxford, 5th edn,1990), pp. 121±2.

Tax reform

197

encouraged vertical integration of processes within ®rms and so distorted the industrial structure. Because VAT taxed only the value added at each stage it was more neutral. But it also had a relevance for a very different kind of tax regime for which Britain and Sweden were the main examples. In these high-wage economies the dependence on direct personal taxes was going to bring both industrial and political problems as the highly visible taxes moved down the income scale and caused resentment among workers and a desire to see wage increases fully compensate for tax burdens. At the time of the Wilson governments it was a commonly held view in policy discussions in the Treasury that the scope for signi®cant increases in income tax rates was very limited. A switch to indirect taxes which were suf®ciently broadly based to bring in signi®cant revenues ± such as VAT ± was a desirable solution to these problems. VAT was therefore relevant to the British case but its adoption required a fairly fundamental change of attitude. The labour movement had long been opposed to indirect taxes because they seemed to be regressive ± that is, they burdened lower incomes more than higher ones. Within the Labour Party the leadership had long recognized ± from at least the Second World War ± that this dichotomy was too simple a guide for those in government, but old views died hard in the party more widely. When Labour governments had to deal with purchase tax ± an indirect sales tax ± they tried to make it as progressive as they could by increasing the rates on luxury items. The most effective form of VAT was one with a single rate charged on a wide variety of goods, with any potentially regressive effects outweighed by its ability to raise suf®cient revenue to ®nance higher bene®ts for the less well-off.68 This would not have been out of line with the asymmetry of the tax± bene®t relationship, whereby the tax side was, overall, only mildly progressive at best, or neutral for many taxpayers, with the cash bene®ts going to those with lower incomes turning the ®nal outcome into a progressive one. Taxes and bene®ts had to be taken together. These distributive issues were not at the forefront of the early discussions on VAT in 1965. The main attraction of the tax at this stage was for the exemption given to goods for export, which was therefore a way of improving Britain's trade balance. Discussions had been stalled by the Richardson Committee, set up to examine turnover taxes, which had come out against a value added tax in 1964, largely because of the minimal effects of taxes on prices.69 But the continuing anxiety about 68 69

For a rare example of this sort of view in Labour circles, see Peter Stephenson, `Valueadded Tax ± Panacea or Monster?', Socialist Commentary (February 1970), p. 10. Report of the Committee on Turnover Taxation (London, 1964), p. 84. The tax advantage

198

Social democracy examined, 1965±1970

the balance of payments kept the proposal alive. There is no doubt that Callaghan saw the attractions of VAT at an early stage, but it was accepted that the major reforms of 1965 ruled out the tax for 1966 because of the strain that additional change would bring.70 However, the possibility of a value added tax was put before the National Economic Development Council again with the encouragement for exports the reason.71 While the government was maintaining the interest in VAT, it also ventured into further tax reform in the 1966 budget with the adoption of the selective employment tax. The 1965 budget had been driven by the need to deliver the expectations for capital gains and corporation taxes, which had been developed in opposition and which were also part of incomes policy. The 1966 budget showed the possibility of less partyinspired reform. In the early stages of its planning the preference was for a neutral budget because `the Government should, if at all possible, avoid further grounds for the accusation that Labour was a high tax party'.72 But by the spring the following year as budget day came closer the continuing adverse trade balance and low unemployment pointed to the need for £200 million to be taken out of the economy. Rather than put up existing taxes, which would have sat uneasily with promises made during the 1966 election, a new tax initiative was more acceptable. On 4 April 1966 Callaghan asked for suggestions for a tax which would favour exporters and provide a disincentive for hoarding labour. Two days later Kaldor presented a paper entitled the `Case for a Payroll Tax and a New Incentive to Exports'.73 This became the selective employment tax (SET), whereby employers had to pay a levy on the workers they employed, but those in manufacturing received it back with a small additional subsidy. This was intended to promote greater ef®ciency in the service sector and squeeze labour out of those industries and into manufacturing where a shortage of labour `was recognized to be the

70

71

72 73

arose, potentially, from a reduction in direct company taxes paid for by an increase in an indirect (turnover) tax for which there was a rebate on goods exported. Callaghan had written `very interesting for the long term' on a paper by Kaldor `The Case for a Value-added Tax as an Additional Instrument of Taxation', sent to him on 30 December 1964. PRO T 171/802. For Callaghan's interest a year later see also Alec Cairncross, The Wilson Years. A Treasury Diary, 1964±1969 (London, 1997), entry for 5 December 1965 at p. 100. Cairncross was head of the government economic service at the time. The president of the CBI noted `If the government were not looking for a legal loophole for export incentives which is GATT worthy we do not think we would have this paper in front of us': MRC, CBI archive, MSS 200/C/3/ECO/16/4/E. 243. 66, 15 June 1966. PRO, T 171/811, `Report by the Chancellor of a Talk with the Prime Minister', 3 December 1965. Ian Bancroft's note, `Tax Incentives for Exports', 5 April 1966, and Kaldor's paper are in PRO T 171/813. Bancroft was Callaghan's private secretary.

Tax reform

199

most important constraint in production'.74 Those manufacturers who exported would also expect to bene®t from the lower prices the subsidy would bring. The scheme appeared attractive to Callaghan because it would show that `the government was capable of producing new measures to control the economy'.75 The 1966 budget certainly represented a strong contrast to its predecessor in terms of policy formation. The 1965 budget was developed and defended as an embodiment of long-held ambitions within the party which could be characterized as reforming and leftwing. The 1966 budget had no point of contact with the labour movement. It was directed at issues which involved either economic management or matters of tax reform at a non-party level. Its immediate antecedents lay in discussions within government and amongst of®cials about ways of increasing tax revenues, encouraging industrial ef®ciency and improving exports. But there had also been wider debate about the value of an employment or payroll tax to encourage the ef®cient use of labour and take some of the burden off the social security budget, which in France or Germany was funded more heavily by employers.76 There was only one paper in Labour Party policy documents from the opposition period which had ventured into this area, and it had dealt with payroll taxes on ®rms in af¯uent regions to subsidize employers in more depressed areas.77 This single example was easily outnumbered by the papers which discussed taxes in the context of `social justice' and incomes policy.78 Just as Callaghan had felt the need to respond in the 1965 budget to the mainstream of Labour thinking as it had been developed in opposition, so in 1966 there was an attempt to address tax ideas which were less partisan in origin. Robert Neild noted in connection with SET that `his thinking was also plainly in¯uenced by the fact that there is much public discussion about the possible need for a payroll tax'.79 The 1966 budget was an impressive illustration of how a chancellor 74 75 76

77 78

79

PRO T 171/811, `Brie®ng Note by A. K. Cairncross on the Economic Outlook', 24 January 1966. PRO T 171/813, `Meeting in the Chancellor of the Exchequer's Room', 15 April 1966. There is a valuable discussion of tax debates of the 1960s in the context of the Conservative Party by Martin Daunton in ` ``A Kind of Tax Prison'': Re-thinking Conservative Taxation Policy, 1960±70' in Martin Francis and Ina ZweinegerBargielowska (eds.), The Conservatives (Cardiff, 1996), pp. 289±315. LPA, RD 636/January 1964, `Report on Taxation and Regional Planning'. Thomas Balogh, who advised Harold Wilson on economic affairs, felt that the policy proposals emerging from the party in 1964 had paid insuf®cient attention to issues of investment and growth. See his `Note of Dissent from Report on Taxation and Incomes Policy', LPA, RD 764/April 1964. PRO T 171/813, `Variation on National Insurance Surcharge and Subsidy to Manufacturers', 14 April 1966.

200

Social democracy examined, 1965±1970

could force through a measure against the more cautious views of the Treasury and, indeed, with remarkably little broad support.80 There was also ingenuity in the way the tax was to be collected by the Ministry of Pensions and National Insurance and the rebates handled by the Ministry of Labour to avoid using what was thought to be the overburdened Board of Inland Revenue. The budget brought home the power of the chancellor in a self-enclosed budgetary process. But was SET a success? SET put Labour on the defensive politically.81 One study of tax reform over the period 1965±74, which dealt with both Labour and Conservative policies, commented that `Of all the taxes we have studied SET was the most generally unpopular.'82 The element of discrimination aroused anger, there were signs of distortion as some companies brought service functions into manufacturing operations in order to qualify for the rebate. The rebate process itself, where all companies had to pay the tax, and then those which were exempt received it back, also seemed clumsy. Some of these dif®culties had already emerged in the pre-budget discussions. The price changes induced by the tax were thought likely to be too small to induce signi®cant shifts of labour from services to manufacturing. Moreover, the subsidy element (that sum greater than the amount of the tax which was paid back to manufacturers) was pitched at its most modest level, in order to limit the outcry at the new tax. The degree of de¯ation to be achieved was also thought hard to predict, and so its effectiveness as an economic regulator was diminished. For the economists a straight increase in income tax looked a far simpler solution.83 But this was the very point. To have increased income tax still 80

81 82

83

Sir William Armstrong's views that there was insuf®cient time to bring the scheme to fruition were made known at a meeting with Callaghan on 6 April 1966 and expressed in a memorandum of 15 April. See `Chancellor's Meetings' in PRO T 171/812 (®rst meeting) and `Surcharge on Employer's Contribution and Subsidy for Manufacturers', in PRO T 171/813. Armstrong was joint permanent secretary at the Treasury. Kenneth O. Morgan, Callaghan: a Life (Oxford, 1997), pp. 239±40. Ann Robinson and Cedric Sandford, Tax Policy-making in the United Kingdom. A Study of Rationality, Ideology and Politics (London, 1983), p. 127. It should be pointed out that some economists have held the opposite view. Thirlwall has called SET an `ideal tax' in his obituary of Kaldor, Proceedings of the British Academy, 1987, p. 694, while Brian Reddaway, who conducted an enquiry into its effects for Callaghan's successor, Roy Jenkins, also felt there was `an enormous credit balance' in favour of SET: `Tax Reform in the United Kingdom' in Tony Lawson, J. Gabriel Palma and John Sender (eds.), Kaldor's Political Economy (London, 1989), p. 150. PRO T 171/813, `Differential Employment Levy', being a note from Bancroft to Callaghan, 26 April 1966. George Brown, as head of the Department of Economic Affairs, was brought in as a support to Callaghan against Wilson, who wanted a bigger element of subsidy, and as a way of forestalling the growing anxieties of the economic advisers, principally Alec Cairncross and Neild.

Tax reform

201

further, after the rates had been put up in 1965, would have been very hard to defend. Callaghan and Wilson were clearly worried about imposing fresh tax increases after 1965 and after further signi®cant increases had been ruled out in statements before the 1966 election. What better than to conceal the mundane necessity to raise taxes with a new instrument which could be presented as much as a means of economic management as a revenue device? Jenkins, Callaghan's successor, used the tax mainly for revenue and placed less emphasis upon its contribution to industrial performance.84 But as a tax on numbers employed, rather than on wages, it was never going to have the buoyancy of a sales tax such as VAT. One advantage for SET which Callaghan had trailed during the 1966 budget preparations was that it might be presented as a `move towards the adoption of a value-added tax'.85 Had this been true it would have been an important point, because it would have shown Labour's ability to embrace tax reform which did not spring readily from its ideology but which was vital at the instrumental level for supporting the kind of government spending to which Labour was committed.86 In the longer term, Callaghan was partly right, because the Conservatives could only contemplate abolishing SET, as they wished to do, by putting VAT in its place.87 As membership of the Common Market entered the realms of possibility this was another way in which a nudge towards VAT could be administered.88 The view of SET opening the door to VAT did not work in the short term. By the later 1960s the distributional aspects had come more to the fore compared to the contribution to export performance. While Kaldor had shown some interest in VAT in the early 1960s his attitude thereafter tended to cool, particularly as the Conservatives developed a strong interest in the tax.89 Within government, VAT was examined in 84 85 86

87

88 89

Robinson and Sandford, Tax Policy-making, p. 144. PRO T 171/812, `Chancellor's Meetings', 6 April 1966. Although the CBI saw the advantages of VAT in particular, it did recognize that its potentially enormous yield would be `a tremendous weapon in the hands of the government': MRC, CBI archive, MSS 200, C/1/1/E. 423.67, meeting of taxation panel, 22 November 1967. Some of the problems this presented for the Conservatives in their discussions about tax are analysed by Daunton, ` ``A Kind of Tax Prison''', pp. 299±300. A member of the CBI's working party on SET noted that it would be `very dif®cult to conceive of another manner in which the government could obtain £485 million in taxation': MRC, CBI archive, MSS 200 C/1/1/E. 273.68, meeting of the working party, 15 July 1968. See Marquand, Mackintosh and Owen, `Change Gear', p. viii. As he wrote in 1968, `The strong advocacy of the value added tax by the Tory Party and business circles is really an attempt to shift the balance of taxation from direct to indirect taxes. This of course would not be acceptable from a socialist point of view for

202

Social democracy examined, 1965±1970

detail in 1967, with an eye on the consequences for the British tax system if the application to join the EEC turned out to be successful. But through Callaghan's in¯uence this was a much wider-ranging enquiry than one bearing just upon the EEC dimension. It set the case for VAT within the workings of the tax system overall and the revenue needs of government over the medium term ± that is, down to the early 1970s. The report was quite clear that, unless required to do so by EEC membership, Britain should not adopt VAT.90 But the ®rmness of the conclusion was not matched by the contents of the report. The case for a wide-ranging enquiry had been made by a study from Callaghan's of®cials into the tax. Part of the problem was that the existing indirect tax base was quite narrow, resting as it did on items such as beer and tobacco whose consumption was not rising particularly fast and where the duty, being speci®c rather than ad valorem, did not move with the price level. As money incomes rose, so there would be an inevitable shift in the balance of taxation from indirect to direct, without there having been any change in tax rates. A widely based ad valorem tax such as VAT would therefore be more buoyant and allow greater ¯exibility towards income tax.91 A Committee was set up under the Chief Secretary of the Treasury, John Diamond, to look at the EEC harmonization aspect as well as the whole structure of taxation on goods and services. Diamond was joined by Harold Lever, then at the DEA, George Darling from the Board of Trade, Balogh and Kaldor, the government's two chief economic advisers, with of®cials from the Treasury, Inland Revenue and Customs and Excise. As important a part of context for the tax analysis as the European dimension was a matter of more strictly domestic signi®cance, namely the revenue gap anticipated for the early 1970s. Given public-spending policies to which the government was already committed, it was anticipated that revenue requirements would grow from 38 per cent of GNP at current factor cost to 44 per cent in 1972. In absolute terms this meant a leap from £12,800 million to £19,300 million.92 It was therefore impressive that the additional revenue from VAT was estimated to be about £900 million, nearly double what any increase in indirect taxes might have brought in if VAT was not adopted. Moreover, the impact on the

90 91

92

obvious reasons': Kaldor Papers, 3/30/209, Kaldor to Tony Lynes of the Child Poverty Action Group, 5 November 1968. PRO T 328/100, `Report of the Chief Secretary's Committee on Value-Added Tax Questions', n.d but 1967, p. 19, para. 83. PRO CAB 134/3195, `Value-added Tax and Alternatives ± a Memorandum by the Chancellor of the Exchequer', Ministerial Steering Committee on Economic Policy, 9 November 1966. PRO T 328/100, `Chief Secretary's Report', p. 7, para. 17.

Tax reform

203

progressivity of the tax system was going to be slight, and to require at most only £100 million in extra social security bene®ts to restore the system to its pre-VAT position. 3 per cent was to be added to the cost of living. If this was the outcome of some of the analysis on the key questions surrounding the tax, how did the report come out against VAT? The report began by challenging the view that Britain was suffering a particularly heavy tax burden compared to other countries. The proportion of tax to GNP was `no higher than the general level obtaining elsewhere, and was indeed lower than in most EEC countries'.93 Moreover, indirect taxation was just as signi®cant a feature of the total tax burden in Britain as elsewhere. So there were no grounds for thinking that, in comparative terms, Britain was especially exposed to direct personal taxation. There were some obvious differences which marked out Britain from the rest. In other countries social security contributions that varied with wages formed a higher proportion of total tax than in Britain, which relied on ¯at-rate contributions, and indirect taxes were of the broadly based turnover kind rather than the more speci®cally directed duties in Britain. But once it had been established that the British tax system was different but not necessarily more burdensome than elsewhere, the urgency to follow a different path was diminished. Three further factors also were used to weaken the case for VAT. First, its origins in Europe addressed problems with `cascade' sales taxes, which Britain did not have. Secondly, VAT would require more staff to run it, perhaps as many as 7,500. Thirdly, it would make no contribution to industrial ef®ciency, whereas SET did have that possibility, even though it was too early to be sure. The report gave almost as full consideration to SET, Kaldor's brainchild, as it did to VAT. So SET plus purchase tax was a better combination than VAT, given that the structure as a whole, if considered in comparative terms, gave no imperative for change. But the `revenue gap' identi®ed at the beginning of the report was still there at its conclusion. Purchase tax and SET did not provide a complete solution to this (neither did VAT, but it got much closer to achieving it). The suggestion was that either local authority rates would have to rise, or income tax allowances be increased below the rate of in¯ation. Neither of these was an attractive option. A crisis over the impact of rates had only been averted by increasing the contribution from central government via rate rebates. Using in¯ation to increase income tax revenue had already been exposed in the early 1950s as a politically unsatisfactory way to achieve higher revenue. In 93

Ibid., p. 4, para. 5.

204

Social democracy examined, 1965±1970

the weight given to the different tax traditions of Britain and Europe, in the expectation that SET would contribute not only revenue but a stimulus to economic ef®ciency, and in the view that direct taxation was not a problem, the report conveyed a good deal of Kaldor's thinking. Given his own forceful role in tax discussions and his friendship with Diamond, this was not surprising. But it did duck some of the big issues surrounding tax and revenue facing Britain at this time. Although it had been concerned as much with the domestic as the EEC context, the failure of Britain's application meant that the report was never discussed at the ministerial committee that sponsored it. It was probably enough to dampen any further interest in VAT that the Diamond Committee had been negative towards it. But, if further weight were needed, the trade unions were also opposed. The TUC had a place on the National Economic Development Council, which was producing a report on VAT, and they used it to be quite obstructive. As the CBI representatives reported, `it was clear from the attitude of the trade union representatives during the discussions that had taken place that they felt a tax on value added would be a tax on consumption falling heavily on the working man, and would accordingly block any progress made by the committee'.94 At the NEDC's VAT committee meeting the TUC were quite forthright that a single-rate tax was out of the question. Moreover, when the question of compensating measures was raised, which might have sweetened the pill, the TUC representatives made it clear that a wealth tax would be a part of any conditions they would put forward.95 Although this more or less guaranteed the ending of any fruitful discussions, in the light of the ®erce opposition to a wealth tax by business, and because a wealth tax was not relevant to the immediate context of VAT, the trade union approach was not simply obstructionist. The TUC had genuine concerns that the lower income groups might suffer from increased prices as a result of introducing VAT, and whilst compensations might have been drawn up to protect them there was no precise plan `on the table', as it were. In these circumstances the TUC was probably right to be circumspect, as the director of the NEDC, Fred Catherwood, conceded in a letter to Vic Feather: What would happen would very much depend on the mixture of taxes and social bene®ts at the time and I still think it possible that a non-regressive, nonin¯ationary mix could be devised. However, I can well understand your lack of enthusiasm for the risks of a major change like this.96 94 95 96

MRC, CBI archive, MSS 200, C/1/1/E. 398.67, taxation panel meeting, 19 October 1967. MRC, TUC archive, MSS 292B, 411.25/2, minutes of VAT Committee meeting, 19 July 1968. MRC, TUC archive, MSS 292B, 411.25/2, Catherwood to Feather, 8 August 1969.

Local government ®nance

205

Callaghan and Wilson had obviously been interested in developing Labour's tax policy beyond those set out by the 1965 reforms. They had little choice, because it was increasingly recognized inside and outside the party that any further search for revenue was bound to mean the direct taxation of moderate incomes, which would have been politically unpopular. This inevitably pushed the party towards more indirect taxation, but the most palatable forms of that ± SET and purchase tax ± were either also much criticized or lacked the potential of VAT. But it was becoming increasingly dif®cult to move on VAT as the distributional implications came to the fore and the trade unions saw the major disadvantages of a leap in the dark. Local government ®nance A striking lack of progress was made on local government ®nance at a time when the reform of institutions was very much in vogue and when emphasis upon the virtues of spreading power away from national government was developing. In the early 1960s there were restatements of the view that local democracy was withering away, that many citizens saw local government as simply the administrative branch of central government, and the combination of low turnout and `national' voting patterns in local elections proved that the political accountability and responsibility which was at the heart of local democracy was lacking. It was also agreed that the key to restoring both the sense of responsibility and the importance of local government was ®nance. According to one councillor from a major authority, `there is nothing so important for the future of local government as the expenditure of more money'.97 Locally generated revenue came through rates, which at the start of the Labour government made up nearly half of total local revenues.98 Local property was a perfectly reasonable base for taxation, and rates were cheap and easy to collect, with little real danger of avoidance. From the point of view of local government the problem was that they were not a very

97

98

Emphasis added. This is a fuller and more sympathetic account of the TUC position than in my article `Ideology and Reform in Labour's Tax Strategy, 1964±70', The Historical Journal, 41(4) (1998), pp. 1121±40 at p. 1137. Edmund Dell, `Labour and Local Government', The Political Quarterly, 31 (1960), pp. 333±47 at p. 339. He went on, `the ®nancial basis and structure of local government has made it very dif®cult for them to sustain their services without government aid and, as its inevitable consequence, creeping government control'. At this time Dell was a member of the Finance Committee of Manchester Council, the highest-rated city in England. See also George Jones, `The Regional Debate', Socialist Commentary (May 1965), p. 8. Tony Travers, The Politics of Local Government Finance (London, 1986), p. 19, table 3.1.

206

Social democracy examined, 1965±1970

buoyant source of revenue because they were not keyed into earnings or consumption, but relied on regular revaluation of property to maintain their link with economic prosperity. Although in Scotland revaluation was carried out regularly, in England it was regarded as a treacherous and provocative exercise. That of 1963 had been postponed from 1961, and was only the second proper such exercise in twenty-nine years.99 From the point of view of the individual, rates were criticized for being regressive and on low incomes (£300 and below) rates were 8 per cent of income, for more prosperous earners (at £1,500 per year) they were 2 per cent of income.100 Particularly through their impact on rents, rates affected many workers more than income tax.101 Alternative taxes presented many problems, and the fairer they were in terms of ability to pay (such as a local income tax) the less fair the outcome between different authorities, those with a poorer population suffering more in revenue terms than under more regressive systems. While it was a familiar theme of policy discussions and Labour party conferences that rates were unfair, there was no great momentum for one particular replacement or supplement for them. Although the information about the impact of rates was known through the publication of the Allen Committee's report, and the importance of ®nance for the health of local government readily acknowledged, no reforms which added to the properly local sources of revenue were devised or implemented by Labour. Instead, additional support was given from central government revenues so that the burden was switched from the householder to the taxpayer.102 The sensitivity of the government to the impact of rates overruled the need to supplement rates with another source of local ®nance in order to restore the health of the institution. As an expert on local government ®nance has commented, `the short-term solution adopted by the Labour government was a badly missed opportunity . . . The opportunity to reduce grant and take pressure off the rates was lost.'103 99 100 101 102

103

Allan McConnell, `The Recurring Crisis of Local Taxation in Post-war Britain', Contemporary British History, 11(3) (1997), pp. 39±62 at pp. 44±5. Committee of Inquiry into the Impact of Rates on Households, Report, PP 1964±5, xxii, Cmd. 4234, p. 141. This was known as the Allen Committee. MRC, TUC archive, MSS 292B, 411, C. T. H. Plant (Inland Revenue Staff Federation) to Len Murray (TUC), 20 January 1970. Travers, Local Government Finance, p. 17. By the end of Labour's period in of®ce the split between rates and central government grant (as a percentage of total expenditure by local authorities) had `worsened' from 48.9:51.1 to 43.6:56.4 per cent. Travers, Local Government Finance, p. 20. Dell had described the challenge in 1960 in these terms: `The question is whether the survival of local democracy warrants accepting the addition to the current far from perfect rating system of other local taxes which may also be from certain points of view far from ideal. Anyone answering that question in the negative has no interest in the future of local democracy, even if he is

Local government ®nance

207

Any examination of the relationship between local government Labour councillors and the party centrally shows their very different conceptions of what their role should be. The lack of reform in local government ®nance in the 1960s was also an indication of the low priority attached by the party centrally to local democracy, in the way that a Labour councillor might have de®ned it. The argument for local government was that it gave people a sense of participation and point of connection in local affairs which they would otherwise have lacked. It was particularly striking in the case of the Regional Hospital Boards, where the absence of any local lay in¯uence was contrasted with the greater accessibility of local councillors. As Crossman had the case put to him, `if we call local government an oligarchy, at least it is one with a mythology of contact with the ordinary citizen and the councillor does feel responsible to ordinary citizens in a way that a member of an RHB doesn't'.104 Local councillors faced more frequent election than national politicians, but they also developed effective relationships with professional of®cials which gave them greater expertise in particular topics than politicians at the national level. The crux of local government democracy was to be willing to draw upon this blend of expertise and representation to persist with policies in the face of opposition from the central government. This did not sit easily with the view from the centre. The party's Advisory Committee on Local and Regional Government wanted to tighten links with local councillors because `The success of many of the Govt.'s plans will depend to a considerable extent on the full cooperation of local authorities at every level.'105 Because local government was important in terms of the services it provided and the volume of money it spent, it could not be allowed to be left unsupervised. The way in which local government was simply the delivery or contact point for a national party was evident in other ways, too. There was criticism of the behaviour of Labour councillors from both local and central perspectives. Both sides identi®ed the problem in the same way. Many Labour councillors of long standing were running local affairs with a minimum of local publicity and discussion: `There are still Labour

104

105

Chancellor of the Exchequer in the next Labour Government': `Labour and Local Government', p. 345. Crossman, Diaries of a Cabinet Minister. Vol. III, entry for Friday, 29 November 1968 at p. 277. Dell was of the same view: `Even if one accepts the arguments that led to the creation of the Regional Hospital Boards in the ®rst place, the present lack of any consumer in¯uence over the service demands its return to local government': `Labour and Local Government', p. 345. LPA, Advisory Committee on Local and Regional Government, circular letter from general secretary, 2 June 1965.

