that section 133 of the act of 1842, as well as the section in question of the act of 1865, be repealed.

The committee, furthermore, went into the general question of the average system and summed up the arguments for and against. They stated that if the country were starting de novo, they would, on the whole, counsel the rejection of the average system, largely for the reason that when his profits are diminishing, the taxpayer is each year paying the tax on more than the profits then earned, and this at a time when he can least well afford it. Other reasons were also advanced against the system. The committee decided, however, inasmuch as the three-year average system had been in force for over sixty years and had on the whole given rise to but little complaint and since any change would necessarily lead to some temporary confusion and distress and might be unpopular, that unless a very decided public sentiment to the contrary should be manifested, they would recommend no further change. Thus the average system was substantially upheld. This brings us, then, to the chief discussion of the whole investigation, namely, that of fraud. This point, however, is so important that it merits a separate section.

§ 5. The Question of Fraud

As an introduction to this discussion, the committee called attention to the fact that "the feeling formerly entertained against the income tax system as inquisitorial and oppressive has, we believe, largely died away. The impartiality and secrecy of the local Commissioners deserve and obtain public confidence in a high degree." But the committee made no attempt to deny the fact that there was still "a substantial amount of fraud and evasion." In their opinion, however, this was true of only a small part of the operation of the act. They estimated, on the basis of the Inland Revenue memorandum, that something like four-fifths of the income tax is either assessed at the source, or subjected to other special methods of verification; and they stated that the sphere

within which evasion can take place has been still further circumscribed by the rapid conversion of private business into public companies and by the operation of the act of 1885, which provided for the deduction and payment of income taxes from foreign investments by bankers or dealers. There is still left, however, a sphere in which self-assessment is requisite, and it is in this sphere that the committee state that while they cannot attempt a quantitative estimate, they have no doubt that the loss of the revenue is serious enough to demand some change in the law. In the evidence we find somewhat conflicting statements. Thus Mr. Stoodley maintained that "the department is in possession of evidence showing that grossly insufficient returns, or no returns at all, are made over long periods of years, with impunity," and he contended that the powers of the department to cope with fraud were inadequate.2 In another place, however, he stated that he did not think there was as much fraud and evasion as was generally believed. He considered that at worst, out of a total gross income in 1901-1902 of eight hundred and sixty-seven millions sterling, there was appreciable room for evasion in only one hundred and fifty millions.3 Sir Thomas Hewitt stated in his memorandum that in his opinion "the number of cases of actual fraud (excluding cases of mere evasion and mistaken views of accounts) are not very extensive, but there are certain cases. These cases have sometimes run to very large amounts.' The Right Honorable C. T. Ritchie stated that "it is a matter of common knowledge that evasions of income tax, payable under Schedule D, are of very frequent occurrence.' Mr. (now Sir) Felix Schuster, one of the Additional Commissioners and a prominent banker, thought that "speaking for the City of London, it may be said that on the whole the returns are very fairly and honestly made." But he thereupon proceeded to give an experience of his own, which deserves to be quoted in full: "One of the surveyors 3 Evidence, pp. 82-83.

15

"4

1 Report, p. v.

2 Appendix, no. I.

4 Appendix, no. 8, pp. 32-33; with interesting examples.

5 Evidence, p. 113.

しい

came to the commissioners and said: 'Here is Mr. So-and-So, who never sends in a return. We have assessed him at £ 300 a year for the last two or three years, and he has always paid on his £300. Don't you think that we might put him up now?' The Chairman said, 'Yes, I do.' He said, 'Well, what shall we call it? What would you put it at £4,000 or £5,000?' The Chairman said, 'No; make it £50,000.' He happened to know something about the man, who paid without a murmur."1

