§ Before coming to my proposals, I want to say something about methods of raising revenue and methods of budgetary or fiscal control of the economy. First, the simplification of the tax system and of the Government's accounts.
§ I arrived at the Treasury with preconceived ideas, long held, and, of course, with undue optimism about the simpleness of simplification. I wanted to do three things, if it were possible. First, to have one system of direct taxation of the individual instead of two, Income Tax and Surtax, as at present. Secondly, I wanted to have one system of taxation of companies, instead of two, Income Tax and Profits Tax, as at present. Thirdly, I wanted to see whether it was possible to present the Government's accounts in a rather more easily understood form, particularly with regard to capital receipts and expenditures.
§ As to the amalgamation of Income Tax and Surtax, there are two factors to be taken into account—one unalterable and the other of great practical difficulty. In the very large number of cases where there is income from more than one source, it is impossible, under our progressive system—and I use this word in a mathematical sense—to avoid dealing with liability to tax in two stages, even if the calculations are made under the same system and the same set of rules. The standard rate of Income Tax can be taken by deduction from dividends and interest. Virtually the correct Income Tax liability can be taken under P.A.Y.E. from wages and salaries as they are earned.
§ Nevertheless, after the individual's total income for the year is known, there has to be another calculation in order to arrive at the tax due, and to make any adjustments which may be necessary in retrospect. Therefore, whatever the system, one cannot avoid two stages—one concurrent and the other in retrospect. That is inevitable if we are to continue a progressive system and deduction at source as we obviously must, and that seems to be unalterable.
§ There is the second matter—one of practical difficulty in the year of change. At present, Income Tax is deducted under P.A.Y.E. concurrently with the 803 earning of the income. Surtax is paid on the income of the year before. If the two systems are amalgamated so that the part which is now called Surtax is deducted concurrently, what would then happen to the Surtax due in arrear? Even if one was prepared to forgive it—a heavy burden on other taxpayers—it would be impossible to do so in a way which would be fair between one taxpayer and another; for example, the salary-earner and self-employed.
§ Therefore, if I were to amalgamate the two taxes, current deductions from salaries would be made to take account of the combined rates from now on, while next January the Surtax bill for last year would have to be met. It is unpleasant enough having to pay one lot of Surtax in a financial year. To ask for two lots from a considerable number of people would seem to gratify too much the naturally sadistic instincts of a Chancellor of the Exchequer.
§ I have tried to get round this difficulty which, I believe, is a very real one, but it has so far proved impossible. Therefore, I have come to the conclusion that the best thing to do is to work for the assimilation of the rules governing Income Tax and Surtax as far as practicable, and this year I hope to make a beginning in one respect in a way which I will describe later.
§ As for the idea of one system of taxation for companies instead of Income Tax and Profits Tax, I was confronted at once with the adverse recommendation of the majority of the Royal Commission. I read the relevant paragraphs of the Report carefully. I would not be deterred by the difficulty considerably stressed in the Report, that of the possibility that the companies tax might become lower than the standard rate of Income Tax. I would face any problems arising out of such a contingency if and when I thought that there was a chance of it happening in practice.
§ However, there are other difficulties. There would have to be a standard rate of tax for deduction from dividends. In that connection, I am told there would be great complication in the case of dividends paid by one company to another. These difficulties were referred to in the Report. They have not yet been resolved and, certainly, I should not wish 804 to be responsible for introducing a new system which, in practice, proved to be more complicated and to present greater difficulties than the present one. I am not quite satisfied, however, and I intend to have these difficulties examined further before the next Budget.
§ The third matter to which I referred a few moments ago was the form and presentation of the Government's accounts. This includes the Estimates and the Exchequer accounts as a whole; including the question of what items should be shown above the line and what below it. We can rightly commend what our forefathers did in the 1860s to reform the accounts of their day, but it is hardly surprising that, a hundred years later, the system they drew up should need modernisation. There is surely something rather confusing about a presentation which puts some capital receipts, including certain debt repayments, above the line. Without wanting to become too controversial, I personally would add to this category receipts from death duties. At the same time, we put below the line some items such as post-war credits which, from many points of view, are indistinguishable from other current payments. I am sure that we have to produce a less confusing presentation. I have set on foot in the Treasury a full review of this matter. It will take time; but I shall see that it is pressed forward.
§ But, meanwhile, we have made a start. Certain proposals for a radical simplification and modernisation of the Estimates have been put to the Public Accounts Committee and the Select Committee on Estimates. I hope that both Committees will welcome these proposals. I shall, of course, carefully consider any comments they may have to make. I should like to see next year's Civil Estimates presented in the new form.
§ So much for the tax structure and the form of the Government accounts.