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Any taxation scheme dependent upon general capital valuation, where the
amount to be paid is large--say larger than a year's revenue--falls, in
my judgment, into the second or third rate category of taxation
expedients. Whenever we are living in uncertain times, with no
steadiness of outlook, valuation of many classes of wealth is then a
tremendous lottery, and collection--which takes time--may be no less so.

The fair face of the outright and graduated levy would be marred in many
ways. First, there are cases affected by valuation. The valuation of a
fixed rate of interest on good security is easy enough. The valuation of
a field or a house in these days presents more difficulty, but is, of
course, practicable. In practice, however, people do not own these
things outright. They have only an interest in them. This is where the
rub comes. A very large part of the property in this country is held in
life interests, and on reversions or contingencies. It is not a question
of saying that a given property is worth L10,000 and that it forms part
of the fortune of Jones, who pays 40 per cent. duty. The point is that
the L10,000 is split between Jones and Robinson. Jones maybe has a life
interest in it, and Robinson a reversionary interest. You value Jones's
wealth by his prospect of life on a life table, and Robinson has the
balance. But the life table does not indicate the actual likelihood of
Jones's life being fifteen years. It only represents the actuarial
average expectation of all the lives. This may be useful enough for
insurance dependent on the total experience, but it may be a shocking
injustice to the individual in taxation. Only some 10 per cent. of the
Joneses will live for the allotted time, and for the rest your valuation
and your tax will be dead wrong, either too much or too little. Jones
will be coming to you two years after he has paid, or rather his
executors will come to you and say: "We paid a tax based on Jones living
15 years, and he has died; this ought, therefore, to be shifted to
Robinson."

DIFFICULTIES OF VALUATION

People often say that a Capital Levy merely imagines everybody dying at
the same time. This parallel is wrong in degree when you are considering
the ease of paying duty or of changing the market values by a glut of
shares, and it is still more wrong when you are thinking of ease of
valuation. When a man is dead, he is dead, and in estimating the death
duty you have not to bother about how long he is going to live! But
every time you value a life interest and take a big slice of it for tax
you are probably doing a double injustice. The charge is incorrect for
two taxpayers. On a flat rate of tax this difficulty might be made less,
but the essence of any effective levy is a progressive scale. Moreover,
whether you are right or wrong about Robinson's tax, he has nothing in
hand with which to pay it. He has either to raise a mortgage on his
expectation (on which he pays _annual_ interest) or pay you by
instalments. So far as his burden is concerned, therefore, there is no
outright cut. You will be getting an annual figure over nearly the whole
class of life interests and reversions. It is difficult to see how one
can escape making adjustments year after year for some time in the light
of the ascertained facts, until the expiry of, say, nine or ten years
has reduced the disparities between the estimated valuations and the
facts of life to smaller proportions.

Next come those valuations which depend for their accuracy upon being
the true mid-point of probabilities. A given mine may last for five
years in the view of some experts, or it may go on for fifteen in the
view of others, and you may take a mid-point, say ten, and collect your
tax, but, shortly after, this valuation turns out to be badly wrong,
_though all your valuations in the aggregate are correct_. While the
active procedure of collecting the levy is in progress for a number of
years these assessments will simply shout at you for adjustment. There
are other types of difficulty in assessment which involve annual
adjustment, but you will appreciate most the necessity for care in the
collection. Enthusiastic advocates for the levy meet every hard case put
forward where it is difficult to raise money, such as a private
ownership of an indivisible business, by saying: "But that will be made
in instalments, or the man can raise a mortgage." But the extent to
which this is done robs the levy of all the virtues attaching to
outrightness, for each instalment becomes, as the years roll on,
different in its real content upon a shifting price level, and every
payment of interest on the mortgage--to say nothing of the ultimate
repayment of that mortgage--falls to be met as if reckoned upon the
original currency level. Then those classes of wealth which are not
easily realisable without putting down the market price also require
treatment by instalments, and those who wish to put forward a logical
scheme also add a special charge upon salary-earners for some years--a
pseudo-capitalisation of their earning power.

