CHAPTER XIV.

DIVISION OF PROPERTY AND INCOME INTO
CATEGORIES.

MAYO-SMITH, in quoting the general income tax tables for 1896-7, remarks that it is impossible to trace "income to its source, either as derived from capital or from labour, from land or personal property, from accumulated wealth or from trade capital."1 Nevertheless, categories have frequently been attempted, and the chief lines of division may here be noted briefly and without any attempt to refer to all the long-forgotten excursions into this province.

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(1) Differentiation: "Earned" and " Unearned,"

"Labour and Capital," etc.

From the very inception of the income tax there have always been numerous writers upon the division of income into categories, "permanent and precarious," "spontaneous and “industrial,” “earned and unearned." Some of these have been in reference to proposed reforms of the system in the interests of just taxation, while others have been investigations into the relative burdens borne by the respective classes, or into the rate of increase of each of the classes.

With regard to the former, the argument and pleading do not belong strictly to this work, and we are concerned only with the distributions and statistical distinctions made. The reader is referred to the discussions themselves for further details. 3

1 "Statistics and Economics," p. 428.

2 Vide my article “ The Meaning of Unearned Income," Economic Journal, June, 1915.

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3 Vide, inter alia, Giffen, " Essays in Finance," 2nd Series, pp. 394, etc.; Capital and Labour," S. J., 1887, p. 208; "Capital and Exertion Incomes "estimated division on Giffen's model. Farr,

The leading protagonist for reform along these lines was J. G. Hubbard, and an abstract of his scheme is appended to show his division in 1885.

Sch. A was divided, one-fourth going to " capitalists" and not subject to an allowance for repairs. Sch. D is assigned one-half to capital and one-half to earned profits.

Discussion on the Income Tax, with proposed Bill
(Right Hon. J. G. Hubbard, M.P., 1885).

Statement, showing the yield of a 5d. income tax levied on the assessments of 1881-2, compared with the estimated yield of a 6d. income tax levied under the provisions of the Income Tax Administration Amendment Bill:

Analyses of income tax assessments to show the increase in the income from capital and from salaries and wages of superin

"On the Equitable Taxation of Property," S. J., 1853. Booth, “On the Principles of an Income Tax," S. J., 1860. Sargant," Fallacy of the Warburton Argument,' S. J., 1861. Sargant, An Undiscriminating Income Tax reconsidered, S. J., 1862.

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tendence respectively have also been made. Giffen gave the following summary (in millions):

In this computation he makes the following estimates :Sch. A.-Assigned to capital, although "it is well known that not even in Sch. A is the income obtained without exertion and care, and some risk of loss, which are entitled to remuneration."

Sch. B.-£25 to capital in 1881 (22 in 1862 and 20 in 1843) with the note: "Interest on 500 millions of capital in 1881 at 5 per cent. In my paper on accumulations of capital I estimated agricultural capital at a larger sum than this; but since then there has been some loss of agricultural capital, and if a larger sum were taken, the rate of interest used in the calculation for the present purpose should be less." To" salaries, etc.," he assigns £36, £38, and £44 respectively. The totals of the two categories bear no discoverable relation to the Sch. B assessments.

Sch. C.-Assigned wholly to "capital."

Sch. E.-Assigned wholly to "salaries, etc.”

Sch. D.-Includes mines, etc. (concerns No. III., Sch. A) throughout, the Sch. A figures excluding them throughout. Part I.," Trades and Professions," is divided between the two :

and the 1881 division is explained as follows:-"Estimating that the income here is worth four years' purchase, and that it may be capitalised at that rate, and then allowing that this capital earns 10 per cent., the rest being wages of superintendence, I have rather exaggerated than depreciated the estimate for capital employed in trades and professions, my estimate being rather more than that of Mr. Dudley Baxter in his famous paper. Part II., "Public Companies," is assigned wholly to capital, "although the vigilance necessary and the risk attendant on the business are really most serious, and part of the so-called profit is .. strictly remuneration of labour."

