Work over Wealth: Disraeli’s 1852 Experiment in Income Tax reform

Many of the economic policies we consider today are not new at all but have been tried, tested, sometimes failed and regularly refreshed and re packaged. In this extract, Dr StJohn reminds us of Disraeli’s failed attempt to tax income less and gains from capital or assets, more.

Joe Biden declared, in a recent speech justifying his administration’s proposals to expand infrastructure and welfare spending and pay for it by raising corporation tax, that ‘We’re going to reward work, not just wealth’. In doing so, he was reprising an idea expressed in Benjamin Disraeli’s first budget as Chancellor of the Exchequer in 1852.

Disraeli hadn’t wanted to be Chancellor in Lord Stanley’s Conservative government and protested that he knew nothing of finance. To this Stanley replied: ‘You know as much as Canning did; they give you the figures.’ But his main problem was not finance but politics. The Conservatives did not command a majority in the House of Commons and this meant Disraeli’s budget might easily fail to pass. So he needed allies — and for these Disraeli looked to the votes of Radical MPs, Liberal politicians of a more ‘progressive’ bent who might be persuaded to vote for a Tory budget if it contained policies they approved of. The main policy Disraeli developed to this end was a proposal to tax the income generated by work at a lower rate from income generated by assets. In the language of the time, this was to tax ‘precarious’ incomes from work at a lower rate than ‘permanent’ incomes generated by ownership of property. Radicals were keen on this idea. Supporters of the free-market system, they wanted to reward meritocratic initiative and hard work over income that came to the idle rich often from no effort of their own — simply by collecting rental incomes for example. Disraeli was happy to oblige, and his budget proposed to keep the tax on property income at 7 pence in the pound, but reduce that on earned income to 5.25 pence in the pound.

Today we might analyse this proposal to have higher wealth taxes as follows:

In the following diagram, the supply of, for example, land, is fixed at S. Assume I own this piece of land which is an asset who’s supply does not vary with the price. Given that, the value of the land varies according to the demand for it. If Demand rises, the price increases from P1 to P2. This gives me greater wealth — the value of my land is now P2 x Q. But I have done nothing to earn this wealth. And if the government chooses to tax some of this wealth — well there is little down side as the land, and I, remain. It does not affect my incentive to hold the land. This is in contrast to a tax on work or on income earned from work. Taxes on effort and production, that vary with effort, are likely to disincentivise the very effort needed for the economy to be successful.

This was a nice play for Radical support. Only it had one fatal problem: Disraeli’s financial inexperience meant he had not realised that the existing tax schedules at the time contained no way of knowing what was earned and unearned income! Each income tax schedule contained both types of income. As a result, the proposal came under fierce attack from Gladstone, who mercilessly laid bare the ignorance underlying Disraeli’s proposals. As Disraeli’s budget unravelled the Radicals had little reason to back him and on a stormy night in December 1852 the budget was rejected by 305 votes to 286. Disraeli had secured no allies. Lord Stanley resigned, the government being replaced by a coalition government of Whigs and Peelites and Gladstone became Chancellor of the Exchequer.

But as one experiment in differentiated taxation ended, another project was resumed, as Gladstone embarked upon a rigorous drive to free trade by cutting tariffs.

Disraeli might, perhaps, take some solace from the fact that his words during that stormy debate have passed into British political folklore:

‘Yes! I know what I have to face. I have to face a Coalition! The combination may be successful. A Coalition has before this been successful. But Coalitions, although successful, have always found this, that their triumph has been brief. This too, I know, that England does not love Coalitions.’

Indeed, the new coalition government lasted just three years before it fell under the impact of the Crimean War.

For more on Disraeli’s political career see: https://www.amazon.co.uk/Ian-St.-John/e/B001K8DTPE?ref_=dbs_p_pbk_r00_abau_000000

.