The tax-free budget

Almost exactly 150 years ago, on 18 April 1853, Chancellor of the Exchequer William Gladstone delivered one of the most memorable Budget speeches in parliamentary history. His five-hour long discourse not only gave a painstaking analysis of the financial health of the nation, it also set out a fulsome history of income tax, and even put forward proposals for its abolition.

Gladstone forecast revenue for 1853-54 of £53,990,000, of which 39% was expected to come from Customs and 28% from excise duties. Stamp duty yielded another 13% of the total revenue, but income tax just 10% – £5,550,000.

Even more remarkably, income tax itself had “legally expired” and Gladstone had to ask parliament to consider whether or not to revive it.

Gladstone suggested it was possible to abolish income tax, replacing it with additional taxes, licences and duties, including taxes on land, houses and other property at the rate of 6d in the pound (2.5p in decimal currency). But while Gladstone made the suggestion, he did not recommend it. Rather, he found favour with Pitt, a “great man, possessed with his great idea”, who launched income tax on the British people at the end of the 18th century.

Indeed, Gladstone referred to income tax as a “colossal engine of finance”.

Just prior to the introduction of income tax in 1798, government and war cost a total of £36,030,000, but revenues were just £20,626,000 – an annual deficit of more than £15,000,000, or almost 43% of expenditure. As the Napoleonic wars raged on through 1806-1815, expenditure hit £65,794,000 a year, but thanks to the introduction of income tax, revenues were flowing in to the tune of £63,790,000, leaving a small £2,004,000 deficit – 3% of expenditure.

Gladstone said it was as important to have income tax ready to hand to finance a war as it was to have well-stocked armouries with which to wage it. “Judiciously employed,” he said of income tax, “you may again, if need be, defy the world.”

Between 1816 and 1842, income tax was dropped, only to be revived by Sir Robert Peel. But Gladstone was hardly enamoured with income tax: he did not regard it as being “well adapted for a permanent portion of your fiscal system.” He thought there were inequalities in income tax and that, even if you could remove them, there would still be “objections to it of the gravest character” – one of which was “the objectionable principle of self-assessment” which, in his view, “leads to grievous frauds upon the revenue”.

Gladstone argued that, in most cases, this was assessed by each trader “against himself”, that is to say, to his own disadvantage. As if echoing modern complaints about the difficulties of assessing corporation tax, he noted, “There are many cases, in trade, in which it is a matter of extreme difficulty to know what return to make, what really is chargeable as profit.” Frequently, the trader “returns his profits greater than they really are.”

This was really just scene-setting, however, trying to get the house on his side by supporting the honest trader while preparing to cite an example of great abuse. Gladstone outlined an instance where some 30 individuals claimed more than £48,000 in lost profits as a result of having their business premises pulled down to make way for a new street.

But the total profits on their income tax forms was just £9,000. So much for the honest trader.

But, fundamentally, Gladstone saw income tax as being temporary in character.

He proposed, in fact, that the rate of income tax should run for two years from April 1853 at the rate of 7d in the pound, then for two more years at 6d in the pound, and finally for three years at 5d in the pound. “Under this proposal, on the 5th day of April 1860, the income tax will expire,” said Gladstone. “Our intention to put parliament in 1860 in a condition to part with (income tax) is a real and a bona fide intention.”

But up until then, income tax was only levied on incomes over £150 per year. Gladstone introduced a new, lower band, so that people on incomes between £100 and £150 a year would be charged 5d in the pound for the remaining seven years of income tax. “Her Majesty’s Government think that in justice we ought to make this demand upon them,” Gladstone argued.

But he emphatically denied any accusation that, by promising to abolish income tax by 1860, his government was seeking “a fictitious and undeserved popularity”.