A really fair and practicable levy would certainly be honeycombed with
annual adjustments and payments for some period of years, and one must
consider how far this would invalidate the economic case of the
"outright cut," and make it no better than a high income-tax; indeed far
worse, for the high income-tax does at least follow closely upon the
annual facts as they change, or is not stereotyped by a valuation made
in obsolete conditions. Imagine three shipowners each with vessels
valued at L200,000, and each called upon to pay 20 per cent., or
L40,000. One owning five small ships might have sold one of them, and
thus paid his bill; the second, with one large ship, might have agreed
to pay L8000 annually (plus interest) for five years; while the third
might have mortgaged his vessel for L40,000, having no other capital at
disposal. At to-day's values each might have been worth, say, L50,000,
but for the tax. The first would actually have ships worth L40,000, so
he would have borne the correct duty of 20 per cent. The second would
have L50,000, bringing in, say, L5000 annually, and would be attempting
to pay L8000 out of it, while the third would be paying L2000 a year out
of his income and still be faced with an 80 per cent. charge on his
fortune! His assessment is computed at one point of time, and liquidated
at another, when its incidence is totally different.

If one cannot have a levy complete at the time of imposition, it clearly
ought not to be launched at a time of rapidly changing prices. But that
is, perhaps, when the economic case for it is strongest.

A DESPERATE REMEDY

I do not rule the Capital Levy out as impracticable by any means, but as
a taxation expedient I cannot be enthusiastic about it. It is a
desperate remedy. But if our present temper for "annual" tax relief at
all costs continues, we may _need_ a desperate remedy. Without a levy
what kind of position can you look forward to? Make some assumptions,
not with any virtue in their details, but just in order to determine the
possible prospect. If in fifteen to twenty years reparation payments
have wiped out 1000 millions, debt repayments another 1000, and ordinary
reductions by sinking funds another 1000 millions, you will have the
debt down to 5000 millions, and possibly the lower interest then
effective may bring the annual charge down to some 200 or 225 million
pounds. If the population has reached sixty millions the nominal annual
charge will be reduced from L7 16s. by one-half, but if prices have
dropped further, say half-way, to the pre-war level, the comparable
burden will still be L4 10s. per head.

It is no good talking about "holidays from taxation" and imagining you
can get rid of this thing easily; you won't. We are still in the war
financially. There is the same need of the true national spirit and
heroism as there was then. Thus hard facts may ultimately force us to
some such expedient as the levy, but we should not accept it
light-heartedly, or regard it as an obvious panacea. Perhaps in two or
three years we may tell whether economic conditions are stable enough to
rob it of its worst evils. The question whether the burden of rapidly
relieving debt by this means in an instalment levy over a decade is
actually lighter than the sinking fund method, depends on the relation
of the drop in prices over the short period to the drop over the ensuing
period, with a proper allowance for discount--at the moment an insoluble
problem. I cannot yet with confidence join those who, on purely economic
and non-political grounds, commend the scheme and treat it as "good
business for the income-tax payer."

FREE TRADE

BY RT. HON. J.M. ROBERTSON

P.C.; President of National Liberal Federation since 1920; M.P. (L.),
Tyneside Division, Northumberland, 1906-18; Parliamentary Secretary to
Board of Trade, 1911-15.

Mr. Robertson said:--At an early stage of the war Mr. H.G. Wells
published a newspaper article to the effect that while we remained Free
Traders we were determined in future to accord free entry only to the
goods of those States which allowed it to us. The mere state of war, no
doubt, predisposed many to assent to such theses who a few years before
would have remembered that this was but the nominal position of the
average protectionist of the three preceding generations. War being in
itself the negation of Free Trade, the inevitable restrictions and the
war temper alike prepared many to find reasons for continuing a
restrictive policy when the war was over. When, therefore, the Committee
of Lord Balfour of Burleigh published its report, suggesting a variety
of reasons for setting up compromises in a tariffist direction, there
were not wanting professed Free Traders who agreed that the small
tariffs proposed would not do any harm, while others were even anxious
to think that they might do good.

