146 



DISCOVERY 



they did a year or two ago. Looking at tlie problem 

 in another way, the large fixed duties which enter 

 into the selling prices of certain articles prevent the 

 prices of these articles from falling in approximately 

 the same proportion as the prices of non-taxed articles 

 are falling, and thus discourage sales to the detriment 

 of the manufacturers and dealers concerned. 



4. The sudden depression following on a period of 

 steadily improving trade has led, in many cases, to 

 increased assessments for income tax at a time when 

 profits are seriously reduced. The full effect of the 

 various rises in income tax during the war had probably 

 not been felt by business firms prior to the recent 

 slump, as the assessments were based on the average 

 profits of the previous three years, which, owing to 

 improving trade, tended to be lower than the actual 

 profits of the year in which the tax had to be paid. 

 We may suppose that X. & Co. had profits of £10,000 

 in 1917, £12,000 in 1918, £20,000 in 1919, and £30,000 

 in 1920. In January 1921 they would be called upon to 

 £10,000 + 12,000 + 20,000 



pay mcome tax on' 



= £14,000 



at 6s. in the pound, i.e. £4,200. This sum would 

 probably be paid out of the profits of 1920, and repre- 

 sents only 2S. g'^d. in the pound on £30,000 profits. 

 The following year the position would be quite 

 different, owing to the sudden slump. In 1921 we 

 will suppose that X. & Co. made a profit of £5,000. 

 At the beginning of 1922 they would be called upon to 



£12, 000-1- 20, 000-1-30,000 , ,, 

 pay mcome tax on - — ■ ■ -^^-^ =£20,667 



at 6s. in the pound, i.e. £6,200. This sum exceeds the 

 actual profits of 1921, representing a tax of £1 45. gd. 

 in the pound. At first sight this appears to be an 

 appalling hardship ; it is known, however, to all business 

 men that under the three-year average system income 

 tax payments work out lightly in years of improving 

 trade, and heavily in the years of declining trade, especi- 

 ally in the first year after trade has begim to decline, 

 so that it is very desirable in good years to place sums 

 to reserve to meet income tax payments in bad years. 

 Even if this precaution has been taken, the making 

 of the income tax payment will be a cause of difficulty, 

 unless the income tax reserve is in a liquid form. It 

 must also be I'emembered that under the three-year 

 average system the total amount paid in income tax 

 over a long period of years works out to very much 

 the same sum as if the tax on each occasion were based 

 on the profit of a single year, onl}^ the jluctuations in 

 the amount due each year are less violent under the 

 averaging system. 



Where firms are privately owned, the partners are 

 subject to super-tax as well as to income tax. The 

 amount of a taxpayer's income for super-tax purposes 

 is, roughly speaking, the amount of income on which 



he has borne income tax the previous year. Thus 

 super-tax figures lag even further behind current 

 profits than do income tax figures. If X. & Co., of 

 the previous paragraph, belonged to one man he would 

 in January 1922 be paying income tax on £20,667 

 (average for 191S, 1919, and 1920) and super-tax on 

 £14,000 (average for 1917, 1918, and 1919). The 

 necessity to accumulate liquid reserves to pay super- 

 tax during a depression in trade is as great as it is in 

 the case of income tax. 



II 



We must now turn to the other side of the picture 

 and consider the effects which high taxation may 

 have on the depression in trade. I propose to dis- 

 tinguish five cases, three of which may be described 

 as material and two as psychological. 



1. High taxation tends to diminish the opportunities 

 to save, thus restricting the flow of new capital which 

 is so essential as a stimulant to trade and industry. 

 So far as the individual is concerned, it is sometimes 

 urged that, the higher the rate of taxation, the greater 

 the effort that will be made to save for future uses, 

 because, the higlier the rate of taxation, the larger the 

 gross income that will be necessary in the future in 

 order to yield a preconceived net income after payment 

 of taxation. It is doubtful, however, whether many 

 individuals look at the problem in this way, and, even 

 if they do, whether, after paying their taxes and 

 meeting what they regard as necessary expenditure, 

 they are in a position to save more than formerly. 

 So far as a business firm is concerned, the prejudicial 

 effect on saving, of high taxation which cannot easily 

 be shifted, appears to be unquestionable. " Saving," 

 in the case of a firm, consists in reserving sums out of 

 current profits for use in developing and expanding 

 the undertaking. Sound finance undoubtedly calls 

 for the accumulation and use in the business of such 

 reserves, yet in the case of a privately owned firm 

 income tax and super-tax, and, in the case of a public 

 company, income tax and corporation profits tax, 

 make very heavy inroads into the profits and greatly 

 reduce the sums available for financing developments. 



2. High taxation tends to discourage the provision 

 made for wear and tear of plant, machinery, etc. 

 Allowing repairs and renewals to fall into arrear not 

 only reduces the productive capacity of the industry 

 concerned in the future, but prejudices in the present 

 the trades with which the renewal orders would have 

 been placed. It is more especially high income tax 

 which discourages proper provision for depreciation, 

 because the sums which the Inland Revenue allow 

 firms to charge as expenses on account of depreciation, 

 in ascertaining their incomes for income tax purposes, 

 tend to be considerably less than the actual cost of 

 repairs and renewals. Thus, repairs and renewals have 



