The company when paying the dividend to B would deduct 4s. 6d. in the £ United Kingdom tax, and intimate on the dividend warrant that the relief in respect of Double Income Tax was 1s. 6d. in the £.

Let it be assumed that B's dividend of £900 is his total income, so that his proper rate of charge to United Kingdom Income Tax is 3s. 9d. He has suffered Dominion tax to the extent of 1s. 6d. in the £, and his ultimate rate of United Kingdom Income Tax is 2s. 3d. in the £ (3s. 9d. less 1s. 6d.), but he has suffered by deduction 4s. 6d. in the £, and he will accordingly be repaid 4s. 6d. minus 2s. 3d. 2s. 3d. in the £ on £900.

=

EXAMPLE 3.-D is a British resident receiving £900 from company C, but he has other income arising in the United Kingdom, and his combined rate of Income Tax and Super-tax is 7s. 6d. in the £. He is entitled therefore to Double Income Tax relief up to a maximum of 3s. 9d., but the whole of the Dominion tax (1s. 6d. in the £) has already been allowed to the company C, who deduct 4s. 6d. United Kingdom tax on payment of the dividends, and no further relief is due. D will therefore be assessable in respect of the £900 at 1s. 6d. in the £, viz. 7s. 6d. less 4s. 6d. United Kingdom tax deducted, and 1s. 6d. Dominion tax.1

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In Section VII., paragraphs 79 to 83, the Commission considered the problem as it affected Great Britain and foreign countries, but found that the difficulty here was much greater owing to the absence of common interest, the sharing of common burdens, and the natural absence of the desire for free circulation of capital within the British Empire. The Commission concluded that no satisfactory change from present conditions could be made unless reciprocal arrangements were effected between the Government of the United Kingdom and the Government of each foreign State where an Income Tax is in force; and that it would only be practicable to arrive at such arrangements by means of a series of conferences, possibly under the auspices of the League of Nations, such as we have been happy to hold with the representatives of the Governments of the Dominions. These considerations, among others, have led us to the conclusion that in the present circumstances we cannot recommend any change in the existing situation as to double taxation of the same income by the United Kingdom Government and by the Government of a foreign State.” 2

In the Finance Act of 1920 the relief proposed for double 2 Cmd. 615, p. 19.

1 Cmd. 615, p. 17.

taxation within the Empire was passed into law. This method of the division of the tax attempts to divide taxation according to the country of residence. It has the objection of placing State loans free of income tax in an obviously unsatisfactory position.

Next with regard to Method III. The method of classification and assignment of sources is best described in the words of the 1923 League of Nations Report referred to above:

By convention it might be determined to attach origin taxation specifically and wholly to particular classes of investments or embodiments of wealth, such as rents of land and of houses and mortgages on real property, but to exempt the non-resident in respect of income derived from business securities. The country of residence would allow the whole of the foreign tax as a deduction from its income tax on the resident in respect of such sources of income, but would charge other sources in full. The country of origin would retain its specific origin taxes in full. It would be necessary to give the country of residence complete power of charging all sources, except for certain specified exemptions, so that the scope of its liability to remit the tax would be easily determined, and the investor, from his total income tax demands, would be able to deduct certain specified taxes on any real property he might have. It might be desirable to impose some limit upon the power of the country of origin to levy in future specially heavy specific origin taxes, which would unduly deplete the exchequer of the country of residence.1

The classification of wealth according to origin includes (1) land, (2) mines, oil wells, etc., commercial establishments, (3) agricultural implements, machinery, flocks and herds, (4) vessels, and (5) mortgages, while residence includes money, jewellery, furniture, etc., and mortgages on income, corporate shares, corporate bonds, public securities, general credits, and professional earnings. In short, intangible wealth except mortgages on property would be assigned to residence, while tangible would be assigned mainly or wholly to origin.

The fourth method-the method of deduction from income from abroad-is that followed by the United States. It is opposed to general practice and places the whole burden of increased taxation in borrowing countries upon the creditor country. In the words of the experts, "Governments need no longer make provision for making the loans free of tax to non

1 P. 42 of the Report.

resident investors, knowing that it will fall upon the exchequer of the creditor country. It is to be doubted whether such creditor countries as the United States, Great Britain, and the Netherlands, having regard to their interests abroad, would ever agree permanently to put their exchequers at the mercy of all the unknown increases of taxation of foreign Governments." 1

It is now usually held that the ideal of double taxation is to exempt income going abroad. Where, however, there are great difficulties in the adoption of this course, a plan based on the classification and assignment of sources and modified by the division of the tax would appear to offer the best solution of a very difficult problem.