Yet the policy proposed by Lord Balfour's Committee has not been
adopted by the Coalition Government in anything like its entirety. Apart
from the Dyestuffs Act, and such devices as the freeing of home-made
sugar from excise, we have only had the Safeguarding of Industries Bill,
a meticulously conditional measure, providing for the setting up of
particular tariffs in respect of particular industries which may at a
given moment be adjudged by special committees _ad hoc_ to need special
protection from what is loosely called "dumping." And even the findings
of these committees so far have testified above all things to the lack
of any accepted set of principles of a protectionist character. Six
thousand five hundred articles have been catalogued as theoretically
liable to protective treatment, and some dozen have been actually
protected. They have given protection to certain products and refused it
to others; according it to fabric gloves and glass and aluminium goods
and refusing it to dolls' eyes and gold leaf.

Finally, the decision in favour of a tariff on fabric gloves has evoked
such a storm of protest from the textile manufacturers who export the
yarns with which foreign fabric gloves are made, that even the
Coalitionist press has avowed its nervousness. When a professed
protectionist like Lord Derby, actually committed to this protectionist
Act, declares that it will never do to protect one industry at the cost
of injuring a much greater one, those of his party who have any
foresight must begin to be apprehensive even when a House of Commons
majority backs the Government, which, hard driven by its tariffists,
decided to back its Tariff Committee against Lancashire. Protectionists
are not much given to the searching study of statistics, but many of
them have mastered the comparatively simple statistical process of
counting votes.

THE "NEW CIRCUMSTANCES" CRY

In a sense, there are new fiscal "circumstances." But I can assure my
young friends that they are just the kind of circumstances which were
foreseen by their seniors in pre-war days as sure to arise when any
attempt was made to apply tariffist principles to British industry. As a
German professor of economics once remarked at a Free Trade Conference,
it is not industries that are protected by tariffs: it is firms. When a
multitude of firms in various industries subscribed to a large Tariff
Reform fund for election-campaign purposes, they commanded a large
Conservative vote; but when for platform tariff propaganda, dealing in
imaginative generalities and eclectic statistics, there are substituted
definite proposals to meddle with specified interests, the real troubles
of the tariffist begin. You might say that they began as soon as he met
the Free Trader in argument; but that difficulty did not arise with his
usual audiences. It is when he undertakes to protect hides and hits
leather, or to protect leather and hits boot-making, or to help shipping
and hits shipbuilding that he becomes acutely conscious of difficulties.
Now he is in the midst of them. The threat of setting up a general
tariff which will hit everybody alike seems so far to create no alarm,
because few traders now believe in it. Still, it would be very unwise to
infer that the project will not be proceeded with. It served as a party
war-cry in Opposition for ten years, and nearly every pre-war
Conservative statesman was committed to it--Earl Balfour and Lord
Lansdowne included. Even misgivings about Lancashire may fail to deter
the tariffist rump.

Some of the people who even yet understand nothing of Free Trade
economics are still found to argue that, if only the duty on imported
gloves is put high enough, sufficient gloves will be made at home to
absorb all the yarns now exported to German glove-makers. They are still
blind, that is to say, to the elementary fact that since Germany
manufactures for a much larger glove-market than the English, the
exclusion of the German gloves means the probable loss to the
yarn-makers of a much larger market than England can possibly offer,
even if we make all our own gloves. In a word, instead of having to
furnish new Free Trade arguments to meet a new situation, we find
ourselves called upon to propound once more the fundamental truths of
Free Trade, which are still so imperfectly assimilated by the nation.

So far as I can gather, the circumstances alleged to constitute a new
problem are these; the need to protect special industries for war
purposes; and the need to make temporary fiscal provision against
industrial fluctuation set up by variations in the international money
exchanges. Obviously, the first of these pleas has already gone by the
board, as regards any comprehensive fiscal action. One of the greatest
of all war industries is the production of food; and during the war some
supposed that after it was over, there could be secured a general
agreement to protect British agriculture to the point at which it could
be relied on to produce at least a war ration on which the nation could
subsist without imports. That dream has already been abandoned by
practical politicians, if any of them ever entertained it. The effective
protection of agriculture on that scale has been dismissed as
impossible; and we rely on foreign imports as before. Whatever may be
said as to the need of subsidising special industries for the production
of certain war material is nothing further to the fiscal purpose,
whether the alleged need be real or not. The production of war material
is a matter of military policy on all fours with the maintenance of
Government dockyards, and does not enter into the fiscal problem
properly so called. But to the special case of dyes, considered as a
"key" or "pivotal" industry, I will return later.