208

Social democracy examined, 1965±1970

councillors who boast that the monthly meeting is concluded in a few minutes.'106 But the purpose of putting this right was different. From the local government perspective, more open behaviour and encouragement of debate was a way of developing public opinion so that projects might be carried through against the wishes of the central government. From the point of view of the party at the centre, the value of a more open and public approach was to provide leadership to party supporters (rather than to all citizens): `There is little doubt that members of Labour Groups have a great responsibility to offer collective leadership to the Labour supporters in their areas . . . elected councillors, if wellinformed, and conscious of the possibilities for improvement in their areas are the natural standard bearers for the party.'107 When Labour suffered heavy losses at the 1968 local elections, T. Dan Smith put forward an interesting suggestion for a thorough survey of opinion amongst defeated councillors and of the Conservatives' record of council work, but this was not taken up by the party's advisory committee at the centre, which merely proposed regional conferences where existing Labour councillors could be informed about the way the Labour government was helping local councils.108 These were two different worlds. When Labour was powerful nationally and using public ®nance as an instrument of economic policy there was little incentive for creating more independent local government with a ®nancial base over which the centre had less control. Hence reform of local government ®nance was inconsistent with the identity of the party. From the local councillors' point of view, even if greater central government involvement in local ®nance was very much a second-best option, it at least saved them from having to engage in `courageous' rate increases. Because their world was so different ± arguably both more accountable but also more `expert' than Westminster government ± local councillors retained an alternative vision of what socialist politics was about, which would come to the fore once the disillusion with `big' government really set in. Economic management and tax administration Most economists' analyses of the Wilson governments point to the delay in devaluation as one of the gravest mistakes of economic policy. The 106 107 108

LPA, RD. 188/December1961, Local Government Subcommittee, `Strengthening Contacts between Labour Groups and the NEC'. Ibid. Many Labour MPs owed their success to party activists who were also local councillors. Jones, `The Regional Debate'. LPA, Advisory Committee on Local and Regional Government meeting 23 May 1968 and paper by Smith, `Some Suggestions for Action following the Recent Local Elections', Re. 309/May 1968.

Ecoomic management and tax administration

209

need to exploit the opportunity of devaluation when it did come in November 1967 for improving the balance of payments required both the restriction of public expenditure and private consumption in order to release resources for exports.109 Jenkins's suitability for this role both within the context of the cabinet, the party and parliament has been well attested in Dell's account of his chancellorship.110 His ®rst budget speech, setting out cuts in expenditure and substantial increases in taxation, was ¯uent and well organized, conveying little sense of the crisis in economic fortunes which was its context. One economist, writing soon after the demise of the government, thought it the most powerful, coherent and elegant of the budget speeches made in the period 1964 to 1970, while according to Dell, `There has been no ®ner budget speech since the war.'111 By the time of his last, in 1970, he was able to report the prospect (later con®rmed) of a balance of payments surplus as well as a surplus on public-sector accounts instead of the de®cit of previous years.112 But this success did not give Jenkins a status to match that which Cripps had achieved in similar circumstances. That would have been impossible, because their personal styles were so different: Jenkins's success depended on in¯icting pain with elegance, whereas Cripps's achievement rested on the impression that he was at the front of the queue for the cold baths. But the unity of the economic ministers in the later 1940s was missing twenty years later, with Brown's departure, Shore's lack of weight and Crosland's absence of team spirit. Moreover, the disaster over In Place of Strife was far worse than the problems with the trade unions under Attlee, and the Wilson government attached a great deal of weight to incomes policy for the restraint of consumption. At the end of Jenkins's chancellorship there were also opinions that the de¯ationary policy was too severe, and these doubts were far more substantial than those raised at the time of Cripps.113 One of those in the forefront of these criticisms was Joel Barnett. As chairman of the PLP ®nance group, Barnett's views carried more weight than those of the average MP and he was to play a major role as part of Healey's Treasury team in the 1974±9 Callaghan government. He was by training and profession an accountant, and thus had the sort of 109 110

111 112 113

H. C. Deb., 761, col. 261, 19 March 1968, Jenkins's ®rst budget speech. Edmund Dell, The Chancellors. A History of the Chancellors of the Exchequer, 1945±90 (London, 1997), pp. 347±50. Joel Barnett, chairman of the PLP's ®nance group and a critic of Jenkins, referred to him as an `urbane and radical Chancellor' in his analysis of the 1969 budget, `The Budget and After', Socialist Commentary (May 1969), p. 8. Michael Artis, `Fiscal Policy for Stabilization' in Beckerman, Economic Record, pp. 262±99 at p. 279; Dell, The Chancellors, p. 357. H. C. Deb., 799, cols. 1212±28, 14 April 1970. See above, p. 108.

210

Social democracy examined, 1965±1970

practical knowledge of the tax system which those with a purely economics background lacked. Taxation was an important part of his political philosophy, since it was the instrument through which a more socially just and equitable society might be achieved.114 Inheritances and gifts had to be dealt with more severely. Taxation not only had to be redistributive but also effective in generating revenue. In both 1969 and 1970 Barnett thought that Jenkins had been too severe because of an excessive concern for the balance of payments: `The lesson for a future Labour Government must surely be to stop the neurotic obsession with the balance of payments, where it has got to the absurd stage where one imagines a typical worker at his breakfast table saying ``Pass the marmalade ± and the Daily Mirror, I just want to look at the balance of payments ®gures before I go to work!'''115 The size of Britain's economy, and the strength of its foreign assets, warranted less concern with hitting a surplus of £500 million for a number of years, and more interest in aiming for a higher rate of growth. Higher growth `is the only way we can hope to ful®l our purpose in political life, namely to expand the social wage through large increases in public expenditure on education, health, housing and the social services'.116 Barnett had little faith in incomes policies for a socialist society: `We should be thankful that at least we have got away from any idea that a prices and incomes policy can bring us nearer to that kind of society.'117 Jenkins took a different line from Barnett on these points. He believed incomes policy was an important element in controlling consumption, because controlling incomes was politically less unpopular than increasing taxation.118 Public expenditure had to be tightly controlled otherwise `the danger was the party would be left with an image of eternal taxation'.119 Within such an image, the likelihood was that direct taxation would lead to most unpopularity. Although empirical research on incentives gave little clear direction, the anxiety that income tax damaged the will to work had to be taken seriously.120 Moreover, in Jenkins's mind the administrative capacity for more tax reform had been exhausted by the 1965 measures, both for the government and society: `There is a limit to the amount of change which the Revenue Departments, individuals, companies and their professional advisers can reasonably absorb.'121 114 115 117 118 119 120 121

H. C. Deb., 783, col. 335, 21 April 1968. `The Budget and After', Socialist Commentary, May 1969. H. C. Deb., 783, col. 335, 21 April 1968. LPA, PLP minutes, 16 December 1969. LPA, PLP minutes, 16 April, 1969. H. C. Deb., 761, col. 276, 19 March 1968. H. C. Deb., 761, col. 274, 19 March 1968.

116

Ibid.

Economic management and tax administration

211

What was Barnett's answer to this? It ran to the heart of the question of whether or not there was more capacity for reform of the tax system which itself was so important for the realization of social democracy's ambitions. Barnett's proposal was to make income tax more acceptable by bringing the rate more in line with what people were actually charged. The problem was that workers thought that a tax rate of 8 shillings and 3 pence in the pound meant that this was what they actually paid in tax, whereas the actual rate was much lower because of the impact of the earned income allowance. Research carried out in Scotland showed that very few workers and managers knew the marginal rate of tax they paid, and to be able to reduce the standard rate to around 6 shillings in the pound would have had considerable political advantages. By removing the earned income allowance, which gave relief a good way up the income scale, reduced rates and personal allowances could be used to reduce income tax for the lower paid and increase for those at the higher levels, without any loss of revenue.122 Instead of going down the VAT route, the idea was to make income tax more palatable and progressive. Barnett's proposal was not only interesting for its substance, but also for the belief that further reform of the tax system was possible at the end of the 1960s. It was generally assumed within the Labour Party and the Labour government that the Board of Inland Revenue was so overloaded from the impact of the 1965 reforms as to remove it as an instrument of further change. As the general secretary of the Inland Revenue Staff Federation commented to Len Murray of the TUC, `The work burden in the Revenue now is the worst in living memory . . . We have not yet recovered from the 1965 Act, certain changes in Finance Acts since then all of which on the face of it seem innocuous enough but have really knocked us sideways when it comes to a quick re-coding operation.'123 The exhaustion of the Inland Revenue had been the reason Jenkins had given for not pursuing the wealth tax, and the idea of an income guarantee for the lower paid which would have involved the Revenue had been shelved for the same reason.124 It is possible to see how PAYE had such a powerful effect on the 122

123 124

See Barnett's notes in LPA, Re. 570/January 1970, study group on taxation, `Memos on Tax Policies'. He had put forward the idea before the 1969 budget; see the Oldham Chronicle, 15 February 1969, in LPA press cuttings collection. The problem of misunderstanding of the true rates of taxation was also noted by the Economic Directorate of the CBI in a memorandum on taxation in MRC, CBI archive, MSS 200, C/.1/1/E 350.68, and by the TUC in `Taxation ± a Review of Certain Features of the British System', Economic Committee 2/2, 12 November 1969. MRC, TUC archive, MSS 292B, 4411. 25/2, C. T. H. Plant to Len Murray, 20 January 1970. Stewart, `Distribution of Income', p. 81.

212

Social democracy examined, 1965±1970

whole tax system. Regarded as a work of genius at the time of its creation, it had become a marvellous revenue engine. Douglas Houghton commented in 1979, `There can be not the slightest doubt that the retention of PAYE has enabled successive governments since the war to tax earnings far more heavily than would have been possible otherwise.'125 However, it cast into relief the comparative shortfall in tax from other factors of production, especially income from property. When Kaldor sent a table to Dick Taverne and Richard Crossman showing how much lighter had been the growth in taxation of income from property compared to that from wages and salaries, he concluded `All this of course was largely the result of the invention of the PAYE machine.'126 The success of PAYE probably intensi®ed both sides of the Revenue's dual identity. On the one hand it reinforced the Revenue's own conservatism. With PAYE being so successful, it was possible, to put it pejoratively, for the Board to rest on its laurels or, more favourably, to become very unwilling to transfer any resources from that smoothly working system to new taxes. However, the very success of PAYE seemed to demand, out of both fairness and equality, the pursuit of other kinds of income and wealth with equal zeal, and the expertise that the Revenue possessed encouraged politicians to do this. The Revenue was therefore, even in the `Age of Reform' which was the 1960s, always likely to resist innovation but, if pressed suf®ciently, then likely to make a good job of it. As one inside observer noted, having remarked on the Revenue's instinctive resistance to fresh taxes, `what we have also found over the years is a most impressive capacity to cope with whatever task is presented once it becomes clear that destruction or de¯ection of whatever threatens it is impossible'.127 But the effort to achieve some sort of commensurable taxation of capital gains and corporate income with salaries and wages through the 1965 reforms seems, on the evidence already presented, to have exhausted the capacity for further reform, especially along the lines of wealth taxation. So the tax strategy of social democracy appeared to be self-defeating, having imposed impossible burdens upon tax administration, but having been encouraged to do that by the very success of the earlier revolution of PAYE. Barnett's scheme for reforming income tax, therefore, seemed to have highlighted instead the inability of Labour to sustain reform. 125

126 127

Douglas Houghton, `The Futility of Taxation by Menaces' in A. Seldon (ed.), Tax Avoision: the Economic, Legal and Moral Inter-relationships between Avoidance and Evasion (London, 1979), pp. 89±99 at p. 97. Kaldor Papers, NK/11/13, letter of 19 March 1970. MRC, TUC archive, MSS 292B, 411.25/2, note by C. T. H. Plant on the Revenue's submission about VAT to NEDC, 30 September 1968.

Economic management and tax administration

213

Barnett, however, was a lone voice of dissent from the view that the Revenue had been overwhelmed by the capital gains and corporation taxes, so that further change was impossible. He believed that his scheme for lowering the `signal' standard rate, yet improving progression, was feasible administratively: In a recent Estimates committee report it was suggested that the Inland Revenue was so overworked as to make it impossible to impose upon them any further major changes in our tax structure. I believe the Committee too uncritically accepted the evidence of the Association of Income Tax Inspectors and other interested witnesses. The two major reasons given for excessive strain were Corporation Tax and Capital Gains Tax. In the case of the former, from my own experience and this can be con®rmed by speaking to other Accountants and those engaged in dealing with Corporation Tax Computations, these are now if anything simpler to produce than the old Income Tax and Pro®ts Tax computations, and the transitional dif®culties are almost at an end. In the case of Capital Gains the bulk of the computations are dealt with by clerks at a much lower level than the Inspectors of Taxes. It will therefore be clear that I do not accept the Inland Revenue could not carry out the above proposals on the grounds of administrative strain.128

It was important that someone like Barnett, with an acknowledged expertise in tax matters, saw scope for further changes which also worked within party preferences about the importance of a progressive income tax, because overall the experience of the Wilson government had been intensely disappointing with regard to taxation and social democracy. Economic management had failed to legitimize taxes, while the redistributive effort, though impressive, had none the less been unable to win many enthusiasts. Direct tax also seemed to be unpopular, and the scope for further reform, though ®rmly on the agenda, appeared to have tested the leadership's socialist convictions beyond their limits. How far a social democratic strategy of tax reform could survive the disillusionment that the Wilson governments had brought and the inevitable encouragement to the left with its more heroic vision of what `socialism' might mean was going to be an intriguing question. 128

LPA, Re. 570/January 1970, `Memos on Tax Policies'.

5

Defensive positions, 1970±1979

In putting forward a programme in the 1960s which blended radicalism and `modernization', Labour's social democrats chimed in perfectly with the mood of the times. Ten years later their position was far more defensive. Partly through the loss of conviction that seemed to permeate the party in the last years of the 1960s, or because of Britain's deteriorating economic position that, to put it at its best, Labour had done little to ameliorate, the kind of tempered intervention which characterized social democracy seemed less secure than either unfettered private enterprise or more vigorous state control. It was no longer able to determine the agenda for change. What was true for the economy generally held good for taxation in particular. At the beginning of the Wilson governments the reforms developed within the party had also linked up with ideas for change existing beyond the party con¯ict. In the 1970s the association between party political discussions and tax reform more generally became weaker, in that the way the politicians talked about tax was very different from the more academic view. Labour was partly responsible for this, in that its tax reforms provoked efforts to ®nd a home for systematic tax thinking outside government. The main embodiment of `expert' tax thinking from the 1970s onwards was the Institute for Fiscal Studies. This had been set up after Callaghan's 1965 reforms out of concern that such major changes could have been introduced with little informed public discussion of the measures involved. The Institute subsequently produced a stream of publications and organised symposia on major tax and social security issues, as well as publishing a journal, Fiscal Studies, from 1979. The Institute embraced a wide range of opinion, but at the most general level its views were sympathetic to moderate Labourism. That is, for example, it favoured measures that produced a more equal distribution of wealth and also, in the context of small businesses, believed that the claims of economic ef®ciency overrode those of the family and the transmission of its property 214

Defensive positions, 1970±1979

215

interests.1 Like Kaldor in the 1950s, the Institute wanted to make capitalism more civilized. The Institute's major contribution to tax reform also had links with Kaldor through the idea for an expenditure tax.2 This scheme, along with the comprehensive income tax, were elegant proposals which would have wrapped up what Labour wanted to achieve within a single coherent system. They followed what Kaldor had long advocated, namely a broad de®nition of income to tax all receipts used in consumption. Such a direct tax system would have encouraged savings and investment while penalizing, for example, consumption from inherited wealth. It included within one tax what Labour had been trying to achieve by adding on extra taxes to income tax as it was conventionally operated. Gifts, capital gains and inheritances all fell within the expenditure tax, as opposed to being separate taxes. However, as in the 1950s, the project for a comprehensive tax based on income broadly interpreted did not make headway in party political debate. Tax experts found the way politicians argued about tax to be essentially uninteresting in the way it centred on the mix between direct and indirect taxes. In the 1970s the big tax question as far as party politics was concerned was how far incentives to work might be improved by switching from direct income tax to indirect taxes, especially VAT. Defenders of income tax had long rested their case on the social survey evidence from the 1954 Royal Commission on the Taxation of Pro®ts and Income, which had not found a connection between marginal rates of income and withdrawal of labour. Tax experts, of whom John Kay was the most noteworthy, did not deny the effect of taxes upon work but thought that the amount of tax landing on additional income, rather than the kind of tax, was the crucial thing. A tax falling on consumption ought to have been no less likely to discourage work than one falling on income. The Conservatives' ®rst budget in 1979, which saw such a shift from direct to indirect taxes but not a change in the burden of tax, did not, in this view, increase incentives, although the chancellor, Geoffrey Howe, saw it as the ®rst step in `a hugely important and lasting change in the tax structure'.3 Economists found the certainty with which politicians drew 1

2 3

See C. T. Sandford, J. R. M. Willis and D. J. Ironside, An Accessions Tax (London, 1973), pp. 134±42, where it was argued that heavy taxes at death, which in some cases led to the break-up of small ®rms, served the national interest of economic ef®ciency rather then the family interest of the preservation of property. See Institute for Fiscal Studies, The Structure and Reform of Direct Taxation. Report of a Committee Chaired by Professor J. E. Meade (London, 1978). J. A. Kay and C. N. Morris, `Direct and Indirect Taxes; Some Effects of the 1979 Budget', Fiscal Studies, 1(1) (1979), pp. 1±10 and esp. pp. 3±4; Geoffrey Howe, Con¯ict of Loyalty (London, 1994), p. 131.

216

Defensive positions, 1970±1979

Table 7. Percentage share of total revenue contributed by taxes on income and expenditure, 1975±1980 Income Expenditure

1975

1977

1980

45.8 27.5

41.9 30.2

38.9 35.2

Source: Central Statistical Of®ce, United Kingdom National Accounts, 1985±6 (London, 1985), table 7.1, p. 55.

a distinction between direct and indirect taxes on these grounds rather simplistic when it was hard to draw ®rm conclusions either way. According to A. B. Atkinson, `it is tempting to conclude that tax policy is a matter for political judgement and that public ®nance is a redundant academic discipline'.4 The dimensions of the tax debate as far as party politics was concerned can be shown in table 7, which is a very traditional and oldfashioned one giving the contribution to revenues of taxes on income and expenditure. There are two points of interest in the table. One is the obvious contrast between the `mix' operated by the Wilson government in 1975 and that introduced by the Conservatives' ®rst budget in 1979. The second is the extent to which the Callaghan government had moved closer to the Conservative position by 1977. Labour had managed to reduce its commitment to income tax signi®cantly by 1977, but it was the Conservatives who made more decisive use of VAT to alter the structure of taxation. Whereas VAT comprised 38 per cent of expenditure taxes in 1978 under Labour, it contributed 52.7 per cent under the Conservatives in 1980. This was part of the pressure Labour was under: to ®nd some escape from a heavy dependence on direct personal tax when there was public outcry at the very high rates of tax operated by Labour. This was partly clothed in the economic language of `incentives', but also represented growing political distrust of the Callaghan government. How to provide a tolerable tax regime to sustain the heavy public expenditure to which the government was committed was the big headache for the Treasury team. The other pressure on Labour came from within the labour movement and ¯owed from the disappointment that the Wilson governments of 1964±70 had not managed to achieve more striking progress towards an egalitarian society. The willingness to press ahead with a wealth tax became a test of the social democrats' stomach to do something about 4

A. B. Atkinson, `On the Switch to Indirect Taxation', Fiscal Studies, 2(2) (1981), pp. 1±8 at p. 7.

Opposition, 1970±1974

217

the equality which they had always espoused, and it was used for this purpose both by the left and the trade unions. Both the `revenue' and `symbolic' forms of taxation with which Labour grappled in 1974±9 were shaped by developments during the period of opposition. Opposition, 1970±1974 Opposition saw a mass of activity within the party, especially in the area of industrial policy, where the key ®gure was Stuart Holland. He argued that a future Labour government would have to take greater control over the business decisions of private industry if Britain was to achieve a higher growth rate and also shift economic power more decisively towards the people. Unlike earlier periods of opposition when control over policy-making had more or less been in the hands of the party leadership, the initiative was out of its hands. In 1970±4 the energy source was the party's research department and the activity was driven by the assumption that the party had campaigned on the wrong policies in 1970, and this represented a subversion by the leadership of what the party really wanted. The story of the opposition period was the way in which the party leadership, in conjunction with the trade unions, regained control over policy-making and thereby reasserted its political authority over the party.5 But the gain was essentially political; pressing questions of policy were left unresolved, especially in the ®eld of taxation. Perhaps the most innovative group, and the one which had the least impact, dealt with capital sharing. Its task was to ®nd ways of providing workers and the people with a `direct and increasing stake in capital accumulation' occurring within companies. Company shares were the key feature of the portfolios of the wealthy, and therefore to exert some claim over share capital was an important step in wealth equalization. The idea was to levy a charge on the company share capital to be placed in a central fund to which workers would be given an entitlement. It was not intended to be linked to the pro®ts of the workers' own company, as was the case with more conventional pro®t-making schemes. It was therefore like a redistributive tax on the share capital of the private sector. Unlike a conventional wealth tax, it had the advantage that it transferred property to the people. One of the charges against the wealth tax was that it merely shifted property to the state, and made therefore a rather limited contribution to equality. Capital sharing was also linked with incomes policy. By being an additional element to negotiated pay it 5

The best account of this period is by Patrick Bell, `The Labour Party in Opposition 1970±74' (Leeds University Ph.D., 1997) for which I had the pleasure of assisting in the supervision.

218

Defensive positions, 1970±1979

suggested that there was more to play for under a planned incomes policy than might be achieved by `laissez-faire' pay bargaining alone. But there were doubts as to how far this would suit the industrial culture of the British worker. European examples of such schemes involved worker representation on boards determining investment policy but, as David Lea of the TUC pointed out, `it is worth underlining that trade unions in Britain strongly distrust fancy Continental ideas about statutory workers' councils. There is far more active industrial democracy in Britain at shop ¯oor level than for example in West Germany, where the statutory arrangements clearly impede the proper expression of workers' interests through their own organization.'6 A further problem was to get workers to appreciate what the state provided for them over and above their pay. For social democracy to be successful the `gifts' of public expenditure had to be appreciated. Only then could equality be pursued and full employment enjoyed without in¯ation. Public expenditure was meant to be a positive good readily acknowledged by the population at large. Robert Sheldon had suggested in 1970 that `it is up to us as socialists more than anyone else never to use ®gures for take-home pay except in exceptional circumstances, because takehome pay will obviously be a declining part of gross earnings as time goes on'.7 The whole logic of social democracy rested upon its ability to secure a greater proportion of national output for public expenditure than for private consumption. Yet agreement to this had been impossible to secure in the later 1960s, when private consumption often rose faster than public expenditure. The same kind of problem arose with capital sharing. In order that such entitlements to a share of company growth might not be in¯ationary (as workers cashed in their holdings) there had to be some restriction on rights of disposal ( just as there had been in the case of post-war credits). It could not be assumed that workers would put the same value on such entitlements as assets for the future as more middleclass savers might have done. Partly this was because some workers, either through necessity or inclination, had no interest in the property in question: it impressed the study group that half of the workers who received shares under pro®t-sharing schemes sold them within the year.8 Partly, too, the climate of wage restraint had undoubtedly made workers suspicious of any attempt to postpone (and therefore lose forever) gains in pay: the group recognized that `a ``hard sell'' would be needed to 6 7 8

LPA, capital shares study group, RD. 254/ February 1972, D. Lea, `A Note on Trade Union Attitudes'. H. C. Deb., 794, col. 599, 21 January 1970. LPA, capital shares study group, minutes of meeting of 3 May 1972.

Opposition, 1970±1974

219

overcome workers' suspicion of income and wealth that was in any way frozen for a period'.9 It seemed unlikely that attitudes favouring present over future consumption could be easily changed, not least in the unsettling and anxious conditions of the early 1970s, which blended both in¯ation and unemployment. It is dif®cult to know how accurately the study group understood workers' attitudes. What perhaps is more to the point is that the party and trade union representatives held a very conventional and stereotypical picture of worker interests, as being obsessively concerned with current consumption and suspicious of any remuneration that did not add immediately to the wage packet. Wealth taxes seemed at ®rst sight a more straightforward proposition, and one which would satisfy a broad range of progressive opinion. The case for a wealth tax rested on two facts. The ®rst was the disparity between income and wealth inequality. Whereas the top 1 per cent of income receivers got only 8 per cent of total income, it was generally accepted that the top 1 per cent of wealth-holders accounted for at least 25 per cent of total personal wealth.10 The second was that inheritance played an important part in the acquisitions of the most wealthy. Selfmade men were in the minority; the chance of having substantial wealth was very signi®cantly increased if one's father had been at least moderately well-off.11 Both of these facts suggested that it was easier to hold on to wealth once acquired than to gain it by earning. The inability of estate duty to collect more than 0.4 per cent of personal wealth per year supported this view. Anyone believing that capitalism was compatible with democracy was bound to be unnerved at these sorts of statistics. It seemed therefore a possibility that Labour might be able to appeal to a broad range of progressive opinion on this issue. Labour's working group on capital taxes certainly hoped that this topic might be free from some of the con¯icts of interest within Labour's supporters that other measures suffered from: There are few enough points in our programme that are not open to the accusation that they impinge adversely on some section of the population whose support we feel we need; whether it be owner-occupiers' resentment of restraint on council house rents; the effects of a more progressive income tax system on the higher paid employees; or the implications for regional policies for the employment situation in the more prosperous areas of the country. We should therefore make the most of issues like capital taxation, where progressive policies can ensure the whole-hearted support of almost anyone likely to vote Labour.12 9 10 11 12

LPA, capital shares study group, minutes of meeting of 6 May 1971. A. B. Atkinson, Unequal Shares: Wealth in Britain (London, 1972), p. 15. Ibid., p. 70. LPA, capital taxation working party, RD. 625/February 1973, `Death Duties ± the Case against Taxing the Donee'.

