Income Tax and the wage struggle

It is popularly supposed to be a virtue in a government not to impose income tax on low-wage workers. So each government tries to claim credit for having made alterations in the income tax which have the effect of freeing some workers from tax liability entirely, or at least of reducing the amount of it. This claim was made by the Labour Party following its six years in office after 1945 and was repeated by the Conservatives at the 1959 election.

Both the claims are so framed as to be distinctly disingenuous.

It was quite true, as the Conservatives claimed, that the raising of the tax allowance exempted millions of people from tax, but it was equally easy to see that, as wages rise, the exempted millions came into tax range again. And when the Labour Party Handbook 1951 claimed that a youth earning £3 a week in 1951 was paying less income tax than would have been levied on a wage of £3 in 1938 it would have been appropriate to point out that £3 in 1951 would buy only about half what it would have bought before the war.

And both governments refrained from stressing the fact that since the war income tax (Pay As You Earn) has been brought down to lower pay levels to take in millions more wage and salary earners than before the war. The number of people paying tax was under four million in 1938, 12 million in 1945, over sixteen million at the end of Labour’s term of office, and up to nearly twenty million in 1961-2. The Tory budget of 1963 removed nearly four million from liability but with every wage increase some will be coming into the range again.

So if it is a merit not to make workers pay income tax neither the Labour Party nor the Tories can match up to the performance of the National Government in 1938; and none of them can compare with the governments in the nineteenth century which exempted practically the whole of the industrial workers and clerks from liability. An article in the summer number of Public Administration, by Mrs. Olive Anderson, shows that in the middle of the century the minimum level of pay liable to tax was about £3 a week, while the wages of even the most highly skilled craftsmen were under 30s. a week, and clerks’ wages were under 40s. a week.

Interest attaches to the comparison because during the Crimean War tax reformers campaigned to get the taxable level brought down so that the mass of workers would be brought in, one suggestion being to make the tax payable on all wages of 6s. a week and over. One of the arguments was that as it was the town workers who were so keen on the war, why shouldn’t they help to pay for it through income tax?

The proposed changes were not adopted, chiefly because of the difficulty and cost of collecting small amounts of tax from millions of individuals, many of whom often changed their jobs and moved to different towns. Below a certain level the tax costs more to collect than the yield to the government.

Later on tax collection became more efficient and more and more people were brought into tax liability by the twofold movement of the lowering of the exemption limit (from £160 in 1899 to £130 in 1915) and the upward movement of prices and wages.)

But what is there in the common belief that the working class as a whole gain from a lowering of income tax and would gain still more if they were entirely exempt? The answer is, nothing at all! The condition of the working class, apart from possible short term effects when changes are introduced, is not the result of taxation whether in the form of income tax or the so-called indirect taxes, Purchase Tax, etc.

To start with, were the working class better off in 1938 when most of them were exempt from income tax and the rate was only five shillings (Is. 8d. on the first £135), than they have been since the war when nearly all of them are within the tax range and tax is at a higher rate? The evidence points to the fact that as a class they were rather worse off in 1938. And to go further back, were they better off in 1900 or 1850 when they paid no tax at all? Again, the answer is No!

In the latest year for which figures are available there were about 23 million wage and salary earners (including company directors) whose total income was about £14,000 million and who paid a tax of £1,200 million. If we take the industrial workers and shop assistants only, with a total wage bill of about £9,000 million a year, the amount of tax might perhaps be in the region of £300 million to £400 million a year.

Of course those who now have tax deducted would find their take home pay correspondingly increased when the deduction was reduced or ceased, and would for a while be better off; but in the general struggle between workers and employers over wages, this reduction of tax would be a factor in stiffening the attitude of the employers. In the situation of recent years, with fairly continuous low unemployment and increasing prices, such a reduction of tax would operate like any slackening in the rise of prices, it would make it that much more difficult for wage claims to make headway against the employers’ resistance.

Conversely, changes which have brought more and more workers into the tax range, or have increased their rate of tax. had consequences similar to rises in the cost of living: they have stiffened the pressure of the workers for higher wages especially when unemployment has been low. In other words now that millions of workers have tax deducted they have come to think in terms of “take home pay” and to struggle for the maintenance or increase of that, rather than to look at the wage before deduction.

Mrs. Anderson, whose article has already been referred to, has found that a similar situation may have existed during the Crimean War. One of the reasons why income tax was not then extended to take in wage earners was that with the shortage of labour caused by the war it was feared that to whatever extent tax was levied on the workers the employers would be forced to raise wages to keep take home pay at its former level.

In short, struggling to raise wages is in line with working class interests, campaigning over taxation is not.
H.