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National Debt affords a good illustration of the axiom for which I often
contend, that complicated social problems do not admit of hard-and-fast
solutions. Even the primary proposition that a National Debt is an evil,
obvious as it seems, is by no means necessarily true. The few remaining
countries of the world which have no debts, such as Persia and Morocco,
are scarcely countries with which we should wish to exchange conditions.
The example of the United States shows that a surplus may be almost a
greater embarrassment than a deficit, and more calculated to produce al-
terations of artificial stringency and plethora in the money market. The
fact is that a National Debt has become almost one of the necessities of
a progressive and civilized country. As in the case of a railway com-



PROBLEMS OF THE FUTURE.



219



pany, if traffic expands, money must be spent on increased plant and ap-
pliances, and if the capital account is rigidily closed, this can only come
out of revenue, and increasing prosperity may mean diminishing divi-
dends. The question is, what is the amount of debt compared with the
resources of the nation ; and how the money is spent, whether unprofit-
ably in useless wars, or wisely in prudent precautions against inevitable
risks, and on objects such as education and sanitation, which promote
the welfare and ultimately the wealth of the community. For it must be
always remembered that the amount of a National Debt is a relative quan-
tity, depending not on absolute figures, but on the ratio which the an-
nual charge bears to the annual income of the country. Thus a debt of
700,000,000 at 3 per cent, of which the capital cannot be called in, is
practically a smaller debt than one of 400,000,000 at 6 per cent The
rate of interest payable on a debt is, however, a very important factor in
deciding whether it is or is not wise to increase taxation for the purpose
of paying it off. Thus in the case of the United States, which affords the
principal instance of large repayment of debt by excessive taxation, the
repayment has not been effected without great sacrifices. From being
the cheapest the United States have become one of the dearest countries
in the world, the mercantile marine has been almost annihilated, and
protected industries have grown up which threaten serious difficulties.
Experience shows, that Protection may succeed as well as Free Trade in
its earlier stages, while the demand of the home market is more than
sufficient to meet the production. But the time comes when the home
market is glutted, and manufacturers must look to foreign markets for
the sale of part of their commodities. In such markets they cannot com-
pete with the cheaper products of Free Trade countries, and the United
States have already approached this stage.

Notwithstanding these drawbacks the policy pursued by the United
States was probably a wise one, for this decisive consideration predomi-
nated, that at the end of the war their enormous debt carried interest at 6
per cent., while now they can borrow any amount at 3 per cent. Every
i therefore redeemed by taxation practically paid off 2 of debt

In the case of England this consideration does not apply. The rate
of interest now paid, especially since the recent Conversion, is so low that
there is little to hope from further reductions, and the question of repay-
ing debt may be treated on its own merits, and as one of raising i by
taxes to pay off i of debt. There are two ways of reducing debt one
by actual repayment, the other by out-growing it Thus, if we take Mr.
Giffen's estimate that the national income, which in 1843 was ^5 1 5>)'
ooo a year, is now 1,200,000,000, while the annual charge for the
National Debt has remained stationary, or rather diminished, we have
practically paid off more than half our debt. The total charge maybe
taken at about 25,000,000 a year for interest, and 5,000,000 for
sinking funds in the form of terminable annuities or otherwise. That



220 BEACON LIGHTS OF SCIENCE.

is to say, taking the nominal capital of the debt at 750,000,000, w
were in 1843 in the position of a man who with an income of 500 a year
owes 750, or a year and a halfs income ; and are now in the position
of one who, with 1200 a year owes the same 750, or less than three-
quarters of a year's income. If the same comparison were carried back
to the close of the war in 1815, it would show that the burden of the Na-
tional Debt is practically four or five times less now than it was then.

In making this comparison it must be remembered also that even if
the ratio of debt to income remains the same, a large debt with a corres-
pondingly large income is a much lighter burden than in the converse
case of a small debt and small resources. Thus, to take an illustration
from private life, a debt of 200 is a very serious affair for a clerk living,
perhaps with a wife and family to support, on a salary of 200 a year ;
while a debt of 20,000 is a mere trifle to a man of 20,000 "a year.
The latter can pay it off with ease out of revenue, and renew it or repay
it by a fresh loan, without the slightest difficulty and at a very moderate
rate of interest ; while to the former it may mean ruin, or a bill of sale of
his effects and usurious interest.

