deducted from profits before assessing income tax as in Great Britain. Excess profits duty was not levied if super tax was charged. The higher of the two taxes alone was chargeable. In the United States the excess profits tax was confined at first to profits directly traceable to war, but it was later on extended to all concerns. The tax, as has been noted, was levied on profits in excess of 8 per cent of the actual capital, with an exemption of $6000 for individuals and partnerships and $3000 for corporations. Profits below 20 per cent, but above this minimum of the invested capital, were taxed at 20 per cent, and those in excess of 20 per cent at 40 per cent. The tax extended to all trades and businesses, including professions and occupations, but beginning with 1918 the tax was only confined to corporations, excluding personal-service corporations (i.e. those whose income is to be ascribed primarily to the activities of the personal owners or stock-holders who are themselves regularly engaged in the active conduct of the affairs of the corporation, and in which capital, whether invested or borrowed, is not a material income-producing factor), which were taxed substantially as partnerships. The object of this was that, as the American income tax falls more lightly on corporations than upon other taxpayers, the tax should fall equally. Under the income tax the entire income or profit of an individual is subject to normal tax and surtaxes, which extend to as high as 50 per cent whether the income is spent or reinvested, but the corporation does not pay income surtaxes, and its stock-holders only pay surtaxes on the profits which are distributed. It was repealed in 1921, as, according to the Secretary to the Treasury, it encouraged wasteful expenditure, put a premium on over-capitalisation and a penalty on energy and enterprise, and it confirmed old undertakings in their monopolies. The duty as levied in the United States was indeed open to these criticisms. In Japan the taxation of excess incomes forms part of the income tax system. When the income of a corporation for any business year exceeds 10 per cent of the average amount of paid-up capital and reserves, that part of income exceeding 10 per cent is taxed at 4 per cent, 20 per cent at 10 per cent, and 30 per cent at 20 per cent. 1 Excess Profits Tax (Act of 3rd March 1917); War Excess Profits Tax (Act of 3rd October 1917); War Profits and Excess Profits Tax Act (Act of 24th February 1919). In itself, the excess profits tax is a good tax, and when again levied should obviate, as far as possible, the weak points of the American Act, especially in respect of (1) a fixed percentage of profits (which should not be calculated on subscribed but on paid-up capital); (2) the allowances on account of expenditure without efficient check; and (3) the same allowance of normal profits for old and new ventures. In the subsequent chapters we shall deal with indirect taxation. CHAPTER XXV INDIRECT TAXATION-GENERAL PRINCIPLES INDIRECT VERSUS DIRECT TAXATION 1. FROM direct taxation we turn to indirect taxation. Here we are faced with the old controversy between direct and indirect taxation. "I never can think ", said a great Scotsman,1 "of direct and indirect taxation except as I should think of two attractive sisters who have been introduced into the gay world of London, each with an ample fortune, both having the same parentage for the parents of both I believe to be Necessity and Invention differing only as sisters may differ, as where one is of lighter and another of darker complexion, or where there is some variety of manner, the one being more free and open, and the other somewhat more shy, retiring, and insinuating. I cannot conceive any reason why there should be any unfriendly rivalry between the admirers of these two damsels; and I frankly own, whether it be due to a lax sense of moral obligation or not, that as a Chancellor of the Exchequer, if not as a Member of this House, I have always thought it not only allowable but even an act of duty to pay my addresses to them both. I am therefore as between direct and indirect taxation perfectly impartial. But then I must say, that with regard to the remission of indirect taxes, I hope that the memorable history of the last twenty years will never be forgotten; for I do not scruple to state that if you look to its economical profits on the one hand, and then to its political, social, and moral results on the other, it is difficult to know which to give the palm in point of magnitude. If we had 1 Gladstone, Financial Statement, 1861, Hansard, vol. clxii. p. 584. 2 not gained one single shilling by the remission of indirect taxation it would have been worth having for the sake of the manner in which it has knit together the interests and feelings of all classes of the community from one end of the country to the other. If, on the other hand, it had had nothing to do with any question of moral and social results, still the merely economical results in promoting the material well-being of the people have been so signal and extraordinary that we may well rejoice to have lived in a period during which it has been our happy lot to take part in bringing about such changes. But, Sir, there cannot be a grosser delusion than the supposition that the work of Parliament, during the period I have named, has been to destroy indirect taxation. The hand of Parliament has wrought a pruning-not to destroy the tree but to strengthen the stock. The aim of the operation has been to give it greater size and vigour; and the consequence is that at this moment, when indirect taxation has been destroyed as the fashionable phrase is, not once but four or five times over, indirect taxation is larger and more productive-I do not mean in this particular year, but in any ordinary year, and upon the average of the last two or three years-than at any former period of our history. Its condition recalls to my mind the tree of golden leaves which has been described by Virgil, from which his hero was ordered to pluck a branch, and on whose trunk, the moment one branch had been plucked, another took its place." THE IMPORTANCE OF INDIRECT TAXATION 2. Indirect taxes have already been defined,1 and we have seen that while indirect taxes are normally collected from the home manufacturer, as for instance in the case of excise duties, or from the importer or exporter as in customs duties, they are shifted on to the shoulders of the consumer in the shape of higher prices for the goods consumed. Since much direct taxation flies over the heads of wage-earners, Governments in all countries have had to depend on indirect taxes for a large part of their revenue. The direct taxation of wages is usually prohibitive on account of the cost of collection, and wages contain a taxable element. The amount for which a labourer offers his services and the amount 1 Vide Chapter XVIII. on which he and his family can subsist are two entirely different things. With the development of direct taxation in the present century, especially since the Great War, the proportion of revenue raised from indirect taxes in some countries has decreased. This is noticeably so in Great Britain and in the Federal revenues of the United States. Indirect taxes before the War were 52.2 per cent of the total tax revenue in the former and 89 per cent in the latter. To-day the percentages are 40-2 per cent and 30-6 per cent.1 In other countries, while direct taxation has developed, 1 I.e. for 1921-22. For detailed figures see Table XII. App. |