220

Defensive positions, 1970±1979

This was very far from the case, however. Where a wealth tax received a broad measure of assent beyond the party it was as an instrument for improving the horizontal equity of the tax system (so that incomedependent taxpayers did not suffer from the greater effectiveness on taxes on income compared to those on capital) and also, by replacing taxes on capital transactions or property income, serve as an encouragement to wealth acquisition.13 This seemed particularly attractive when real rates of return on investments and savings were negative because of in¯ation, making it even harder for anyone with negligible property holdings to acquire more. Ian Little and John Flemming showed that it was possible to combine this kind of measure with one that satis®ed Labour's egalitarian priorities by having quite severe rates on the largest wealth-holdings. As they summarized the distributional arguments for their tax: `A predominantly capitalist system, which we believe to be likely to do more for the poor than any other system, can function very well only if a few people can and do become rather rich. But they do not need to become very rich.'14 Little and Flemming's model of society was a capitalistic one. It was a society where individuals might set up and run small businesses and become, by conventional terms, wealthy. But there would come a point where they arrived at the threshold of the higher rates of the wealth tax and might have to sell their business or turn it into a public company. Only at that stage would the small business be threatened. It was a view of society which applauded accumulation but not great riches.15 Wealth taxation was therefore a way of encouraging property ownership as well as tax equity. Labour might have been interested in this line of approach. Its policy-making in the early 1970s, although it appeared hostile to business, did not in fact encourage a take over of the private sector by the state, but rather some kind of planning relationship. Capitalism was therefore left intact, however much business interests thought otherwise. But Labour gave very little thought to popular capitalism when it came to wealth taxation. It assumed, by its silence on this question, that almost anyone who supported Labour would have no interest in accumulating property. It could see that those living off small amounts of capital might need protection from egalitarian wealth taxes, but the relationship to acquisition of property was not explored, and neither were the consequences of in¯ation on property incomes. Instead, 13 14 15

See Nigel Lawson's comment that there was a `reasonably strong case' for such a tax in H. C. Deb., 884, col. 1510, 22 January 1975. J. S. Flemming and I. M. D. Little, Why We Need a Wealth Tax (London, 1974), p. 1. Select Committee on a Wealth Tax. Minutes of Evidence, PP 1974±5, xxxvi, q. 1605 (Little).

Opposition, 1970±1974

221

Labour's working party proposed a veritable battery of capital taxes both at points of transfer and at its resting place, `with the objective of breaking up great concentrations of wealth'.16 It proposed both an annual wealth tax and an array of capital transaction taxes. The shopping list for the latter included a tax on capital transfers made by the donor, a tax on those who received gifts and bequests, and the capital gains tax was to be continued, although it could be set off against the donor tax. In the light of the problems with the 1965 tax reforms, such a list was impracticable and unnecessary. It did show how widespread contemporary interest in a wealth tax was not of itself a support to Labour's own ambitions for redistribution, since the idea could sustain so wide a range of political and social motives. However, it was pretty clear that an incoming Labour government would have to do something about the inadequacy of estate duty, upon which there was general agreement; whether the answer was a tax on transfers or on wealth in situ was going to be an important question. There was a sense, too, that a day of reckoning had to come. It was not merely a question of the technical problems of devising a satisfactory tax, but also of overcoming the resistance and obstruction of the wealthy. Refusal to co-operate in surveys on savings and personal assets had always been strongest by the rich, while the avoidance devices of trusts of various kinds had stymied attempts at effective capital taxation. A paper by Bryan Gould accurately caught the mood of the party when it concluded that `The wealthy have made fools of our tax man for too long.'17 If a part, and perhaps the greater part, of Labour's activity in opposition was concerned with working out the rami®cations of its own beliefs, the Conservatives also in¯uenced the way the party's thinking was organized and developed, especially over poverty. The Heath government's proposal for tax credits required Labour to bring together two policy areas ± social policy and taxation ± which had hitherto been separate. The upshot was to reinforce the party's traditional attachment to progressive income tax rather than to develop new ways of ®nancing and legitimizing relief for the poor. Both left and right were agreed on the signi®cance of the tax credit idea as it was presented in the Green Paper of 1971. According to George and Priscilla Polanyi of the Institute of Economic Affairs, `it represents the most important change in Britain's system of social welfare payments since the introduction of Beveridge's post-war social 16 17

LPA, working group on capital taxation, RD. 732/April 1972, `The Reform of Capital Taxation'. LPA, working group on capital taxation, RD. 827/June 1973, `Plugging a Tax Loophole'.

222

Defensive positions, 1970±1979

security system in 1948'. Brian Abel-Smith, one of Labour's social policy advisers who had also played a part in the analysis of poverty in the 1960s similarly believed that, `viewed as a social security reform, they represent the largest single step forward in the nearly universal provision for the poor and for social dependants since post-war developments stemming from the Beveridge Report'.18 The functions of tax credits were as follows. The personal allowances that were normally set against tax would have been replaced by tax credits paid irrespective of income (and not merely to those liable to income tax). All income would then be taxable. If credits exceeded tax due then the difference would be paid out in cash; if not, there was a tax liability. From the tax angle this brought some simpli®cation, because tax was now based on the entire income and not on the varying conditions of liability induced by individual circumstances. On the social security side the main change was that people now got a state bene®t automatically as a condition of low income, instead of having to show speci®c need. It extended the bene®ts of the tax system to those hitherto too poor to qualify for them. Now those who had hitherto been below the tax threshold would gain; this was the reason for the `negative' or `reverse' label sometimes attached to these schemes. Tax credits did not come out of the blue in the 1970s. From the later 1960s `the idea of a negative income tax positively sped across national borders'.19 It also had a long history in Britain, built around the idea of yoking together the tax and social security systems to provide a guaranteed minimum income. A version prepared by Lady Rhys Williams of the Liberal Party was discussed before the Royal Commission on the Taxation of Pro®ts and Income in the early 1950s. The idea of some form of negative income tax had many attractions in the late 1960s and early 1970s. There was a new awareness of the existence of poverty in families headed by a single wage earner.20 When Michael Meacher led a Labour motion in the Commons in 1971 criticizing the government's 18

19 20

George and Priscilla Polanyi, `Tax Credits: a Reverse Income Tax', National Westminster Bank Quarterly Review (February 1973), pp. 20±34 at p. 20; Brian Abel-Smith, `Equity and Dependency', being a memorandum submitted to Select Committee on Tax Credit, PP 1972±3, xxxiv, vol. 2. Keith Banting, Poverty, Politics and Policy (London, 1979), p. 141. A. B. Atkinson remarked that `One of the most striking ®ndings of Abel-Smith's and Townsend's study The Poor and the Poorest was the extent of poverty among households with at least one wage earner': Poverty in Britain and the Reform of Social Security (Cambridge, 1969), p. 78. Low-income families with children seemed to have bene®ted little from the redistributive measures of the 1960s compared to pensioners and those without children. Adrian Webb and Jack Sieve, Income Redistribution and the Welfare State (London, 1971), p. 113. Sieve was a member of Labour's tax credit study group which met from 1971 to 1973.

Opposition, 1970±1974

223

record on poverty he singled out the low paid as the fastest-growing category within the poor.21 What was at issue was not merely who was poor but the mechanism through which they might be helped. What some regarded as the ®rmest claim which the poor could make upon society ± that formed by the insurance principle of the Beveridge reforms ± had provided inadequate bene®ts.22 What had increasingly supplemented insurance-based payments, namely means-tested supplementary bene®ts, aroused two contrasting reactions. One was that many who should have received bene®ts were either ignorant of what was their due or too ashamed to make a claim. From this perspective, social security staff were slow, unhelpful and adversarial. From the other side there was no doubt that government efforts to invite more people to claim would merely encourage scroungers and reward dishonesty.23 A more widely discussed aspect of the bene®t system was the problem of the `poverty trap' ± that is, the way in which the withdrawal of meanstested bene®ts as income rose exposed recipients to very high rates of tax, so `trapping' them in poverty.24 Just how apparent the trap was to those who suffered from it was uncertain, because of the varying times at which bene®ts would have been withdrawn. But the practical outcome ± that the poor remained poor ± was serious: `it is disruptive of the moral fabric of the country as individuals attempt to escape from the system by both lawful and unlawful means.'25 There was no easy answer to this problem. The larger the bene®ts to those in poverty, the greater the jolt when they were withdrawn; the more generous the bene®t, the heavier the tax burden on those just above the poverty line. Family allowances were paid in cash and provided a possible solution, but these were unpopular, particularly among the working class, because they were thought to be subsidizing the pro¯igacy of large families. The limits to the `clawback' arrangement, whereby the bene®t from the allowances was taken back through the tax system from those who were not in poverty, had already been discovered by the Wilson government.26 Social policy experts could see little scope for further advance without some fundamental change of 21 22

23 24 25 26

H. C. Deb., 813, col. 2089, 5 March 1971. For a contemporary discussion of the forms which the claims of the poor upon the state might take, see Robert Pinkner, `Social Policy and Social Justice', Journal of Social Policy, 3(1) (1974), pp. 1±19. Richard Crossman, The Diaries of a Cabinet Minister. Vol. III, Secretary of State for Social Services, 1968±70 (London, 1977), entry for Friday, 4 October, 1968 at pp. 211±12. A well-known contemporary discussion was by Frank Field and David Piachaud, `The Poverty Trap', New Statesman, 3 December 1971, pp. 722±3. Della Nevitt and Jonathan Bradshaw, `Proposals for a Tax Credit System', S.C. on Tax Credit, appendix 43. See above, p. 185.

224

Defensive positions, 1970±1979

attitudes or mechanisms. For David Piachaud, `it would appear that the political limit to redistribution through bene®ts and taxes related to each household's income is close to being reached'.27 This was the context into which tax credits have to be placed: the low-paid as a fast-growing category among the `rediscovered' poor; acute problems of a poverty trap created by taxes and selective bene®ts; and uncertainty about the form which the claims of the poor upon the state might take, now that the insurance principle had been weakened and the tax sensitivity of the non-poor had been effectively established. Although poverty was an area that Labour might have felt was peculiarly their own, in fact it posed very considerable dif®culties because of their adjacent constituency among the `non-poor' working class. It was therefore a very dif®cult policy area for Labour because of the need to achieve `the abolition of poverty in a way which neither destroys incentives nor antagonises the section of the working class who are earning incomes just above the poverty level'.28 Negative income tax in its pure form ± that is, at levels suf®cient to replace most discretionary bene®ts ± was a non-starter because of the generous payments required to lift people over the poverty line and the fairly severe tax rate needed to pay for them. The Conservatives' scheme was more modest, in that its various credits would only replace completely the family income supplement (FIS) which they had introduced and which triggered some of the problems of the poverty trap. The scheme provided some practical help to families poor because of a low-wage earner, and it also offered a new principle for welfare payments through the tax system rather than as social security bene®ts. This was itself of some interest. The tax system recognized claims on income of various family responsibilities, stemming from the right of persons to their income as their property. A person with a substantial income from which he supported children was recognized as having a smaller `taxable capacity' than a single man with a similar income. Welfare payments were based on need, and were very obviously a transfer from one section of the population to another. Linking the poor to the tax system was probably a better way of protecting their position than the reverse. Although this might seem to be a rather academic way of looking at it, and should not conceal the fact that within the tax system families had come off worse than single people, it was none the less the case that child tax allowances had fallen less in value since the 1940s than family 27 28

Piachaud, `Poverty and Taxation' in W. A. Robson and B. Crick (eds.), Taxation Policy (Harmondsworth, 1972), pp. 71±86 at p. 86. John Mackintosh, `Socialism or Social Democracy? The Choice for the Labour Party', Political Quarterly (1972), pp. 470±84 at p. 478.

Opposition, 1970±1974

225

allowances.29 Universal child bene®t, which in 1977 replaced tax allowances for children, and so in theory linked middle-class interests with those of the poor, has over time suffered from the view that many of its recipients do not need it because of their comfortable incomes. The idea that raising children gives an irreducible claim to relief compared to the circumstances of the childless ± the sort of logic found in the tax system ± might have been a better protection for the poor than the welfare system. There was a larger question, too. The Heath government was full of reforming energy. In some of its early measures it gave relief to higherincome earners in particular and in general it was challenging the assumptions that had shaped the government of Britain since 1945. It was attempting something of which Labour was incapable and which it would not have wanted to emulate. But if, as part of this project, it had managed to make some improvement in the welfare system, where Labour had been widely regarded as ineffective, this would have been a major challenge.30 The party's response to tax credits can be divided into two. Broadly, the social policy experts favoured the tax credit scheme as a way of helping the low paid and therefore recognized the possibilities for redistribution that it offered. The economists, on the other hand, were opposed to the scheme because they thought it provided too much bene®t to the non-poor and would block the restoration of a more progressive income tax. It was fortunate for Labour that this division of principle could be avoided for the practical purpose of opposing the scheme. The ¯aw which Labour seized upon was the fact that it was not revenue neutral: it was estimated to `cost' £1,300 million in lost revenue, as the proposals showed that most taxpayers besides the poor would have bene®ted in income tax terms from the scheme. This enabled Labour to argue that `the worst feature of the scheme put forward by the government is its total political dishonesty'.31 The party feared that there would be more indirect taxation in order to pay for tax credits, and that to rely on future economic growth to generate increased revenue was also too speculative. 29 30 31

Dennis Lees, `Poor Families and Fiscal Reform', Lloyds Bank Review, 86 (1967), pp. 1±15 at p. 5. Bell, `Labour Party in Opposition', pp. 42±3. LPA, tax credits working party, `Proposed Statement on the Tory Green Paper (second draft)', RD. 638/February 1973. See also the comment by Andy Thompson, the member of the research department dealing with tax credits: `In the drafts I've produced so far, I haven't formulated a ®rm commitment against tax credits in principle, and I don't think we need to.' LPA, tax credits working party, notes for meeting of 3 July 1973, `Problems Likely to Occur'.

226

Defensive positions, 1970±1979

But even if the function of opposition could be discharged in this way, there were divisions of opinion over the principles underlying the scheme. Three social policy experts ®gured in the party's discussions about tax credits, David Piachaud, Jack Sieve and Brian Abel-Smith, the latter offering the most substantial contribution. Sieve supported tax credits because they would enable the lowest income groups to use the tax allowances that had previously been irrelevant to them: `for the ®rst time the poorest parents will receive as of right the same ®nancial support from the community as do the richest.'32 Piachaud agreed with Sieve that `tax credits presented a possibly unique opportunity for progressive income redistribution'.33 The most substantial claim for tax credits came from Abel-Smith, and he was particularly interested in it as a means of transferring resources to the poor when public attitudes towards such a process seemed so unfavourable. He was not impressed with the level of support for families in Britain compared to other European countries, where universal provision was more generous. He would have preferred that a scheme such as the Conservatives' was unnecessary: `are we such an immature society that we can only make much better provision for dependants in the guise of tax reform?' Tax credits made help to the poor more palatable for the rest of the society than any other method: `the advantage of the scheme is that it does make it possible and acceptable to provide the employed person himself with an allowance which society would ®nd hard to accept being paid to anyone universally. This is of major bene®t to the poor.'34 The economists in the party took a rather different approach, which focused far more on the tax side. Their general concern was to try to restore progressivity to income tax which had been weakened by the fact that the standard rate covered well over 90 per cent of all income tax payers. Income tax was an issue under tax credits because they seemed to entrench a more proportional scheme and place a bar against a return to a more progressive one. Under the existing system income tax was cumulative, where tax was deducted as income was earned. If earnings rose, or were interrupted, adjustments could be made within the tax year. Tax credits came with a proposal to simplify the tax as well as the bene®t side of welfare. Tax was to be deducted week by week on a non32 33

34

LPA, papers of the tax credit working party, `The Case for Tax Credits,' June 1972. LPA, minutes of the sixth meeting of the tax credits group, 17 May 1973. In his book The Distribution and Redistribution of Incomes (London, 1982), p. 102, he also argued that a scheme like the Conservative one would have been redistributive. S. C. on Tax Credit, minutes, q. 1599.

Opposition, 1970±1974

227

cumulative basis, so that any adjustments would have been made at the end of the tax year. For this to be the simpler system for which the government was aiming the tax would have had to be set at a single rate for the vast majority of taxpayers, so subverting Labour's intentions. A key contribution to the tax credits group that directed attention to income tax came from Joel Barnett and Robert Sheldon. Their paper argued that the unfairness of a ¯at-rate tax up to £5,000 had to be corrected by introducing reduced-rate-bands for those on low incomes and a lower starting point for those on higher earnings.35 While presenting the case for reforming income tax, the paper also showed the problems this posed in terms of the cost of weakening the tax as a revenue provider. The revenue lost from introducing a reduced-rateband was put at £2,225 million, while the gain from increasing the tax on incomes over £5,000 was £640 million. This paper expressed very succinctly the desired aim of restoring progressivity and its in¯exibility for increasing revenue. Both Barnett and Sheldon were members of the Commons' select committee on tax credits, and their note of dissent from the majority report rested on the interpretation that it would entrench a ¯at-rate tax and thereby legitimate increases in indirect taxes: `we refute this attitude to direct taxation.'36 Although Kaldor had played less of a part in directing Labour's tax policy when Jenkins was chancellor, his was still an important voice within the party.37 In his evidence to the select committee Kaldor identi®ed one of the worst features of the scheme as `the erection of a ®rm and lasting barrier to progressive taxation', leaving in place a simple proportional tax.38 Kaldor also criticized the way in which the ¯at-rate tax credits gave bene®ts to those above poverty levels, so `wasting' the resources spent on reform. For others this was merely a tolerable cost of winning acceptability for the scheme. But critics emphasized the need for a progressive income tax as an instrumental part of welfare reform. Both Tony Atkinson and the Child Poverty Action Group saw the solution to poverty in the form of a `new Beveridge': high universal bene®ts `clawed back' from those above the poverty line by a progressive income tax.39 35 36 37

38 39

LPA, tax credits working party, RD. 619/February 1973, `Income Tax, Corporation Tax and Capital Gains Tax'. S. C. on Tax Credit, vol. 1, para. 27, p. 73. A Labour party research department paper referred to the `powerful and comprehensive critique of the tax credit Green Paper in Nicky Kaldor's document', LPA, Finance and Economic Affairs Sub-committee, RD. 822/June 1973, `Reduced Rates of Income Tax'. S. C. on Tax Credit, minutes (Kaldor), pp. 1 and 7. S. C. on Tax Credit, minute, q. 1520. Atkinson's other contribution to the debate, which set out in detail the possible distributive impact of recouping the £1,300 million

228

Defensive positions, 1970±1979

There were other doubts about tax credits, mainly on the welfare as opposed to the tax side. The bene®t for those below the poverty level was rather unevenly spread; some of those who received tax credits in place of FIS would have lost other bene®ts as well and might therefore have become worse off.40 The dif®culty of providing help for those who needed it while keeping welfare within tolerable bounds was not solved by schemes such as the tax credit that tried to restore some of the automatic entitlement which had been so attractive a feature of the original Beveridge reforms. What the tax credit discussions had done was to draw out the Labour Party's longstanding commitment to a progressive income tax while at the same time showing its limitations as a revenue source. The signi®cance of this was not merely as a reiteration of one of the party's traditional views about taxation, but also for its part in the con¯icts between the party's shadow Treasury team and the trade unions between 1973 and 1974. What brought of®ce back within Labour's grasp was not the vast policy-making operation organized from the research department, but the failure of Edward Heath to strike an effective bargain with the trade unions over incomes policy. Labour's claim for another chance at government was the possibility that it might `do a deal' with the trade unions so that the dire conditions brought upon the country by the three-day week might be avoided. In negotiations with Heath, the principal trade union leaders (Vic Feather of the TUC, but primarily Hugh Scanlon and Jack Jones) had raised a number of non-wage issues to do with housing and taxation, among other things. These had led to the breakdown of negotiations, but as far as the trade unions were concerned, `What the TUC could not agree with the Government, they could agree with the Labour Party.'41 The demands the trade unions would make for their co-operation in some vague form over pay could be heavy, because the trade union question was at this point (as it was not in 1979) one which worked in Labour's favour. But while the trade union relationship displaced the signi®cance of the party, and so saved the parliamentary leadership from the burdens of the former's expectations, the trade union demands should have been contained if one set of shackles was not to be replaced with another. A key change in personnel helped the leadership's cause. At the start of the opposition period Roy Jenkins had been chairman of the Finance

40 41

de®cit from the scheme by indirect taxes and the amount going to bene®t those above the poverty level, was in an IFS publication: Atkinson, The Tax Credit Scheme and the Redistribution of Income (London, 1973). Alan Deacon and Jonathan Bradshaw, Reserved for the Poor. The Means Test in British Social Policy (Oxford, 1983), pp. 188±9. Bell, `Labour Party in Opposition', p. 285.

Opposition, 1970±1974

229

and Economic Affairs Subcommittee. But `Europe' had become the main focus of Jenkins's activities and this led to his marginalization in, and ®nally resignation from, the party. The Finance Subcommittee was reorganized with Denis Healey as its chairman. Portraits of Healey have commented on how his formidable intellectual powers outshone his contribution to the party's ideology. Indeed, evidence of this brain power was more obvious in his highly regarded and broad-ranging cultural interests than in contributions to socialist theory. But his view of what the party ought to aim at ± sustainable and practicable improvement in social conditions ± was real enough, and his willingness to grapple with intricacies of public ®nance and with his Treasury advisers was of outstanding value to the 1974±9 governments.42 His unique ability to withstand the ferocious pressures of that period is shown by his uninterrupted tenure of of®ce. Joel Barnett was becoming a key ®gure in the party's tax expertise. He had been chairman of the PLP's ®nance group and had been a lone voice urging further reforms at the end of the 1960s when the Wilson government seemed to accept that the Inland Revenue did not have the resources to carry out further changes. The uni®cation of surtax with income tax by Anthony Barber, the proposals for an inheritance tax and the exploration of tax credits (which required the setting up of a special study group by the Inland Revenue) seemed to bear out Barnett's contention that bureaucratic overload was exaggerated. More so than in Healey's case, Barnett believed in the central importance of public ®nance for Labour, as the means to channel resources to those who needed them, in the form of more schools, hospitals and houses. Taxation, too, was itself a source of social cohesion and unity. As he told the Commons in December 1974, `I have never been more convinced that without such a [fair and just tax] system we cannot hope to achieve the unity so desperately needed at this time of great crisis.'43 For a study that focuses mainly upon the tax system rather than upon economic policy, Barnett is a more central ®gure than Healey. For Barnett, Healey's accession to the chairmanship of the Finance and Economic Affairs Subcommittee was a welcome development: `When Denis Healey became Shadow Chancellor, life in the shadow Treasury team became much more pleasant; it was the start of a long and generally harmonious period in which we all worked closely together.'44 42 43 44

Edmund Dell, A Hard Pounding. Politics and Economic Crisis (Oxford, 1991), p. 25. H. C. Deb., 883, col. 1369, 17 December 1974. Joel Barnett, Inside the Treasury (London, 1982), p. 13. Healey received a great deal of support from Barnett in opposing Conservative budgets from 1972 onwards, and described him as a `feisty Manchester accountant': Healey, The Time of My Life (Harmondsworth, 1990), p. 367.

230

Defensive positions, 1970±1979

The main activity of the shadow Treasury group was to try to contain the burgeoning policy commitments being developed in opposition by pointing to the heavier income tax they would require. Having languished in the ®rst two years of opposition, and been deliberately sidelined from the development of industrial policy, the Finance and Economic Affairs Subcommittee now returned to something like its former, elevated status within policy-making.45 In May 1973 Healey told the Home Policy Committee that it was time to educate both the trade unions and the party about the problems of ®nding the revenue for Labour's programme, and the Economic Affairs group had already started preparing substantial papers on the subject.46 They felt they were breaking new ground in the scrutiny of policy in opposition. The argument was also taken to the labour movement as a whole. Healey's speech at the party conference in 1973, well known for its promise to squeeze the rich, was in fact intended to underline how much more tax his audience would have to pay: `before you cheer too loudly, let me warn you that a lot of you will pay extra taxes too.'47 The Finance and Economic Affairs Subcommittee pressed the Home Policy Committee to come up with some priorities in its public expenditure commitments and pointed to the need to give `serious consideration to increased taxation in sections of the community other than the wealthiest'.48 Because of the way a small number of very high incomes dragged the ®gure for average earnings upwards, Healey believed that the tax burden on those of average earnings would have to be increased.49 Since Labour proposed to start the higher rate of tax at one and a half, instead of four times average earnings, and since the yield from this change would just about have matched the pledged increase in pensions but no other items on Labour's programme, Healey was probably right to be pessimistic. The Finance and Economic Affairs Subcommittee also put these arguments to the trade unions through the TUC±Labour Party Liaison Committee. The message that the party wanted the TUC to give formal consideration to was sombre. The increases in personal direct taxation which could be made without affecting wage earners would only barely 45

46

47 48 49

Bell, `Labour in Opposition', p. 106, shows how the committee under Jenkins was kept away from what the party's research department saw as the key policy discussions on the control and planning of industry. LPA, Home Policy Committee minutes, 7 May 1973, and RD. 776/April 1973, `Financing Labour's Programme. Report by the Finance and Economic Affairs Subcommittee to the NEC and Home Policy Committee (2nd draft)'. Labour Party, Annual Report (LPAR), 1973, p. 129. LPA, RD. 736/April 1973, `Taxation and Public Expenditure ± the Options'. Bell, `Labour Party in Opposition', p. 175.