One official witness divided the chief examples of fraud () into four classes: First, the deliberate evasions, chiefly in (2) the professional classes. Secondly, the practice of those who think that everybody else is in the habit of under-declaring, and that they are only doing themselves justice if they (3) also under-declare. Thirdly, where it is a question of ignorance, and where no books are kept, as in the case mainly of little traders and lodging-house keepers. And fourthly, those who evade because they do not make any declaration at all.2 With reference to the last point, one of the Special Commissioners said: "I am astonished to find the peculiar code of honor which is to be found all over the country. A man who would cut his arm off before he would deliberately write a false statement, will wait until he is assessed, in the hope that the assessment will be wrong. And he will deliberately abstain from giving information which, according to the return, he is bound to give, and yet consider that he is not doing anything dishonourable or illegal."3

Another witness, on being asked what objection there could be to requiring every man to keep a return, stated: "There is really no reason why they should object, except that persons do not seem to deal so rationally with questions of income tax as with other subjects." A little later, and subsequent to the report of the committee, the secretary of the

1 Evidence, pp. 172-173.

2 Testimony of Commissioner Debenham, Evidence, p. 176.

8 Walter Gyles, Evidence, p. 119.

4 Evidence, p. 83.

Income Tax Reform League, Mr. Hallet Fry, asserted that the chief frauds were to be found in the following classes: "foreigners residing in England, money-lenders, journalists, theatrical people, recipients of large professional incomes, people without a definite residence, like bachelors, speculators, and recipients of large incomes living in very modest houses." 1 In the evidence before the committee, however, every one agreed that the frauds which had been chiefly growing in recent years were to be found in the case of corporations which declared themselves foreign companies, with only a branch office in London. Mr. Simpson stated that within the last three or four years the claims for abatements from so-called foreigners had increased enormously, and that special income-tax-repayment agencies had even been formed for this purpose alone.2 Sir Thomas Hewitt asserted, "I know that the evasion under the provisions of the Act extends, and is daily more widely extending, to Belgian iron, to silks from France and elsewhere, to wines from Germany, France, and Italy; to a very great extent to velvets, mantles and other goods peculiar to foreign trade from various foreign countries, and secondly to trade from India and the Colonies." 3

After carefully considering all these points, the committee concluded that an adequate remedy would be attained by the adoption of the following measures: First, that every person should be compelled to make a return, whether he is liable to income tax or not. "We recognize," said the committee, "that no steps should be taken that can possibly be avoided, which would tend to make the income tax more unpopular, and therefore more difficult of collection." But they did not think that this compulsion would impose any hardship on the taxpayer. They recommended, furthermore, that the penalty. for failure to make a return be limited to five pounds, where the individual is not liable to pay any tax. Where the indi

1 Hallet Fry, "The Income Tax Problem," in Magazine of Commerce, September, 1907, p. 33.

2 Evidence, p. 103.

3 Appendix no. viii, p. 36.

vidual is liable, however, and makes no return, or an incorrect return, a change in the law is also recommended. Under the existing system the penalty was twenty pounds and treble the duty, and the law allowed only one year in which to rectify the omission by a surcharge. These provisions the committee thought entirely inadequate, and recommended not alone that the surcharge or supplementary assessment might be made at any time within three years from the end of the year of assessment, but furthermore, that the maximum penalty should be treble duty for the entire period. Finally, the committee recommended that the most effectual and appropriate penalty for fraud would be publicity, and that the government should be empowered to publish names and details in case of gross fraud, whenever they considered it advisable. As a minor point, the committee also recommended that employers who were now required to send in lists of their employees, should henceforth be compelled to include also the amounts of their

salaries.

§ 6. The Select Committee of 1906

Such was the famous report of the departmental committee. It was several years before any of the recommendations were put into force. In the meantime, and especially after the return of the Liberal party to power in 1906, the interest in the more fundamental questions of differentiation and graduation of the tax had become so widespread that the government of Sir Campbell-Bannerman decided to appoint a parliamentary committee to consider these particular questions.

On May 4, 1906, a Select Committee of seventeen members was authorized "to inquire into and report upon the practicability of graduating the income tax, and of differentiating, for the purpose of the tax, between permanent and precarious incomes." The committee was composed of Sir Charles W. Dilke, as chairman, and of prominent members like Mr. Keir Hardie, Sir Thomas Whittaker, Messrs. McKenna, Redmond, Trevelyan, Cavendish, and others. The witnesses were comparatively few in number, but were all of them dis