and professions six twenty-eighths of the whole tax. In 1905 lands and houses paid seven twenty-eighths and trades and professions sixteen twenty-eighths, or more than half of the whole tax and more than double that paid by lands and houses under Schedule A.

These figures, while they are a striking testimony to the development of our commerce, constitute from Mr. Gladstone's standpoint an imperative demand for the reconstruction of the Income-tax.

Even under the conditions existing in 1853, notwithstanding his individual opinion, Mr. Gladstone was forced to admit, 'It is on all hands agreed that the Income-tax is not adapted for a permanent portion of your fiscal system unless you can by reconstruction remove what are called its inequalities.'

We have dealt at some length with Mr. Gladstone's views, not only on account of their importance coming from such high authority, but because Mr. Gladstone has been quoted, by many who had failed to grasp his real attitude on the question, in support of fiscal theories which he would have been quick to repudiate.

It is worth noting that Mr. Disraeli, with that intuition with which he was so richly endowed, proposed in the ill-starred December Budget of 1852 an Income-tax of 7d. per £ on realised incomes and 51d. per £ on precarious incomes.

On this same Budget the Derby Administration was defeated; even a differentiated Income-tax could not save the political situation.

In 1861 an attempt was again made by Mr. Hubbard's Committee to deal with differentiation, but no practical conclusion was reached, although various plans were suggested for consideration.

These facts clearly show that even on this branch of the subject the Select Committee which has just concluded its labours had no light task to discharge.

Nor is the fact disputed that the present high rate of tax presses very heavily and unfairly on the lower incomes which lie above the abatement line.

It is self-evident that a shilling Income-tax presses much more severely on the man with an income of say 8001. a year than on his neighbour who enjoys an income of 8,000l. a year.

GRADUATION

The real remedy for both grievances is a reconstruction of the Income-tax on modern lines. Democratic in our ideas, conservative in practice, graduation has been held to be unworkable in this country in consequence of the large amount of Income-tax which is collected at the source, amounting roughly to three-quarters of the whole tax.

Nothing is to be gained by minimising or ignoring difficulties in the way of reform. It is, however, astonishing to find when we look back over the last half-century how many reforms, economic and political, declared to be impracticable in their application and

impossible of attainment, have by a process of natural evolution quietly taken their place in our system of government.

tax.

And so it will be with regard to the graduation of the Income

The evidence of the official witnesses, including Sir Henry Primrose, the chief of the Inland Revenue Department, will be of great service in the solution of the problem with which the Chancellor of the Exchequer has to deal.

It was frankly admitted by them that income taxed at the source could be graduated up to incomes of 1,000l. a year, even under the incubus of our present cumbrous system of abatements.

More significant still was the evidence which conceded that earned incomes directly assessed could without difficulty up to 2,000l. a year enjoy a differentiation by a lower rate of tax.

It is not too much to say that there was not an Income-tax reformer in the Committee, or out of it, who could have foreseen or dared to prognosticate so frank an assurance of practicability from Somerset House.

The Income-tax is at present graduated by abatement up to incomes of 7001. a year.

The abatements given with the Income-tax at 1s. are equivalent to a direct tax of

1d. per £ on incomes of 180l. a year

It is open to question whether one-tenth of the taxpayers who claim abatement realise the small rate of Income-tax they at present pay.

Tell any one with an income of 500l. a year that he pays an Income-tax of only 814. per £ and he will very likely contradict you, if he does not laugh at the suggestion.

How much better would it be if each taxpayer had the means of knowing exactly the rate of Income-tax he had to pay.

Foreign countries and our own Colonies have demonstrated the practicability of graduation.

The adoption of a direct graduated tax does not necessarily involve the abandonment of taxation at the source.

Investments under Schedule C and dividends under Schedule D might continue to be taxed at the source and shown as deducted in the direct individual assessment returns.

Under Schedule A if the owner were taxed directly instead of through his tenant, who now pays his landlord's tax and deducts it

from his next payment of rent, the change would not in any way jeopardise the efficient produce of the tax.

It is well, therefore, to bear in mind that a graduated Income-tax may be combined with the retention of partial collection at the source.

A graduated Income-tax progressively increasing with the amount of income would ensure the recognition of two canons of taxation commended by political economists-namely, that a tax should be levied according to ability to pay; and that the taxpayer ought to know exactly how much he has to pay.

Let us now consider how incomes are distributed, and whether that distribution supports the case for graduation.

The Income-tax payers number 1,100,000, according to the latest estimate; of these 800,000 are below the abatement limit.