Opposition, 1970±1974

231

meet the rising cost of providing existing social services, let alone the greater plans that Labour was contemplating as part of the social contract. Using in¯ation to increase the revenues of government was not an option either: `It would be totally dishonest, when we stake so much of our credibility on a strategy for tackling in¯ation, to make plans to take advantage, by stealth, to bring about changes in the pro®le of taxation and public expenditure.'50 Various papers had narrowed down the revenue issue to rates of income tax and especially the starting point of the higher rate, which was expected to fall considerably under Labour. The scope for closing tax loopholes or raising more money from a higher rate of VAT on luxury items had been estimated to be modest.51 The trade unions did not wish to let the question of tax revenues determine Labour's public expenditure commitments. Jack Jones had successfully presented resolutions at the 1972 and 1973 party conferences on the need for more generous pensions, and these became, at an estimated £1,250 million per year, the biggest single item in Labour's programme. Jones claimed that workers would be prepared to meet some of the cost: `Every meeting I have addressed on this issue, 99 percent of the thousands of letters I have received and the whole range of opinion polls say that working people are prepared to pay their share of doing right by the elderly.'52 Given the hostility of wage earners to income tax, it was most unlikely that this would turn out to be the case. In fact the TUC expected a Labour government to look elsewhere: `Although the revenue to be obtained from taxing the wealthy and high income groups is not unlimited, these groups must provide very substantial sums of increased revenue before any consideration is given to further increasing the burden of direct or indirect tax on the great mass of wage and salary earners.'53 This was simply avoiding the issue. The Labour Party's investigations had convinced it that taxing the rich could not provide the answer to Labour's revenue requirements for its public-spending programme; not only would a wealth tax take time to implement, such taxes could never produce the sums required. Back in the 1960s Crosland had drawn a distinction between `political' taxes, such as those on wealth, and 50 51

52 53

LPA, RD. 776, `Financing Labour's Programme', p. 17. This is precisely what happened, in the event: see Barnett, Inside the Treasury, p. 23. See LPA, RD. 821/June 1973, `Increased Revenue from Indirect Taxation', which noted the scope for `limited' increases, and RD. 884/September 1973, `Increased Revenue from Income Tax', which, in suggesting a starting point of £2,200 taxable income instead of the existing £5,000 for the ®rst of the higher rates, pointed to the implications of Labour's spending programme for its tax demands. LPAR, 1972, p. 271. LPA, TUC/Labour Party Liaison Committee 17/1, 26 November 1973, `Paying for Labour's Programme'.

232

Defensive positions, 1970±1979

`revenue' taxes, which should be regarded more instrumentally and less as ful®lling a redistributive function. The trade unions, in wanting to turn to the rich ®rst, were trying to reintegrate a political tax with a revenue function which it could never ful®l. They were ignoring what the economists in the party were saying about the political implications for income tax. But the trade unions, while expansive on the spending side of their demands, were never forthcoming about the tax dimension, nor about the implications of taxation for incomes policy and wage bargaining. The Labour side pressed the TUC in November 1973 on the `relative weight to be given to any necessary increase in direct as opposed to indirect taxation and on the impact these increases might have on the climate of wage negotiations under a Labour government given Labour's social and economic policies'.54 This was no idle enquiry, given the attention devoted to the impact of taxation on workers' earnings in widening the gap between gross and net real earnings and so encouraging the `pay explosion' of 1970±1.55 But the trade unions were unforthcoming on this, nor did they wish to discuss the implications for wages of the oil crisis, which pointed to the need for a reduction in demand. Incomes policy itself was also not a topic for debate, the unions preferring to discuss industrial ef®ciency and manpower utilization. But these topics were now part of an industrial policy which was less technocratic than it had been in the 1960s and more to do with revisiting Labour's desire to exert some control over industry. The new relationship with the trade unions, which had saved the parliamentary leadership from the full force of their own party's discontent, had revealed the intense tax pressures a future Labour government would be under, rather than indicating any means for their possible solution. In the event, conditions in the early life of the third Wilson government were even more savage than the opposition discussions had anticipated. Democracy and tax policy, 1974±1979 The broad outline of economic policy under the Wilson and Callaghan governments is now well established. It is a story of some success; one 54 55

LPA, TUC/Labour Party Liaison Committee, minutes 26 November 1973. See, for example, H. A. Turner and Frank Wilkinson, `Real Net Incomes and the Wage Explosion', New Society, 25 February 1971, pp. 309±10. This also entered into debates within the Labour party about whether or not reduced rates at the bottom of income tax were really worthwhile, compared to raising the tax threshold itself. Kaldor had argued that the abolition of reduced rates in Jenkins's 1970 budget had increased the tax liability of the lower paid as they entered income tax; those in favour of a higher threshold (which Jenkins's measure had achieved) thought the problem was in¯ation of earnings, rather than, strictly speaking, abolition of reduced rates. See LPA, RD 822/ June 1973, `Reduced Rates of Income Tax'.

Democracy and tax policy, 1974±1979

233

study has concluded that `it seems fair to claim that the Labour governments left the economy and policy-making machinery in better condition than they had found them in 1974'.56 Public expenditure had been brought under closer control through the system of cash limits, effective taxation of North Sea oil had been implemented, in¯ation was down from the horrendous levels of the early 1970s and it had been possible to introduce some tax cuts in the budget of March 1977. An in¯ation ®gure of 24 per cent in 1975 had given way to one of 8 per cent by 1978. What sunk Labour was industrial relations, which had such a powerful in¯uence both at the beginning and the end of the period. At the beginning Labour had to deal with the consequences of the threshold agreements struck under Heath's government, which allowed the immediate translation into pay awards of rises in prices. The annual rate of increases in earnings rose from 12.5 per cent at the end of 1973 to 25.5 per cent a year later. The sense of a government unable to control its own employees (since public-sector pay bene®ted most from the threshold payments) in a context of very high in¯ation showed that the horrors which had brought down the Heath government were far from being solved. That some progress was made in subsequent years did not provide the rewards that Labour deserved, for two reasons. First, the appalling experience of 1974±5 created a powerful impression on the electorate. However much Labour might have been trapped by the ¯aws of the Heath government, in that Wilson could only have overturned the threshold agreements at the price of a ferocious row with public-sector workers, it was his government's connection with in¯ation and tax increases, including the establishment of the infamous top rate of 98 per cent (83 per cent on earnings plus 15 per cent on investment income), which stuck in the public mind. Secondly, the sheer political and physical energy devoted to reining in public expenditure after the expansion at the start of Labour's period in of®ce and achieving the pay policy which by 1977 had brought considerable success, and which was expended in the party, in the cabinet and in negotiations with the trade unions, added to the traumas of the IMF's intervention at the end of 1976, sapped the reserves of the key ®gures in the government. It was possibly the sense of con®dence that the major battles had been won, combined with the exhaustion which had accompanied their achievement, which led to the restrictive pay policy of 1978/9 and the disasters of the winter of discontent.57 56

57

Michael Artis and David Cobham, `Summary and Appraisal' in Michael Artis and David Cobham (eds.), Labour's Economic Policies, 1974±79 (Manchester, 1991), p. 277. Healey, The Time of My Life, p. 448, while chaps. 18±20 give a vivid account of the pressures of being chancellor at this time.

234

Defensive positions, 1970±1979

The performance of British industry and the instability in the world economy were major problems to which the Labour government could not have been expected to produce ready answers. Both the forecasting of the de®cit in public ®nances and the measurement of the public sector in relation to the economy as a whole also caused dif®culty, in the sense that ®gures were provided for the government's critics which made things seem a lot worse than they actually were. Relations with the trade unions were at the heart of Labour's dif®culties, which were in turn an indication of fundamental problems of government. The behaviour of trade unions had not in essence changed since at least the 1960s, nor had government's hunches about how to deal with them. The priority for personal consumption over bene®ts embraced by the `social wage' had been advanced by trade union leaders at least from the 1950s onwards. Equally, the belief of governments that providing a suitable context for incomes policies ± that is, a society being made more fair or equal through taxes and bene®ts ± would assist wage restraint had also been practised since the 1960s. So governments were desperately trying to provide what trade unions regarded as, at best, ancillary `goods'. In¯ation, and trends in trade union politics, intensi®ed the problems from the later 1960s. In¯ation meant an explicit and savage scramble to protect living standards but also an especial urgency for success in incomes policy. At the same time, the power of the shop ¯oor in trade unions was a widely established phenomenon. So the intensi®ed atmosphere in wage bargaining caused by in¯ation coincided both with greater efforts by the government to deal with trade unions centrally (in order to achieve pay restraint) and with shop-¯oor pressure to secure wage advances. This was not just a worker question; contemporaries were struck by how far non-working-class groups were willing to go in order to defend their pay. In¯ation had an ugly effect on society. The Heath government had been stunned at the power of trade unionists to defeat the police during the miners' strike in 1972. A sense of community and the possibility of collective self-restraint lay at the heart of Labour ideology, whether socialist or social democratic. This is why they believed in incomes policies, and why it ought to have been possible to transfer private resources into bene®cial and redistributive public expenditure. Trade unions, however, acted more along the lines of competitive individualism. Relations with government were therefore more like pay negotiations than exercises in a kind of `economic citizenship' where the national interest might be properly acknowledged. In these conditions the government views on pay policy were set by a sense of what was practicable and what the level of production and in¯ation suggested was desirable. What should be also

Democracy and tax policy, 1974±1979

235

offered through the `social wage' and public expenditure was limited by the effect on taxation. Although, as was shown in the previous section, trade unions were reluctant to focus on the cost through personal direct taxation of the bene®ts they were demanding of Labour in opposition, it might have been different when a Labour chancellor was setting the tax rates. The direct involvement of Healey and Barnett in pay questions, and the crucial signi®cance attached to the views of key trade union leaders ± especially Jack Jones and Hugh Scanlon ± ought to have led to an easing of the pressure on public expenditure and of the tax regime which Labour introduced at the beginning of its period in of®ce. After all, the industrial worker had emerged as one of the conservative in¯uences upon Labour's tax policy through his inclusion in income tax at the standard rate. During the 1966±70 government, Labour ministers had been aware that the brake upon redistributive policies towards the poor would come as much from the working class as from the better-off. In all the discussions about relieving poverty it was the impact on the tax liability of those who were just above the poverty line which was taken most seriously. The importance of tax as a determinant of net pay was also well understood. Jack Jones was the major ®gure from the trade union world in the 1970s, and he was well attuned to views of his members. He had supported the growing weight attached to shop-¯oor opinion in the Transport and General Workers' Union, and spent a good deal of time mixing with the local members and their shop stewards. As he described his social life in his memoirs, `My main enjoyment was having a few drinks with the lads, the active members of the union, wherever this was possible. If I visited a factory or docks I would ®nish up in a local pub, thrashing out ideas with shop stewards and local of®cials.'58 But while his whole life was rooted in the TGWU he also had a massive presence in political life, and he deployed his in¯uence shrewdly, often using a public forum such as the left-wing press to put pressure on the party leadership rather than acting through the party machinery where his voice might have been more quickly dissipated.59 One of Jones's projects in politics was to improve the position of pensioners, and major increases were awarded under Labour. Pensions were increased by more than unemployment and sickness bene®ts, and average earnings.60 At the Labour party conference, Jones had suggested 58 59 60

Jack Jones, Union Man, an Autobiography (London, 1986), p. 177. Bell, `Labour Party in Opposition', p. 276, and Jones, Union Man, p. 245. Alan Gillie, `Redistribution' in Artis and Cobham, Labour's Economic Policies, pp. 229±47 at p. 231.

236

Defensive positions, 1970±1979

that his members would be happy to pay the extra tax required to fund better pensions. But Barnett was doubtful how far Jones's members supported his pressure to increase pensions and public expenditure more generally: That does not, of itself, make the trade union leaders wrong, but democracy is also about representing the views of those for whom you are elected to speak. The public expenditure policies we were asked to implement did not have the backing of the ordinary trade unionist, particularly with regard to their total cost and its consequences for personal income tax.61

Having for many years before 1974 urged the virtues of public expenditure and the need for the ordinary wage earner to appreciate what was being done for him and his dependants through the tax and welfare system, Barnett now, in his increasing pessimism about the burdens of such expenditure, was expecting the trade union leaders to convey the sceptical views about welfare and sensitivity to income tax which he was sure their members held. It was frustrating to him that union democracy did not seem able to produce this result. It would have made the scaling down of the social democratic state that much easier. Jones did not much trust politicians, inevitably, because they rarely took the trade union view.62 One area where he was justi®ed was over the wealth tax, and this became as much an issue over the integrity of the government as a matter of tax reform. Jones ®rmly believed in the need for greater equality and saw it as a real concern for his members. As he introduced his union's submission to the Royal Commission on the Distribution of Income and Wealth, to us this is no academic exercise. We want to involve our membership, and the public, in this opportunity to move towards a massive redistribution of incomes and wealth . . . Any misrepresentation of income and wealth, any fault in their measurement, any unfairness in the way they are taxed, must be revealed and corrected if we are to achieve economic justice for our members.63

Trade union pressure on this issue became crucial because the party's contribution was so weak. It was true that Healey as chancellor had little interest in a wealth tax, not least because the `administrative cost and political hassle' could not be justi®ed in terms of the revenue it might have produced.64 What was less understandable was the poor 61

62

63 64

Barnett, Inside the Treasury, p. 61. Jones was not much impressed with Barnett either, whom he described as `a chirpy little man, [who] was impervious to trade union comment and appeared to be hypercritical of our efforts': Union Man, p. 305. As he wrote of his disappointment that Barbara Castle was not more sympathetic to the unions when she was secretary of state 1968±70: `I had already begun to learn how dif®cult it was to talk in practical terms to politicians once they had been elevated to Government of®ce': Union Man, p. 197. MRC, TGWU Papers, MSS 126/JJ/4/22, Inequality (London, 1975), p. 9. Healey, Time of My Life, p. 404.

Democracy and tax policy, 1974±1979

237

performance of the party over the issue. The February 1974 manifesto committed the government to introducing a wealth tax, and a Green Paper was published later in the year which proclaimed that `The government is committed to use the taxation system to promote greater social and economic equality. This requires redistribution of wealth as well as of income. Thorough-going reforms are needed in the taxation of capital.'65 However, the Commons select committee which was set up to make recommendations was, from the point of view of securing a wealth tax, a disaster. The Labour side was poorly organized and lacked a coherent view. It was noticeable that on the crucial issue that the Green Paper had not clari®ed ± was such a tax to do with reducing vertical inequality or improving horizontal equity ± two of the Labour reports disagreed. Douglas Jay, the committee's chairman, saw horizontal equity as the main objective, with a limited contribution to reducing inequality, while Jeremy Bray's report (which received the least support of the ®ve reports) was concerned only with inequality between the classes. Jay found the behaviour of the Labour members dif®cult: `as many of my Labour colleagues were sparse in attendance I found myself at times operating as simultaneously Chairman, Minister and Chief Whip for my own side (rather like batsman, wicketkeeper and umpire at once).'66 Robinson and Sandford's close examination of the committee's work concluded of the Labour members that `They really seem to have lacked the will to win', whereas, `as a result of their interest, hard work and good preparation the Conservatives were able to make most of the running in the Committee and were by far its most active members'.67 The Conservatives contested one of the Treasury's big points about the overall rationale of the tax, namely that the more equitable society which it would produce would also provide a better environment for its economic and social policies, most particularly the containment of in¯ation.68 But there was scepticism about this point, too, within the Labour party among the social democrats. The sectional con¯ict apparent in pay bargaining suggested that the relevance of policies designed to `improve' society as a whole was weak. One of the most perceptive observers in the Labour party, John Mackintosh, noted that doctors and 65 66 67 68

Wealth Tax, PP 1974, xvii, Cmd. 5704. Douglas Jay, Change and Fortune. A Political Record (London, 1980), p. 482. Ann Robinson and Cedric Sandford, Tax Policy-making in the United Kingdom. A Study of Rationality, Ideology and Politics (London, 1983), pp. 174 and 176. S. C. on Wealth Tax, `The Economic and Financial Consequences of a Wealth Tax Explained', para. 2, p. 295.

238

Defensive positions, 1970±1979

schoolteachers who were putting in big pay claims were not interested in a wealth tax: The point is that organised groups seek their own interests and, as such groups have become more powerful in modern societies, there is more and more dif®culty in persuading them to consider the well-being either of their class or of the community as a whole, whether or not the Government is, in its other policies, pursuing socially equitable policies.69

In one respect this was beside the point, because it was the mood of the moment that the `tone' of the Labour party was set by those who wanted to secure an irreversible shift in the distribution of wealth and economic power as a political goal rather than as an outcome having a more instrumental purpose, of the sort implied by Mackintosh's argument (that moderating pay claims was the overriding priority to which other measures should be subordinate). Perhaps a more telling criticism was made later in the decade, when a survey of voters in two constituencies noted that only 37 per cent of those who supported Labour thought that a wealth tax was a good idea.70 The wealth tax therefore looks as though it was one of those issues where the enthusiasm of the Labour voter was signi®cantly less than that of party activists. On more core issues, such as health or poverty, the Labour voter probably did not feel signi®cantly less committed than either the activist or the party member.71 These questions of the degree of support for the wealth tax from within Labour's constituency, and the sustaining of the argument about the proposal, highlight a more general point, namely the differences between the `tax culture' of this period and that of the 1920s, when capital taxation was last seriously debated.72 In terms of the thoroughness of debate and the pursuit of the argument, the Labour Party had operated more impressively in the 1920s than in the 1970s. Its performance in the democratic processes which constituted the tax culture was more complete and more obvious in the earlier than in the later period. In the earlier period there was a reasonably coherent group, centred on Dalton, who argued the case for the capital levy both on the hustings and in the tax enquiries of the time. They were aware of having to develop their arguments both with `the 69 70 71

72

Mackintosh, `Socialism or Social Democracy', p. 477. Sandford, `The Wealth Tax Debate' in Frank Field (ed.), The Wealth Report (London, 1979), pp. 108±26 at p. 123. Patrick Seyd and Paul Whiteley, Labour's Grassroots. The Politics of Party Membership (Oxford, 1992), where they show in table 9.1 on pp. 212±13 the differing strengths of opinion about certain issues amongst Labour voters, activists and party members. They do not include the wealth tax in the list, but poverty relief shows a striking conformity of attachment whereas the abolition of private education (akin to the wealth tax as an issue), for example, attracted far less support from Labour voters than party activists. See above, p. 28.

Democracy and tax policy, 1974±1979

239

people' and with the experts. Some found it easier to do so with the latter than with the former. But there is a sense of an argument being tested in both settings. One can believe that these Labour MPs, in deciding to press ahead and keep faith with the levy idea, were drawing the wrong conclusions from their involvement in the public argument. But at least there was such an exploration of the issue which was essentially democratic. In the 1970s there is less evidence of the argument being taken to the people and to the experts. There was no group of MPs trying to explain the proposal to a popular audience. While there was plenty of expert scrutiny there was less direct engagement with this by the Labour party, at least on the terms of a wealth tax which would have developed vertical equality more than horizontal equity. It is true that the select committee of the 1970s was a much more party political instrument than the Colwyn Committee of the 1920s, but even so Dalton, Lees-Smith and Pethick-Lawrence do not have their counterparts in the 1970s. Healey was able to exploit this weakness in the party's participation in debate, when in November 1975 enquiries were made by the TUC about the fate of a proposal which had been a manifesto item. The weary condescension with which Healey made the point is captured in the written record: He [Healey] had not seen the report [of the select committee] but he was informed it was the largest ever produced by a House of Commons committee. He had also been told that the Labour Party members of the committee had come out in favour of lower rates and a narrower spread than the Green Paper. Also, because of the absence of two Labour Party members the minority report would be published as a majority report. This would not affect the Government's commitment but this could add to the dif®culty of getting legislation ready for the next Finance Bill. Nevertheless, he took note of the importance the TUC attached to this being done.73

It was a feature of the unusual politics of the 1970s that Healey was unable to dispose of the wealth tax question with the help of an ineffective party and studied neglect. The key ®gure was Jones. He regarded the TUC/Labour Party Liaison Committee as a way of `keeping the government on its toes'.74 The continuing need to negotiate about pay throughout the 1974±9 governments gave the TUC the opportunity to keep its wider demands to the fore. As it reminded the government, in December 1976, `it was important not to lose sight of the essential features of the Movement's programme, such as help for pensioners and the introduction of a wealth tax. The TUC had been 73 74

LPA, TUC/Labour Party Liaison Committee minutes, 24 November 1974. Jones, Union Man, p. 282.

240

Defensive positions, 1970±1979

concerned to read of the chancellor's intention now not to introduce a wealth tax in the lifetime of the present parliament.'75 The TUC suggested a working party, of which Jones was a member, be set up to try to bring in a tax at an early date.76 The wealth tax needed more than a working party of MPs, trade unionists and ministers. Barnett (one of the members) and his team were hardly likely to have spurred on an idea which they had tried to subdue during the early years of the government, nor could non-experts solve the issues which surrounded the tax. These were principally to do with the dif®culty of valuing for an annual tax certain forms of wealth (such as shares in unquoted companies) which were not themselves easily realizable. But this was not the point of the exercise. From Jones's point of view it was clear that unequal distribution of pay and wealth was being sustained by tax advantages and devices which required investigation and correction. He doubted that the Healey and the Treasury team really wanted to go down this path, and he knew that the pre-election promises of a wealth tax had turned out to be empty. The TUC/Liaison Committee gave Jones the opportunity to keep the idea a¯oat even if it did not provide the necessary expertise to advance the proposal in any signi®cant way. For the government, the wealth tax was one of the most demanding exercises in tax reform because it targeted wealth in situ rather than at its transfer, and the main aim ± achieving some reduction in inequality ± was not served by most of the ideas circulating in the wider community, which were directed at improving horizontal equity and reducing taxes on investment income and capital gains. Labour could only have embedded its proposal in broader, non-party sources of support by turning it into a tax which served conservative rather than radical ends. The select committee of 1974±5 had given a ¯avour of some of the opportunities for opposition on both technical and principled grounds. To have embarked on such a measure after the gruelling years of restraining public expenditure and containing wage in¯ation, and when the primacy of pay over non-pay factors had been demonstrated, would have been inconceivable. The main impact of the revival of the wealth tax idea at the end of 1976 was that it ran against the efforts of the Treasury team to reassure business that Labour was not irredeemably 75 76

LPA, TUC/Labour Party Liaison Committee minutes, 6 December 1976. LPA, TUC/Labour Party Liaison Committee minutes, 31 January 1977. A similar working group was set up, for similar reasons, to introduce child bene®t, a universal payment which replaced the child tax allowance, but which the government had shelved because of fears concerning the reduction in take-home pay produced by the withdrawal of the allowance. This led to the implementation of child bene®t, whereas there was no wealth tax.

Democracy and tax policy, 1974±1979

241

hostile to the private economy. While it had appeared, the CBI noted, that in 1977 the government `had acknowledged the important role in the economy of the private sector, yet it is now re-committed to introduce a Wealth Tax on a scale unprecedented in the world'.77 Jones's scepticism about the government's commitment to redistributing wealth should not hide the fact that the Labour government did respond to long-held views, intensi®ed in the opposition period 1970±4, that something had to be done about wealth and the ineffectiveness of estate duty as a tax upon it. Capital transfer tax, introduced in 1974, was meant to tackle the avoidance of death duties by gifts inter vivos and so have a particular impact on inheritances. It also dealt with trusts. They allowed assets to be moved out of absolute ownership, so avoiding estate duty, yet still leaving many of the bene®ts and objectives that an owner might have intended. They were a particular feature of property ownership in the United Kingdom: `Here they are one of the most important vehicles for the holding and transmission of wealth and their numbers and complexity provide a signi®cant factor in any explanation of how, despite the increasingly high nominal rates of taxation since the First World War, concentrations of wealth have been substantially maintained.'78 Trusts were taxed not only where an interest was retained, but also where trustees had discretion over the accumulation and use of the funds. But capital transfer tax also revealed, in its treatment of certain kinds of property, the ambivalence at the heart of social democratic tax strategy as it had developed after Dalton. This ambivalence, rather than the deliberately exploited complexities of United Kingdom property law, undermined the hope that capital taxation would make substantial inroads on large holdings of wealth. The tax was levied on transfers within and beyond families. It formally fell on the donor of the gift rather than one who received it. `Progressive' expert opinion favoured a tax on the receiver or donee.79 The advantage claimed for this version was that it might have encouraged a broader distribution of wealth than a donor tax, since there was an advantage in 77 78 79

MRC, CBI archive, MSS 200/C/1/1/E. 8.78, draft of budget representation, discussed at committee meeting, 25 January 1978. Board of Inland Revenue memorandum, `Trusts', S. C. on Wealth Tax, evidence, 16 April 1975. Cedric Sandford was particularly in favour of this version: see his Taxing Inheritance and Capital Gains. Towards a Comprehensive System of Capital Taxation (London, 1965), esp. chap. 5. Sandford had submitted papers on the inheritance tax (the accepted name for a donee tax, although the Conservatives' reversion to estate duty under this name in 1986 was misleading) to the Labour Party's capital taxation working party (1972±4) and was also a member of the CBI's Taxation Committee in the 1970s. Tait, who gave evidence before the Select Committee on the Wealth Tax, claimed that it was the favourite amongst tax economists.

