History of Income Tax

the Development of Income Tax from its beginning in 1799 to the present day related to the social, economic and political history of the period

b.e.v Sabine

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134561421
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

This classic book tells the story of the development of Income Tax from its beginning in 1799 to the present day and relates it to the social, economic and political history of the period.

There have been studies of Income Tax at various stages in its growth; studies of finance and taxation in general in which Income Tax has been closely concerned; studies too of some of the Chancellors of the Exchequer who have made significant contributions to the Income Tax system; but this is the first time an attempt has been made to encompass the whole 160 years or so of its life in one volume.

And a fascinating story it is too when set in perspective. The author shows how Income Tax was introduced to finance the Napoleonic Wars, how it was revived by Peel to pay for Free Trade, and how it underwrote Victorian prosperity and confidence. He then describes its immense expansion through two World Wars to its present position as a dominant feature of British finance. This book was first published in 1966.

CHAPTER I

Life Without Income Tax

DIRECT taxation in Britain before 1799 had a very spasmodic history and was usually associated with some sort of national emergency.¹ The chief and the oldest type of direct land taxation was the Danegeld, which had been levied and paid to buy off the Danes; indeed, direct taxation began in this somewhat humiliating form. Canute, the Danish invader, continued the tax, in spite of the extinction of its original purpose, as a war tax for the defence of the realm. William the Conqueror regarded this source of revenue as so important that the first great enquiry into landed property, later known as the Domesday Book, was made for the purpose of assessing Danegeld and it continued to be levied until the reign of Henry II.

A further source of income, since 1066, was the various feudal dues, which soon became commuted for money. Scutage, for example, or ‘shield money’, was made payable, if the King approved, to the Exchequer from lands in lieu of the military service of their knights by virtue of which their lands had originally been granted to them. This emphasis on hard cash was intensified by such dramatic events as the demanding by the Emperor Henry VI of ransom for Richard I when he was captured returning from one of his Crusades. A tax on movables, as opposed to land, had been levied by Henry II to finance the Third Crusade. The experiment was made again in the agonizing attempt to raise the Lionheart’s ransom and henceforward personal property became a regular subject of assessment.

Taxing personal property required a different form of survey from that which had been undertaken in the time of Domesday and many such investigations were carried out during the thirteenth century. But early in the fourteenth century, these came to a halt and the system of tenths or fifteenths was set up, which was in effect the grant to the King of a parliamentary subsidy based on a tenth or a fifteenth of the value of certain personal property in each area. It was clearly easier to levy fixed sums or multiples of fixed sums in this way and to leave the various local authorities to settle the incidence among themselves.

But national expenditure, even during the Middle Ages, often outpaced national income; an example of this was the beginning of the reign of Richard II when a combination of bad finance and military extravagance led to the imposition of the poll taxes of 1377, 1379 and 1380. These failed for three main reasons: the populace was either hostile or reluctant; the type of survey required was really a census, which had never before been attempted; and the officials found practical difficulties in its administration.

The poll tax of 1380 was a graduated tax – the highest amount to be paid by any individual being 20s and the lowest 4d. ‘The poor were to aid the rich’ but the individual contributions were governed by rank. This worked out most inequitably; in a poor village the full amount would be exacted from the poorest labourer, but in a more prosperous community the less wealthy would pay the minimum amount. The money was obtained, it is recorded, ‘non sine diris maledictionibus’, but there was widespread evasion. When the returns came in it appeared that the population had fallen since the poll tax of 1377, by nearly half a million. Early in 1387 a writ was issued in the name of the King to the Barons of the Exchequer demanding immediate efforts to collect the rest of the tax and fresh Commissioners were set up who found ample justification for the Crown’s allegations of wholesale fraud. But in some areas the hated Commissioners were set upon and stoned. The Chief Justice of the Common Pleas was met at Brentwood by an armed mob, three of his clerks seized and executed and their heads mounted on poles. The unhappy Judge was lucky to escape with his life. This was, in fact, the beginning of the great rebellion of 1387. The story that the rebellion was provoked by a collector of taxes insulting Wat Tyler’s daughter seems to be a legend since the first uprising was not in Kent, but in Essex, but no doubt it was excellent anti-government propaganda.

The fate of the poll tax well illustrates the more complicated issues arising in the later Middle Ages as compared with the unsophisticated times of the Conqueror. Then a comparatively primitive community could be surveyed by the techniques of an efficient and clearheaded ruler. Three hundred years had changed both the personality of the state and of the people. It was still possible to make reasonably accurate surveys, assessments and records. But a competent and reliable staff to execute a tax based on these instruments did not exist. Still less was there any administrative machinery to make possible the drawing up of an annual income and expenditure account, or any sort of annual budget.