It is clearly, therefore, better for a country to remain with a fixed debt
and outgrow it, than to attempt to pay it off by taxes which fetter trade
and retard the development of industry and wealth. This was substantially
the policy of the great Sir Robert Peel when he imposed the Income-tax,
not for the purpose of paying off debt, but to repeal oppressive taxes and
inaugurate the system of Free Trade under which the Empire has made
such marvellous strides in prosperity that, as Mr. Giffen shows, its aggre-
gate annual income has increased in forty-five years from 515,000,000 to
1,200,000,000 a year. No one can say that the country would have
been as well off if Sir Robert Peel had adopted the opposite policy, which
a good many amateur financiers and half-formed journalists now call
sound finance, and applied the proceeds of his Income-tax as a sinking
fund. Even Mr. Gladstone, rigid economist as he is, has practically
adopted the same policy as Sir Robert Peel, and his splendid financial
reforms have been carried out by applying surpluses to reduce and sim-
plify taxation, instead of appropriating them to large repayments of debt.

In fact, it is sufficient for a Chancellor of the Exchequer to aim at
avoiding any permanent increase of debt in times of peace. To insure
this, as experience shows that with our extended empire, and the growing
wants of an increasing population, the necessity of occasional drafts on
capital account cannot be avoided, it is wise to frame estimates on the
safe side, and make a moderate provision in the way of sinking funds, so
as to have surpluses in ordinary years to apply in counteracting this ten'
dency towards increase. But this is a very different thing from opposing
an inflexible non possumus to all demands for increased expenditure on
capital account, however indispensable they may be for national safety
and welfare,



PROBLEMS OF THE FUTURE.



221



If, for instance, it should be clearly established that an outlay of, say,
50,000,000 in addition to the ordinary estimates is absolutely necessary
m order to bring our army and navy up to the standard necessary to
give us reasonable security, there should be no hesitation in raising it by
a loan. The charge for it would not exceed 1,500,000 a year, or less
than one penny in the pound of Income-tax, and the existing sinking
funds are ample to secure us against its being a permanent addition to
the debt. Surely this is better than remaining with our eyes open, only
half insured, risking being involved in great wars menacing our very ex-
istence, and in all probability having to do expensively in a panic what
might have been done efficiently and economically by prudent and timely
preparation.

In view of the necessity for larger expenditure to provide for the
security of the Empire, it is important to consider whether the system of
taxation by which the revenue is raised is such as commends itself to the
intelligence and good sense of the community, and taxes the different
classes fairly in proportion to their several interests. The main argument
of demagogues is to represent the army and navy as institutions by which
poor men are taxed to provide outdoor relief fior scions of the aristocracy.
This is a gross exaggeration, and on the whole there is no civilized coun-
try in which taxation is less unfair and less oppressive than in our own.
A country in which the total effective taxation for Imperial purposes does
not exceed 5 or 6 per cent, of the national income, and in which the
money wages of labor have doubled and their spending power increased
in the last forty years, cannot justly be described as groaning under
excessive taxation. Still there is a certain substratum of truth in the
assertion that the enormous unearned wealth of the country does not pay
as much as it ought towards the defence of the Empire and the main-
tenance of law and order, on which its very existence depends. In order
to form any just opinion on this subject it is indispensable to keep clearly
in view the fundamental distinction, which has been too much overlooked,
between earned and unearned income. The former is a creation of nat-
ural, the latter of artificial law. The former commands a market all over
the world wherever muscles and brains are in request The latter de-
pends to a great extent on rights and privileges, secured by laws which
differ in different ages and countries, and are in this country exceptionally
favorable to the extreme rights of property.