242

Defensive positions, 1970±1979

purely tax terms in passing property to the less wealthy of two bene®ciaries. In the 1970s, when scepticism about the state was gathering pace, it also seemed attractive to argue for a tax which had the greatest effect upon inequality when its contribution to government revenues was at its lowest. For this effect to operate would have required that a donor would be encouraged to make gifts outside the family in order to achieve a lower tax liability. Whether a tax could have had such a profound effect was obviously highly uncertain. The inheritance, or donee tax, was a non-starter as far as the Labour government was concerned because of administrative dif®culties, but its own transfer tax still had the advantage of landing on inherited wealth rather than savings generated by enterprise, which would have been caught by a wealth tax. This was a long-standing Labour interest, and Healey drew upon it when he presented the innovation: `we on the government side believe that if there is no limit on the ability of the wealthy minority to pass on the fruits of their labour to their children, we introduce into the class structure of this country a degree of inequality, indeed immobility, which is deeply damaging both to economic ef®ciency and social unity.'80 Giving was taxed over a lifetime, so parents, even if ultimately they paid no tax, none the less had to keep records of gifts to their children in a way they had never done before. This enabled Nigel Lawson to claim that `There will be a feeling of offence against natural justice, of offence against the basic instinct of human kind ± the desire to own property, the desire to have independence and the desire to help fellow members of the family.'81 The mechanism of the tax was also forbidding. It was not charged simply on the value of the gift received, but calculated on the amount of the gift plus the tax paid; this was called `grossing up'. Although, as was often the case with taxes, the rates gave a misleading impression of the severity of the tax, they did look savage when published by the government. If an asset of £250,000 was transferred with no previous gifts then the tax paid at rates obtaining in February 1975 (which were reduced in the course of further ®nance bill debates) was 73 per cent. If £50,000 had already been given then the tax rose to 102 per cent of the value of the gift. When the effects of capital gains tax was brought into the picture the tax on a £250,000 transfer was 120 per cent.82 Although no detailed studies had been done by the Inland Revenue on the possible effects of capital taxes on the distribution of wealth (and none had been asked for 80 81 82

H. C. Deb., 884, col. 1550, 22 January 1975. H. C. Deb., 884, col. 1513, 22 January 1975. H. C. Deb., 886, cols. 573±8, 21 February 1975, written answers.

Democracy and tax policy, 1974±1979

243

in 1975), the Revenue thought that a transfer tax might have a more substantial impact than an annual wealth tax.83 Although the debate over the capital transfer tax was ®erce, it did not turn out to be as savage an instrument as the estate duty it replaced.84 As Healey noted in his memoirs, `I had to accept so many other special cases for exclusion that when I left of®ce four years later, the CTT was still raising less revenue than the avoidable estate duty it replaced.'85 The chief ways in which the severity of the tax was reduced were through lower rates for agricultural land and the assets of private businesses. While the standard rates were quite high, a study in 1981 argued that: Anyone with considerable wealth ± say £1 million ± is most unlikely to be a potential payer at the standard rate. It is easy to acquire access to the business relief, for instance, by purchasing a sleeping partnership, or to become quali®ed for `working farmer' CTT relief by purchasing a farm, and employing a manager to do the farming.86

By 1976, in fact, it was already clear to one tax expert that `the chancellor's desire for equality has now been replaced by a concern for ef®ciency', largely because of concessions granted to small businesses and agriculture.87 The question of giving relief to assets which performed a speci®c economic function, but which remained personal rather than corporate in their ownership, was a crucial one for Labour. Those who believed in a mixed economy inevitably found that more brutal strands in Labour's thinking ± that small companies were essentially devices for avoiding higher rates of income tax ± were too simplistic and unsympathetic. Barnett was one of the Labour MPs who had thought, for example, that the treatment of small companies in the 1965 Finance Act had been too harsh. He was generally sympathetic towards small businesses, and from his background as an accountant he had knowledge of the business world which few of his colleagues possessed. A fellow accountant on the Conservative side, Cecil Parkinson, made this the basis of his appeal: I have often wondered how the Chief Secretary reconciles the things he had to say at the Dispatch Box with the sort of advice he used to give to the people in the world in which he lived very successfully for a long time. I ask him to go 83 84 85 86 87

S. C. on Wealth Tax, evidence, q. 50. `I do not think we have had many debates in which the speeches have been so deeply felt': Denis Healey, H. C. Deb., 884, col. 1547, 22 January 1975. The Time of My Life, p. 404. The exemption he refers to was for money inherited by a widow. Alister Sutherland, `Capital Transfer Tax: an Obituary', Fiscal Studies, 2(3) (1981), pp. 37±52 at p. 48. Cedric T. Sandford, `Finance Bill Notes. Capital Transfer Tax: Agriculture and Businesses,' British Tax Review, 2 (1976), pp. 146±7.

244

Defensive positions, 1970±1979

back to Manchester and talk to various people ± not people whose fathers left them fortunes, but people who have built up businesses and made a success of their lives. He should ask them how they feel about this tax and what it will mean, and whether their enthusiasm for investing in and enlarging their businesses has been affected.88

The way to reconcile the tax with a tolerant attitude towards private businesses was to grant concessions on business assets and agricultural land. To some this seemed merely to present opportunities for tax avoidance. Colin Phipps, a Labour MP who was also a company director and landowner, opposed relief for owners of woodlands: `if relief is granted the effect is that it will become another source of tax avoidance for wealthy people', and his solution was to take all such land at transfer into national ownership.89 Barnett noted, too, when trying to promote his concessions on woodland to the Conservatives, that the TUC had been strongly opposed to any preferential treatment for landowners.90 The TUC had also been quite forthright towards small businesses in connection with the proposal for a wealth tax, believing that it would have been no bad thing if such ®rms which were burdened by indebtedness arising from the tax were to be run subsequently by the National Enterprise Board.91 Anxiety that such approaches were too harsh may not have been con®ned to the social democrats. Trends in socialist thinking that emphasized decentralization and small-scale enterprise as a more democratic form of economic life might have had some unease at the implications of capital taxation for small businesses. Tony Benn had been one of the Labour MPs keen to keep alive the possibility of a wealth tax.92 At ®rst sight, small businesses might have seemed the polar opposite to the left. Benn certainly anticipated as such when he visited some small businesses in his Bristol constituency: `I had geared myself up to sympathise with small businesses and at the same time I was rather nervous of them because I thought they would all be potential National Front people.' But instead he found it `an absolutely fascinating hour' during which he heard from a printer how tax levels were making things very dif®cult and how ` ``I want to pass it [the business] on to my sons, 88 89

90 91 92

H. C. Deb., 884, cols. 1617±18, 22 January 1975. H. C. Deb., 887, col. 1613, 5 March 1975. Alan Tait, of Strathclyde University, in his evidence on a wealth tax, had argued that there should be no exemptions: `whenever exemption is made a potential loophole is created.' S. C. on Wealth Tax, evidence, pp. 310±11. H. C. Deb., 887, col. 1607, 5 March 1975. For Barnett's acceptance of the need to protect small businesses, see H. C. Deb., 911, cols. 1136±7, 17 May 1976. S. C. on Wealth Tax, evidence, q. 2775. LPA, TUC/Labour Party Liaison Committee minutes, 23 February 1976.

Democracy and tax policy, 1974±1979

245

but the business would have to be sold to pay for death duties.'' ' One of them told Benn how ` ``Equality and fairness are not the same.'' '93 It was not surprising that Benn was caught off guard by the small businessmen in his constituency, some of whom were Labour voters and not the extreme Conservatives he had expected to meet. Labour's thinking on business had little interest in small companies. If Labour expected to ®nd a sympathetic tendency within capitalism it would rather have been among the salaried managers of the large-scale corporations who, it was thought, were not driven solely by the pro®t motive and who would have had a part to play in a state-managed, but not state-owned, economy. This was consistent with the thesis that as ®rms evolved from the owner-directed company to the more impersonal, large corporation, so they might ®t more easily into a centrally directed economy. The small business, by contrast, because it allied economic function and personal property, seemed to be an obstacle to any gradual socialization. This picture had become a little more complicated by the 1970s. Although the planning agreements devised in Labour's opposition period were intended to work with the major companies in the economy, socialists also recognized that large-scale economic organizations could not change the realities of work experience, even where the state was their owner. The experiments with worker co-operatives was an expression of that interest in the small-scale economic unit. Moreover, some small businessmen were by social origin working-class and Labour in political preference. So although Labour's socialists may not have given a great deal of thought to small business, they would at least have had to accept their political and social relevance to Labour's position. Even from a socialist perspective, the questions raised by taxation and small business were not as straightforward as they had been for earlier generations on the left. If the implications of CTT for socialists is a matter for conjecture, the predicament of the social democrats is more certain. They had to face the fact that, if it was to be a success, capital taxation might have punitive consequences for small businesses and agriculture as a consequence of suf®ciently egalitarian tax rates being set. The alternative was to offer concessions for these interests which provided vehicles for avoidance and so caused the tax to fall not on the rich but upon the more modestly endowed who could not afford professional advice and whose assets were not substantial enough to pursue the avoidance devices on offer. In an earlier period, Dalton had been an enthusiast 93

Tony Benn, Con¯icts of Interest. Diaries 1977±80, ed. Ruth Winstone (London, 1991), entry for 18 March 1977, p. 77.

246

Defensive positions, 1970±1979

both of nationalization of land and industry and of the capital levy, and had therefore faced no such contradiction. But his proteÂgeÂs, who had contributed so signi®cantly to revisionist ideas in the 1950s, had dropped nationalization in favour of equality which, it was believed, could be pursued within the framework of a private economy. Edmund Dell's remark that `It was a defection [from nationalization and socialism] that some disguised by speaking of ``equality'' ' captured the point perfectly.94 A valued instrument in the achievement of equality was capital taxation, especially if it was aimed at inherited wealth. But the experience of the 1970s and CTT had shown that this effort could be undermined by the need to protect the private economy from the full thrust of egalitarian taxes. So the social democrats' commitment to equality was ¯awed because one of the most important instruments for its realization ± taxation ± exposed and brought into play the ambiguity towards property at the heart of social democracy. Public expenditure, taxation and the trade union presence The key question for the Labour government from 1976 onwards was how to achieve a credible strategy on public ®nance following the rapid in¯ation of 1974±5 and the rise in tax burdens. The latter can be expressed as a fall in the tax threshold as a percentage of average industrial earnings for a married man with two children, and the increases in numbers paying tax, including those entering the higherrate-bands. Table 8 shows both the deterioration in these ®gures and the attempts to retrieve the position during 1976±8. Because of constraints upon borrowing ± the public-sector borrowing requirement was the key single proxy for the success of the government's ®nancial strategy ± arguments about taxation were debates about public expenditure. Public expenditure was a vulnerable area for the Labour government: it was defeated in the Commons in March 1976 in the debate on the public expenditure White Paper through the abstention of thirty-seven Labour MPs, and in 1977 fears of losing a no-con®dence motion arising from a similar debate led to the Lib±Lab pact as a mechanism for keeping the government going.95 In these arguments about public expenditure the government faced sustained opposition from its own supporters. It was the claim of the 94 95

Edmund Dell, The Chancellors. A History of the Chancellors of the Exchequer, 1945±90 (London, 1997), p. 403. Barnett, Inside the Treasury, pp. 115±16.

Public expenditure, taxation and trade unions

247

Table 8. Income tax threshold (for married man with two children) as percentage of average industrial earnings and numbers paying income tax and tax at higher rates, 1973/1974±1977/1978 Year

Threshold

Basic rate of income tax

No. of taxpayers (thousands)

No. of taxpayers at higher rate (thousands)

1973±4 1974±5 1975±6 1976±7 1977±8

50.3 48.3 41.5 43.8 48

30 35 35 35 34

19,800 20,500 20,900 21,300 20,900

392 752 1,240 1,430 1,060

Sources: Board of Inland Revenue, Inland Revenue Statistics (1980 and 1982), table 1.3, p. 9 (1982) for numbers of taxpayers and (1980) for tax thresholds.

1976 budget that cuts in public spending would allow the transfer of resources to private industry and also to exports. Such a connection was open to the counter-argument that reductions in public spending might themselves restrict growth in the economy as a whole. But for the left to claim that there was scope for more public spending required a statement about how to achieve faster growth, and for this they relied upon the Alternative Economic Strategy, which needed import controls and a higher level of government intervention in the economy. The ground was weak here because of the scepticism towards the left's industrial policy as well as the wider acceptance of Britain's integration into an international economy in which the con®dence of ®nancial markets was an inevitable, if rather slippery, factor. So the tendency of the left to sustain their arguments for more public spending with an economic policy that lacked credibility weakened their case, but not the intensity of their opposition. The government's record on public expenditure also gave some ground for resisting criticisms about the levelling off in expenditure which, it was claimed, betrayed what the party stood for. In the 1960s it had certainly been assumed that the value of public expenditure was conveyed by its rising share of gross domestic product. By the 1970s there were doubts that this was enough. Public spending was producing jobs for the middle class and bene®ts for the rich. Patrick Duffy, MP for Attercliffe, a working-class constituency in the east of Shef®eld, claimed that public expenditure `confers more bene®ts per capita on the west side of Shef®eld than it does on its east end. This is not in the interests of Attercliffe, its working people or Attercliffe's industry and its workers.' He continued, `If we persist in the present policies of universality and

248

Defensive positions, 1970±1979

non-selectivity, we are in danger of doing things that the Labour party does not stand for and has never stood for.'96 Despite this Labour's record, even when judged by some conventional yardsticks, was good. It was possible to show that, at a time of poor economic performance when most people's real incomes were either static or declining, resources were being transferred to the poor through social security spending. Long-term social bene®ts increased signi®cantly more than earnings, and the numbers living below the level at which supplementary bene®t could be claimed declined by one third while Labour was in of®ce.97 Pensioners did especially well from this, while the unemployed on short-term bene®ts were less favoured. But overall the record was good and fully consistent with the traditions of the party. As Piachaud pointed out, `Social security has never been the most evocative feature of socialism and many on the left have neglected it totally. Yet the task of relating income to needs in an equitable manner is central to socialism, and social security is central to that task.'98 Whatever hopes there may have been for incomes policies to achieve redistribution, the experience of the 1970s con®rmed that the tax and bene®t system was still central to that process. Many low-paid people (who bene®ted from Jones's ¯at-rate pay policy of 1976) were not in households which were in poverty; and many of those who were in poverty were not there because of low pay. Incomes policies therefore left untouched a signi®cant part of the poverty problem. The ®scal mechanism was effective in moving resources to poorer families, and a good deal of the transfers were across rather than within income levels. The Diamond Commission paper on poverty concluded that two thirds of transfers took place between similar family types at different levels of income, whereas the remainder were between different family types at similar income levels.99 The Family Expenditure Survey material also showed that, after all bene®ts and taxes had been accounted for, the share of income received by the lowest groups increased and that of the higher income groups declined from 1973 to 1978.100 While Labour therefore ful®lled a traditional aim of redistribution in the most arduous of circumstances, it failed to get the full credit for this 96 97

98 99

100

H. C. Deb., 907, cols. 504±5, 10 March 1976. David Piachaud, `Social Security' in Nicholas Bosanquet and Peter Townsend (eds.), Labour and Equality. A Fabian Study of Labour in Power, 1974±79 (London, 1980), pp. 171±85 at p. 183. Ibid., pp. 184±5. Royal Commission on the Distribution of Income and Wealth (RCDIW), Background Paper, No. 5. Causes of Poverty. R. Layard, D. Piachaud, M. Stewart, in collaboration with N. Barr, A. Cornford and P. Hayes (London, 1975), p. 129. Alan Gillie, `Redistribution', pp. 240±5.

Public expenditure, taxation and trade unions

249

within the labour movement, in rather the same way as had happened in 1964±70. The arguments about public expenditure were not over what was being achieved in social policy but were more to do with what levels of taxes the Labour government ought to impose on the population. Healey had presented this both to the TUC and in the White Paper in the form of a telling statistic that a married man on average earnings was paying one quarter of his income in tax compared to one tenth in 1961.101 The speech which drew out the tax dimension in the Commons debate on public expenditure came from Brian Sedgemore, opposing the government from the left: The important question is whether it is now a crime to end all crimes for the Labour Party to go to the public and to say that we can provide even more schools and hospitals but that this may mean some increases in taxation, that it may involve new taxes on wealth, or on such things as advertising, that it may involve withdrawing tax relief for the better off, and even tightening up on tax avoidance. It may in the future involve us as a political party in saying to the British public that the man on average earnings will have to pay more tax, whether through VAT, increases in tax on alcohol and tobacco, or even through direct taxation. The only political point I make about that is that if that really has become a crime, indeed the nature of political parties in this country is changing, changing too fast, and changing for the worse.102

One response to this was from David Marquand, who argued that even if voters were to indicate a willingness to pay the taxes to fund higher public expenditure `they have a nasty habit of rebelling against the consequences when higher taxes are imposed'.103 For Barnett the crux of the matter was that higher spending would mean heavier taxes not merely for the average worker but also for the pensioners, the disabled, widows and the low paid. For Dell it was a matter of tax resistance, showing itself through in¯ation: `part of the reason for the in¯ationary pressures that we have suffered over recent years is that people want to retain a higher proportion of their incomes than they are allowed to retain at current tax levels.'104 Labour had to address the tax problems both of the poor and the moderately well-off. For those on low incomes in¯ation had eroded the value of personal allowances so that the tax threshold fell, thus perpetuating the poverty trap which had been discussed so widely under the Heath government. The Meade Committee report showed that between weekly earnings of £25 and £60, marginal rates of tax for a family man 101 102 103 104

LPA, TUC/Labour Party Liaison Committee minutes. H. C. Deb., 907, col. 305, 9 March 1976. H. C. Deb., 907, col. 318, 9 March 1976. H. C. Deb., 907, col. 550, 10 March 1976.

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Defensive positions, 1970±1979

on additional £1 in pay ranged from 73 per cent to 137 per cent.105 This range covered the lower paid ± hospital porters, caretakers and road sweepers for example ± rather than the working class more conventionally de®ned. The use of in¯ation to increase tax revenues in a negligibly growing economy so as to avoid further borrowing was quite deliberate.106 This became a regular theme of pressure groups, such as the Low Pay Unit, which argued that no married man with children should pay tax below the level of the TUC's minimum wage of £30 a week.107 This would not have done a great deal to help, since the Meade Committee ®gures showed that the problem existed at twice that level of pay. The casualty of this awareness that income tax fell upon the low paid was the concept of the social wage, which otherwise might have helped to justify high levels of taxation. While the Low Pay Unit supported the idea in principle, it doubted its effectiveness in the 1970s because `the low paid not only bene®t most from the social wage but also pay a larger proportion of their wage increases towards it'.108 At the other end of the scale were the high-income earners. Given the high hopes of the TUC that the Diamond Commission would lead to effective control of high incomes and wealth, it was perhaps ironic that one of its main contributions was to sustain the campaign for some lightening of the tax on middle and senior managers.109 The commission showed that real salaries after tax had fallen by 17 per cent at the £10,000 level and 25 per cent at £25,000 between 1969 and 1975, with most of the deterioration coming in the ®nal two years of that period.110 The commission also con®rmed the popular view that the damage was done by the multiple higher-rate-bands, which increased the marginal rate of tax. A high average rate of tax (the burden of tax as a percentage of total income) would not have had such a pronounced effect on salary increases as a high marginal rate. The commission's report produced a graph showing how for a broad range of managers (earning between £5,000 and £22,000) a year the post-tax bene®t of a 15 per cent salary 105 106

107 108

109 110

IFS, Structure and Reform, p. 84. As Barnett admitted in the Commons, H. C. Deb., 891, col. 1746, 8 May 1975, and also in his memoirs: `one method, which might be described as raising revenue by stealth, was by not increasing the personal allowances for income tax purposes, and thus raising substantial amounts in direct taxation in real terms, much of it from very low paid workers': Inside the Treasury, p. 23. Chris Pond, `Taxing the Social Contract', Low Pay Unit paper, April 1975. Ibid., p. 4. For Barbara Castle's failure to promote the social wage as a means of de¯ecting pressure for lower taxes, see Brian Harrison, `Incomes Policies in Britain since 1940: a Study in Political Economy' in Kristine Bruland and Patrick O'Brien (eds.), From Family Firm to Corporate Capitalism. Essays in Business and Industrial History in Honour of Peter Mathias (Oxford, 1998), pp. 269±96 at p. 286. See Healey's budget speech in H. C. Deb., 909, col. 276, 6 April 1976. RCDIW, Higher Incomes from Employment. Report No. 3, Cmd. 6383 (1976), p. 84.

Public expenditure, taxation and trade unions

251

increase fell from 13 per cent to 6 per cent as the salary rose towards £22,000. At higher levels they kept more from any increase because there were no more distinct tax bands.111 The CBI made reductions in personal income tax its main campaign against the Labour government: `the shift has been away from corporate taxation towards a much greater concern over the serious impediment that high rates of personal taxation are having on incentives at all levels, from the shop¯oor to the boardroom.'112 Labour had made considerable concessions to companies, and had not reversed the change made to corporation tax by the Heath government. The Conservatives removed the key element in Labour's 1965 tax, which was sequential taxation of dividends, ®rst as company pro®ts and then again through income tax on the dividends going to shareholders. The 1973 change to an imputation system gave shareholders credit for the tax paid by the company that could offset their own liability to tax on their dividends.113 Although Kaldor, the driving force behind the 1965 version of the corporation tax, thought that the Conservatives' version would be `intolerable in any democratic society', Healey took the more relaxed view that to change back to Labour's own version would have been too disruptive and diverting for industry.114 The same priority for moderation was in play over taxing North Sea Oil. Here the purpose was twofold: to prevent windfall pro®ts from the new opportunity going untaxed, but also to prevent too harsh a rate from deterring or slowing exploitation of the oil ®eld.115 Reconciling the pressures for reductions at both ends of the income tax spectrum was not easy. Those looking for a signi®cant raising of the tax threshold for the low-income group sought compensation in higher tax rates which would have been politically impossible: in 1975 the Low Pay Unit suggested putting up the basic rate from 35 per cent to 38 per cent and bringing down the starting level for the higher rate from £4,000 to £3,000 of taxable income.116 Such increases on top of those already introduced by Healey in 1974 would have been suicidal. Efforts 111 112 113 114 115

116

Ibid., ®g. 6, p. 65. University of Warwick, MRC, CBI archive, MSS 200 C/1/1/E. 66.77, general budget representations, Economic Situation Committee, 3 February 1977. John Kay and Mervyn King, The British Tax System (Oxford, 5th edn, 1990), pp. 58±9. Kaldor's views are in a memorandum, `Corporation Tax Structure', in Kaldor Papers, 10/46/1, 28 May 1974 and Healey's in H. C. Deb., 909, col. 249, 6 April 1976. Edmund Dell, who was responsible for devising the tax, has given a full account in `The Origins of the Petroleum Revenue Tax', Contemporary Record, 7(2) (1993), pp. 215±52, esp. p. 241. David Ross, `North Sea Oil', British Tax Review, 2 (1976), pp. 99±109. `Taxing the Social Contract', p. 6.

252

Defensive positions, 1970±1979

to improve the position of income tax payers without courting the unpopularity of the majority (as the Low Pay Unit's proposals would have done) emerged in the 1977 budget. According to Barnett, `we had discussed it interminably, and pored over a great volume of tables and graphs, looking at how we could best bene®t the lower income groups while also trying to do something for skilled workers and middle management'.117 The budget reduced the standard rate, gave bigger increases in personal allowances than had been awarded previously, increased the starting point of the higher rates and broadened their ®rst band of income. In his speech Healey had reported pressure from both the CBI and the TUC for reductions in income tax and Barnett argued that it `would be foolish not to recognize that there is a widespread feeling in the country that taxes on income are too heavy and that it would be better to rely more on those taxes where there is an element of choice'. As one who had doubted that direct taxes damaged incentives he was forced to concede that `the price being paid in terms of work effort, morale and incentive is becoming dangerously high'.118 What angered the left was that Healey tried to connect the raising of the higher-rate threshold to a working-class interest. Such relief, according to Healey, was not only intended to be of help to middle management but also `to many skilled workers in key areas of our economy'.119 The left rejected this connection, and the New Earnings survey for 1977 showed that the great majority of workers in the highest decile of earnings in their trades were well below the £120 per week which would have brought them near to the ®rst of the higher rates. As Jeff Rooker pointed out, `It is false to bring in such people, because it makes us look as though we are seeking to cut back on the real take-home pay of millions of ordinary skilled workers. That is far from the truth; the top 10 per cent of skilled toolmakers would be nowhere near paying the higher-rate of tax.'120 Audrey Wise found the higher rate tax reliefs both `outrageous and sad coming from a Labour government'.121 Labour, of course, had faced a similar situation in the later 1940s when it relaxed its progressive tax regime and faced criticisms for giving too much away to nonworking-class interests; but Labour had a far wider constituency than simply a working-class one. Moreover, the cost of giving relief at the bottom was far greater than easing the higher rates. Although Rooker and 117 118 119 120 121

Barnett, Inside the Treasury, p. 114. H. C. Deb., 929, col. 276, 29 March 1977 (Healey); 930, col. 1509, 28 April 1977 (Barnett). H. C. Deb., 930, col. 998, 28 April 1977. H. C. Deb., 931, col. 1121, 10 May 1977. H. C. Deb., 931, col. 1136, 10 May 1977.

