ISJ Index | Main Newspaper Index

Encyclopedia of Trotskyism | Marxists’ Internet Archive

International Socialism, Summer 1963


John Crutchley

The Two Nations


From International Socialism, No.13, Summer 1963, p.31-35.
Transcribed & marked up by Einde O’Callaghan for ETOL.


John Crutchley is studying economics and sociology at the LSE. He has been active in the labour movement since the Suez Crisis. A former editor of Clarion he is now responsible for the sociology magazine Nexus.

All the facts and analysis in this article are taken from Richard Titmuss – Income Distribution and Social Change. Allen & Unwin. 25s. All quotations are taken from this book. The main aim of the article is to put in a simple way the results of Titmus’s complicated but very thorough analysis. I hope it will provide a guide for overworked and underpaid workers, active young socialists and lazy students. The most important previous studies that Titmuss attacks or extends are:

The revolution in the distribution of income since prewar is well known and well documented. Professor Robbins wrote of a tax structure which ‘relentlessly, year by year is pushing us towards collectivism and drab uniformity’. The Board of Inland Revenue (BIR) concluded their survey on 1938 and 1949 incomes by noting ‘a very considerable trend in redistribution of incomes’ even before income tax. Lydall maintained ‘the trend in income distribution over the past two decades has been much more strongly equalitarian than in any previous period of our history’ (1959). Professor Paish came to the same conclusion. Such respectable opinion led the Tory Government to reduce income and surtax levels and increase regressive taxation throughout the 1950’s. Very few socialists disputed these facts in any detail until Professor R.M. Titmuss in his latest book – Income Distribution and Social Change. His analysis completely invalidates the view that wealth in Britain has been subjected to an equalitarian shift, in fact every item in his analysis confirms the fact that the rich are getting richer and the poor are getting (relatively) poorer.

Titmuss criticizes the evidence for income distribution because it is based solely on the BIR annual tax figures which have become completely divorced from the structure of wealth. These figures are stubbornly based on a division between income and wealth which is increasingly unrealistic in a modern capitalist economy. His main points are that social and demographic changes alone make the BIR figures suspect but when gifts, covenants, discretionary trusts, capital gains, hobby farming, golden handshakes, the spreading of income into retirement and benefits in kind are considered the whole case for income redistribution collapses and the alternative thesis that the rich are getting richer is verified.

Social and demographic changes have significantly altered the tax ‘universe’ of the BIR since 1938, particularly the increase in total employment. In 1938 over 3 million people were probably affected by unemployment during the year (this includes families of the unemployed), in 1958 the figure was around half-a-million. The increase in the number of working class married women is particularly of great importance because ‘the statistical presentation of the effect tends to exaggerate the amount of equalization. It does so because of the substitution of one higher value unit for two lower ones – a process accentuated since 1938 by the trend towards more and earlier marriages’ (p.49). As these are non-recurring factors the belief that there is a long-term trend towards equalization is refuted. Furthermore there are similar factors that distort the statistics in social class I: there are more single taxable units due to the increasing life expectancy of upper class women, mainly wealthy widows (33 per cent of all estates whose value exceeded £50,000 in 1958/9 were left by women), Social Class I has higher divorce rates compared with classes IV-V, and there are more women with professional earnings and profits that are assessed separately for income tax purposes.

A further defect of the statistics is that they refer neither to individuals nor families. The importance of this is revealed by an acute analysis of wealth and kinship which we will review, but the absurdity of the taxation definition can first be shown by the fact that the income of infants is not assessed as part of parents income. In case you think that kids don’t earn much anyway it is as well to remember that a law case in 1941 concerned a child earning £2,600 pa. The Royal Commission on Taxation (RC Tax) refused to consider infants’ and parents’ income together apparently due to some doubt as to whether they shared the same standard of living.

The most important way the rich maintain their wealth is through the power and opportunity to rearrange income-wealth between kin and over time. Before reviewing the more complicated covenants and discretionary trusts we will consider the prevalence of ‘gifts’.