The real difficulty in carrying out such a loan as has been suggested
is not so much in the amount required, as in the impression which pre-
vails that there is no security for the money being properly spent, and
the feeling that our system of taxation is inequitably assessed. As
regards the first point, it is unfortunately only too true that under our pres-
ent system of administration we cannot depend on getting money's worth
for our money. How can it be otherwise when we consider what that
system has been and to a great extent still is ? A long experience of



BEACON LIGHTS OF SCIENCE.

administration, both in the affairs of the State and of private companies, has
taught me this lesson the great secret both of efficiency and economy is
to have a clear chain of responsibility, so that, if anything goes wrong
you can at once put your finger on the man who is accountable for it.
Having this, and a clear system of accounts, so as to be able to see at
a glance what the results really are, give your officals a free hand and let
them feel that they are sure of your support as long as the results come
out right. And above all avoid frequent changes, and let there be a
reasonable degree of permanence in your policy, so that the heads of de-
partments may know what work they have to do, and how much they
will have to spend, with some tolerable assurance of certainty.

Our existing system violates all these rules. Governments change on
the average every three or four years, and with every change of Ministry
new men come into power at the Admiralty and War Office, who are
selected by Parliamentary considerations, and are as a rule totally inexperi-
enced in the work of the departments over which they preside. With
new men at the head and changes in many of the principal officials, new
views and a new policy are introduced, and a programme is hardly laid
down before it is either expanded to meet gome momentary panic, or
more probably cut down to enable the new Chancellor of the Exchequer
to introduce a Budget contrasting favorably with that of his predecessor.
The object seems to be not to define responsibility, but to conceal it.
The Admiralty, for instance, seems to be constituted with curious inge-
nuity for making it impossible to fix responsibility on any definite individual.
Does a new ironclad refuse to answer her helm or rolls so that she cannot
fire her guns in a seaway, who is to blame ? Is it the naval constructor ?
but perhaps he was overruled by the Sea Lords, or the First Sea Lord by
the Board, or the Board by the First Lord, or the First Lord by the
Treasury. Very probably the design was sanctioned and the construction
begun in Lord Northbrook's time, and the ship was finished and her defects
discovered under Lord George Hamilton. And what reasonable man
could hold either one First Lord or the other responsible for not being a
heaven-born naval architect, and for adopting plans laid before them by
presumably competent officials ?

So, again, if guns burst, or ships and forts lie idle for want of guns,
whose fault is it ? Scarcely that of the Admiralty, who do not even
manufacture or buy their own guns, but most probably that of the
Chancellor of the Exchequer and Cabinet, who refuse to sanction the
necessary expenditure. Or, again, in the case of dock yards, who knows
exactly what the work costs, and how that cost compares with that of
other countries and of private establishments; and who is responsible for
detecting and preventing waste and extravagance ?

I often think what the result would be if the railway companies
managed their affairs on the same principles as the nation applies to its
naval and military expenditure. Suppose the Brighton Board were turned



PROBLEMS OF THE FUTURE.

out every three years, and a new Board came in with new views, a new
poiicy, and new men at the head of the locomotive, traffic, and other
great spending departments, how long would it be before expenses went
up and dividends down ?

One great advantage of the system which I advocate would be that
such a loan would almost of necessity introduce a better system of admin-
istration. It would not be sanctioned without a definite and well-con-
sidered programme of the purposes to which it was to be applied. So
many ironclads ; so many cruisers and torpedo-vessels, of such tonnage
and speed, and at such estimated cost per annum, until the required
number was completed ; and so forth for forts, batteries, and other
requisites for an efficient army. And this definite expenditure would
have to be carried out by individuals, or by small special commissions,
which would be selected for their fitness and practical experience in their
respective departments, whose tenure of office was independent of Parlia-
mentary changes, and who knew beforehand for five or six years what
work they were expected to do and what money they would have to do it
with. Of course the general supervision and control would remain of
the Cabinet Ministers at the head of the departments, and the ultimate
control of Parliament would not be affected. But there would be a prac-
tical assurance that so long as the programme was being properly carried
out it would not be interfered with ; and with a clear system of accounts
showing the results year by year, the control of Parliament would really
be greater than when matters are so muddled up that it is almost impos-
sible to say what the actual results are, and, if they are unsatisfactory,
who is responsible.