Public expenditure, taxation and trade unions

253

Wise made no headway on this point in the main budget debates, their revenge came when the Finance Bill went into standing committee and they sided with the Conservatives to get personal allowances indexed to rise with in¯ation.122 In a debate on the poverty trap several days later, Rooker took issue with the government over the tax concessions given to higher-rate taxpayers in the budget, so connecting it with the revolt over indexation.123 Despite the concessions made by Healey, and the protests which they drew from the left, the direct tax system was more progressive at the end of Labour's period than it had been in 1973.124 After the enormous problems caused by the inheritance of the threshold agreements from the Heath government ± which linked prices and wages together without the time lags that occurred in `normal' collective bargaining ± and the initial decision not to follow the path of de¯ation taken by other countries in the face of the oil price rise, Healey and Barnett followed a plausible tax strategy of broadly based reductions in direct taxation with some concession to radical opinion in the form of the capital transfer tax, with all its limitations. Yet the overall result of this approach was failure. It is tempting to argue that the real problem for the Callaghan government was the winter of discontent of 1978±9 and the frustrations of the public-sector workers which drove this along. But tax policy was one of the areas where public unease and distrust of the government was most powerfully expressed, and this was linked with the trade union question. Part of the problem was that the political context for tax adjustment was so fraught. However much Tribunite arguments may have been despised from within the Treasury team ± they `would demand more of everything, making it all the easier to ignore them'125 ± the group carried enough numerical weight in the Commons to in¯ict defeats in the public expenditure debates of 1976 and 1977. The resulting pact with the Liberals led to further trouble in the 1978 budget, as Liberals pressed for a 1 per cent reduction in the basic rate of income tax, against the wishes of government.126 Where the government did not make any reductions, and where it was symbolically damaging not to have done so, was in the top rate of tax, which was 83 per cent (and 95 per cent with the investment income surcharge). The CBI wanted the top rate brought down to 60 per cent to match European levels.127 Sticking with the 83 per cent rate was an 122 123 124 125 126 127

PP 1976±7, 2, minutes of Standing Committee D, 14 June 1977. H. C. Deb., 933, col. 746, 17 June 1977. Gillie, `Redistribution', pp. 237±41. Barnett, Inside the Treasury, p. 63. Ibid., pp. 143±5. MRC, MSS 200 C/1/1/E 99.78, `The 1978 Budget and Finance Bill'.

254

Defensive positions, 1970±1979

anomaly in Labour's approach to taxation since 1976. Although it affected very few, the top rate seemed to illustrate how provocative yet ineffectual Labour could be. A signi®cant reduction would have been cheap to achieve: to have come down from 83 per cent to 68 per cent would have cost £42 million in lost revenue.128 But the TUC would not support such a reduction, and the top rate remained. The TUC was the major interest group addressed in Labour's budgetary policy.129 Healey had involved the trade unions quite deliberately in the 1976 and 1977 budgets, when he distinguished between tax concessions which were `unconditional' and those which were conditional upon an effective pay deal being struck. In 1976 the bargain worked, and the increases that Healey had identi®ed as conditional went ahead, but in 1977 the additional 1 per cent off income tax that had been tied to a pay deal was not forthcoming. Because of the pressure from trade unionists for an end to pay restraint, rather than its perpetuation, the outcome in 1977 was not surprising. Jones had already criticized the budget for the rise in petrol taxes which had been the way of meeting some of the cost of the income tax reductions.130 Opposition claims that the linkage between tax concessions and pay policy was a subversion of the House of Commons authority have been regarded as overheated.131 The arrangement simply formalized the consideration of pay factors in tax which had been present in budget discussions for many years. But equally, the strategy was not devoid of any signi®cance. What it represented was not a further accretion of trade union in¯uence, but a stage in the growing political vulnerability of the trade unions and one which was openly developed by the government. The exposure that resulted from bringing the trade unions more explicitly into the budget process was not lost on the left. Sedgemore pointed out that the arrangement over conditional tax concessions `is likely to bring odium on the trade union movement. It is presented in such a way that if it is not accepted pensioners will feel bitter about price increases and others who are not trade unionists will be con®rmed in their dislike of the trade union movement.'132 As an example of such reactions the CBI noted that `it was unfair to make changes most

128 129 130 131 132

S. C. on Wealth Tax, evidence, memorandum from Inland Revenue, para. 24, p. 57. `The TUC came close to the head of the list. We always ticked off which of their requests we had been able to meet, if only partially': Barnett, Inside the Treasury, p. 62. The Times, 17 April, 1977, p. 1. Dell, in The Chancellors, regards it as `politically realistic': p. 423. H. C. Deb., 938, col. 964, 12 April 1977.

Public expenditure, taxation and trade unions

255

bene®cial to middle managers dependent upon negotiations in which they are largely unrepresented'.133 This was not an isolated example. While Healey frequently (and justi®ably) praised the TUC and the trade unions for the success in pay restraint down to 1977, Barnett never concealed the pressure the government was under from the TUC, whether it was over the limited scope for cuts in higher-rate taxes or the dif®culty of reducing housing subsidies because of the effect on pay policy.134 He was also unconvinced that a low basic rate for VAT was a necessary price for pay restraint.135 The government was drawing attention to the political role of the trade unions, which the government itself had encouraged, and which the trade unions were fundamentally unsuited to ful®l. Had the trade unions been willing to integrate a wide range of policy matters with pay bargaining then the approach might have been fruitful. But hopes that the unions might take on such a role were usually disappointed. Those working for the Low Pay Unit in the 1970s commented that `The TUC has, over the years, developed a comprehensive programme of tax reform. What has been lacking is the full force of the movement behind demands for the implementation of this programme.'136 Another observed that `people don't understand that the unions have a very de®nite set of issues to do with wages, earnings levels, relativities and composition of pay etc. and this is a tremendously absorbing thing for them'.137 This is exactly the point that was made regarding trade unions and tax in the late 1940s and early 1950s, which shows how little the intervening years had changed the capacity of the unions to act on a broader front, even though governments increasingly expected them to do so.138 It was over tax that the association of the TUC and the trade unions in more obviously political rather than industrial questions became most apparent. Because it was a role which outsiders tried to create for them but which the unions themselves were unable to ful®l, it did them considerable damage.139 But it also damaged the Labour government. 133 134 135 136 137 138 139

MRC, MSS 200 C/1/1/ E 47.77, Taxation Committee minutes, 4 May 1977, `Finance Bill 1977'. H. C. Deb., 907, col. 453, 10 March 1976 and 909, col. 759, 8 April 1976. Barnett, Inside the Treasury, pp. 33ff. Chris Pond, Frank Field and Steve Winyard, Trade Unions and Taxation (London, 1976), p. 18. Nicholas Bosanquet, cited in Michael McCarthy, Campaigning for the Poor. The CPAG and the Politics of Welfare (London, 1986), p. 251. See above, p. 117. `By placing unions so centrally in the political stage, it prepared the way for the devastating political reaction': William Brown, `Industrial Relations' in Artis and Cobham, Labour's Economic Policies, pp. 213±28 at p. 226.

256

Defensive positions, 1970±1979

By seeming to intensify the historic relationship between the trade unions and the Labour Party, the government only served to underline how problematic that relationship was. This was in a context where the direct tax system itself seemed to offer little room for manoeuvre. At one level it was in Jeff Rooker's remark that in his surgery every week `people are asking ``Why do I pay so much tax?'' '140 At another it was in Barnett's comment that `I have always believed that the disincentive argument was grossly over-stated, and I have said so frequently in the House and elsewhere. But in 1975±6, when the yield of income tax would have been increased by only 6 per cent if we had con®scated all post-tax income over £5,000 a year, the case for direct progressive taxation does not need to be made. We already have it.'141 There had been enough public discussion for the liability of income tax to be well understood. Although the main thesis of Robert Bacon and Walter Eltis's widely-read Britain's Economic Problem: Too Few Producers ± that the growth of a public sector which did not sell its output was a drag upon private industry ± was controversial, their emphasis upon the heavier burden of taxation made an impact.142 Direct evidence of taxpayer attitudes showed that people had a clearer grasp of marginal tax rates than earlier surveys had reported. Whether this arose from the considerable attention devoted to the topic in the media, or re¯ected the ending of the earned income allowance in 1973, which had complicated the picture given by tax rates alone, was unclear.143 Change Many of the problems with which Labour had to grapple from 1974 to 1979 were not new. Dismay at the silent impact of in¯ation on the tax burden of the less well-off had been evident in the early 1950s, as had been the related dif®culty of raising the tax threshold to offset this development. Labour's need to address a broad range of interests from the poor, the well-paid worker and the salaried manager had also been pressing under the Attlee governments. The political salience of `incentives', whatever the doubts about their economic reality, and the attractions of a switch to indirect taxes, had confronted Labour politicians before 1970. The problem was that Labour had reaf®rmed its traditional views during opposition in 1970±4, rather than questioning them. 140 141 142 143

H. C. Deb., 933, col. 755, 17 June 1977. H. C. Deb., 907, col. 447, 10 March 1976. Robert Bacon and Walter Eltis, Britain's Economic Problem: Too Few Producers (London, 1976), pp. 6±8. Alan Lewis, `Perceptions of Tax Rates', British Tax Review (1977), pp. 358±66.

Change

257

Socialist Commentary, a good guide to social democratic thought, had still been able to publish an editorial in 1970 which stated that, as far as taxes were concerned, `we, as socialists, should accept the burden without complaint ± indeed, to do so might be said to be the acid test of socialist conviction'. But it added what had already become apparent in the 1960s, that `our generation of socialists has also to think of taking money out of private pockets, all private pockets, in order to put it into the public. This is one of the great changes confronting socialist thought on the threshold of the seventies.'144 During the opposition period the commitment developing further progressive direct taxation had been af®rmed, and taxation remained, as it had been in the 1960s, an important part of the party's rhetoric, the very willingness to discuss it openly being an indication of the collectivism that underwrote Labour's ideology. By the end of the 1970s Labour's capacity to achieve the `great change' had been exhausted. Because of the way Labour had committed itself to traditional views about tax and a long-standing relationship with the trade unions during opposition, the period 1974±9 was another painful learning experience. But it was not one in which all sections of the movement shared, and the process was incomplete by 1979. Just how far Labour had abandoned its attachment to public spending and taxation policies that had characterized it for so long, despite the appalling pressures the government had been under, was unclear.145 In fact, it was successive electoral defeats, rather than policy challenges, which lay behind Labour's eventual conversion. In the 1979 election both the Conservatives and Labour promised a switch from direct to indirect taxation, but whereas the Conservatives were keen to talk about taxes, Labour candidates were less forthcoming.146 This was a promise which the Conservatives were able to ful®l far more brutally than Labour would have done. Organizations such as the CBI, which had been campaigning for reductions in direct taxation through the 1970s, found that the Conservative government out¯anked them in its ®rst budget. Howe's budget cut the standard rate of income tax by 3 per cent and not by 1 per cent, increased threshold for the investment income surcharge by 100 per cent (not 50 per cent) and raised the rate of VAT to 15 per cent (not 10 per cent). These changes were not legitimated because they were technically `correct'. 144 145

146

`Who Likes to Pay Taxes?', Socialist Commentary (February 1970), p. 3. The distinctiveness of Labour's views, and the limited impact of new doctrines even upon those in government, is the theme of Kathleen Burk and Alec Cairncross, `Goodbye Great Britain': the 1976 IMF Crisis (London, 1992), esp. pp. 227±8. David Butler and Dennis Kavanagh, The British General Election of 1979 (Basingstoke, 1980), p. 297.

258

Defensive positions, 1970±1979

VAT, after all, had a signi®cant effect upon the cost of living, and the drastic shift engineered by the Conservatives was more than a purely tax-based judgement would have required. Conservatives knew that to exploit the distrust of the state which was pervasive in the 1970s required taxes that played down the consent required in their operation (direct personal income tax) and instead, however ®ctitiously, seemed to give an element of choice (indirect taxes). This was a reality to which left-wing governments everywhere had to adjust, and it is not surprising that Labour found that it was beyond them to carry conviction in the new era.147 147

Donald Sassoon, One Hundred Years of Socialism. The Western European Left in the Twentieth Century (London, 1997), p. 740.

6

Epilogue: New Labour, old problems?

`No issue is more sensitive for Labour than tax.'1 This might have been the guiding theme of Labour's modernizers as they took the party from defeat in 1992 to the greatest victory of its history in 1997.2 Certainly the chroniclers of that election noted how successfully Labour had become the party that the electorate decided to trust on tax: `The main achievement was to turn around the two key de®cits of 1992 on leadership and tax.'3 But this triumph did not go unchallenged either inside or outside the party. To some commentators, Labour's pre-election commitment not to increase taxes could not be squared with its commitment to better public services and seemed to be a betrayal of its fundamental party identity: `Britain can have more and better public services and higher taxes, which is what Labour should stand for. Britain can have fewer or less lavish public services and lower taxes, which is what the Tories should stand for. The country cannot have it both ways.'4 Within the Labour Party some thought higher taxes were the appropriate response to the tax changes of the Conservative governments as well as the way to fund higher public spending.5 For much of its history Labour had been dogged by a reputation as the taxing party. In 1997 it seemed to have buried that and reaped a glorious reward. But has Labour found a solution or avoided one? For the tax experts, the high pro®le which tax issues took in party 1 2 3

4

5

Peter Mandelson and Roger Liddle, The Blair Revolution. Can New Labour Deliver? (London, 1996), p. 103. Assessment of the scale of Labour's victory is provided by Ross McKibbin in `Why the Tories Lost', London Review of Books, 3 July 1997, p. 3. David Butler and Dennis Kavanagh, The British General Eection of 1997 (Basingstoke, 1997), p. 232, and p. 243 where the authors noted that `by February 1997 some opinion polls reported that more voters expected taxes to increase under a Conservative government than a Labour government'. `Tony's Taxing Time', The Economist, 23 September 1995, p. 41. See also Andrew Dilnot, of the Institute for Fiscal Studies, `Magic Required', The Guardian, 24 May 1997. Roy Hattersley, `Ten Percent of What?', The Guardian, 28 November 1995, and `Leftwing Group Launches Bid for Higher Tax', Sunday Times, 4 May 1997.

259

260

Epilogue

politics was not matched by any commensurate achievements in reforming the system. The way forward was still thought to be through the comprehensive taxation of either income or expenditure so that a broader tax base would permit lower rates.6 At the party political level, however, the Conservative budgets seemed to provide opportunities for Labour opposition, on two grounds: ®rst, the way in which the `taxcutting' theme of the Thatcherite rhetoric had none the less to cover a rising tax burden in terms of the national product, and secondly, the contribution that tax changes had made to the growth of inequality. The Conservatives showed that cutting tax rates and easing the tax burden were two different things. According to one study, it was changes to taxes and bene®ts, and especially cuts in income tax rates, which had the biggest effect in increasing inequality during the 1980s and 1990s.7 Essentially, these cuts worked against a tendency which would otherwise have operated, of the large increases in pre-tax earnings of the well-off attracting heavier direct tax burdens under a progressive system.8 In contrast to the 1950s, however, Labour did not respond by stressing the need for greater fairness or equality in the tax and bene®t system. Although the Labour governments in 1964±70 and 1974±9 managed to achieve some measure of redistribution through the tax and social security system, this did not commend itself to Blair as he campaigned in the 1997 election: `redistribution will be more about creating opportunity than it will be about taking a few quid off one group of people and giving it to other people on bene®t.'9 Gordon Brown made the same point about `tax and spend': `I think he [Crosland] would have recognized that increased spending does not necessarily increase social justice: that you can tax, spend, borrow . . . and fail.'10 The most practical and public demonstration of this new attitude was the commitment by Gordon Brown, in a speech to businessmen, to stabilize income tax rates, and not to let the higher rate go above 40 per cent.11 In addition, public spending in the ®rst two years of a Labour 6

7

8 9 10 11

For discussions of comprehensive expenditure and income taxes, see John Kay and Mervyn King, The British Tax System (Oxford, 5th edn, 1990), chap. 6; Margaret Wilkinson, Taxation (Basingstoke, 1992), chap. 12; Fabian Society Taxation Review Committee, The Reform of Direct Taxation (London, 1990), chap. 7. Paul Johnson, `Taxes and Bene®ts, Equality and Ef®ciency' in Andrew Glyn and David Miliband (eds.), Paying for Inequality. The Economic Cost of Social Injustice (London, 1994), pp. 160±80 at p. 162. Alissa Goodman, Paul Johnson and Steven Webb, Inequality in the UK (Oxford, 1997), pp. 219 and 279. `Not a promised land', The Guardian, 1 May 1997. Gordon Brown, `Equality Then and Now', in Dick Leonard (ed.), Crosland and New Labour (London, 1999), pp. 35±48 at p. 39. `Brown Buries the Tax and Spend Image', The Guardian, 21 January 1997.

New Labour, old problems?

261

government was not to rise beyond what the Conservatives had planned. This commitment on the tax side was largely symbolic, in that ®xed tax rates can be quite consistent with higher tax yields; indeed, on the same day as this speech Brown was careful to rule out any commitment to keeping overall tax burdens stable. But this announcement on rates, essentially meaningless in its implications for tax burdens, had the desired effect. One respectable journalist believed that the `real break from socialism' would be dated from Gordon Brown's speech on tax and public spending.12 Labour's past performance had provided the imperative for altering the public mind on the party and tax: `After the 1992 election debacle, Labour leaders realised that high taxes can have an impact not only on the rich but also on those who hope to become richer.'13 An academic study of Labour's prospects in the light of the 1992 election, which argued that the party should not be too defensive about its record on tax, none the less recognized that the issue could not be seen in isolation: `it is of no conceivable value in being seen as a high tax party unless voters are convinced that the high taxes will yield effective returns.'14 The brutally simple solution to this problem set out by Brown in his 1997 speech marked an abrupt change from Labour's traditional approach, which had stressed that a fair tax system would win public consent. This had appeared in the report of the Social Justice Commission set up by John Smith, where it was noted that the doctrine that taxation was con®scation had made headway under the Conservatives, but that: If, however, a government is prepared to make the case for responsible taxation, to ensure value for money in every public service, to design fair taxes, reform its budget process and give people useful information about how their money is spent, then there is every reason for taxes to be, if not popular, then at least widely acceptable.15

This approach, with echoes of the 1950s and 1960s, was eventually 12 13

14

15

Anne Applebaum, `Tony Blair and the New Left', Foreign Affairs, 76(2) (1997), pp. 45±60 at p. 47. Anatole Kaletsky, `Mr Brown's Secret Package', The Times, 15 April 1996. The deÂbaÃcle concerned the alternative budget put forward by John Smith, the shadow chancellor, which the Conservatives claimed would not only hit the rich but also the ordinary taxpayers. The belief in the party that the shadow budget had been a mistake is reported in Mandelson and Liddle, The Blair Revolution, p. 44. Anthony Heath, Roger Jowell and John Curtice, `Can Labour Win?' in the collection of essays edited by them, with Bridget Taylor, Labour's Last Chance? The 1992 Election and Beyond (Aldershot, 1994), pp. 275±308 at p. 294. The Commission on Social Justice/Institute for Public Policy Research, Social Justice. Strategies for National Renewal (London, 1994), p. 379.

262

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judged insuf®ciently straightforward compared to the simpler but less meaningful commitment to leave some symbolic rates untouched. Labour did not therefore respond in kind to the Conservatives' reductions in tax rates (by simply putting them back up again) but recognized them as the necessary price for winning the electorate's con®dence that the new party had also shed some traditional instincts. But it did not follow that, in accepting rather than challenging the prevailing views about tax, Labour had accepted a diminished role for the state. In the 1970s taxes seemed, in the hostility they attracted, to be acting as proxies for the general standing of the state. It seemed entirely reasonable that the extent to which taxes were tolerated depended upon whether or not the state appeared to be making good use of the money. But Labour's plans for the late 1990s and beyond set out an ambitious role for the state which seemed unsynchronized with its cautious attitude towards taxation. This is the nub of the uncertainty surrounding Blair's strategy: that sooner or later Labour will have to confront some historically familiar choices about taxation and public spending that its rhetoric has not yet broached, or, rather, has denied exist. Labour's programme might appear perverse when examined in its broader economic context. It seemed to be abandoning its traditional function of using the welfare and bene®t system to compensate for the inequality and insecurity that capitalism tended to produce just at the time when that tendency was most strikingly in evidence. Blair's dismissive attitude towards redistribution struck an odd note when the growing diversity of pre-tax earnings and employment experience seemed to provide its justi®cation. But redistribution and generous social security bene®ts were passe in the 1980s, in the face of the market and deregulation. Policy analysis has become more concerned with the costs of dependency on welfare at a time when inequality has been growing.16 With the global mobility of capital, national strategies of economic management were also outdated. What remained open to the left was to enable the people to experience more widely the bene®ts of the economic growth of the 1980s, which the right seemed able to dispense to only a section of the population. For this to be achieved required that skills and competencies ± human capital ± be developed suf®ciently so that mobile capital would land in Britain's markets rather than elsewhere. This strategy owed a good deal to the views of American policy-makers attached to Bill Clinton, principally the secretary of labor, Robert Reich.17 16 17

Alan Deacon, `Dependency and Inequality: a False Polarity in the Poverty Debate?' Journal of Social Policy, 28(1) (1999), pp. 166±73. Mandelson and Liddle, The Blair Revolution, p. 89: `Robert Reich, the US labor

New Labour, old problems?

263

The interest in skills and learning covers a number of problems. It has to address not only the dif®culties of the poorly educated and unskilled at the bottom of the heap, but also those who ®nd themselves displaced from managerial jobs by technological change. But like many of the nostrums which have been put forward over the years to blend Labour's interests with the economy, the emphasis upon education can be aligned with the party's longer-term ideology. Although pretensions towards economic management have now been abandoned, education and training can still ®nd a place in Labour's recurring theme of modernization.18 The identi®cation of `vested interests' who need to be combated has also furthered this alignment with Labour's traditional appeal even if, in this case, they are to be found somewhat implausibly in education.19 The value attached to work as a social and moral activity probably found favour with the majority of the population. Tax credits for those in work, so that seeking employment attracted support rather than relying on bene®ts, was presented as the acceptable face of the welfare state when they were introduced in 1999.20 As a social activity, work showed that people shared some fundamentally similar experiences whereas unemployment created a major dividing line in society, and as far as young males were concerned it promised to end the `bus-stop as youth club' syndrome. But to focus so much attention on work, at a time when full employment carries no economic value, makes the core of Labour's welfare policy very ambitious. Training and education have to be highly ef®cient at preparing people for the labour market if they are not to become clicheÂs. Wage subsidies compensating for low pay, and supports of a practical kind ± child care, public transport ± all need to be effective.21 Welfare to work is therefore an expensive commitment, and government borrowing is not a means of meeting any gap which might arise between government revenue and expenditure. Down to 1999 the public-spending record of the Labour government seemed to con®rm a relationship whereby increased spending was committed to health and education while tax rates remained stable. The overall outcome of changes in taxes and bene®ts has also been redistributive. Those nearer 18 19 20

21

secretary, is more responsible than anyone for stressing the primacy of investment in skills in the modern world.' Donald Sassoon, `Re¯ections on the Labour Party's programme for the 1990s', Political Quarterly (1991), pp. 365±76 at p. 369. Mandelson and Liddle, The Blair Revolution, pp. 91ff. Labour's tax credits, which are a means-tested earnings supplement, are different from the universally awarded credits which were put forward (but not adopted) by the Heath government, but the belief that welfare was better founded when delivered through the tax system to working people was common to both schemes. Robert Reich, `Third Way Needs Courage', The Guardian, 21 September 1998, p. 20.

264

Epilogue

the bottom of the income range have had their post-tax income increased the most, in percentage terms, while the top 10 per cent have suffered a decline in post-tax income.22 This painless balance was achieved because of steady economic growth, so that extra tax revenue produced by prosperity could go on public spending without increasing expenditure as a proportion of GDP.23 Any slow-down in growth in the future will confront Labour with the choice of having to increase revenue or cut back on services. So it is back to tax. If the Blair government does have to raise taxes in order to meet public-spending commitments, it is doubtful whether or not it will be able to generate increases away from the main areas of popular interest. This will mean ®nding revenue (and redistribution) outside personal direct taxation, from national insurance contributions or indirect taxes (such as on petrol). This was tried in the 1998 budget, which achieved some redistribution through these taxes, but such is the interest in tax that a vigorous opposition ought to be able to highlight any changes in overall tax burdens. Conservative policies on tax have given Labour very little room for manoeuvre within personal direct taxation. Conservative chancellors not only increased the burdens on the middle classes but also modi®ed the structure of taxation in ways that Labour could not reverse when in of®ce. In particular, Conservatives removed some of the bene®ts which had reduced the tax base and distorted behaviour. The con®nement of mortgage tax relief to the lowest rate of income tax and the removal of tax relief on life assurance premiums were both supported by a Fabian Society tax enquiry as ways of broadening the tax base.24 The Commission on Social Justice also recognized that separate taxation of married women established in 1990 was extremely popular, and the possible advantages to the very rich couples in being able to redistribute income between themselves should not cause Labour to revoke it.25 This likelihood of tax avoidance had led Labour to show very little interest when in of®ce in redressing an anomaly which had become particularly striking by the 1970s.26 But as many more married women began to work in the 1970s this was a grievance that Labour could not have ignored. The fact that the Conservatives had remedied 22 23 24 25 26

Institute for Fiscal Studies, `Distributional Consequences of Fiscal Reforms since May 1997', Budget 2000, pp. 1±4 at p. 3, ®g. 1. Tony Travers, `Squaring the Circle', The Guardian, `Society' section, 22 September 1999, pp. 2±3. Fabian Society, Reform of Direct Taxation, pp. 47 and 53. Commission on Social Justice/Institute for Public Policy Research, Social Justice, p. 382. A good treatment of the subject can be found in Ann Robinson, `Taxation and the Family' in David Collard (ed.), Fiscal Policy. Essays in Honour of Cedric Sandford (Aldershot, 1990), pp. 55±66.

New Labour, old problems?

