All Commentary
Wednesday, March 1, 1967

The Selective Employment Tax

Mr. Winder, formerly a Solicitor of the Su­preme Court in New Zealand, is now farming in England. He has written widely on law, agriculture, and economics.

A totalitarian regime never ac­quires power in a democratic state as suddenly or as completely as communism conquered Russia, but Britain, nevertheless, is driven to­ward total socialism by a terrible inevitability which follows con­tinuous inflation. If this strikes a note of despair, it must be put down to the loss of freedom from which the British people have long suffered.

The latest manifestation of so­cialistic drift is the Selective Em­ployment Tax which is levied against wages to provide subsidies for export industries, a unique de­parture from the long-standing practice of taking from the rich to give to the poor. The alleged justification for this discriminating tax is that those who pay it produce only services, but those who receive it produce tangible products which add to our real wealth and can be exported.

Thus, we renew in the twen­tieth century the old mercantilist notion that some industries are better for the nation than others: and perhaps they are — if the na­tion is hopelessly committed to inflation. This latest step in Brit­ain may serve as warning to other peoples dedicated to inflation as a way of life.

All employers in Britain, al­ready required to withhold from wage payments the National In­surance Tax and the Pay-As-You-­Earn Income Tax, must now also pay a weekly Selective Employ­ment Tax of 25 shillings ($3.50) for men and half that rate for women. That is the end of the matter for any employer in a serv­ice industry. But the employer who is manufacturing commodi­ties, at the end of the accounting period, will receive his selective employment tax payment back in full plus a bonus of 7s. 6d. a week per employee. Also, the govern­ment expects to retain some £200,­000,000 annually from the pro­ceeds of this imposition.

This tax violates the basic can­ons of taxation. It is not equal or convenient or efficient; but revenue is not its primary pur­pose, that being to correct an economy grown steadily more wasteful and chaotic over the past twenty years or more. It is sup­posed to shake laborers out of the industries which the govern­ment considers nonessential and move them to “essential” indus­tries.

Consumers Give Direction

In a free market economy with a sound monetary system all in­dustries arrange their production in response to the way individuals choose to spend their money. In other words, workers are em­ployed in industries in accordance with the demands of the consumer. Every penny spent is a vote as to which industry should expand and which shall slow down its output.

But with the kind of full em­ployment achieved and sustained only by continuous inflation, this monetary guide tends to fail. Hid­ing the first hints of unemploy­ment in any industry under a fresh supply of irredeemable currency leaves the entrepreneur with no reliable guide as to where it is most desirable to employ labor, or any other scarce resource. The economy, under such conditions, produces many things that are absolutely wasteful and neglects the production of those that are most needed.

Consequently, the government further intervenes to correct the harmful consequences of its infla­tionary policy, and we have such measures as the Selective Employ­ment Tax. The result is an ag­gravation of the hardships stem­ming from inflation and a post­poning of the necessary correc­tives that can only come as prices and wages are freed to reflect accurately the true market situa­tion.

In Sussex where I live, for ex­ample, there are few manufactur­ing industries. The shopkeepers, the hotelkeepers, the lawyers, the doctors, the dentists, the hair­dressers, the gardeners, the do­mestics, and numerous others who render services to the community must pay this tax. Some employers doubtless will be squeezed and obliged by the tax to dismiss less efficient employees — especially the very young and the very old. But instead of leaving their homes and migrating to the Midlands in search of a job, these persons are more likely to take unemployment pay under the National Insurance scheme. If the factories of the Midlands are to attract additional workmen, they must expand their investments. But here again, in­flation discourages saving and in­vestment, and government spend­ing has created this additional problem that it now must try to solve.

The new tax law provides that charities such as the Salvation Army must pay the tax, but it will eventually be returned to them, so that the government is taking nothing from charity but a forced loan which pays no interest. Farm­ing, fisheries, and transport work­ers are placed upon a similar foot­ing. We can safely say that, in the hope of forcing labor into the necessary jobs, about half the country is being taxed for the benefit of the other half.

Discriminatory Powers

But the greatest danger from this tax lies in its potentiality for discrimination. By it, every industry in the country is placed at the absolute mercy of the gov­ernment.

The well-known financial cor­respondent, George Schwartz, writ­ing in the Sunday Times, puts the matter this way, “I have not the spirit or the build of a dictator, but give me the power inherent in this tax, and I would engage to make the whole economy dance to my tune. I could expand or con­tract industry at my will. I could alter the economic balance between regions, sexes, and ages; I wouldn’t care who owned what. All private property would be under my sway.”

Mr. Schwartz is quite right. Any government which can im­pose a tax of 25 shillings on one industry and a subsidy of 7s. 6d. for the benefit of another can easily quadruple the penalties and benefits and do what it likes with industry.

This much is certain, that wherever you have money which can lose its value by inflation you will eventually get a chaotic econ­omy with nothing to guide its production. Sooner or later, the government is likely to intervene with corrective weapons which be­long to a socialist dictatorship —the inevitable consequence of con­tinued inflation. The only appro­priate corrective is a sound mone­tary and fiscal policy — plus faith in freedom.