How then stands the argument from the fluctuations of the exchanges? If
that argument be valid further than to prove that _all_ monetary
fluctuations are apt to embarrass industry, why is it not founded on for
the protection of _all_ industries affected by German competition? The
Prime Minister in his highly characteristic speech to the Lancashire
deputation, admitted that the fall of the mark had not had "the effect
which we all anticipated"--that is, which he and his advisers
anticipated--and this in the very act of pretending that the _further_
fall of the mark is a reason for adhering to the course of taxing
fabric gloves. All this is the temporising of men who at last realise
that the case they have been putting forward will bear no further
scrutiny. The idea of systematically regulating an occasional tariff in
terms of the day-to-day fluctuations of the exchanges is wholly
chimerical. A tariff that is on even for one year and may be off the
next is itself as disturbing a factor in industry as any exchange
fluctuations can be.

Nor is there, in the nature of things, any possibility of continuous
advantage in trade to any country through the low valuation of its
currency. The Prime Minister confesses that Germany is _not_ obtaining
any export trade as the result of the fall. Then the whole argument has
been and is a false pretence. The plea that the German manufacturer is
advantaged because his wages bill does not rise as fast as the mark
falls in purchasing power is even in theory but a statement of one side
of a fluctuating case, seeing that when the mark rises in value his
wages bill will not fall as fast as the mark rises, and he is then, in
the terms of the case, at a competitive disadvantage.

But the worst absurdity of all in the tariffist reasoning on this topic
is the assumption that in no other respect than wage-rates is German
industry affected by the fall of the mark. The wiseacres who point
warningly to the exchanges as a reason for firm action on fabric gloves
never ask how a falling currency relates to the process of purchasing
raw materials from abroad. So plainly is the falling mark a bar to such
purchase that there is _prima facie_ no cause to doubt the German
official statement made in June, that foreign goods are actually
underbidding German goods in the German markets, and that the falling
exchange makes it harder and harder for Germany to compete abroad. We
are dealing with a four-square fallacy, the logical implication of which
is that a bankrupt country is the best advantaged for trade, that
Austria is even better placed for competition than Germany, and that
Russia is to-day the best placed of all.

TARIFFS AND WAGES

The argument from the exchanges, which is now admitted to be wholly
false in practice, really brings us back to the old tariffist argument
that tariffs are required to protect us against the imports of countries
whose general rate of wages is lower than ours. On the one hand, they
assured us that a tariff was the one means of securing good wages for
the workers in general. On the other, they declared that foreign goods
entered our country to the extent they did because foreign employers in
general sweated their employees. That is to say--seeing that nearly all
our competitors had tariffs--the tariffed countries pay the worst wages;
and we were to raise ours by having tariffs also. But even that pleasing
paralogism did not suffice for the appetite of tariffism in the way of
fallacy. The same propaganda which affirmed the lowness of the rate of
wages paid in tariffist countries affirmed also the _superiority_ of the
rate of wages paid in the United States, whence came much of our
imported goods which the tariffists wished to keep out. In this case,
the evidence for the statement lay in the high wage-rate figures for
three employments in particular--those of engine-drivers, compositors,
and builders' labourers: three industries incapable of protection by
tariffs.

Thus even the percentage of truth was turned to the account of delusion;
for the wages in the protected industries of the States were so far from
being on the scale of the others just mentioned, that they were reported
at times to be absolutely below those paid in the same industries in
Britain. For the rest, _costs of living_ were shown by all the official
statistics to be lower with us than in any of the competing tariffed
countries; and in particular much lower than in the United States. There
were thus established the three facts that wages were higher in the Free
Trade country than in the European tariffed countries; that real wages
here were higher than those of the protected industries in the United
States, and that Protection was thus so far from being a condition of
good wages as to be ostensibly a certain condition of bad. All the same,
high wages in America and low wages on the Continent were alike given as
reasons why we should have a protective tariff.