Outright ‘gifts’ are not taxed or supervised to any great extent. Thus the new regulations introduced in 1957 led Professor Wheatcroft to remark there ‘would appear to be as many – although different – avoidance devices open under the new rules as there were under the old’ (p.74). Furthermore in 1960 the Government liberalized the 1946 law that when a donor died within five years of the gift it was considered as part of his estate and thus liable for death duties. Under the 1960 Finance Act this liability was reduced by 15 percent if the donor dies in the third year after the gift, 30 percent in the fourth year and 60 percent in the fifth year. Only a year before the Economic Secretary to the Treasury had refused to change the five year rule as ‘it was by no means excessive, especially as we, unlike many countries, have no gift tax.’ (p.74).

How important gifts have become is shown by the fact that between 1946 and 1959 an average of £6 million p.a. Was collected on gifts that did not escape the five year rule. Now the rule has been relaxed these gifts will certainly increase. In case you are wondering why rich people are happy to give away money the following famous quotation from the Unilever magazine Progress should help:

‘Men maintain their former wives, mother-in-laws, adult sons taking postgraduate courses at University, invalid nieces, infirm uncles, wards, protégés and others who for undisclosed reasons have claims on their generosity. The technique used insures that when a part of a man’s income is transferred to someone else, the liability to tax on that part is transferred with it. Thus a married man with an income of £15,350 a year can put fully £250 in the hands of his aged and impoverished mother-in-law at a personal cost to himself of £28 2s 6d.’ (p.78)

Wouldn’t you give your wife’s old lady 250 quid if it only cost you 28? Nor is this all, the 1960 Finance Act ruled that gifts in favour of other peoples’ marriages are not taxed at all whenever the donor dies. For example – ‘A million pounds could be given to a son or daughter on marriage and no estate duty will be paid even if the donor dies next day.’ (p.76)

The UK is unique in the capitalist world in the amount of opportunities in which the rich can distribute their wealth by covenant and trust and thus escape tax. The historical basis of these legal arrangements was to preserve the landed aristocracy of England. In the past ‘they were seen more as a protection against the personal extravagance of members of the kin than as a means of avoiding taxation’ (p.71). However in recent times, inspired by insurance companies they have been used for taxation avoidance, nor is it only the landed rich that shelter under these ancient laws as our subsequent review will show.

Covenants involve an irrevocable alienation of wealth, paid annually for more than six years to anyone (including kin but excluding unmarried infants), not in return for tangible goods and services. Such covenants are counted as a charge on income and not liable to income tax. The RC Tax pointed out that this leads to ‘private understandings by virtue of which the benefits of the income never really leaves, or is somehow returned to the covenanter’ (p.73). The SIR in its evidence to the RC Tax (1955) estimated that there were 110,000 current covenants which involved an estimated tax loss of £5-10 million. However as 50,000 covenants concerned surtax payers a further £5 million tax was lost. For no given reason the RC Tax reduced these figures in its final report (p.82-3), although they did recommend that the use of covenants should be restricted. This was in 1955 and till now the government has not amended the existing law.

These covenants are mainly used to divide income and wealth among the family. For example it is estimated that £10 million is lost in taxation through relief to ex-wives of the upper classes while these arrangements are of vital importance in perpetuating wealth in the family. Titmuss quotes two legal experts, Potter and Monroe as saying ‘if the property invested in the head of the family is regarded as the property of the family, it is a normal step for him to spread his property over the whole family during his life, and if this is done the tax and duty imposed upon the property will thereby be reduced’ (p.78).

One result of this is that the young married rich have a lot of money. Lydall estimates that 1 percent of married men aged 18-34 owned stocks and shares valued between £2000 and £10,000. Furthermore, ‘of those aged 20-24 less than 2 percent have more than £2,000; and the dispersion among these is very wide. Average net capital held by those with more than £2,000 varies from more than nearly £16,000 per person for those aged 20-24 to less than £10,000 per person for those in age groups 45-74. In the final age group (75 and over) it rises to about £11,000. Amongst those with over £100,000 the average for the under 45’s in 1951-6 was as high as £450,000, compared with less than £250,000 for those above this age’ (quoted p.79).

Covenants are also widely used as a cheap way of sending kids to public schools and explains the boom in public and preparatory schools since the war. The most popular way is for grand-dad to pay for his grandchildren. A man earning £3000 a year can settle £80 on his grandchild at a personal cost to him of £30, the taxpayer pays the remaining £50. Another way is to give a capital sum to the future school while the kid is still in the cradle. The school takes out an insurance policy on the future school fees for when they become due. The Economist estimated that if the grandfather did this 8 years before the child starts school he pays £880 instead of £1,380 and reduces his death duties.

