“The capacity of any state to act and realise its policy goals depends … on its financial resources. This simple … statement is central to the formation of the state in Europe and vital to its political, social and economic history” (Trusting Leviathan, henceforth TL, pp. 1–2). “Taxation has been a minefield that the major political parties have had to cross. It has involved general political and ethical principles and masses of technical detail” (Whiting, p. 6). These two quotations encapsulate the importance of taxation as a historical subject, as well as the difficulties involved in its study. Martin Daunton and Richard Whiting deal with it from methodologically similar standpoints, though Whiting is closer to Peter Clarke than to Daunton in stressing the influence of academic economists on policy making.Footnote ¹ However, this also reflects the different emphases of the two works: while Whiting studies the history of taxation in relation to the Labour Party and its avowed aims, Daunton's approach is to investigate how governments create a viable and efficient fiscal system.

The latter task has never been easy to perform, and yet failure can come at a heavy price—involving political discredit, crisis of legitimacy, and even revolution, as illustrated by the case of France in 1789. Indeed, one of the methodological features of Daunton's approach is the comparison with other countries—not only France but also Germany, Sweden, and the United States. It is a tour de force, which combines a magisterial synthesis of the existing literature with impressive new insights based on primary source research. His analysis starts with the impact of the French Revolution on British public finance. By the late 1790s the cost of fighting France was bankrupting the British state. Would this result in revolution? In 1798, rebellion in Ireland revealed that there were cracks in the edifice of the Hanoverian monarchy. Until then the war effort had been chiefly funded through indirect taxes—which fostered popular discontent—and the National Debt—which had grown rapidly at an alarming rate. The political legitimacy and credit of the state were restored from 1799, when William Pitt introduced a new powerful engine of government revenue, the income tax. Yet taxes used up 20 percent of the national income, a level that was politically unacceptable. After the end of the war in 1815, successive generations of finance ministers worked hard to roll back the “fiscal-military state.” Despite colonial wars and imperial expansion, during the rest of the nineteenth century they were largely successful, and by 1899 taxes had fallen to about 10 percent of the national income. Daunton argues that fiscal containment resulted in “a high level of trust in the financial rectitude of the government and in the equity of the tax system, contributing to the political legitimacy of the British state. … As a result, the state was able to fund the massive enterprises of war and welfare in the twentieth century” (TL, p. i).

In 1799 and for a century afterward, central government expenditure was regarded as a necessary evil. Its primary aims were paying for the armed forces and the servicing of the debt that had been incurred for military purposes, while social services were funded from local rates—the bastion of local autonomy. The balance between “local” and “central” taxation remained a crucial constitutional principle throughout the period up to the Second World War. Partly because of its buoyancy, the wartime income tax was perceived as undermining such balance and thus, indirectly, “English liberty.” Yet the abandonment of the tax in 1816 threatened again the legitimacy of the state by rendering the fiscal system “heavily reliant on customs and excise duties, with the danger of conflicts between trade interests, between land and commerce, and between rich and poor” (TL, pp. 53–54). Lord Liverpool's government, aware of the danger of social unrest, unsuccessfully tried to renew the income tax in order to assuage popular feelings. This provides an early indication of one of Daunton's general points, that is, that irrespective of the party or coalition in power, governments were more concerned than backbenchers about creating a fiscal system that would earn broad social acceptance.

The first volume is dominated by the emergence of the Gladstonian fiscal constitution. Daunton agrees with both Gareth Stedman Jones and H. C. G. Matthew about the disarming effects of financial reform on political radicalism, and with Boyd Hilton about Robert Peel and the Tory liberals being indeed the “precursors” of Gladstonian liberalism.Footnote ² But in Daunton's work there is no echo of the religious dimension that is so central to Hilton's explanatory model. Instead, he insists on the rise of the ideology of “public duty,” a notion shared by successive generations of politicians and officials, independent of theological persuasion. While this ideology aimed at the preservation of the ruling elite and the protection of property, it did involve “adopting policies which were even-handed between all types of property, and between the propertied and the non-propertied” (TL, p. 63). This outcome was helped by Britain's culture of secrecy in the management of public affairs, which meant that, in the preparation of budgets, “interest groups were excluded from any bargaining over tax rates and exemption” (TL, p. 72).

As we have already seen, success was possible because the costs of empire building for the British taxpayer were contained. This was achieved not only by “retrenchment” but also by shifting the costs. Following C. A. Bayly and others, Daunton argues that the fiscal-military state and related expenditure were exported to India and the rest of the Empire, where unreconstructed fiscal-military policies caused precisely the sort of tension and political upheaval that the London government had avoided in Britain. There were outbursts of rebellion in various parts of the Empire in the 1830s and 1840s, but then Britain adopted a new misleadingly liberal policy with the colonies of “white settlement.” While internal government was devolved to elected colonial assemblies, the extent of their real autonomy, that is, the power and competence of the colonial administrations, was strictly limited.