There stands out, then, the fact that the payment of lower wages by the
protected foreign manufacturer was one of the tariffist arguments of the
pre-war period, when there was no question of unequal currency
exchanges. To-day, the argument from unequal currency exchanges is that
in the country where the currency value is sinking in terms of other
currencies the manufacturer is getting his labour cheaper, seeing that
wages are slow to follow increase in cost of living. Both pleas alike
evade the primary truth that if country A trades with country B at all,
it must receive _some_ goods in payment for its exports, save in a case
in which, for a temporary purpose, it may elect to import gold. But that
fact is vital and must be faced if the issue is to be argued at all.
Unless, then, the defender of the occasional tariff system contends that
that system will rectify trade conditions by keeping out goods which are
made at an artificial advantage, amounting to what is called "unfair
competition," and letting in only the goods not so produced, he is not
facing the true fiscal problem at all. Either he admits that exports and
freight charges and other credit claims must be balanced by imports or
he denies it. If he denies it, the discussion ceases: there is no use in
arguing further. If he admits it, and argues that by his tariff he can
more or less determine _what_ shall be imported, the debate soon narrows
itself to one issue.

The pre-war tariffist argued, when he dealt with the problem, that
tariffs would suffice at will to keep out manufactured goods and let in
only raw material. To that the answer was simple. An unbroken conversion
of the whole yield of exports and freight returns and interest on
foreign investments into imported raw material to be wholly converted
into new products, mainly for export, was something utterly beyond the
possibilities. It would mean a rate of expansion of exports never
attained and not only not attainable but not desirable. On such a
footing, the producing and exporting country would never concretely
taste of its _profit_, which is to be realised, if at all, only in
consumption of imported goods and foods. It is no less plainly
impossible to discriminate by classes between kinds of manufactured
imports on the plea that inequality in the exchanges gives the foreign
competitor an advantage in terms of the relatively lower wage-rate paid
by him while his currency value is falling. Any such advantage, in the
terms of the case, must be held to accrue to all forms of production
alike, and cannot possibly be claimed to accrue in the manufacture of
one thing as compared with another, as fabric gloves in comparison with
gold leaf. In a word, the refusal of protection to gold leaf is an
admission that the argument from inequality of currency exchanges counts
for nothing in the operation of the Safeguarding of Industries Bill. In
the case of any other import, then, the argument falls.

MEMBERS ONE OF ANOTHER

But that is not all. The case of Russia alone has brought home to all
capable of realising an economic truth the fact that the economic
collapse of any large mass of population which had in the past entered
into the totality of international trade is a condition of proportional
impoverishment to all the others concerned. He who sees this as to
Russia cannot conceivably miss seeing it as to Germany; even tariffist
hallucinations about a "losing trade" under German tariffs cannot shut
out the fact that our trade with Russia and the United States was
carried on under still higher hostile tariffs. The unalterable fact
remains that industrial prosperity rises and falls in the measure of the
total mass of goods handled; and men who realise the responsibility of
all Governments for the material wellbeing of their populations can come
to only one conclusion. Trade must be facilitated all round for our own
sake.

Once more we come in sight of the truth that the industrial health of
every trading country depends on the industrial health of the rest--a
Free Trade truth that is perceptibly of more vital importance now than
ever before. It is in the exchange of commodities, and the extension of
consumption where that is required on a large scale, that the prosperity
of the industrial nations consists. And to say that, is to say that
until the trade exchanges of the world in general return to something
like the old footing, there cannot be a return of the old degree of
industrial wellbeing. Not that industrial wellbeing is to be secured by
the sole means of industrial re-expansion: the question of the need of
restriction of rate of increase of population is now being more and more
widely recognised as vital. But the present argument is limited to the
fiscal issue; and it must suffice merely to indicate the other as being
of the highest concurrent importance.

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