Firms paying school fees of employees children is also a growing trend. ‘It has been held that where an employer covenants to pay an annual sum for seven years to be held on discretionary trust for the benefit of a fixed number of named infant children of employees, a sum paid to a particular child must count as his personal income and not part of his father’s income. The employer concerned in this particular case was ICI.’ (p.89). This has resulted in a considerable number of top management who have been to public schools and a high proportion of directors who come from a small number of public schools, as was confirmed by a study undertaken by the Liverpool University Sociological Department (p.90).

Discretionary trusts are perhaps the most important way in which income and personal capital are made to disappear from the public (i.e. Inland Revenue) eyes for anything up to 100 years. The rich covenant with the trustees nominated by themselves to control a certain amount of their wealth and to distribute it annually in certain specified ways. Henceforth the State cannot tax this money and as the millionaire has himself selected the trustees they will obviously work in his interest. Titmuss stresses the importance of this point: ‘The selection of trustees may thus be seen as one of the most important decisions in the life of the wealthy. As a power-supporting class, the trustees of such covenants represent another of the keys to understanding the sources and distribution of wealth in society. If chosen wisely, the covenator not only retains the power that resides in the continuance of freedom of choice in the use of capital and income through the operation of the principle of interest but he also secures a substantial reduction in taxation and estate duty. Power is thus enhanced in the attractive garb of benevolence’ (p.93). Titmuss goes on to discuss the various ways the ruling class make use of these trusts to preserve their wealth. They are used to reorganize the shareholdings of a family comp any with a view to reducing death duties. They are growing in popularity

‘... as a means of splitting and spreading incomes and capital over the life of a family, born and unborn, for several generations. In combination with other provisions in the tax payers’ armoury, they may create income out of capital, transfer income from one person to one or more persons, turn income into capital, and transfer unearned income into earned income’ (p.97).

Roughly 10 percent of the total wealth of Britain is held in trust (£4,500 million out of £50,000 million). Since 1961 trustees have been able to invest on the stock exchange which will increase the amount of money held in trust. Titmuss quotes another expert, Grundy as saying, ‘as far as estate duty is concerned, the revenue benefit almost exclusively from the unlucky, the ungenerous and the unwise’; anyone ‘who is prepared to divest himself of most of his assets and does so with proper advice should not – given luck – trouble his executors with estate duty problems’ (p.98). We must now consider the capital gains which dominated the ‘fabulous fifties’. The SIR estimated (1954) that the amount of capital appreciation was £200-250 million a year. The minority of the RC Tax (Nicholas Kaldor and George Woodcock) maintained that £500-800 million a year was. nearer the mark. Plus a further £100-200 million increase in real property values. This estimate was based on 1950-54 prices and was thus before the great shares boom. Between March 1958 and March 1960 stock exchange prices rose £12,000,000 while in the period 1951-60 real property prices rose 900 percent. The Economist reported that to make a capital gain of less than £200,000 on a £1 million speculation in 1959 was unsatisfactory. These fantastic increases in share values together with the 135 percent increase in undistributed profits between 1949 and 1959 (from £914 to £2,147 million) compares strikingly with the meagre, 63 percent increase in surtax payments in the same period (from £235 to 610 million). Obviously it was more profitable to reinvest profits and benefits from untaxed capital gains than to pay heavy taxes on redistributed profits. This conclusion is reinforced by Lydall’s estimate that the richest 1 percent of the population owned 81 percent of all stocks and shares in Companies (1959).

But the rich are not content with just raking in capital gains from the boom, they devise various snide tricks for increasing their wealth. These are known as bond-washing, dividend stripping, the strip trick, stock shunting, lay jobbing and the forward strip. This is a too complicated field to explain in a short article but basically the idea is to get control of a weak company, strip it of all its assets and sell it at a big loss and claim this loss against taxation assessments. This has ‘worried’ the Chancellors of the Exchequer since 1937 but in 1960 Heathcoat Amory said it still ‘was large and was increasing’.