The next question is, whether the burden of taxation is equitably
assessed on the different classes and interests.

Taking Mr. Giffen's estimate of the national income and its sources, in
1884 the total was 1,200,000,000 a year, of which 400,000, ooo was
unearned income from capital, and 800,000,000 working income, 180,-
000,000 of the latter being derived from professional and trading incomes
above 150 a year included in the Income-tax, and 6 20, ooo, ooo from
working incomes of lower amount, principally consisting of wages.
Measured by income, therefore, the unearned is one-third, and the earned
two-thirds of the total amount. But it must be remembered that the
unearned third is derived from realized property, and is worth on the
average perhaps twenty year's purchase, while the unearned two-thirds is
precarious, depending on life, health, employment, and a hundred other
contingencies. Without attempting any detailed estimate, it is evident
that the value of the unearned property, which requires a higher insurance
against risks, far exceeds that of the property which is earned by work,
and that it ought to pay its fairly corresponding share of the premium
which is required to cover those risks adequately.

Let us see now how the national revenue to provide for national



224



BEACON LIGHTS OF SCIENCE.



expenditure is actually raised. Taking the average expenditure of the
last three or four years in round figures, it is about 90,000.000 a year,
of which

30,000,000 is for National Debt interest and sinking fund,
30,000,000 for naval and military defence,
20,000,000 for civil administration,
10,000,000 for expenses of collection of revenue.



90,000,000

This is met by

Post Office, telegraphs, &c., which are mainly payments for services ren.

dered ..................... 10,000,000

Crown lands and interest on advances, &c., which are not taxes .... 1,500,000

Miscellaneous, which are mainly matters of account, and fees for services

rendered ................... 3,500,000

Revenue which is not taxation ....... 15,000,000

Leaving in round figures 75,000,000, which is raised by taxes as follows,
viz.

Customs .................... 21,000,000

Excise ..................... 27,000,000

Stamps and taxes, including probate and succession duties .... 15,000,000

Income-tax ................ ... 12,000,000

75,000,060

Continuing the analysis more closely we find

TAXES MAINLY PAID BY THE NON-PROPERTIED CLASSES.

Alcohol Home spirits .......... 14,000,000

Foreign spirits .......... 4,500,000

Beer ............. 8,500,000

Licences ............ 3,500,000

. 500,000



Tobacco .................. ". . 9,000,000

Tea and coffee .......... . ....... 5,000,000

Total ............... 44,500,000

TAXES PAID EXCLUSIVELY OR PRINCIPALLY BY THE PROPERTIED CLASSES.

Income-tax . . * ..... 12,000,000 (but of this nearly one-half according to

Giffen's estimate, is paid by trading,
professional, and other working in-
comes).

Probate and succession duties . . 8,000,000

Deeds ......... 2,000,000

AsM-s^d taxes ....... 3,000,000

Wines ......... 2.000,000

27,000,000



PROBLEMS OF THE FUTURE. 225

Leaving about 3,500,000, which is raised mainly by taxes affecting
trade, such as bills of exchange, receipt stamps, railways, marine insur-
ances, &c.

As far as can be ascertained by the aid of Mr. Giffen's figures, the
amount paid specially by unearned income does not exceed 15,000,000
to 20,000,000 a year out of a total Imperial taxation of 75,000,000.

The mere statement of the figures is sufficient to show that this is not
a sufficient proportion. Without proposing any Radical or Socialistic
change in our fiscal system, it is evident that such a tax as that on tea
ought not to be maintained to enable unearned income to escape from
paying a larger share of taxation. The tea duty combines almost every
conceivable disadvantage. It discourages temperance, restricts the
development of an important industry in our colonies, and presses with
special severity on the unrepresented and weaker female half of the popu-
lation, whose interests we are bound to consider. The first step towards
a really national Budget of the future ought to be to repeal this tax, and
make up the deficiency by equalizing and increasing the duties on all
property alike, real or personal, which passes by gift or succession, and is
therefore clearly unearned. The additional cost of providing for an
efficient navy and army, including the interest and sinking fund of any
loan raised for the purpose, ought also to fall mainly on this class, though
a portion of it might properly be provided by a temporary reduction of
the large amount of sinking fund applied to the redemption of debt.