For this is the curious anomaly in the financial history of England during the later Middle Ages. On the one hand there is the elaborate organization of the Exchequer and the other household departments which it controlled; and on the other hand the haphazard and wasteful expenditure which it carefully recorded, but could not control. The King was expected to be a good housekeeper and ‘live off his own’; additional revenue should only be raised for extraordinary purposes. Thus it was that the King was continually forced into the position of having to justify his need for additional revenue, a process which came to a head in the constitutional struggles of the seventeenth century.

Direct taxation is not a prominent feature of Tudor finance. For one thing, Henry VII and Elizabeth were magnificent housekeepers; and Henry VIII, for all his extravagance, had his father’s resources at the beginning of his reign and the spoils of the monasteries at the end. Taxation was still not a normal, but an abnormal, incidence on the country and over Elizabeth’s whole reign, for example, parliamentary taxation averaged rather less than £80,000 a year, and for the first thirty years little more than £50,000.²

The subsidy was one of the normal ways of raising money granted by Parliament. The sum named was divided between the counties for collection and administrative machinery was set up to bring in the required amount. In 1541, for instance, the rate was at one shilling in the pound for land and sixpence in the pound for goods, so combining the two different taxes of the Middle Ages on land and movables.

The Stuarts and their Judges used the magic phrase ‘the defence of the realm’ to cover a system of direct taxation which included ship-money, a seventeenth century throw-back to the old Danegeld. But the nation realized as well as Strafford that ‘the debts of the Crown taken off, you may govern as you please’.³ Resistance, instigated by Hampden, was followed by London; very few local officials could be persuaded to collect the tax; and the Scottish war in 1639 dissipated the surplus so painfully achieved the year before.

Cromwell developed a variant of direct taxation in the ‘Monthly Assessment’, based on a specific quota from each district, although it could be varied at will. But central control was so weak that it had to permit ‘concessions to practicability’ which left its view of ‘equitable distribution little more than a statement of opinion’.⁴ It became, in fact, a stereotyped land tax, but it should be noted that, like the subsidy, the assessing body was composed of local Commissioners. They were appointed by a ‘Names’ clause in the 1656 Act for instance. The lists are not long and that for Huntingdon shows the Protector had not neglected his own family. The other officials were the Surveyors, who are mentioned three times in the Act and then ignored,⁵ the assessors, whose duty it was to draft the assessments, and the various collectors. All these were appointed by the Commissioners and were paid one penny in the pound on completing their tasks, except the unfortunate Surveyor. Absentees from the realm paid double duty, a final clause probably aimed at the exiled Cavaliers.

The question whether the numbers of Commissioners should be increased was debated in the Lords in 1666, but it was argued that the greater the number, the less tax would be raised ‘for many Commissioners encumber one another and rather preserve the case of themselves and their many friends than the advance of the King’s service and the public benefit’. In 1660 the Monthly Assessment produced £70,000 and a poll tax, in the same year, was estimated to produce £40,000.⁶

By the end of the seventeenth century, the Commons had taken from the King his prerogative of economic regulation and the new political leaders, men like Montague, Godolphin, Walpole and Pitt, gained and held power on the ground of financial genius. But taxation was still a surprisingly haphazard affair, despite the need for reliable sources of revenue, aggravated by the expense of carrying on the various military and naval campaigns of the period. The experiment of aides was the latest in a long series of extemporizations and here again, the important point is not so much the yield of the tax, but the fact that as with the Monthly Assessment before it, it relied for its administration on the local Commissioners.⁷

But in the England without income tax in the last years of the seventeenth century, two of the elements necessary for such a sophisticated tax were already present. Supervision by Parliament over the collection and expenditure of additional revenue needed by the Crown had now been established, and although the expedients adopted – subsidies, poll taxes, monthly assessments and aides – usually foundered on the rocks of insufficient administration, they did a great deal to create that intelligent interest in national finance which has always been a feature of English political life. The safety and welfare of England was bound up with sound finance and this became a tradition of English political criticism which has lasted to the present day.

The second element was the emergence of the local Commissioners to form the administrative framework by which the latest direct taxes such as the aides were to be assessed and paid. These Commissioners were, in effect, the local gentry, as can be seen from the list of Commissioners which may be found in many local histories. Their administrative unit was the division and they met twice a year. On the first occasion, the various officials were appointed – clerk, assessors and collectors. At the second meeting they made the actual assessments and signed the duplicates, one of which was sent to the Exchequer by the Receiver of the town or county. Central control was vested in the Agents for the Bringing in of Taxes.

This control was directly exercised. The Agents corresponded with the local Commissioners encouraging them in the performance of their official duties in general and advising them on points of law, or matters in dispute in particular. Normally, however, the Commissioners were left to get on with the day to day administration of the aides without interference from the central government unless their advice was requested, or an Act for a new aide was brought in which might require fresh instructions.

But the tradition of evasion continued. From the disappearing population of the fourteenth century poll tax, the complaints of the Elizabethan Commissioners that ‘many be twenty times, some thirty and some much more worth than they be set down at’, to Bacon’s ‘The Englishman is most master of his own valuation and the least bitten in purse of any nation in Europe’, such current criticisms from the Agents as ‘there is strange neglect and omission in the Assessor’s returns’ have an all too familiar ring.