The ‘one-man company’ is another way in which income becomes capital before it has been earned or is distributed over time and over the kinship group to avoid tax. For example in the Jasper case three men owned 161 companies and were able by buying and selling their own property around these companies to make income disappear untaxed into their pockets. Affluent capitalism does not stop at instant coffee: according to the Guardian (2 January 1962) there was a company in London that had a stock of ‘ready-made “instant” companies, all with impersonal names and a nominal authorized capital of £100, designed for the growing number of people who have realized the advantages of turning either themselves or their businesses into limited companies.’ The popularity of this method of tax dodging is shown by the huge increase in private companies from 143,221 in 1938 to 363,663 in 1960 while the number of public companies fell from 14,355 to 10,806. However it must be remembered that the total share capital of the public companies increased in this period which reflects the increasing monopoly concentration while the enormous rise in private companies results from taxation fiddles; 55 percent of new private companies in 1960 had share capital of under £1000.

The ways in which the rich are getting richer is unending. Titmuss quotes Anthony Vice in the Director, February 1962 as writing that 50 major companies had launched share option schemes in the previous two years for their top executives. The increase in hobby farming is another fiddle. You can buy a big farm just outside London, decorate it lavishly, entertain extravagantly with wine, women and horses, make a huge loss and then claim farming subsidies plus an income tax rebate on your town job.

Nor should we be fooled by the balance of payments figures that show a post war decline in Britain’s imperialist earnings. The rich still invest abroad, £2000 million between 1950 and 1959 but the interest and dividends only come back very slowly. Why? because its better to keep it in Jersey or the Bahamas. The Times estimated in 1961 that the total amount of British tax avoidance money in Jersey mortgages alone had reached £10 million. This whole field must be investigated more thoroughly before we can talk about the end of empire as some socialist theorists have done.

One of the strangest aspects of the rich getting richer is that they prefer to live in debt. Between 1957 and 1959 Lloyds Bank overdrafts increased from 1 in 10 to 1 in 7 and Barclays Bank overdrafts more than doubled between 1955 and 1959. The reason is that the privileged buy their consumer durables (cars, houses, household appliances) through bank loans. This is much cheaper than the HP charges that the working class have to pay and they use this overdraft as a claim for reduced income tax. Lord Kildracken said in a letter to the Times that for anyone subject to standard income tax ‘bank interest at even 19 percent would be a better bargain than HP charges at 6 percent’. But as we know the HP charges are at least 9 percent while bank interest is around 5 percent.

Compensation for loss of office is also very important particularly for those directors made redundant by takeover bids. Compensation was untaxed till the 1960 budget when a limit was set, every amount over £5000 is now taxed although the RC Tax had recommended the limit should be £2000. It must be remembered that both the company and the director was untaxed on this money. Heathcoat Amory said in his last budget speech that compensation ‘may represent both a deductible expense for the company that pays them and a tax free benefit to the recipient’. How important the ‘golden handshake’ is can be seen from the following examples; Lord Portal. £30,000 and Mr Cunliffe £58,000 (British Aluminium takeover). Lt Col Kingsmill £60,000 plus £4,000 a year pension (Taylor Walker), Sir Frank Spriggs, £75,000 (Hawker Siddeley), Mr Nidditch, £40,000 (Ely Brewery and Jasper takeover), for more examples see page 136. This compares with a survey of workers compensation benefits that found the highest payment was £120 after 49 years service!

We now have only two further areas to review, the spreading of income into retirement and benefits in kind. Spreading income into retirement has become the major method of the rich getting richer, because they are able to avoid or minimize taxation. Since the war pensions for big business bosses have boomed. These ‘top hat’ pensions schemes have taken the generous civil service pensions as a minimum model. Between 1938 and 1958 occupational pensions increased 900 percent (£137m to £1,233 million) compared to the 252 percent increase in personal incomes and the 124 percent increase in surtax (£70m to £157m). At least half of the wealthiest 1 percent are covered by very generous pensions schemes. The result of this is a big increase in the flow of funds into insurance companies which is reflected in the spectacular rise in the value of their assets. Between 1952 and 1960 insurance dividends increased by 12 percent a year while their investment income increased by 10 percent per annum. The Phillips Committee wrote in 1954 that ‘a substantial proportion of the cost of occupational pension schemes is borne by the State – the annual sacrifice to revenue maybe of the order of £100 million’ (p.165). The 1956 Acts made pension provisions easier and since then the size of the insurance business has increased at least 3 times. Deferred income through pensions constitutes a major erosion of the progressive taxation base erected by the War Budgets and the Labour Government.