THE SINGLE TAX

13. No reference has been made in discussing the distribution of the burden of taxation to the single tax, which is, as its name indicates, the only tax on some one class of things in a country's revenue system. The omission has been intentional, because the single tax is outside the sphere of practical finance and is now more a question of ethics than economics. Viewed historically, it has been of advantage as a reaction against high or oppressive taxation. Adam Smith mentions Alcázar de Arriaga who propounded in 1646 the single Alcavala,2 a general income tax, in his book Nueva Declaracion de un medio universal para extinguir los tributos en Castilla, or New Declaration of a Universal Plan for Suppression of Taxes. In 1671 another Spaniard, Centani, submitted to the King of Spain a memorial in which he asserted definitely that “la tierra es la verdadera y fisica hacienda" (land is the only real wealth), and insisted on the removal of indirect taxation in favour of a direct tax founded on an extensive cadastral survey. He has rightly been regarded by Cannan and others as the direct ancestor of the Physiocrats Quesnay and Turgot. Vauban, the celebrated Marshal of France, published in 1707 a book on financial reform called La Dime royale, where he aimed at a proportional tax on every description of income derived from landed property and from house property, profits

1 P. 42 of the Report.

2 The Wealth of Nations, Book V. chap. ii. part ii. art. iv., "Taxes upon Consumable Commodities".

N

arising from commerce and industry, salaries and pensions of officials, Government stocks, and also the wages of artisans and labourers. Vauban considered that 10 per cent should be the maximum, and 6.66 per cent a normal rate. On the wages of artisans and labourers a rate of 3.33 per cent only should be demanded because they are liable to bad seasons. This was to be the Treasury's principal source of revenue subject to being doubled in case of great necessity of the State."

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The single tax of the Physiocrats (l'impôt unique) in the words of Quesnay, the great Master of the school, was to be levied directly on the net return (produit net) of land and not on wages, or on the (gross) produce, in which case it would increase the cost of production, be detrimental to trade, and destroy annually a part of the wealth of the nation ".1 The impôt unique was not to be rigorously applied as is sometimes thought. Mirabeau the elder, for example, was prepared to make the land tax responsible only for one-third of the revenue, the remainder being from the income tax. Turgot in his Réflexions sur la formation et la distribution des richesses,2 like all practical financiers, saw that the Physiocrat doctrine was an ideal, as he was of opinion that the time had not arrived even for the abolition of the troublesome octroi. Henry George 3 in the eighties of the nineteenth century aimed, like his great predecessors more than a century earlier, at a single tax. He was for the abolition of all taxation save that upon land values. Similarly a writer has recently proposed an annual production tax of 10 per cent or other required amount assessable upon an employer of labour and capital, the independent worker, and owner-user (i.e. a person who owns capital and himself uses that capital).

4

A single tax has great drawbacks-(1) that it will not bring sufficient into the Treasury to balance the budget; and (2)

1 Vide Euvres économiques et philosophiques de F. Quesnay, fondateur du Système Physiocratique, avec une introduction et des notes par Auguste Onckeu, Frankfort-sur-le-Main, 1888.

2 A translation of this will be found in Prof. Ashley's Series of Economic Classics, New York, 1888.

3 Progress and Poverty (New York, 1879); Social Problems (New York, 1884); The Land Question (New York, 1888); cf. F. A. Walker, Land and its Rent, 1883.

Vide "The Foundation of Taxable Capacity-A New System," by P. D. Leake, F.C.A., read before the London members of the Institute of Chartered Accountants on Tuesday, April 24, 1923, published in the Accountant of April 28, 1923.

that it would mean a very unsatisfactory distribution, all things considered, of the burden of taxation. In other respects, too, it is not satisfactory, as, for example, it would generally be relatively difficult and expensive to collect. Multiple taxation, on the other hand, has not those drawbacks. The anomalies between persons under a single tax are corrected, and evasions more easily detected. Moreover, under a diversified scheme of direct and indirect taxation, the ability of all classes to pay is taken into account. Indirect taxes are usually, although not always, voluntary taxes in the sense that the taxpayer, who does not consume these articles, is a non-payer of taxes. The present income tax hits marginal expenditure, and is deducted at the source, and is less felt than if it were collected otherwise, i.e. when the taxpayer had spent most of the tax. An inheritance tax, as we shall see, on account of the large increase of personal wealth to the beneficiaries, is paid at the time when tax payments normally take a secondary place, and is a good tax all things considered. Particular taxes like the income tax and the inheritance tax are sometimes criticised because of their complexity, but this is often unavoidable, especially where multiplicity is reduced to a minimum. After all, a finance minister has to make the Government pay its way, and his mind must be locked and bolted to this result. A single tax is for this wholly impracticable, and he must needs have recourse to a multiplicity of taxes. He has, indeed, in taxation to live up to the principle of Martial's epigram, "Principis est virtus maxima nosse suos". Like Gladstone in his Budget speech (that took, it is said, five hours to deliver)—the speech of 1853—he has often to remove old taxes that cramp or harass trade and industry. If the finance minister comes into office after a great war or a national calamity like famine or earthquake, he has to find money for the Treasury wherever he can. But this is not all. He has to be a man who could never lose his head. As a brotherhood finance ministers are usually plain and unpretending men, gifted with indomitable wills and iron minds, tireless workers very precise in statement and with a clear grasp of detail. In the distribution of the burdens of taxation they require to possess the genius of common sense in its highest and best development.