265

this in 1990, so taking it off the agenda, probably helped Labour in the mid-1990s. Certainly, it is doubtful if Labour could have polled so well amongst women voters ± an important break from its own dismal electoral performance with this group ± if women taxpayers had not been granted independent status. Conservatives had also accepted the logic, through Nigel Lawson in 1988, that the rate at which capital gains tax should be charged ought to be the same as income tax, and not at a ¯at rate, if capital gains were to be regarded as income. Labour's understanding that middle-income earners were heavily taxed, plus the fact that progress had already been made towards widening the tax base, meant that the scope for tax innovation open to Labour in 1997 was slight. There were some opportunities, of course. In his ®rst budget, Brown removed the tax credits on dividends earned by pension funds and companies. This was presented as a way of encouraging retention of pro®ts by companies ± a traditional Labour interest ± but was more likely a straight forward tax increase. What about capital taxation? Here the history of bipartisan tax policy was harder to liquidate. The Conservatives had ®rst weakened then abandoned Labour's capital transfer tax in 1986 and replaced it with an inheritance tax. Most tax economists understood an inheritance tax to be levied on the receiver of the estate rather than the donor, but the Conservative measure was much the same as the estate duty whose inadequate treatment of inherited wealth Labour had tried to remedy. The problems of taxing wealth in this way were still formidable in the 1990s, even though the nominal incidence of the tax had eased. Deliberately inaccurate disclosure of the value of estates for probate, delay in replying to Revenue enquiries, and removal of assets abroad combined with the recruitment of skilled staff into the private sector all led to arrears of a tax which only fell on 4 per cent of estates.27 Moreover, where the tax did fall was on those with modest assets rather than upon the very rich. Before the 1997 election Labour was still identi®ed as a party with a strong interest in limiting inheritances, and investment advisers encouraged clients with private businesses to look closely at the way their transfer could be managed through trusts or assets realized through sale.28 Developing capital taxation within `New Labour' could hardly be based on an appeal to equality of the sort which had proved so fruitless in the 1970s. The position had become even less favourable by the 1990s. Although inequality was widely documented by academics, public and political interest in redressing it was minimal. The relationship between 27 28

National Audit Of®ce, Inheritance Tax (London, 1992). For example, Barclays Bank/BZW, `Your Last Chance?', Private View (spring 1996).

266

Epilogue

politics and economics was set out by an authoritative study: `Political choices unquestionably contributed to the rise in inequality. That widening of the distribution itself makes similar political choices easier to sustain. It becomes harder for choices that reverse changes to gain adequately widespread acceptance.'29 But Labour did not abandon capital taxation altogether, in contrast to its stance on direct personal taxation. Rather, it became linked not with equality in the sense of reducing the holdings of the rich and passing them to the state, but with the ®nancing of education and `lifetime' learning programmes. It was hinted that Labour might link taxation of gifts and inheritances with one-off grants to individuals to ®nance retraining, so using physical capital to enhance human capital.30 This was tried with the windfall tax on public utilities where the proceeds went towards getting the young unemployed back to work. But the windfall tax fell on what many regarded as the `surplus' or `abnormal' pro®ts of the privatized utilities, and therefore on an obvious and deserving target. It was also a once-and-for-all imposition. If capital taxation is to play a part in the ®nancing of Labour's welfare and training programme, then a more permanent place has to be found for it. Does New Labour's ideology provide such a place? Alongside the changes in organization, intended as a pre-emptive strike against the power of the party and the trade unions over policymaking, went the abandonment of clause IV on the national ownership of the means of production and its replacement by a statement which stressed co-operation and community as the means through which `power, wealth and opportunity are in the hands of the many and not of the few'.31 It seemed to be a way of avoiding the clash between equality and ef®ciency which had dogged Labour in the 1970s. Noel Thompson has pointed out that such an approach may not imply that signi®cant a challenge to the capitalist order; after all, industrial production and economic organization rely a good deal on co-operation and trust between the different factors of production.32 The view that capitalism performs best when it is acquisitive, vulgar and possessive has been refuted as an inadequate explanation of its success. Instead, the contribution of behavioural codes and motivations not in themselves 29 30 31

32

Goodman, Johnson and Webb, Inequality in the UK, p. 283. Mandelson and Liddle, The Blair Revolution, p. 96. Statement on the party membership card. See also Mandelson and Liddle, chapter 2, where a study of Blair stresses his belief in the community as the source of a mutual interest in welfare and its relationship to his religious views. Noel Thompson, Political Economy and the Labour Party. The Economics of Democratic Socialism, 1884±1995 (London, 1996), pp. 281±2, and chap. 18 generally for a perceptive analysis of Labour's recent thinking on the market and social justice.

New Labour, old problems?

267

capitalist or pro®t-driven has recently been underlined.33 Labour's refusal to redress the balance between employers and workers, which had changed so much against the latter, pointed to the way in which competitive ef®ciency was being protected from some of the party's traditional attitudes. But while there may be some alignment between co-operation, community and the market in production, there is more tension between them in matters of property, which is relevant to taxation. Property is much less amenable to functional co-operation than production. In the 1980s there was a greater questioning of some of the assumptions underlying redistribution than there had been earlier. As a result, `social justice' lost any normative content it might have had and became synonymous with equality. So the co-operation found in modern production need have no implications for attitudes towards the outcome or result of that process, namely private property. This is what people think the state is taking away from them in taxation. Yet to ful®l the welfare programme based on education and work will require, in the words of Robert Reich, Labour's exemplar, that `the better off have to pony up'. For this reason, amongst others, the Third Way in America `proved more perilous than anyone initially assumed'.34 The ideology that Labour brings to this necessity, and to an ethical argument about taxation and fairness which the party has rarely had to confront head-on in its history, has replaced equality of outcome with community and cooperation as its watchwords. There may be some uncertainty about how deeply or widely this change has been grasped within the Labour Party. But this cannot change the fact that `New Labour' has committed itself to `community' as the key idea of its identity.35 Blair's stress on the community as the necessary milieu for the full development of the individual, and the implication that as individuals alone we are incomplete and undeveloped, has echoes of Ramsay MacDonald's collectivism. But the latter's ideas were unusual in the context of the labour movement, and the more fully worked out versions of these beliefs are to be found in `new liberalism' rather than socialism. The text where there is an attempt to reconcile a right to work with free enterprise, where these proposals are rooted in the common good pursued by a community of rational, self-directing individuals, where the social nature of wealth and its obligations are stressed, and where 33 34 35

Amartya Sen, `Moral Codes and Economic Success', in Samuel Brittan and Alan Hamlin (eds.), Market Capitalism and Moral Values (Aldershot, 1995), pp. 23±34. Reich, `Third Way Needs Courage'. This is given considerable prominence in the admiring portrait of Blair in Mandelson and Liddle, The Blair Revolution, chap. 2, `Labour's Leader'.

268

Epilogue

these are used to justify taxation of `surplus' reward, is L. T. Hobhouse's Liberalism.36 As he wrote: The ground problem in economics is not to destroy property, but to restore the social conception of property to its right place under conditions suitable to modern needs. This is not to be done by crude measures of redistribution, such as those of which we hear in ancient history. It is to be done by distinguishing the social from the individual factors in wealth, by bringing the elements of social wealth into the public coffers, and by holding it at the disposal of society to administer to the prime needs of its members.37

Certainly Robert Reich's formulation of the task ahead for the Third Way is very close to Hobhouse's: For the Third Way to succeed it has to be turned into a political movement, based on a new social contract between winners and losers. In return for the winners gaining what they need in order to do even better, they must agree to apply a portion of their added booty to the things that give the others a fair shot at joining the winners' circle. A nation is a collection of people linked by culture and belief who are willing to pool certain of their resources in order that all their members have a fair chance of succeeding.38

If the economy falters, so that public spending can only be met by increased tax rates (as opposed to the greater revenue ¯owing silently from economic growth), then Labour's appeal to community will have to be used not to wean the party faithful from its socialism but to convince the better-off that they must hand over more money to the state. Armed with an unconventional rhetoric, Labour will face a task rarely absent from its history, but at a time when the trend of opinion and circumstance is hardly propitious. 36 37 38

L. T. Hobhouse, Liberalism and Other Writings, ed. James Meadowcroft (Cambridge, 1994), especially chap. on `Economic Liberalism'. Ibid., p. 91. Reich, `Third Way Needs Courage'.

7

Conclusion

Labour's involvement with taxation has been set in a paradox. At a general level its philosophy has held sway, and yet its particular achievements have been disappointing. Progression, the core principle of the tax system that worked in Labour's favour, went largely unchallenged for much of the century. Yet the outcome of Labour's efforts to use existing taxes more effectively and to devise new ones to satisfy its aims has been a failure. The explanation for this lies in the asymmetrical nature of tax debate set out in the introduction to this book. Labour has found that some of the key components of its tax philosophy have gone unopposed by the Conservatives. This may seem a rather odd judgement to make, since for much of the time Labour has felt itself to be on the defensive about tax, and it has been the issue through which voters have shown greatest concern about Labour's aims and capabilities. Yet the challenge to Labour has usually been about the levels rather than the principles of taxation. Labour as a `tax and spend' party has been a frequent characterization of Conservative argument; Labour as the guardian of progressive taxation has been almost unheard. Yet progressivity, the idea that a tax deduction rises more than proportionately with income, is at the heart of a democratic or radical view of tax. Its supports of a theoretical kind have long been exhausted. The idea that those with higher incomes or greater wealth `need' that money less than those with lower resources, that the utility of additional income at the higher levels is less than at the lower, has not survived scrutiny.1 What it rested on was the unwillingness of the Conservatives, and conservatism, to challenge the assumption that the market economy created inequality and that it was desirable to try to reduce this inequality by taxation. This challenge only came effectively in the Thatcher period. Before then, the complaints were about levels of taxation and their possible effects on economic ef®ciency, largely through the issue of incentives. But this was to introduce a practical 1

The classic text on this is Walter J. Blum and Harry Kalven, Jr, The Uneasy Case for Progressive Taxation (Chicago, 1953).

269

270

Conclusion

rather than a moral case against progressive taxes. It also proved remarkably dif®cult to bring empirical evidence to bear upon this question in a way which favoured the opponents of progressivity.2 Even when the larger issues were challenged by the Thatcher government, it was recognized that the `incentives' question was not at the heart of the case for lower taxes. This unwillingness, for the pre-Thatcher period, to tackle head-on the case for equality that lay at the heart of the tax philosophy arose from the widespread defensiveness about the ethics of capitalism. As one outstanding ®gure of the Thatcher governments recognized, `While its material success, and its demonstrable superiority over all known alternative economic systems, is no longer open to question, capitalism is still widely seen as morally suspect.'3 Labour has not been able to take full advantage of this favourable position because it was challenged at another level by the many interests affected by particular taxes that tried, usually successfully, to weaken their impact. This re¯ects Labour's failure to establish another of its core propositions, that payment of taxes should be accepted as part of an individual's responsibility to society and its government. This has been a theme of Labour's views on tax throughout its history, but it has been impossible to establish as a prevailing norm. This is shown by the way in which many of the institutions and instruments of private property and the market economy have also had value as devices for tax avoidance ± small businesses and discretionary trusts being two examples. Such strategies, too, have been regarded as perfectly legitimate activities. A tax journal reassured its readers in 1932 that `the legitimate avoidance of income tax requires great skill for its successful accomplishment. The practice of such a skill is a perfectly honourable occupation.'4 More recently, at an Institute for Fiscal Studies conference on the enforcement powers of the Inland Revenue, it was remarked that, while measures to counteract the `black' economy should be pursued vigorously, `Re-education of the tax-paying population so that it was generally considered that paying tax was a good thing was perhaps too much to hope for and, in any event, some indicated that they would not wish to live in a society where such views were the norm.'5 2

3

4 5

For a statement of the Conservative view which was strongly opposed to the levels of taxation but which did not address the principles that underlay them, see Geoffrey Stevens, `A Conservative View of Direct Taxation', British Tax Review (1957), pp. 295±302. Nigel Lawson, `Some Re¯ections on Morality and Capitalism' in Samuel Brittan and Alan Hamlin (eds.), Market Capitalism and Moral Values (Aldershot, 1995), pp. 35±44 at p. 36. `Ethics of Avoidance', Taxation, 5 March 1932. Malcolm Gammie and John Kay, `Taxation, Authority and Discretion', Fiscal Studies, 4(3) (1983), pp. 46±61 at p. 57. Emphasis added.

Conclusion

271

To develop its tax strategy within such a setting, where the challenge came as much at the detailed level of the implementation and workings of taxes as at arguments relating to the philosophy of the tax system as a whole, Labour had to rely upon a certain kind of expertise. Knowledge of taxation was quite speci®c. Kaldor's career showed that it did not ¯ow directly from a study of economics. His status as a tax expert derived from his membership of the Royal Commission on the Taxation of Pro®ts and Income. It was generated, not surprisingly, from a close acquaintance with the workings of the tax system itself. The problem for Labour was that those men who made their careers in the Inland Revenue and then emerged as public ®gures tended to be conservative in outlook and to represent the interests of private industry.6 Social policy analysis might have offered a more fruitful recruiting ground for expertise sympathetic to Labour, and some of its most distinguished practitioners have indeed contributed to Labour-sponsored enquiries over years. Their in¯uence might have encouraged Labour to look at tax for its instrumental function, as a generator of revenue for social bene®ts, and be less preoccupied with the particular qualities of the taxes themselves. A neutral tax system can fund redistributive welfare measures, after all. But their impact has been limited in two senses. In the ®rst place, social policy analysis has never fully joined up with tax policy, since its orientation is essentially towards the welfare system. Secondly, social policy academics have not surprisingly focused on the poor, and their conception of the social structure re¯ects this. Their interest in tax therefore encourages a division along the exemption point between those who ought not (but often do) pay income tax because they are poor, and those who should pay tax because their incomes are well above the subsistence level. The Labour party has never con®ned itself to this perspective, but has been as much concerned with the wage earner and the salaried professional or technical employee whose interests needed protection in relation to the wealthier sections of society. The poor have never monopolized its attention. The expertise upon which Labour has drawn shows various character6

The careers of the four experts who have ®gured in this study were as follows: Josiah C. Stamp, 1880±1941: Inland Revenue, 1900±19; Nobel Industries, 1919±26; ICI, 1927±8. Adviser to government on international and domestic ®nancial questions. Paul Chambers, 1904±81: Inland Revenue, 1927±47; ICI, 1947±68. W. H. Coates, 1909±63: Inland Revenue, 1904±25; Nobel Industries, 1925±6; ICI, 1927±50. Arthur Cock®eld, 1916±: Inland Revenue, 1938±53; Boots Drug Co., 1953±67; served in Conservative governments, 1979±84.

272

Conclusion

istics. Philip Snowden undoubtedly bolstered the party's credibility in ®nance in the 1920s when the tax powers of the state seemed particularly threatening and when, locally, the party seemed only too willing to use them. The price was that Snowden seemed unable to move from a reliance upon the Treasury. As the Conservative Sir John Marriott commented at the time of the 1924 budget, `these budgets are prepared to a very large extent, and admirably prepared, by the permanent members of the civil service'.7 Hugh Dalton was more vigorous, but tended to put all his eggs in one basket. The capital levy, his pet project, never saw the light of day, and as a chancellor he seemed to have tunnel vision. But the way in which his chief contribution to the party, as a political patron, also partnered his interest in public ®nance, meant that he acted as an important bridge for tax questions from Snowden to the post-1945 generation. Nicholas Kaldor's expertise was directed exactly where the party's leadership thought it ought to go in the postAttlee era, namely towards a tighter grip on the spending power of the business classes able to exploit the narrow de®nition of income as used by the tax authorities. This was essentially about tax avoidance rather than equality, so it was to leave some aspirations unful®lled. The task of responding to egalitarian demands in the 1970s fell to Joel Barnett. His background was in many ways ideal. As an accountant he had a thorough grasp of tax administration, and this enabled him to be more positive about the scope for further tax reform after the 1965 budget than many of those in the party who accepted the Revenue's view that they were hopelessly overburdened by the new taxes introduced in that year. His knowledge of small businesses also told him when Labour was going too far in its anti-avoidance strategy. But it also meant that the problems caused for capital transfer tax by concessions for small businesses and agriculture turning into avoidance devices were unresolved. There was a political context to Labour's activities in addition to an intellectual one. The trade unions were probably the most powerful in¯uence upon this. Their position has been an uneasy one. Had they been simply a channel for the views of their members ± that they wanted to pay less income tax ± then the strains of the 1970s caused by top rates of tax that brought ridicule and welfare demands that were expensive might have been avoided. But the unions had been encouraged to participate in tax matters by governments anxious to secure consent for incomes policies. However, this involvement was damagingly uneven. On the one hand, trade unions made demands which governments took 7

H. C. Deb., 172, col. 1719, 1 May 1924.

Conclusion

273

seriously and tried to ful®l even, at times, against their better judgement as was undoubtedly the case in 1974±9. On the other, it was impossible to dislodge wages as the central preoccupation of trade unionists. So they had been drawn into a political dialogue which they were un®tted to sustain, to the disadvantage of both themselves and the Labour Party. Although this is a record of few achievements, it should not be regarded as a study in failure. Taxation as Labour understood it was an expression of obligation to community and state as well as the means for a democracy to achieve agreement about a fair distribution of rewards in a market economy. To pursue these ends in a society whose political culture has been shaped by individualism rather than collectivism and where private property has complex and deep foundations was to explore the limits of political action.

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Tax Credits National Union of Mineworkers, Barnsley National Union of Railwaymen, Modern Records Centre, University of Warwick Trades Union Congress, Modern Records Centre, University of Warwick Economic Committee Taxation subject ®les Transport and General Workers' Union, Modern Records Centre, University of Warwick 3. british government records (public record office, kew) Inland Revenue Papers IR 64 Intelligence and Statistics Division IR 75 Papers of the Royal Commission on the Taxation of Pro®ts and Income IR 113 Treasury Papers T171 (Budget) T172 (Subject Files) T176 Niemeyer Papers B. P R I N T E D S O U R C E S 1. british government publications Economic Trends Inland Revenue Statistics National Income and Expenditure 1946±53 (1954), 1959 (1959) and 1963±73 (1974) Reports of the Board of Commissioners of the Inland Revenue National Audit Of®ce, Inheritance Tax (London, 1992) 2. royal commissions, committees, select committees Royal Commission on the Distribution of Income and Wealth, various reports 1975±9 Royal Commission on Income Tax, Report and Minutes of Evidence, PP 1919, xxiii, parts 1 and 2 Royal Commission on the Taxation of Pro®ts and Income. Final Report, Cmd. 9474, PP 1955±6, xxvii. Minutes of Evidence. Second Report, Cmd. 9105, PP 1953±4, xix Committee (Allen) of Inquiry into the Impact of Rates on Households, PP 1964±5, xxii Committee (Colwyn) on the National Debt and Taxation. Report, Cmd. 2800, PP 1927, xi. Minutes of Evidence, 2 vols. Report of the Committee on Turnover Taxation (London, 1964) Select Committee on Income Tax, PP, 1906, ix, report and evidence

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Select Committee on Tax Credit, PP 1972±3, xxxiv, vols.1 and 2 Select Committee on a Wealth Tax. Minutes of Evidence, PP 1974±5, xxxvi 3. political organizations Labour Party, Annual Report 4. periodicals and newspapers The Accountant The Economist The Guardian Listener Lloyds Bank Review Nation New Leader New Society New Statesman Socialist Commentary The Spectator The Statist Stock Exchange Gazette The Times Tribune 5. parliament Parliamentary Debates (Commons), 5th series 3 . M E M O I R S A N D WO R K S O N TA X AT I O N G E N E R AT E D B Y T H E L A B O U R M OV E M E N T Barnett, Joel, Inside the Treasury (London, 1982) Benn, Tony, Con¯icts of Interest. Diaries 1977±80, ed. Ruth Winstone (London, 1991) Bevan, Aneurin, In Place of Fear (London, 1952) Brown, Gordon, `Equality Then and Now' in Dick Leonard (ed.), Crosland and New Labour (London, 1999), pp. 35±48 Callaghan, James, `The Approach to Social Equality' in D. Munro (ed.), Socialism the British Way (London, 1948), pp. 127±52 Time and Chance (London, paperback edn, 1987) Carter, George R. and Houghton, H. W., `The Income Tax on Wages by Quarterly Assessment', Economic Journal (March 1918), pp. 30±42 Commission on Social Justice/Institute for Public Policy Research, Social Justice. Strategies for National Renewal (London, 1994) Crosland, C. A. R., The Conservative Enemy: a Programme of Radical Reform for the 1960s (London, 1962)

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The Future of Socialism (London, 1956) Crossman, Richard H. S., The Backbench Diaries of Richard Crossman, ed. Janet Morgan (London, 1981) The Diaries of a Cabinet Minister. Vol. III, Secretary of State for Social Services, 1968±70 (London, 1977) Dalton, Hugh, The Capital Levy Explained (Edinburgh, 1923) `The Measurement of the Inequality of Incomes', Economic Journal, 30 (1920), pp. 348±63 The Political Diary of Hugh Dalton, 1918±40, 1945±61, ed. Ben Pimlott (London, 1986) Practical Socialism (London, 1935) Principles of Public Finance (London, 1922 and 1954) Some Aspects of the Inequality of Incomes in Modern Communities (London, 1920) Will Capital Leave the Country? (London, 1924) Dell, Edmund, The Chancellors. A History of the Chancellors of the Exchequer, 1945±90 (London, 1997) A Hard Pounding. Politics and Economic Crisis (Oxford, 1991) `Labour and Local Government', Political Quarterly, 31 (1960), pp. 333±47 `The Origins of the Petroleum Revenue Tax', Contemporary Record, 7(2) (1993), pp. 215±52 Fabian Society Taxation Review Committee, The Reform of Direct Taxation (London, 1990) Gaitskell, Hugh, `The Economic Aims of the Labour Party', Political Quarterly, 24(1), (1953), pp. 5±18 Graham, Thomas N., Willie Graham. The Life of the Rt Hon. W. Graham (London, 1948) Graham, Willie, `Labour and the Surtax', The Banker ( January 1928), pp. 44±50 Healey, Denis, The Time of My Life (Harmondsworth, 1990) Houghton, Douglas, `The Futility of Taxation by Menaces' in A. Seldon (ed.), Tax Avoision: the Economic, Legal and Moral Inter-relationships between Avoidance and Evasion (London, 1979), pp. 89±99 Jay, Douglas, Change and Fortune. A Political Record (London, 1980) `Labour and Tax Reform', British Tax Review (March 1957), pp. 16±23 Socialism in the New Society (London, 1962) The Socialist Case (London, 1937) Sterling: Its Use and Misuse: a Plea for Moderation (London, 1985) Jenkins, Roy, Fair Shares for the Rich (London, 1951) A Life at the Centre (London, 1991) Jones, Jack, Union Man, an Autobiography (London, 1986) Mackintosh, John, `Socialism or Social Democracy? The Choice for the Labour Party', Political Quarterly (1972), pp. 470±84 Mandelson, Peter and Liddle, Roger, The Blair Revolution. Can New Labour Deliver? (London, 1996) Mortimer, J., The TUC and Wages Policy (London, 1950) Pethick-Lawrence, F. W., The Capital Levy (London, 1920) A Levy on Capital (London, 1918)

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4 . B O O K S A N D A RT I C L E S Abel-Smith, Brian, Freedom in the Welfare State (London, 1964) Abel-Smith, Brian and Townsend, Peter, The Poor and the Poorest. A New Analysis of the Ministry of Labour's Family Expenditure Surveys of 1953±54 and 1960 (London, 1965) Applebaum, Anne, `Tony Blair and the New Left', Foreign Affairs, 76(2) (1997), pp. 45±60 Artis, Michael and Cobham, David (eds.), Labour's Economic Policies, 1974±79 (Manchester, 1991) Atkinson, A. B., `Inequality and Social Security' in Peter Townsend and Nicholas Bosanquet (eds.), Labour and Inequality (London, 1972), pp. 12±24 `On the Switch to Indirect Taxation', Fiscal Studies, 2(3) (1981), pp. 1±8 Poverty in Britain and the Reform of Social Security (Cambridge, 1969) The Tax Credit Scheme and the Redistribution of Income (London, 1973) Unequal Shares: Wealth in Britain (London, 1972) Bacon, Robert and Eltis, Walter, Britain's Economic Problem: Too Few Producers (London, 1976) Balogh, T., `Differential Pro®ts Tax', Economic Journal, 68 (1958), pp. 528±33 `Food Subsidies', Bulletin of the Oxford University Institute of Statistics, 10 (1948), pp. 322±40 Banting, Keith, Poverty, Politics and Policy (London, 1979) Barna, Tibor, `Those ``Frightfully High'' Pro®ts', Bulletin of the Oxford University Institute of Statistics, 11 (1948), pp. 213±28 Barry, Brian, Political Argument (London, 1965) Beckerman, Wilfred, `Objectives and Performance: an Overall View' in Wilfred Beckerman (ed.), The Labour Government's Economic Record: 1964±1970 (London, 1972), pp. 29±74 Beckerman, Wilfred (ed.), The Labour Government's Economic Record: 1964±1970 (London, 1972)

