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Published by EH.NET (March 2004)
Martin Daunton, _Trusting Leviathan: The Politics of Taxation in Britain,
1799-1914_. Cambridge: Cambridge University Press, 2001. xiii + 438 pp. £40
or $60 (hardcover), ISBN: 0-521-80372-1 and Martin Daunton, _Just Taxes:
The Politics of Taxation in Britain, 1914-1979_. Cambridge: Cambridge
University Press, 2002. xvi + 406 pp. £45 or $70 (hardcover), ISBN:
0-521-81400-6.
Reviewed for EH.NET by Hugh Pemberton, Department of Economic History,
London School of Economics.
Despite the importance of taxation in the modern industrialized state, the development of
British tax policy has become surprisingly neglected. Taken together, therefore, these two
works by Martin Daunton (Professor of Economic History at Cambridge University) fill a
large gap in the literature, and fill it with considerable style.
As Daunton notes, "The capacity of any state to act and to realise its
political goals depends, more than anything else, on its financial
resources." Whereas in the middle ages rulers drew resources from their own
estates or domains, by the sixteenth and seventeenth centuries the "tax
state" was beginning to emerge in many parts of Europe -- encouraged by the
search for new ways of raising revenue to finance the increasing cost of
warfare, and by economic development and the emergence of a more complex
and commercial economy which created new "handles" on that economy which
taxation could grasp. The principal theme of Daunton's first volume,
_Trusting Leviathan: The Politics of Taxation in Britain, 1799-1914_
(2001), is the sustained effort by British policy makers gradually to
create a sense of trust in Britain's tax system after the strains placed on
it by the Napoleonic wars. Daunton ascribes Britain's ultimate victory over
France to its capacity to extract a higher proportion of its national
income for military spending, partly through taxation and partly through
the willingness of lenders to finance the national debt, confident that the
state's ability to raise revenue would ensure repayment. Nevertheless, the
unpopularity of what critics came to term the "tax-eater" state created a
significant legitimacy problem. Whereas government expenditure had been 8
to 10 percent of national income in the eighteenth century, by 1815 it had
reached 23 percent of GNP. With the war over, but with continuing high
levels of taxation needed to service the national debt built up during the
war, taxpayers made common cause with radicals to decry the menace of
militarism and "old corruption" -- the costs of royal extravagance,
sinecures, and pensions, and the parasitism of rich landowners and
financiers. Daunton's great success is to show how this political crisis
was defused during the remainder of the long nineteenth century.
The creation of trust essentially had three elements. The first was the
reassuring of tax payers that their taxes would not be misused via an
assault on "waste." This entailed an extraordinarily sustained program of
expenditure retrenchment which reduced tax revenues to 9 percent of GNP by
1900, though of course in a much larger economy. Second was a long and
complex process of administrative reforms designed to contain political
pressures for higher spending. Parliament was transformed from a forum in
which competing interests negotiated their share of taxation into an
auditor of expenditure -- a role made easier by the simplification and
consolidation of government accounts; by the development of a culture of
secrecy around the budget which successfully excluded outside interests
from its production; by the institution of a single consolidated fund
(which removed individual items of expenditure from Parliamentary control);
and the linked direction of end of year surpluses to repayment of the
national debt, thus preventing them being used later for electoral
manipulation.
The third element was the gradual creation of an ethos of "balance" and
fairness in taxation. This involved gradual alterations in political
language and culture, particularly in the Treasury and the revenue
departments, coupled with the transformation of the structure of taxation
with a marked shift away from indirect taxes. Perhaps the most successful
innovation was the introduction of income tax in 1842 and the consequent
transformation of narrowly based tax system riddled with inequities between
classes and between interests, with taxes falling disproportionately on
trade and industry, on producers, and on the poor. Introduced as a
temporary measure by Peel, it was Gladstone's 1853 budget that ensured its
acceptance by managing to balance the overall tax system without
differentiating between earned and unearned income, applying an equal rate
to all incomes to avoid demands for concessions from various interests.
This process of trust-building is admirably set out by Daunton. One might
ask, I think, if the story told here is a little too apolitical and
over-focused on officials -- though in a profoundly technical policy area
officials did wield enormous power and the party political battles fought
over taxation are well documented elsewhere -- but Daunton does make a
strong case that the enormous expansion in the scope of taxation in the
twentieth century was only made possible by the high level of legitimacy
that was created in the three-quarters of a century after 1815. The
drawback of the process, which Daunton acknowledges but perhaps does not
fully explore, was that Britain's minimalist tax state had consequences in
terms of urban squalor, inadequate education, ill-health, poverty, and low
life-expectancy that one might argue created pressure for a radical rise in
public expenditure commitments and thus of taxation.
Perhaps surprisingly, Daunton's second volume, _Just Taxes: The Politics of
Taxation in Britain, 1914-1979_, does not begin in 1906 -- for the tax
reforms implemented by the Liberals between 1906 and the outbreak of war
represented the beginning of a marked break with the minimalist tax state.
That it does not, is justified by the (perhaps debatable) assertion that it
was still possible to argue that at the margin taxes still had the same
impact on all, and that the reforms were therefore consistent with
Gladstonian principles of balance and fairness. Instead, Daunton begins
with the outbreak of war in 1914.
