Approach to Budget: A balanced budget and taxation application
January, 28th 2010
Wilsons regard for Indian enterprise was doubtless genuine, but with Finance Ministers one must always watch out! While he might have denied any direct link between the market scenes he admired and what he was planning to do in his first Budget, the fact is that this peaceful commerce was to be used to buttress the one really controversial innovation the introduction of an income tax.
And the reason Wilson needed this support was because, unlike some of our more recent FMs, taxing incomes was not something that came easily to him.
As Bhattacharya notes, Wilsons approach to Budgets stuck to a relatively conservative public finance approach: to aim for a balanced budget and apply taxation for revenue only: This meant that revenue should be raised in such a way as to cause minimum interference; taxation must not deflect economic behaviour from what it would have been in the absence of taxation.
Wilson may have drifted from the hard laissez-faire days of his youth, but he had not become an easy taxing left-winger.
Bhattacharya points to two corollaries that would have chimed with Wilsons beliefs: taxation should not protect indigenous industry and it should not be progressive. Allowing protectionist tariffs would have been anathema to someone with anti-Corn Law roots like Wilson, while progressive taxation was seen as wrong because it punished economic enterprise.
To a group of petitioners who wanted income tax on a graduated scale Wilson replied that it was not the object of taxation to equalise the conditions of men. Wilson today would be a strict libertarian, arguing that equity is best served by removing restrictions to allow all people to compete equally. But he still needed the revenue.
The greatly expanded military expenditure due to the Mutiny had left the government with big debts. The relatively static land revenue would not meet the shortfall, and a sudden upsurge duties from opium sales (the other main source of revenue) was both unlikely and probably undesirable.
So what could Wilson do? The market scenes provided an answer. Commerce like that flourished best in stable social and political conditions, and for that the government was responsible. So if such stability was being provided and the suppression of the Mutiny could be seen as an example of that then wasnt the government entitled to charge a fee for its services in the form of a tax on incomes generated by such commerce?
Some holes could be picked in this argument, not least the fact that Indians were being asked to pay for a stability caused by suppressing them. But men like Wilson genuinely saw the Mutineers are lawless bandits, and felt that the sort of trade going on in Calcutta was what most Indians wanted.
In any case, he needed the money. In his speech of February 18, 1869, presenting the budget statement, which must count as the first Indian Budget Speech, Wilson went ahead and imposed Income Tax. (Earlier he had already proposed another direct tax in his License Tax Bill of 4th March, 1860, which levied a small license fee on traders, but this attracted less attention).
The reaction was immediate and strong and not just for monetary reasons. Bhattacharya writes, for example of how Marwari traders of Calcutta went on a deputation to the Secretariat of the Bengal Government to submit that if enquiry by income tax assessors disclosed how much of the money employed by them in trade was their own, and how much belonged to others, the result would be commercial discredit for many Marwari cooties.
Zamindars were particularly upset because they felt such a tax went against the spirit of the Permanent Settlement instituted by Lord Cornwallis in 1793. This had attempted to create through the zamindars a local landed aristocracy, who could be counted on to serve as a buffer between the British and Indian farmers, and who would collect the land revenue in return for various privileges.
The zamindars argued that this included exemption from income tax, but this cut no ice with Wilson who inveighed against the pretensions of the zamindars. Yet the zamindars lobby was strong enough, in the short term, to get the income tax dropped soon after Wilsons death.
But the real salvo against Wilsons Budget came from Madras. Sir Charles Trevelyan, the Governor, was one of the most influential people in the Empire and Wilson had been expecting problems from him. He had worked with him at the UK Treasury, which Trevelyan has essentially run for many years, and had got full experience of Trevelyans difficult personality.
Trevelyan was extremely intelligent and capable and he knew it. The one feature throughout his career was his willingness to say what he believed, regardless of its effect on others, and to stick by it, whatever the facts and consequences.
Very early in his life, as a young officer in India, he had caused a scandal when he denounced his superior for taking bribes. But he stood his ground and the superior was dismissed, leading Lord William Bentinck, the then Governor-General to remark that it was just as well that Trevelyan was mostly on the right side of most questions for he gives a most confounded deal of trouble when he happens to take the wrong one. So was Trevelyan in the right or wrong in his opposition to Wilsons Budget?
In some superficial areas he was certainly wrong. Trevelyan was objecting to the principle of centralisation partly on grounds of prestige (Madras had long chafed at taking directions from Calcutta despite being the older settlement), but this misguided since it was bound to happen.
In a few years Trevelyan would return as Financial Member himself (much to the unhappiness of Wilsons family), and he did little to reduce his powers then. Madras could also argue that since the Mutiny had hardly affected the South it was unfair it had to help pick up the tab, but this could not be avoided in the new unified British Raj.
But Trevelyan did raise one important and dangerous point of principle: how, he asked, could people be taxed if they did not have political representation. Its true there were a few Indians on the Legislative Council in Calcutta, but these were only a few super-zamindars and rajahs, who were hardly representative of native interests.
This was dynamite because as everyone would have remembered no taxation without representation had been the battle cry of the American Revolution. Trevelyan was formulating an argument for Indian nationalism and all the worse because, in true Trevelyan style, he did not do it quietly behind the scenes, but in public official correspondence.
And Indians responded. For example, in Prarambh, a fictionalised recounting of the career of the merchant Jagannath Shankarshet and the early 19th century in Mumbai, written by the economist Gangadhar Gadgil, he describes a public meeting called by Shankarshet and other Mumbai merchants to felicitate Trevelyan. For their part the British were livid and immediate representations went out to London to recall Trevelyan. For all his ability in India and influence in the UK, he couldnt prevent it and soon left Madras (though this would only temporary and he would come back to Calcutta).
Why did Trevelyan raise this point? It was not opposition to income tax in principle since Bhattacharya points out that he had already formulated a scheme for direct taxation, and as Financial Member he would follow policies similar to Wilsons. Trevelyan did have a deep connection to Indians, who he did not confuse with privileged zamindars, and perhaps he worried about the long term consequences of burdening Indians with taxes with no chance of political representation.
One intriguing link is Ireland unlike Wilson who was just a commentator, Trevelyans position at the Treasury during the Famine made him directly responsible for aid, or the lack of it, and some Irish writers have held him responsible for genocide. This is extreme, since he did ultimately, if grudgingly, organise aid, but it is possible that his direct experience of such a disaster did make him realise the long term consequences of bad governance of a subject population.
Last, but not least given such strong personalities, there was Trevelyans simple dislike for Wilson the ex-hatter, who he saw as representing self serving merchant interests, rather the supposedly unbiased ones of administrators like himself. He also felt that Wilson just saw the Indian post as a stepping stone to that of Chancellor of Exchequer back home.
In that he was probably unjust since Wilsons dedication to his Indian job, where he achieved so much in so short a time, could not be doubted. Overwork almost certainly played a role in his death from dysentery on 11th August, 1860.
In her history of The Economist Ruth Dudley Edwards writes that two days before, knowing he was probably dying, he still insisted on receiving the Viceroy, Lord Canning, with who he discussed his financial bills: And taking devotion to duty almost to a level of self-parody, on the day of his death almost his last words were Take care of my Income Tax.