Finally we must consider benefits in kind which have become so widespread in capitalist countries that some theorists have talked of neo-feudalism and the change from contract to status (in Japan you get Geisha girls on the expense account). In Britain such benefits are taxed not at current market values but at a lower, estimated cost to the donor. This is illustrated by the famous but trivial case quoted by Titmuss of ‘the employer who gave suits value £14 5s each to 22 employees. The value on which tax was chargeable was agreed at £5, this being the value of the suit second-hand as soon as it was received’.

The general trend in Britain is for more personal expenses to be deductible and more benefits to become inconvertible. Thus the Institute of Directors welcomed the new 1961 regulations as a liberalization. That benefits in kind have a crucial importance in upper class living standards is shown by the following figures; a 1960 survey revealed that 57 out of 67 firms helped their employees with house purchase, either by loans or acting as guarantors. Over half the firms owned houses that they let at a nominal rent, e.g. English Electric owned 1536 houses, no taxes are paid on these concessions which are growing at a time when subsidies on council houses were being slashed. In 1955 government statisticians assumed that half of all new cars were bought by business firms and 20 percent of the passenger services on British Railways were paid for by expense accounts. We have already shown the aid given by big business to the education at public schools of the children of their employees. In 1955 the Government estimated that 10 percent of expenditure on wines and spirits (£33m) was on business accounts.

Naturally this increase in benefits has been accompanied by an increase in tax avoidance which is now serious and widespread. The BIR Staff Association summed this up in their evidence to the RC Tax in a Brechtian manner:

‘Legal avoidance has become a science with its own inventors and practitioners. The history of the Income Tax in the last thirty years is the story of the war between experts who have devised schemes to enable their wealthy clients to reduce the burden of their tax and the legislators seeking constantly to frustrate them – a war fought out in endless and costly skirmishes in tax offices, and in battles, even campaigns, in the Courts – a war in which again and again the taxpayer has won a temporary advantage only to be countered by fresh powers invoked by the legislature – until the web of the law is so tangled that only the experts on either side can unravel it. In almost every case the machinery of avoidance depends on a legal fiction – the separate personality of the Private Investment Company. At its simplest the taxpayer, whether trader or investor, steals an advantage over his less clever or more conscientious fellow by escaping surtax on undistributed profit; but he pays himself expenses and other allowances in money or in kind; he rewards himself for giving up the direction of his business or for undertaking not to compete with himself; he turns invested income into earned income by paying himself for managing his own investments; the property dealer converts his trade into a series of casual gains by forming a separate company to handle each transaction; the builder turns each speculative scheme into a casual gain by entering into a separate contract (at an unprofitable price) with a separate company which has only one transaction of buying and selling and then expires; the manufacturer buys a moribund company with large accumulated tax losses which he sets against his subsequent profits; and so on.’ (Quoted on page 183).

They go on to contrast the 7,937 cases of evasion investigated between 1948 and 1951 without one prosecution with the ‘squalid cases of false claims for National Insurance and National Assistance dragged into Court’ (p.184). Nor is the fight of the BIR made easier by the continual tendency of big business to offer the tax experts larger salaries to work on their side!

All the evidence surveyed by Titmuss confirms the thesis that the rich are getting richer and that the British taxation system is becoming more unequal. This has been reinforced by the taxation policies of the Tories that has continually shifted towards regressive taxation; the increases in National Insurance and National Health levies yielded £12000 million in 1961/2, this was six times greater than the yield from surtax before the limit was increased from £2,000 to £5,000. The cuts in subsidies on food and houses and the shifting of State burdens onto the local rates all accentuate the increasingly regressive taxation of Britain. Despite the apparent prosperity of the working classes in the 1950s they were in fact getting (relatively) poorer compared with the increasing wealth of the very rich. That this increasing inequality has not become the centre of domestic politics exposes the weakness of the whole British left. This popularization of wealth is increasing rapidly every year and must now become the basis of a major polemical attack on the ruling class.

Top of page

ISJ Index | Main Newspaper Index

Encyclopedia of Trotskyism | Marxists’ Internet Archive

Last updated on 31.10.2006