The theme of this second volume is very different from the first, focusing
on the marked expansion of Britain's state, on increasingly bitter
divisions over the use of tax to favor particular sections of British
society, and on the marked decrease in the tax system's efficiency and
electoral legitimacy. By 1979 it had become hard to argue that Britain's
fiscal system was '"scientific, equitable and fair" and thus, argues
Daunton, was the stage set for the Conservatives' attempt to cut taxes and
roll back the British state. Essentially, _Just Taxes_ seeks to explain the
background to the Thatcher assault, assessing through a careful
chronological analysis of fiscal politics after 1914 why the British tax
system developed as it did, and how taxation came widely to be condemned
perhaps more for its form than its level.
The high level of trust engendered by Victorian fiscal reform explains why
Britain's tax system was able to weather both growing political pressure in
the early twentieth century for redistribution via the tax and welfare
systems, and pressure for higher military spending in the lead up to and
prosecution of the First World War. It left Britain better placed than many
countries to cope with the enormous strain put on it by cost of the war,
and it explains why there was no crisis of consent when the level of tax
failed subsequently to fall back to pre-war levels. The inter-war years,
argues Daunton, then saw the containment of the radical threat from Labour
via a remarkable increase in the level of government expenditure (by 1938,
tax had reached 25 percent of national income) and an increasing transfer
of income from rich to poor, with support for taxation consolidated via
concessions to the "middling" middle class, a crucial element of
Conservative electoral support. The Second World War then saw another
increase in the level of taxation, which reached almost 45 percent of GDP
in 1944. As with the First World War, an enduring displacement occurred --
sustained by an increase in rates of taxation, a widening of the tax base
(not least via the implementation of "Pay as You Earn," an ingenious scheme
of payroll deductions which drew many new tax payers into the income tax
net), and the ending of middle class concessions.
Compared with the long nineteenth century, therefore, there had been a
radical shift in the purpose and effects of British taxation. Tax was now
no longer solely viewed as a means of financing government expenditure. It
was also being used to manage demand, to restructure the economy, and to
promote social equity. Unfortunately, these aims sometimes conflicted. In
particular, policy makers increasingly feared a trade-off between social
equity and economic efficiency.
By 1950, Daunton argues, there was a general acceptance both in the civil
service and in the Labour government that that an overhaul of taxation was
needed, not least because the system was increasingly over-dependent on
income tax. The incoming Conservative government in 1951 had similar
concerns, worried that very high marginal rates of personal income tax were
eroding incentives, but it proved unable to reduce the tax "burden" to any
significant degree because to do so would require deep and politically
unpopular cuts to social services. Despite a Royal Commission on the
Taxation of Incomes and Profits in 1951, a wide-ranging review of tax
policy by the Treasury in the 1960s, and attempts by both major political
parties to devise alternative visions of how tax should be used in a modern
economy, a strategic reform of Britain's tax system failed to materialize.
Partly this was the product of political reluctance to embrace reforms that
would immediately produce many losers but whose benefits would be felt most
in the long-term. Partly, Daunton argues persuasively, it was the product
of civil service intransigence, particularly in the revenue departments,
which found it hard to break with their Victorian institutional
inheritance. Instead of a strategic reform program, a series of changes to
tax took place that, while sometimes radical in themselves (for example
Labour's 1965 introduction of capital gains taxation and overhaul of
company taxation), were largely incoherent, often contradictory, and
contributed massively to the growing complexity, decreasing efficiency, and
reduced legitimacy of the tax system.
One might quarrel with the argument that the overall level of taxation in
1979 was unsustainable, as one might also like rather more attention to the
Second World War, the fulcrum around which tax policy moved in this period.
However, these are relatively minor quibbles. It is difficult to argue with
Daunton's conclusion that a series of apparently rational decisions had by
1979 produced a chaotic and inequitable tax system that was progressive in
name only; and that this unfairness and incoherence had severely undermined
the legitimacy of Britain's tax system in the minds of voters. As Kay and
King remarked in _The British Tax System_ (Oxford, 1978) -- a key text for
Daunton - "no one would design such a system on purpose and nobody did.
Only a historical explanation of how it came about can be offered as a
justification." _Just Taxes_ provides this explanation.
The two volumes are not just for specialists, virtually all their chapters
merit inclusion on reading lists for undergraduates studying British
social, economic or political history in their respective centuries. If
they have a fault, it is in their presentation of statistics, which is
sometimes haphazard. This reviewer would have liked more graphs and tables,
and more consistency in the data series presented. It is not clear, for
example, how the formal incidence of taxation changed over the two
centuries and the data that are provided on the changing structure and
overall level of taxation are not always consistent. Nevertheless, one of
the great strengths of these two volumes is that they present what can
sometimes be highly technical subject matter in a consistently intelligible
way, and they combine a broad view with an excellent exposition of detail.
Each volume is a magisterial work of historical institutionalism in its own
right. Taken together they represent a major achievement.
Hugh Pemberton is British Academy Postdoctoral Research Fellow, London School of
Economics. During this fellowship, he is conducting a program of research entitled
"Governance and the Development of Private Pensions in Britain since 1946." He is the
author of _Policy Learning and British Governance in the 1960s_ (Palgrave Macmillan, in
press 2004).
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2004). All EH.Net reviews are archived at http://www.eh.net/BookReview.
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