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Index

Abel-Smith, Brian (social policy academic), 176±7 Child Poverty Action Group, 183 The Poor and the Poorest (1965), 176±7 tax credits, 222, 226 Albu, Austen (Labour MP), 134 Allen Committee on rates, 206 alternative economic strategy, 247 Amalgamated Engineering Union, 94, 98, 102, 158 Amalgamated Society of Engineers, 20 Anderson, Sir John (Scottish Universities' MP), 74, 86 Arnold, Sydney (Liberal then Labour MP), 22, 38 Atkinson, A. B. (social policy academic), 27, 193, 216, 227 Attlee, Clement (Labour prime minister), 75, 128, 130, 168 compared to Wilson governments, 169 avoidance of tax, 3±4, 146±7, 155±6, 166±7, 264 Bacon, Robert (economist), 256 Baldwin, Stanley (Conservative prime minister), 29, 32 Balogh, Thomas (economist), 108, 162, 163 Barna, Tibor (economist), 86 Barnett, Joel (Labour Treasury minister) 1965 budget, 165±6 1977 budget, 252 assessed, 272 attitude to taxation, 210, 211, 229, 252, 272 capital transfer tax, 242±44 Labour Party/TUC liaison committee, 240 relationship with Healey, 229 relationship with trade unions, 235±6 sceptical about burdens on Revenue, 212±13

tax burdens, 249, 256 tax credits, 227 views on economic policy, 210 Beckerman, Wilfred (economist), 179 The Labour Government's Economic Record (1972), 179, 190 beer duty, 91±2, 99 n.130, 202 Benn, Tony (Labour MP), 244±5 Benson, George (Labour MP), 83, 95 Bevan, Aneurin (Labour minister) 1951 budget controversy, 105±6 In Place of Fear (1952), 126 tax compliance, 126 Beveridge, William (welfare reformer), 221±2, 223, 228 `new Beveridge', 227±8 see also welfare Bevin, Ernest (foreign secretary and trade unionist), 85 PAYE, 98±9 Blair, Tony (Labour prime minister), 262, 264, 267 redistribution, 260 Booth, Alan (historian), 50 Boothby, Robert (Conservative MP), 83, 86±7 Bosanquet, Nicholas (economist), 180, 255 Labour and Inequality (1972), 180, 186, 190 Bowen, J. W. (trade unionist), 35 Bower, Frank (industrialist), 87±8 Bowley, Arthur (statistician), 13, 14 Boyd-Carpenter, John (Conservative Treasury minister), 121±2 Boyle, Edward (Conservative Treasury minister), 73, 155±6 Brailsford, Henry (radical journalist), 40±1, 53 Brown, George (Labour minister), 159, 209 Brown, Gordon (Labour chancellor), 260±1, 265, 266

287

288

Index

budgets 1924, 43 1941, 62±3 1945 (October), 69, 86±7, 96, 97 1946, 71,74, 96 1947, 69, 86, 87 1947 (November), 85, 100, 108 1948, 77±8, 79±80, 92, 93, 96, 99 1950, 96, 99, 103 1951, 92, 104, 105±11, 129 1952, 112±14, 120 1953, 118 1960, 73 1965, 159±68, 169±70 1966, 173, 199±201 1965 and 1966 compared, 199 1969, 210 1970, 186 1976, 247, 254 1977, 252±3, 254 1979, 215±16, 257 1988, 265 1998, 264 Bullock, Herbert (trade unionist), 138 business expenses, 124±5, 131, 133±4 Butler, R. A. (Conservative chancellor), 104, 112±13, 118 Cairncross, Alec (economic adviser and historian), 107, 200 n.83 Callaghan, James (Labour chancellor and prime minister), 15 n.23 in 1945±51, 94, 125 1965 budget, 159±60, 162±4 1966 budget, 166, 173 1976±9 government, 232±3 and Kaldor, 135 tax reform, 196, 198 VAT, 201, 205 Campbell, J. S. (trade unionist), 116 Canny, Sir George (chairman, Inland Revenue), 62 capital gains, and their taxation 1940s, 88±9 1950s, 131 1960s, 155±6 1962 capital gains tax, 157±8 1965 capital gains tax, 159, 162 as anti-avoidance device, 171 capital levy after First World War, 22, 24, 30±4 after Second World War, 75±8, in 1950s, 127, 131 capital sharing, 217±19 capital transfer tax, 241±3, and small companies, 243±5

Carron, William (engineers' leader), 158 Carter, George (Labour Party), 20 Catherwood, Fred (National Economic Development Council director), 204 Chamberlain, Neville (Conservative chancellor), 50 Chambers, Paul (chairman of Inland Revenue and industrialist), 87, 97±8 cheap money, 78, 124±5 Chester, D. N. (political studies academic), 123±4 Child Poverty Action Group, 182±3, 185±6, 227 Churchill, Winston (Conservative chancellor and prime minister), 35, 40±1, 45, 129 Clark, Colin (economist), 66 Clay, Henry (economist), 32, 40 Clynes, J. R., 34, 44 coal miners 1945±51, 98±9 and Conservatives, 112 First World War, 19 and tax awareness, 118 Coates, W. H. (Inland Revenue of®cial), 41, 271 n.6 Cock®eld, Arthur (Inland Revenue of®cial), 3, 73, 136, 155, 271 n.6 Coghlan, T. A. (Australian tax of®cial), 14 Colwyn Committee on the National Debt and Taxation, 17, 31, 34±5, 44, 47, 55 companies, and taxation of, 16±18, 38 1945±51, 83±90, 125 1960s, 140±1, 159 1965 corporation tax 161±2, 163±4, 251 Confederation of British Industry (successor to Federation of British Industries) 1965 Finance Act, 164, 170 1979 budget, 257 personal income tax, 251, 253, 254±5 wealth tax, 193±4, 241 Conservative Party 1920s, 40, 53 1950s, 111±13, 121 1960s, 153±9 1965 Finance Act, 160, 164±5 1979 budget, 215±16, 257 corporation tax, 251 food subsidies, 95 and Labour Party, 40±41, 53±4, 83, 111±13, 121±2, 148±9, 153±59, 165, 216, 237, 257, 259±61, 269±70

Index local government, 59 Select Committee on a Wealth Tax, 237 tax credits, 221, 224, 225 wealth tax, 190 Co-operative Society, 47±50 corporation tax 1920s, 18, 38 1950s, 141 1965, 159±60, 161±2, 251 cost-of-living index, 100, 117 Cripps, Stafford (Labour chancellor), 64, 85 1945±51 assessed, 123±4, 125, 128 1950 budget, 103, 105 death duties, 75 food subsidies, 101±2 income tax, 99 purchase tax, 91±3 special contribution (1948), 77±80, 81 Statement on Personal Incomes, Costs and Prices (1948), 81 treatment of working class, 113 Crosland, Anthony (Labour MP and ideologue), 102±3, 145, 209, 231 The Conservative Enemy (1962), 151±2 contrasted with Dalton, 131±2 and Kaldor, 135, 136 The Future of Socialism (1956), 148±50 taxation and ideology, 148±51 Crossman, Richard (Labour MP) Daily Herald, 51 Dalton, Hugh (Labour chancellor ), 18 1930s, 51±2 1945±51 assessed, 123±4, 128±9 assessment, 272 background, 8±9 budgets, 1945 (October), 69, 86±7, 96, 97 1946, 71,74, 96 1947, 69, 86, 97 1947 (November), 85, 100, 108 capital levy, 28±9, 34 chancellor, 67±77 comparisons with 1970s, 238±9 contrasted with Cripps, 64 and Crosland, 131 and Kaldor, 142 Co-operative Society, 49 corporation tax, 18 equality, 131, 154 food subsidies, 100, 108 Labour's surtax (and Mosley), 36±8 Practical Socialism (1935), 50, 72 Principles of Public Finance (1922), 31

289 Some Aspects of the Inequality of Incomes in Modern Communities (1920), 26±7 tax expertise, 26±8, 56±7, 108±9 taxation and nationalization, 246 Daunton, Martin (historian), 58 Davies, J. E. (industrialist), 88 death duties before 1939, 11, 31 1940s, 71±5 1950s, 121 1970s, 221 1980s, 265 Dell, Edmund (Labour MP), 160, 209, 246, 249 Diamond, John (Labour Treasury minister) 1950s, 132 1965 budget debates, 164±5, 166 and Kaldor, 134±5 VAT enquiry, 202±4 see also Royal Commission (Diamond) on the Distribution of Income and Wealth Dilke, Sir Charles (Liberal MP), 12, 14 Duffy, Patrick (Labour MP), 247±8 economic management, 65, 68 1951 budget, 107±8 1960s, 208±10 1970s, 232±4, 246±7 Economic Trends, 174, 181 Edwards, Charles (trade unionist), 55 Edwards, John (Labour Treasury minister), 104 Eltis, Walter, 256 Britain's Economic Problem: Too Few Producers (1976), 256 equality (and inequality), 2±3, 6, 27, 131, 143±4, 179±82, 184, 242±5, 265±6 European Economic Community, 202, 204 evasion of tax, 57, 124, 126, 131 excess pro®ts taxes First World War, 16±17 Second World War, 84 expenditure tax, 3, 136±8, 215, 260 expertise in tax, 53±4, 55±7, 270±3 in relation to economics, 107±9 economic and social policy analyses compared, 25, 174±9, 271 Fabian Society, 26, 136, 180, 264 fairness, 3, 6, 143±4, 245 family allowances, 36, 181, 184, 187, 223 Family Expenditure Survey, 174±5, 181, 183, 248 Family Income Supplement, 224, 228

290

Index

Feather, Vic (TUC of®cial), 204, 228 Federation of British Industries Conservatives' capital gains tax, 158 Cripps's special contribution, 79 pro®ts taxes, 86±7 Feinstein, Charles (economic historian), 192 Field, Frank (Labour MP), 185±6, Figgins, J. N. (NUR general secretary), 102, 116 First World War, 16±23 Flemming, J. S. (economist), 220 food subsidies under Conservatives, 112, 114 under Labour, 95, 96, 103, 104±5, 108 Freeman, John (Labour minister), 106 Gaitskell, Hugh (Labour leader), 130±2, 145 1945±51, 75±7, 84, 91, 123±6, 128±9 1951 budget controversy, 105±11 general elections 1922, 34 1923, 34 1950, 94, 102 1959, 154 1997, 259 George, Henry (economist), 26 Gilbert, Bernard (Treasury of®cial), 68 Gillett, George (Labour MP), 44 gilt-edged stock, 160, 164 Glasier, Bruce (Labour politician), 10 Gordon-Walker, Patrick (Labour MP), 147, 154 Gould, Bryan (Labour MP), 221 Graham, Willie (Labour Treasury minister), 18, 26, 39, 42, 48 Gregg, Sir Cornelius (chairman, Inland Revenue), 69, 76 Hall, Robert (Treasury economist), 133 Harcourt, William (Liberal chancellor), 11,15 Harrod, Roy (economist), 117±18 Hayek, F. A. (economist), 4 Healey, Denis (Labour chancellor) 1977 budget, 252±3 capital transfer tax, 242±3 as chancellor, 236±7 in opposition, 230 qualities, 229 Heath, Edward (Conservative prime minister) 1965 budget, 164±5 1970±4 government, 221, 224±5, 228, 230, 251

Helsby, Lawrence (civil servant), 157 Henderson, Hubert (economist), 32, 57 Hicks, John (economist), 120 Hicks, Ursula (economist), 117 Hill, Ted (trade unionist), 113 Hilton, John (industrial relations academic), 48, 63 Hobhouse, L. T. (Liberal thinker), 12, 268 Hobson, J. A. (economist), 11, 17 Holmes, J. S. (Liberal MP), 17 Hopkins, Richard V. N. (Inland Revenue and Treasury of®cial), 22, 63, 101 Horner, Arthur (trade unionist), 115 Houghton, Douglas (Labour MP), 15 n.23, 76, 132 PAYE, 212 tax consent, 152 tax policy-making, 145±7 Howe, Geoffrey (Conservative chancellor), 215, 257±8 incentives, 5, 95, 98±9, 113, 117±19, 215±16, 252, 256±7 incomes policy 1948±50, 81±2 1960s, 153 1965 budget, 159, 168 1970s, 232, 233, 248, 254±5 income tax allowances, 21, 96, 119±20, 184±5, 224±5 changes in rates, 18±19, 61±4, 247±8, 249±54, 260 `clawback', 181, 184, 223 earned income allowance, 96±7, 211 graduation, 16 higher rate, 247, 250±2, 253 married women, 151, 264 pay, 187, 230, 254±5 progressivity, 269 reliefs, 96±7, 252 tax reform, 148±52, 167, 196 threshold, 96, 119±21, 168, 185±6, 247, 249 wage earners, 97±9, 185±6 see also incentives; pay-as-you-earn; surtax Independent Labour Party, 28, 36, 60 indirect taxes, 67, 91±3, 95, 137, 215±16, 252, 257±8 in¯ation, 65, 78, 85, 87±8, 101, 187, 233 tax yields, 120, 249±50 inheritance, 27, 31, 71±2, 241±2 initial allowances, 88 Inland Revenue, Board of, 13, 17, 45 burdens upon, 125, 170, 210±13

Index capability of, 56 capital gains tax, 89, 140, 156 capital transfer tax, 242±3 Conservatives, 155±6 conservative attitudes of, 57±8, 212 Cripps's special contribution, 78±9 Dalton, 69±70, 73 food subsidies, 101 First World War, 19±20 Kaldor, 143 Labour's surtax proposal, 37±8 Second World War, 62±4 tax reliefs 96±9 wealth tax, 191, 194±5 see also Canny, Sir George; Gregg, Sir Cornelius; Johnston, J. Alexander; pay-as-you-earn; Primrose, Sir Henry Institute for Fiscal Studies, 214±15, 249±50, 270 International Monetary Fund, 233 Jarvis, David (historian), 53 Jay, Douglas (Labour Treasury minister) 1930s, 51±2 1945±51, 71, 74, 82, 122±6, 128±9 1951 budget controversy, 111 1965 budget, 160 food subsidies, 101±2, 104 income tax, 99 Kaldor's expenditure tax, 137 Paying for the War (1940), 51 Select Committee on a Wealth Tax, 237 The Socialist Case (1937), 71, 82 surtax, 122 Jay, Peter (®nancial journalist), 193 Jenkins, Roy (Labour chancellor) 1950s, 132, 145 1970s, 228±9 budget strategy, 210 capital levy, 127±8 compared to Cripps, 209 Fair Shares for the Rich (1951), 127±8 special contribution (1968), 194 wealth tax, 194±5 Jewkes, John (economist), 95 Johnston, J. Alexander (chairman, Inland Revenue), 143, 156 Jones, Jack (general secretary, Transport and General Workers' Union), 228, 235 pensions, 231, 235±6 wealth tax, 239±40 Kaim-Caudle, Peter (social policy academic), 186±7

291 Kaldor, Nicholas (economist), 60, 90, 152, 171 1965 budget, 160, 162±4, 168 assessed, 272 company taxation, 140±1, 251 compared with Dalton, 142 criticism of, 167 An Expenditure Tax (1955), 135 Inland Revenue, 143 Institute for Fiscal Studies, 214±15 integrated tax structure, 146 Labour Party policy groups, 146 PAYE, 212 personality, 142 Royal Commission on the Taxation of Pro®ts and Income, 120±1, 134, 138, 271 selective employment tax, 198 tax credits, 227 taxable capacity, 134±6, 138±40 VAT, 201±4 `Keep Left' group, 107±8 Keynes, J. M. (economist), 35, 37, 53, 76 1931 crisis, 45±6 1941 budget, 62±3 capital levy, 24, 31, 32 Keynesian analysis, 107 Second World War, 50±52 Korean War, 105±6, 109 Labour councillors, 207±8 Labour Party and Conservative Party, 40±41, 53±4, 83, 111±13, 121±2, 148±9, 153±59, 165, 216, 237, 257, 259±61, 269±70 Finance and Economic Policy Subcommittee, 153, 228±9, 230±1 food subsidies, 104 high tax reputation, 2, 59±60, 154, 210, 259±61, 269 Liberals' views of, 32, 37 modernization, 154, 157, 167, 196, 263 National Executive Committee, 40, 94 in opposition, 143±8, 217±32 Parliamentary Party, 54 ®nance group, 78, 83, 95, 97, 209, 229 relationship with trade unions, 82, 158, 171±2, 179±80, 187, 204±5, 228, 231±2, 254±6, 272±3 Select Committee on a Wealth Tax, 237±9 tax expertise 1920s, 25±8, 32, 43, 56±7 1945±51, 122±3, 128±9 1950s, 132, 134±5, 137, 145, 147±8 1960s, 209±10

292

Index

Labour Party (cont.) assessed, 271±2 tax strategy, 2±3, 6±7, 25, 56, 58±60, 171±2 tradition, 137, 152±3, 167, 171±2 TUC joint bodies, 54, 230, 239±40 land value taxation, 10, 44±5 Lavers, G. R. (social investigator), 105 Lawson, Nigel (Conservative chancellor), 5, 242 Lea, David (TUC of®cial), 218 Lees-Smith, H. B. (Labour MP), 26, 33, 54, 239 Lever, Harold (Labour MP), 145 1965 budget, 165±6, 167, 191 tax avoidance, 147, 161 n.113 VAT enquiry, 202 Liberal Party, 8, 11, 15±16 Lib±Lab pact, 246, 253 Little, Ian (economist), 95, 129, 175, 220 Lloyd George, David (Liberal prime minister), 11, 12, 19, 47 local government, 59±60, 128, 205±8 Low Pay Unit, 250±2 MacDermott, Niall (Labour Treasury minister), 161 MacDonald, Ramsay (Labour prime minister), 10, 33, 43, 44, 54, 267 McKenna, Reginald (Liberal chancellor), 32 Mackintosh, John (Labour MP), 183, 189, 237±8 McLintock, William (accountant), 21 Madge, Charles (sociologist), 52 Mallett, Bernard (Treasury of®cial), 43 Marquand, David (historian and Labour MP), 46, 183, 189, 249 Marshall, Alfred (economist), 25 Maudling, Reginald (Conservative chancellor), 121±2 Meacher, Michael (Labour MP), 190, 222±3 Meade, James (economist), 68, 72, 76, 84±5 IFS Committee on Reform of Direct Taxation, 249±50 middle classes, 21, 39±40, 99, 102, 250±1 Milne-Bailey, W. (TUC of®cial), 54 Moffat, Abe (trade unionist), 113 Money, Leo Chiozza (Liberal MP), 13±15 Morrison, Herbert, 59, 66, 128 Mosley, Oswald (Labour MP), 36±7 Murray, Len (TUC of®cial), 187, 211

Nation, The, 37±8, 59 national debt, 23, 35±6, 38±9, 75 see also Colwyn Committee on the National Debt and Taxation National Debt Enquiry, 75 national defence contribution, 84 National Economic Development Council, 154, 198, 204 national insurance, 92, 152, 264 National Land Fund, 72 National Union of Mineworkers, 113, 115 National Union of Railwaymen, 116 Neild, Robert (economic adviser), 160, 199 Niemeyer, Otto (Treasury of®cial), 35 New Leader, The, 38±40 North Sea oil, 251 Owen, David (Labour MP), 183, 189 Paine, William (banker), 29±30 Parkinson, Cecil (Conservative MP), 243 pay-as-you-earn, 63±4, 97±9 1965 budget, 166±7 effect on tax system, 211±12 incentives, 118 tax reform, 140±3, 151±2 payroll taxes, 150±1, 198±9 pensions, 181, 231, 248 Pethick-Lawrence, F. W. (Labour MP), 25±6, 33, 44, 53, 239 petrol tax, 99, 264 Phillips, Morgan (Labour Party general secretary), 102 Phipps, Colin (Labour MP), 244 Piachaud, David (social policy academic), 183, 224, 248 Pigou, A. C. (economist), 25 Pimlott, Ben (historian) 50, 81, 153 Plowden, Edwin (civil servant), 80 Polanyi, George (economist), 221 Polanyi, Priscilla (economist), 221 Poplarism, 59 popular understanding of taxation, 53, 55, 98, 117±18, 211, 256 post-war credits, 65 poverty, 173, 176±7, 184±5 and 'poverty trap', 223±4, 248 Primrose, Sir Henry (chairman, Inland Revenue), 13 'producer' and 'non-producer', 10, 85 pro®ts tax, 84±87 property ownership, 57, 190±1, 219 public expenditure, 154, 233, 246±9 purchase tax, 91±3, 197, 203

Index railwaymen, 114, 116±17 rates, 53, 205±8 redistribution, 2, 4, 179±95, 235, 248, 253, 262±3 regional health boards, 207 Reich, Robert (US labor secretary), 262, 267±8 rentiers, 46, 69, 79 Revell, Jack (economist), 192 Rhys Williams, Lady, 222 Richardson Committee on Turnover Taxation, 197 Rignano, Eugenio (Italian socialist), 27, 29, 71±2 Ritchie, Lord (stock exchange), 158 Robertson, D. H. (economist), 29 Robinson, Ann (public ®nance academic), 237 Rooker, Jeff (Labour MP), 252±3, 256 Rowntree, B. S. (social investigator), 105 Royal Commission (Diamond) on the Distribution of Income and Wealth, 236, 248, 250 Royal Commission on Income Tax, 20±2, 25, 56 Royal Commission on the Taxation of Pro®ts and Income, 117±18, 215 Samuel, Herbert (Liberal MP), 18 Sandford, Cedric (public ®nance academic), 237 Scanlon, Hugh (general secretary, Amalgamated Engineering Union), 228, 235 Schuster, Felix (banker), 14 Second World War, 61±2 Sedgemore, Brian, 249, 254 Seers, Dudley (economist), 103, 107±8, 175 Select Committee on Income Tax, 12±16 selective employment tax, 198±205 Seligman, E. R. (public ®nance academic), 12 Sheldon, Robert (Labour MP), 227 Shirkie, Robert (TUC), 21 Shore, Peter (Labour MP), 160, 209 Sieve, Jack (social policy academic), 226 Simon, E. (Liberal councillor), 59 small companies, 4, 5 capital gains tax, 164±5 capital transfer tax, 243±5 socialism, 245 Smith, John (Labour Party leader), 261 Smith, T. Dan (Labour regional politician), 208

293 Snowden, Philip (Labour chancellor), 8±9, 10, 11, 18, 35 1920s, 42±7 1929±31, 45±6 assessed, 272 capital levy, 33±4 Churchill, 44, 45 comparisons with, 109 First World War, 19, 22±3 Labour and the New World (1921), 44 Labour's surtax proposal, 38±9 land value taxation, 44±5 opinions about, 36, 43, 44 n.143 referred to in 1951, 106 Select Committee on Income Tax, 12±16 tax strategy, 56, 59, 92 social democracy, 214, 218 Social Justice Commission (Labour Party body), 2, 261 social security, 169, 181, 184±5, 248 social wage, 94, 234, 250 Socialist Commentary, 257 special contribution 1948, 77±80, 193 1968, 193 Stamp, Josiah (tax expert), 17, 54 authority of, 29, 56 British Incomes and Property (1916), 29 capital levy, 29±32 Co-operative Society, 47±8 Stephenson, Peter (Socialist Commentary contributor), 189 Stewart, Michael (economist), 180, 190±1 Stock Exchange Gazette, 44 Streat, Raymond (industrial spokesman), 50 surtax, 36±42, 69±71, 121±2, 131, 152 see also income tax, higher rate tariff reform, 10 Taverne, Dick (Democratic Labour MP), 1 n.3, 212 Tawney, R. H. (socialist) `spirit of', 188 and n.43 tax administration, 62±4, 125±6, 165 tax credits, 221±8 tax rates, 18±19, 61±2, 91±3, 247 tax reform, 135±6, 148±52, 167, 196±205, 260 tax structure, 150±2, 216±17, 257±8 Thomas, J. H. (Labour minister), 33, 34 Thompson, Noel (historian), 266 Titmuss, Richard (social policy academic), 151±2, 178, 183 Income Distribution and Social Change (1962), 151

294

Index

tobacco duty, 71, 91±2, 99 n.130, 202 Townsend, Peter (social policy academic), 176±8 Child Poverty Action Group, 182±3 Labour and Inequality (1972), 180, 186 The Poor and the Poorest (1965), 176±7 trade unions, 81 assessed, 272±3 behaviour, 233±5 equality, 180 family allowances, 36±7 incomes policy, 81±2, 155, 156±8 opinions of members, 235±6 pay, 114±17 tax policy, 81±2, 254±6 Trades Union Congress 1945±51, 66 1960s, 155 budget policy, 252, 254±5 capital levy, 31 Colwyn Committee, 31, 55 Conservatives, 114±16, 158 Labour Party, 230±1, 254 lower paid, 119 small companies, 244 wage restraint, 99 Treasury 1947 (November) budget, 101 capital taxation, 70±1, 73±4, 78±9 capital gains tax (1962), 162±3 expertise, 109 tax reliefs, 96±7 wealth tax, 237 see also budgets Trend, Burke (civil servant), 69, 70±1 Treveleyan, Charles P. (Liberal and later Labour MP), 15 Tribune, 103 trusts, 4, 241 value added tax, 196±8, 201±5, 255, 257 Vestey, Sir William (industrialist), 55 War Emergency National Workers' Committee, 25

Watts, Nina (historian), 107 wealth tax 1960s, 155, 165, 190±5, 204 1970s, 211, 217, 219±21, 231±2, 238±41 1990s, 265 Webb, Beatrice (socialist), 43 Webb, Sydney (socialist), 24, 25, 33, 43 Wedgwood, Josiah (Labour MP), 26 The Economics of Inheritance (1929), 26 welfare, 66±7, 93±4, 181±2, 262±3 see also Beveridge, William (welfare reformer) Wheatcroft, G. S. A. (tax academic), 148, 170 n.142 Williamson, Philip (historian), 46 Wilson, Harold (Labour prime minister) 1951 budget controversy, 106 1950s, 132 1964±70 governments, 180±1, 183±4, 213, 216 1965 budget, 159±60 1966 budget, 201 1974±76 government, 216, 233 equality and ®scal privilege, 144 taxation and incomes policy, 158±9 windfall tax, 266 Wise, Audrey (Labour MP), 252 Wood, Kingsley (Conservative chancellor), 62±3 Woodcock, George (TUC general secretary), 120, 121, 138±41, 158 Wootton, Barbara (economist), 35 working class consumption, 188±9 taxation 1945±51, 65±6, 90±105 1974±9, 252±3 Conservatives, 112±14 First World War, 19±21 welfare, 66±7 Worswick, G. D. N. (economist), 108, 134, 137, 175