Ireland. An estimate is made for 1843, the total gross income under all schedules thus estimated being about £30,000,000.

It will be observed that, although he endeavoured to make all the necessary qualifications, Giffen omitted to notice that, while the Schs. D and E figures for 1843 and 1881 are comparable (incomes of £150 and upwards), the year 1861-2 includes incomes £100 to £150, and is therefore not comparable with the others. In his subsequent remarks, however, where he concludes that the capitalist classes have advanced in forty years 110 per cent., working income in income tax returns 100 per cent., and working income not in income tax returns 160 per cent., this error has no effect ("Economic Inquiries," I., pp. 415-19).

Dr. Bowley, before the S. C. on Income Tax, 1906, assigned Sch. A and Sch. C, one-half of Sch. D (£221,000,000), and the whole of Sch. D evasion (£35,000,000) to the unearned class.1 The income of public companies alone, however, without the unearned income assessed on persons and firms, was £267,000,000, or £46,000,000 more. The present statistics of differentiation do not enable an exact figure to be given, and it can only be said that earned income must be considerably in excess of £234,000,000 out of £866,000,000.

Messrs. Mallet and Strutt allocated to unearned income as follows:-Under Sch. A, all except the income of clergy from landed property; under Sch. B, a small amount for interest on loans to farmers (£60,000); under Sch. C, all except small payments to clergy, etc.; under Sch. D, the whole of public companies' profits, but no part of the income of persons and firms except £5,000,000 for charges such as royalties, interest on loans, annuities, etc.; under Sch. E, a small amount for interest on loans. The allowance of £5,000,000 for charges of this character appears to me to be very small, but otherwise the method is a distinct improvement on earlier estimates.

Productive and Unproductive Income.-W. R. Lawson, quoting the 1900-1 figures, remarked:-" Of the 594 millions on which the tax was paid, a large proportion represented non-productive income, rents of land and houses, annuities, interests and dividends, salaries of Government and other public officials. The only income adding unquestionably to the wealth of the nation was that under Schs. B and D, namely, farming and business

1 Appendix, p. 221.
2 S. J., July, 1915.

profits. These formed less than 360 millions out of a total of 594 millions" ("Two Record Budgets, 1860 and 1903," Fortnightly Review, May, 1903).

(2) Division of Capital into Real and Personal Property.

This division has generally been attempted in order to ascertain the relative burden of taxation on each class, and Goschen's Report on Local Taxation, with his use of tax statistics to show the increase in real property, has been widely quoted. Sir R. H. Inglis Palgrave (on "Local Taxation") and Leone Levi (S. J., 1884) have followed similar methods.

Baxter's division was "landed incomes," personalty incomes," and "industrial incomes," but his treatment did not involve any actual analysis of total incomes.

This division for ascertaining incidence bristles with difficulties. For example, it is not a decided point as to whether land tax is a " tax," or whether redeemed land tax should be considered. How far rates are a burden on the thing which happens to be used as the measure of what shall be charged is an unsettled problem, and in view of the fact that taxes are paid by persons, and not by things, is probably not capable of ultimate solution.

In Lord Milner's view this distinction between realty and personalty is entirely a legal one, without economic significance, and is therefore to be distinguished from the distinction between rateable and non-rateable property.

The Treasury classification in 1885 (H. C. 345—“ Paget's Return: Imperial Taxation on Real and Realised Personal Property ") assigned the income from quarries and fishings, one-half of the income from mines and canals, and one-fifth of the income from waterworks, to "real property." For personal property the allocation included farming stock and implements, public debt, Indian and colonial funds, ironworks, gasworks, "other" public companies, foreign and colonial securities, railways (in and out of the United Kingdom), mortgages on rates, other profits, one-fifth of trades and professions, and the respective balances of mines, canals, and waterworks. With regard to the three last named, the