The gross amount of income brought under the review of the Inland Revenue Department for 1905 was 912,129,680l. In his evidence before the Select Committee, Sir Henry Primrose stated the aggregate income on which, after deductions, tax was payable at 728,000,000l. He estimated the income enjoyed by individuals to be 678,000,0001.

This gigantic total may be divided into three parts:

If we divide this income into two parts corresponding to the division made by the abatement limit, we find that 800,000 persons enjoy an income of 250,000,000l. under the abatement line of 7001. a year, and that 300,000 persons enjoy an income of 428,000,0001. above the abatement line.

These figures are very conservative and were largely exceeded in the evidence given before the Select Committee by well-known statisticians. Moderate as they are admitted to be, they prove how large an amount of the national income is enjoyed by a comparatively small number of persons.

They do more. They point the way by which, without penalising anybody, a more equitable adjustment of taxation might be made.

DIFFERENTIATION

Some authorities are of opinion that if a graduated scale of Incometax were adopted, there would be no need for differentiation. That is not so. The income depending on the exertion of the individual is more precarious than the income from land and houses.

The scheme laid before the Select Committee of 1861 by Mr. Hubbard proposed to tax industrial incomes at two-thirds of the income, and that proportion has generally been considered a fair one, whatever form the relief may take.

、

The question of classification is one not without difficulty. The Select Committee of 1906 was asked to say whether a distinction could be made between the two classes of income usually designated 'permanent' and 'precarious.' That classification was discarded in favour of earned' and 'unearned' income, a distinction which gets rid of many technical objections and has the further advantage that the present classification of the Income-tax Schedules readily lends itself to this division. It is, after all, a rough and ready method, not by any means scientifically accurate, but one which does substantial justice to the different classes, as a glance at the schedules will show.

The case of the limited company under Schedule D created some difference of opinion. The view ultimately accepted, essentially a just one, even in the case of a private limited company, was that where the aid of the State was invoked to limit a trader's liability and to convert his interest in the business into the form of an investment, it ought to be taxed as such. It is estimated that earned incomes under Schedule D amount to 208,661,000l., and the unearned incomes to 295,907,000l., or a total of 504,568,000l.

For the year 1905 the estimated produce under Schedule D from private trades and professions amounted to 7,560,350l. The produce under the same schedule derived from public companies, &c., would therefore amount to 10,701,366.

If the total produce of the Income-tax is roughly divided into earned and unearned income according to the existing schedules the result would be as follows:

It would thus appear that two-thirds of the total tax would be

charged on unearned income partly derived from property, and to a greater extent derived from trade and investments.

GRADUATION BY SUPER-TAX

It has long been the dream of the Socialist to be able to get at the incomes of the very rich for the purpose of imposing heavy taxation.

Mr. Snowden, M.P., advocated an Income-tax of 1s. per £ with a super-tax of 6s. in the £ on very large incomes. Mr. Keir Hardie was more modest, with a tax of 1s. 6d. on incomes derived from property and investments, a tax of 1s. with abatements on incomes from personal exertions, and an additional tax of 1s. 6d. per £ on the highest incomes.

None of these proposals found acceptance with the Select Committee, but they decided that the imposition of a super-tax was practicable. Given a personal declaration of income, the imposition of a super-tax on large incomes presents no practical difficulty.

It has been suggested that the levying of such a tax would meet the demand for reform. That is a very superficial view. The taxation of incomes of 5,000l. a year and upwards, even at a very high rate, leaving the inequalities and hardships unredressed in the lower incomes, does not appeal to the financial reformer as a possible solution. The Select Committee, while deciding that a super-tax was practicable, give no sign of enthusiasm in its favour.

In time of war such a possible method of taxation would be of the utmost value. From this point of view the advocates of personal declaration of income have much to say in favour of their view.

PERSONAL DECLARATION OF INCOME

The great struggle for mastery between the progressive economists on the Select Committee and their more conservative coadjutors was waged over the question of a personal declaration of income.

Personal declaration of income is the foundation of any equitable system of Income-tax. If ability to pay is the test, then only will we possess the material to enable us to make a just apportionment. Mr. Bernard Mallet, of the Board of Inland Revenue, showed in evidence that the great majority of foreign continental taxes belong to the class in which disclosure of the taxpayer's total income is required.' These countries include Germany, Switzerland, Holland, Sweden, and Denmark.

It is the same in the case of the Income-taxes of British Colonies, with the exception of Tasmania. He also stated that in Saxony 'the system of compulsory individual declarations under heavy penalties for misstatements is stated to have been productive of excellent results from a revenue point of view.'

It is not generally known-indeed, it was denied not long ago by a Chancellor of the Exchequer in the House of Commons-that by