The Commissioners themselves had considerable difficulty in making the complex machinery of assessment and collection work efficiently, judging by the number of complaints by the Agents. There were delays in holding meetings, delays in appointing officials, delays in delivering the duplicates of their assessments; but even more important to the Exchequer, delays by the local collector in making his payment to the central receiver for the particular county or town or, as seems most common, delays by the receiver in making final payments to the Treasury. But it is hard to see how the Agents could exercise any supervision in the strict sense; their instructions tended to become exhortations and the Commissioners executed the functions of their office as best they could rather than as the Acts intended they should.

The last decade of the seventeenth century, which saw many fiscal experiments, was notable for the aide of 1692 which granted a levy of 4s in the pound for one year ‘for carrying on a vigorous war against France’. The tax was imposed on the annual value of land, on the income from various offices (not naval or military) and an income from merchandise and goods on the assumption that they would yield six per cent – the rate of interest then usual – on their capital value. Once again administrative difficulties proved insuperable, especially that of assessing intangible property. Returns were made in the most casual fashion, and while partisans of William and the revolution were generous in their estimates, those who still looked to the king over the water were guided by their political sympathies in judging their income. To begin with, the yield was close on £2,000,000, but this began to diminish and within six years the tax had become an apportioned tax, that is, each county was allocated its share of the amount which it was desired to raise. It also became almost exclusively a land tax, being first called by that name in 1697. During the eighteenth century the fact that this tax was a land tax became the basis of the squires’ complaints that they and not the merchants of the towns made the greatest contribution to the Treasury. The tax lived on until a few years ago, although it was being gradually extinguished by a system of compulsory redemption; it was finally abolished by Section 68, Finance Act, 1963. The tax on offices, incidentally, which was, as mentioned, part of the original 1692 Act, could be and was avoided from the beginning by simply changing the title of any particular office liable; however, it remained on the statute book until 1876, when it was repealed; in 1866 it had yielded £823.

There was probably more direct taxation in the seventeenth century than in the eighteenth, which believed more in indirect taxation on luxuries with a return to the Tudor and Stuart tradition of exempting the poor. Direct taxation needed an efficient bureaucracy and a more searching method of ascertaining an individual’s income, both of which factors had yet to come. It was much easier to raise money by customs and excise. In 1715, for instance, customs and excise yielded £4,000,000 out of a total revenue of £5,500,000; in 1755 the figure was nearly £5,500,000 out of a total of about £6,750,000.⁸ This pattern continued until 1793 when, in Pitt’s words ‘the happy result of ten years of economy, of labour, of firmness and of wisdom on the part of parliament in their endeavours to cultivate the arts of peace, to augment the revenue and to ameliorate the condition of the people of the country’⁹ was shattered as Louis Capet mounted the scaffold on that wet and dreary morning of January 21st.

So despite the intense national concern with all forms of taxation, and the long-standing existence of a system of assessment and collection by Commissioners and their officials going back at least to the fourteenth century, it was becoming clear that no type of direct taxation could succeed with amateur interest only and an intrinsically amateur organization. The solution was to appoint reliable local representatives of the central government, but it was not to be expected that this solution would either occur or commend itself to contemporary economists and politicians. This reform came gradually, almost clandestinely. Like the office of Commissioner itself, the Surveyor, who entered direct taxation very much by the back door, acquired duties and responsibilities almost by a process of organic growth than conscious legislation.

The Surveyor, as previously mentioned, first occurs in the Taxing Act of 1656, which required the Commissioners to appoint ‘two at least of the honest and able inhabitants within each parish, township or other distinct place to be surveyors and assessors’. But it was the assessors who were to do all the work of drafting the assessments; the Surveyors may have had some personal survey work since there is nothing to show that forms of any kind were to be issued, but no specific duties were laid down and, what is more important, no remuneration, so the office must have been supernumerary.

Forty years later, in 1696, there was an ‘Act for Making Good the Deficiency of the Clipped Money’ by which ‘the hearth of the Englishman was darkened by the appearance of the tax gatherer at his window’ and the duty of the Surveyor under that Act was to count the number of windows in houses.¹⁰ The tax was progressive – a house with less than ten windows paid two shillings; from ten to twenty windows, two shillings, plus an additional four shillings; twenty windows, or more, two shillings and eight shillings additional. Administration was in the hands of the Land Tax Commissioners who appointed the Surveyors and collectors.

The first record of the establishment of the Surveyors is one fixed by the Treasury in 1719 and also by the same instrument, the central Commissioners’ salaries were settled. The salary of the former ranged from £30 per annum to £100 and of the latter £400. The office of the Commissioners cannot have been very busy since the staff consisted of a secretary, an assistant secretary, a solicitor and a clerk, and they supervised, at that time, only the Land Tax and the Window Tax. The sma...