Rather different was the case of India, which was by far the most important part of the Empire. Instead of giving India parliamentary devolution, the British strategy was to create a new class of native landowners who would act as intermediaries between the Indian taxpayer and the government, and whose interest was generally associated with the preservation of law and order. This settlement “contained the revolt against taxation by ‘establishing a counterbalancing interest in property,’ creating intermediaries who reduced the need for direct contact between the [East India] Company and the mass of the population. However, the paramount need for support from the territorial aristocracy also limited the ability of the Company to extract revenue from the land” (TL, p. 127). After 1858, the Raj continued to struggle with this problem, which doomed to failure attempts to establish an Indian income tax. Instead, the British had to rely on indirect taxation, such as the salt tax, which was to exercise Mohandas Gandhi so much. Ultimately this story is similar to the crisis of the income tax and Corn Laws in Britain in the 1840s, but with the opposite fiscal outcome, eventually resulting in civil disobedience and rebellion. For what better counterfactual could Daunton wish? Yet, in his brilliant synthesis he neglects one element that is important in explaining the stability of the Raj in the latter part of the nineteenth century: the revenue and profits from the opium trade with China, which, between 1858 and 1913, helped to service the Indian debt (on which the Raj's fiscal-military state was run) and provided huge fortunes for the emerging Indian and Parsi mercantile bourgeoisie, who ran the trade.Footnote ³

The Gladstonian constitution worked well for two generations, but by the end of the century was coming under strain. Part of the problem was that the costs of naval rearmament, colonial wars, and the new social reforms outstripped the income of the traditional sources of revenue. The crisis was far from being solved by August 1914, but “what stands out is not so much the existence of a fiscal crisis as success in negotiating the treacherous finances of a major war. When Britain entered the First World War, its fiscal system was more capable of sustaining the formidable demands of worldwide conflict than was the case in the other combatants” (TL, p. 375). Like Pitt the Younger a century before, Herbert Asquith and David Lloyd George in 1914–18 managed to retain legitimacy and credit for the British state in time of global warfare. However, “the demands of war finance meant that the income tax became more progressive at the upper end” (TL, p. 379). Later, tax reduction was concentrated on lower middle-class incomes, which comprised a sensitive electoral constituency. Because of the benefits offered by welfare and education, this and other sections of the middle classes supported high taxation in peacetime. The old perception of state expenditure as a necessary evil was replaced by a more positive appraisal of the government's role in the field of social reform. C. Ò Gráda and Martin Pugh have recently shown that—in terms of popular attitudes—the introduction of the 1908 Old Age Pension was probably the watershed, but the final change came only with World War I and the democratization of the franchise between 1918–28.Footnote ⁴ The pursuit of equality through redistributive taxation came at the expense of incentives, efficiency, and growth.

The tension between incentives and equality, the desirability and definition of equality, and the effects of planning and welfare provision on efficiency and incentives—these are some of the main questions in the second volume. From 1918 to the 1990s there was no equivalent of the Gladstonian consensus, not even in the period 1945–70. Both main parties were internally divided between left and right. The Conservatives were concerned about incentives but were unable to do much about them until 1979, while “many in the Labour party were doubtful about the role of incentives and the free market as the basis of a just society” (Just Taxes, henceforth JT, p. 30). Against such a background dominated by crisis and conflict, Daunton reassesses W. S. Churchill's contribution as chancellor of the exchequer (1924–29). In contrast to both contemporary treasury fears about Churchill's competence, and many modern historians’ emphasis on his ill-fated decision to return to the gold standard, Daunton argues that Churchill “had a strong intuitive sense of the changes necessary to preserve the legitimacy of the fiscal system at a much higher level of extraction and progression” (JT, p. 122). Despite his fame as a class warrior, his main concern was the reduction of unemployment, “the appeasement of class bitterness, the promotion of a spirit of co-operation, the stabilisation of our national life” (p. 124). For Daunton, Churchill's first budget of 1925 “ranks as a major restatement of fiscal policy” (p. 124). This included widows’ pensions, assistance to respectable and hard-working members of society, and a much slower rate of redemption of the national debt. A number of creative accounting devices, in breach of Gladstonian finance, allowed him to run deficit budgeting while simultaneously giving the impression that the budget was in balance. Churchill's handling of the treasury helped Britain to escape “the corporatism of continental Europe with its ‘constant brokerage’ between organised interests outside the legislature, and a displacement of power from elected representatives, parliament, political parties and the career bureaucracy. By contrast, parliamentary government was accepted in Britain, and organised business was obliged to join rather than to reject the party-political system” (JT, p. 99). The “aura of neutrality and fairness,” which had been associated with the Gladstonian treasury, was not lost. The state continued to be perceived as having its own interest—the public interest—which it was able to assert “in the face of opposition from powerful groups, whether the City, industrialists, organised workers or middle-class opponents of ‘waste’” (JT, p. 100).

