DISCOVERY 



147 



to be financed to a considerable extent out of profit> 

 subject to income tax. When £i,ooo of profits are 

 required to pay for £700 of repairs, firms are loath to 

 carry out more than the most urgent repairs, 



3. It is claimed by many authorities that certain 

 new taxes, especially those levied in connection with 

 the Safeguarding of Industries Act, are impeding 

 foreign trade, not merely by the imposition of a 33J 

 per cent, tax which formerly did not exist, but by the 

 uncertainties and petty quibbles to which that Act 

 has opened the door. 



4. The chief psychological effect of high taxation 

 appears to be to promote pessimism and to discourage 

 enterprise amongst business men. There can be no 

 question that all business transactions involve risks 

 and that the uncertainty now prevailing about price 

 movements makes the risks bigger than usual. If 

 business risks are successfully negotiated, the Govern- 

 ment, through taxation, takes a substantial slice of 

 the resulting profits ; whereas, if the risks prove too 

 great and losses are incurred, the Government does not 

 fully share them. The business community, in many 

 cases, appears to feel that the game is not worth the 

 candle under present circumstances and prefers to 

 wait for more favourable conditions before launching 

 out. The prospect of retaining a bigger share of 

 profits, if made, would probably act as an incentive to 

 adopt a more enterprising policy. 



5. A second psychological effect of high taxation is 

 that it tends to diminish the incentive to work, and in 

 certain cases, at least, will lead to less work being 

 done. An individual is prepared to do a certain 

 amount of extra work for the sake of earning an extra 

 pound, but if that pound is reduced to 17s. or 14s. by 

 the deduction of 3s. or 6s. income tax, the incentive 

 will be less. He may do the extra work, nevertheless, 

 for the sake of maintaining his standard of life, or he 

 may do some of the extra work, preferring his leisure 

 to doing the last and most disagreeable part of it ; 

 or he may do none of the extra work, so as entirely 

 to escape the tax liability which would accrue on his 

 income passing a certain sum. It is certainly commonly 

 believed that miners fairly recently, if not at present, 

 have deliberately refrained from work, when the pay 

 corresponding to that work would raise their incomes 

 above the exemption limit of the income tax. Reduced 

 output, whether brought about by this or any other 

 cause, tends to increase the cost of production and 

 penalise all industries which have to use the restricted 

 output. 



Ill 



Whilst it is conceivable that a particular industry 

 or even business generally, might be almost taxed out 

 of existence, it fortunately does not appear as if such 

 an acute position had been reached in this country. 



The situation here may pjrhaps be summarised by 

 saying (i) that the prevailing depression has tended 

 to augment certain taxes ; and (2) that high taxation 

 is tending to aggravate the problem of unemployment 

 which has been primarily caused by other circum- 

 stances. ' It is somewhat doubtful as to how far a 

 modest reduction in taxation would help to stimulate 

 employment. Anything more than a modest reduction 

 in taxation is almost inconceivable in view of the 

 position of the national finances ; even a modest 

 reduction might prove very embarrassing, though it 

 has to be remembered that, if it really succeeded in 

 stimulating trade sufficiently, the reduced taxes might 

 yield as much with improved trade, as the higher 

 taxes would with more depressed trade. If taxation 

 were reduced and the revenue suffered, we must briefly 

 consider how the Government could hope to make 

 both ends meet. 



1. The sums provided in the Budget for the repay- 

 ment of debt might be curtailed, or even eliminated, 

 for the time being. Unfortunately, since the Armistice, 

 there has been no reduction of debt out of taxation 

 revenue ; such debt reduction as has been achieved 

 has been financed out of the sums obtained from the 

 sale of surplus stores, etc., and some of these sums, 

 which are really capital and not income, have had to 

 be employed to meet current expenditure. As nothing 

 has been raised by taxation for the repayment of 

 debt, there is no relief to be found in that direction. 



2. Some services, which are at present paid for out 

 of taxation, might be defrayed instead out of borrowed 

 money. Financially, this would be one step worse 

 than meeting current liabilities out of the proceeds of 

 the sale of surplus stores, etc. When we remember 

 that our international credit and the movements of 

 the Foreign Exchange depend very largely upon the 

 soundness of our national finances, it is difficult to 

 approve of this extreme step as a deliberate policy. 



3. Sufficient economies might be effected in national 

 expenditure to enable taxation to be reduced. The 

 difficulty here is that a very big reduction in expendi- 

 ture is required to make both ends meet in 1922-3, 

 without any question of managing with less taxation 

 revenue, so that this solution does not appear to offer 

 very much prospect of relief. 



The authorities are faced by a choice of evils : to 

 reduce taxation and jeopardise the national finances ; 

 to maintain taxation and jeopardise trade recovery. 

 The one comforting thought in the dilemma is that 

 this is a case where it is not necessary to plump solidly 

 in favour of one course or the other ; a solution may 

 possibly be found in some kind of compromise. 



April 29, 1922. 



» See my article on The Problem of Uvemployttient in Dis- 

 covery for November 192 1. 