As regards the manner in which taxation should reach this class of
unearned incomes there are two ways possible : one to reform the In-
come-tax on the broad, simple principle of observing a distinction be-
tween earned and unearned income, and making the latter pay at a higher
rate ; the other, that of making a large addition to the succession duties,
especially on all property which did not go to make a moderate provision
for widows and children. Or perhaps both plans might be adopted,
though I incline to think that the greater part of any increased taxation
on unearned property should take the form of a heavier duty when it
passes and repasses for the first time into the hands of those who have
done nothing to earn it. A higher rate of Income-tax on unearned than
on precarious income would be fairer in principle, and would remove
much of the discontent with the tax which makes Chancellors of the
Exchequer court popularity by reducing it, and it would be very desir-
able to introduce it

On the other hand, a heavy succession duty is paid once for all in a
lifetime, and those who come into land or money by the fortunate acci-
dent of having been born, have no reason to complain if their windfall
turns out to be somewhat less than it would have been if they could have
kept the whole and transferred the burden to their less fortunate brethren
who have nothing but what they have worked for.

It is, however, in regard to local taxation that the distinction between



22 6 BEACON LIGHTS OF SCIENCE.

earned and unearned income is of most importance. Let me give a
practical instance of what is meant by the " unearned increment."

There is a mountain valley in Wales the value of which for agricult-
ural purposes might be at the outside 800 a year. But coal and iron
were discovered in it ; a set of capitalists took a lease, sunk pits, and
erected works, and a town sprang up. The first and second set of capi-
talists lost their money ; and about 1,000,000 was sunk in the concern,
which ultimately passed into the hands of a third set for about 200,000,
and with this reduced capital is now a fairly flourishing company. But
all the time wages were paid, and the population increased until it num-
bered over 8000.

As regards the landlord the result was this : that his 800 was con-
verted into 8000 a year, which has been punctually paid through good
times and bad, and represents a capitalized value of probably 160,000.
This is as purely a stroke of luck as if he had won the amount at Monte
Carlo or by backing a Derby winner ; indeed, more so, for in that case
he must have stood to loose as well as to win, while in this actual instance
he risked nothing. Again, he would not have received this windfall if
the law of England had been like that of many other countries, in which
minerals below the soil belong to the State or the Commune. Surely
in such a case as this the unearned increment ought to contribute
largely towards the local rates for providing sewers, water supply, schools,
and other requisites of civilized existence in the town to which the owner
of the soil was indebted for this enormous increase of his wealth.

The same thing applies with equal force to the immense unearned
increment which has accrued to the fortunate owners of the soil from the
growth of industry and population in large towns. It ought to contrib-
ute largely towards local rates, and be held under conditions not fixed
solely by the landlord's right to make the most he can of his own, but by
a due regard for the welfare of the community by which the additional
value of the property has been created.

To sum up : if, to use a bold figure of speech, I were Chancellor of
the Exchequer, I should look forward to framing a "Budget of the
future " on something like the following lines ;

1. To equalize the succession duties on real and personal property,

and raise the amount to a sufficient figure to enable me to repeal
the tax on tea.

2. To reform the Income-tax on the principle of charging a higher

rate on unearned than on earned income.

3. To assign the " unearned increment "in towns and from mines

and royalities to Local Boards, as a subject for local taxation
within equitable limits, in aid of rates for local purposes.

4. To raise by loan a sufficient sum (say 50,000,000) to be spent

over five or six years in placing the army and navy, but espe-
cially the navy, on a footing which, according to a programme



PROBLEMS OF THE FUTURE. 227

prepared by practical authorities, would be sufficient to place the
defences of the Empire on to a reasonably secure footing.



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