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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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