Churchill aimed “to appropriate the ideology of ‘new Liberalism’ which had, to a large extent, migrated into the Labour party with its attempt to claim socially created wealth for the community. But Churchill felt that Labour's development of ‘new Liberal’ ideology would destroy rather than preserve enterprise and competition” (JT, p. 135). Daunton basically agrees, and, in the end, so does Whiting. Philip Snowden was a real pioneer in Labour finance since he believed “that corporate and national savings were more important than individual savings, for they were more easily directed to socially useful purposes” (JT, p. 146). Yet to many in the Labour Party his approach was too pragmatic and conservative. Sidney Webb's line, which was passed at the Labour Party conference in 1928, went beyond the New Liberalism. He argued that “the market meant waste” and “assumed the inevitable concentration of production in large units as a step towards replacing private ownership and irrational consumer choices” (JT, p. 147). From 1945, Hugh Dalton and Stafford Cripps were in a position to experiment with similar ideas and “their own ideological assumptions about the nature of incentives and the determinants of economic growth, rejecting the pursuit of personal gain as the only route to efficiency” (JT, p. 196). Unlike Snowden in the 1920s, the “Labour Chancellors of this period had created a socialist version of good government, which owed little to the Treasury or the Inland Revenue” (Whiting, p. 109). Rather, it relied on economic expertise, and the notion that “a knowledge of economics in particular (as opposed to law or accountancy, two equally relevant areas of expertise)” was particularly important (p. 109). While this tendency reached an apex in Nicholas Kaldor's days (Whiting, p. 135), the party was divided as to the extent and purposes of parliamentary socialism, and their policies represented an unhappy compromise between ideology and the realities of practical politics. Especially in the 1940s, taxation of profits increased, and, in a trade-off, wage restraints controlled inflation at the cost of productivity. This resulted in inflexibility and uncompetitiveness, from which there was no escape without parliament contemplating “a change in competition policy, an attack on the power of the unions and industrial associations and a willingness to condone higher profits” (JT, p. 228).

The problem was compounded by the Conservatives from 1951, when they settled for a quiet life and short-term electoral advantage, instead of trying to challenge the socialist version of “good government.” Thus in the 1950s and 1960s there was a “policy vacuum at the heart of the government—or a sense of fatalism that the room for change was limited” (JT, p. 280). Peter Thorneycroft was the first Chancellor to contemplate a radical change, in the shape of a shift to indirect taxation—a step later also considered by Labour policy makers, despite ideological resistance within the party (Whiting, pp. 197, 201). “Little could be done until the government opted for one of two solutions. The first policy was to devise a package of measures to provide incentives for profits, savings and earnings, alongside more generous welfare for low incomes” (JT, p. 275). This approach was attempted—unsuccessfully—by the Conservatives in opposition after 1964. “The second policy was simply to ignore the unions and concern for an even-handed package, on the ground that slow growth harmed everyone. This policy was pursued after 1979, when … Mrs Thatcher embarked on a policy of incentives without social integration” (JT, p. 275). From the 1980s, savings, ownership, privatization, and “popular capitalism” gained new significance in Conservative rhetoric, as the problem of finding buyers was solved by the strategy of offering shares to a large number of small investors. “Unlike the proposal of the tax package, the strategy was a blatant appeal to the self-interest of the middling groups with scant regard either for the creation of efficiency or for the well-being of the poor” (JT, p. 326). Thatcher's fiscal revolutions also succeeded because by the late 1970s “the median voter paid income tax and was less inclined to support redistribution” (JT, p. 336), especially if this frustrated economic growth—which had finally become of paramount public concern.

For Labour, alarm bells should have rung earlier, but the party was unable to take action until they were forced to by the electoral defeats of 1979–92. Yet, as early as 1949, Cripps had stressed that “the limits of redistributive taxation had been reached” (JT, p. 106). Britain's international commitments and the Korean War caused a major party crisis from 1951. Later,

It is difficult to escape Whiting's conclusion that Labour fiscal policy offered “a record of few achievements” (Whiting, p. 273). If his book is not intended to be “a study in [the] failure” of socialist strategies, it looks like one. It is also a study in the resilience of “new liberalism” as the only viable financial philosophy for the Left. If in the 1910s “there was nothing that Labour was proposing [in matters of taxation] that could not be found in the ideas of progressive liberals” (Whiting, p. 11), in the 1990s New Labour adopted “beliefs [which were] to be found in ‘new liberalism’ rather than socialism” (Whiting, pp. 267–68). It was Churchill striking back.