Suspended Euthanasia

Just Taxes: The Politics of Taxation in Britain 1914-1979, Martin Daunton, 2008.

Workshop, Wyndham Lewis, 1915.

In The General Theory, John Maynard Keynes predicted - and argued for - the “euthanasia of the rentier”. This is often read to be Keynes at his most radical, even quasi-socialist bent, especially by those seeking to claim the Master for the left. But when placed within a proper context, Keynes’s ostensibly radical proclamation is far from outrageous. By the time he had penned that phrase in 1936, the ‘rentier question’ had been at the fore of the politics of taxation in Britain for almost two decades. The belief that those sustained by unearned income (inheritances, bonds, and literal rents) were parasitic, and needed to be expunged, had become common in quite broad circles. Taxes on capital, profit, and income were on the table. For the first time, the notion that fiscal policy should do more than fund expenditures began to take hold. So where did this rentier-averse world come from? And, one might ask, what happened to it?

Martin Daunton tackles both these question in Just Taxes. He begins with the First World War and its aftermath, when Britain’s ‘night-watchman’ state was blown apart. This is the counterpart to the continental trajectory that Charles Maier traces in Recasting Bourgeois Europe, and, although I will not dwell on it here, the fiscal developments Daunton traces shed much light on the British Thermidor. Daunton, however, has a wider scope than just the interwar years in mind. Just Taxes flourishes when it tackles the post-World War two period that saw a (partial) triumph of the redistributive fiscal state, and explains how this project ran aground: a process that terminated with Thatcherism, even if it was not always bound to do so.

Prior to the First World War, British taxation was organised along principles of what Daunton calls ‘Gladstonian balance’. The burden of revenue raising was distributed ‘fairly’ between classes, with the income tax - established in 1842 - levied at a flat rate, and with the majority of citizens exempt. This was sophisticated compared to elsewhere, where indirect taxes were relied upon, and income tax was more or less unheard of. But although innovative, it was still a system rooted in a notion of ‘justice’ that took the inequality in society as given. The aim was to finance spending while rocking the boat as little as possible.

The Great War shattered this system. Britain left Versailles with an enormous debt, largely owed to domestic bondholders. As it did elsewhere, the question of who should pay for the war ignited demands for redistribution that neither the Labour, nor the Liberal, nor the Conservative party could ignore. The targets were Rentiers - owners of government bonds, war profiteers, and landlords, unproductive parasites in a variety of progressive traditions. They were the villains of the rhetoric of David Lloyd George and the Labour party socialists.

The decades that followed the war saw a plethora of redistributive schemes raised and advanced, to varying success, by the left. They ranged from very radical (capital levies, a surtax, and nationalisation) to still-quite-radical-for-the-time (steeply graduated income taxes, a profits tax, and death duties). In particular, the surtax, which sought to “soak the rich" - targeting investment incomes over £500 - exemplified how what began as a debate over a war debt had morphed into something much larger and more permanent. This political thread binds the rather disconnected British experience to the more familiar continental narrative, and Daunton does us an invaluable service by pulling it out.

However, the left would have little opportunity to advance this vision as the global Thermidor seeped into Britain as it had on the continent. For most of the interwar years, Britain was under Conservative rule, which made efforts to snatch a capital-friendly fiscal state back from the jaws of democracy. In amongst this were the civil servants in Treasury and Inland Revenue; who, according to Daunton, “were very concerned that the fiscal system should not be used in the interests of one class or group against another, in a way that would threaten consent and trust in the state”. In fact, while politicians and economists feature in Just Taxes, the often-faceless civil servants within Treasury and Inland Revenue often show the most agency. Their institutional loyalty made them de facto pro-Conservative. Upon Labour’s much-vaunted entry to government in 1929, Inland Revenue and the Treasury made effort to dissuade Chancellor Snowden from the surtax; describing it, Daunton writes, as “the engine for an orgy of new expenditure” that would “breach the fiscal constitution”. What ultimately emerged would be much less radical. A profits tax went away in 1927 and talk of wealth taxes was repressed. Snowden raised income taxes on only the very wealthy; kowtowed by Inland Revenue into not hitting the rentier harder.

Nonetheless, the redistributive genie was not getting back in the bottle. The political forces that war had unleashed could not be fully wound back. In this regard, Britain exhibited the same Thermidor-tinged politics as continental Europe did, albeit under a deflationary rather than an inflationary canopy. A strong Treasury and the legitimacy of the Bank of England enabled Britain to diverge from the paradigm of interest group politics, chaos, and corporatism that had took root on the continent. While it is hinted at by Maier, and rather peripheral in Mattei, the fiscal component of Britain’s divergent path through the twenties is not lost on Daunton.

This non-corporatist, moderately redistributive holding pattern would be upheaved by the Second World War. As nobody wanted a repeat of the debt politics of twenty years prior, a need for higher taxes was instantly apparent. For the first time, most workers entered the income tax system, enabled by the pioneering PAYE system of 1942. Unlike the first war, excess profits were taxed at 100% from early on, to avoid the treacherous politics of profiteering. The war meant that when Labour was swept to power in 1945, Britain’s fiscal landscape was radically different than it had been in 1929. Under Chancellor Hugh Dalton, Labour finally had the political capital for a “radical attack on socially functionless wealth”. Dalton borrowed Keynes’s call for a “euthanasia of the rentier”, increasing the surtax and death duties. Euthanising the rentier promised to deliver justice, equality, and growth.

What went wrong? Daunton keeps his judgements and political leanings close to his chest - the tone is as sympathetic to Churchill as to Attlee, Heath, or Wilson. But I think we can point to two causes in his narrative: a failure to actually euthanise the rentier, rather than just hit high incomes; and the lack of a coherent approach, as cracks in the 1945 model appeared, to delivering equality and growth. At first, the new fiscal constitution labour had forged in 1945 - centred on the income tax, surtax, and a differential profits tax - was well entrenched. A decade of Conservative rule did not even try to challenge its fundamental precepts. But as the sixties passed, consternation towards a fiscal constitution which had achieved neither its economic or social goals grew. For critics on left and right, high income taxes were stunting incentives and frustrating savings. Crucially, it was also becoming apparent that income taxes were not capable of delivering the euthanasia of the rentier. Other than death duties, the fiscal system had no real mechanisms to target wealth. The rich remained rich, even if their incomes were lower. The appetite for a fiscal renegotiation was growing.

The way we know this story ends was not set in stone, however. Bold, left-wing fiscal programmes were proposed that sought to tear up the postwar constitution, producing growth while finally euthanising the rentier. I was particularly compelled by Nicholas Kaldor’s ‘integrated’ tax system. Kaldor proposed a triumvirate of a capital gains tax, annual wealth tax, and gift tax; alongside a reduction in the income tax and the abolition of the surtax. This was a programme by an eminent economist that could have radically shifted how the redistributive fiscal state operated. However, it was not to be. These ideas, among others, were left stillborn as power went back and forth during the seventies. The result was “a growing loss of legitimacy” given to the tax system; and consequentially, the conditions that would send Thatcher into office in 1979.

Just Taxes is far from a perfect book. It is clearly from the pre-Piketty era: for all the talk of inequality, there is little data within. I had to continually remind myself that the book is a political history more than it an economic one. But it does manage to wring a compelling narrative out of something that can easily seem impenetrable. Working my way through Gerald Feldman’s magnificent - but somewhat dense - The Great Disorder at present has only made Daunton’s talent in this regard more apparent. Just Taxes is a reminder of the clarity that good economic history can provide.