A short history of income tax

INCOME tax was introduced by William Pitt the Younger nearly 200 years ago to finance the struggle against Napoleonic France. Subsequent wars have brought big changes in tax.

The schedules of the new tax listed sources of income. The list began with property, moved on to woodlands, through trade, profession or vocation, Crown appointments and ended with a final catch-all for income which did not come within any of the other categories. In a history of the tax system, John Kay wrote: "The idea that employees were people of sufficient standing to be liable for income tax was not conceived of." Yet that catch- all now catches most of us.

In Victorian Britain it caught few people. Aside from the burden of running a blue-water navy, this was the era of the nightwatchman state. There was only one rate of income tax and the highest it reached was 62/3 per cent, during the Crimean War. In the mid-19th century, there were fewer than half-a-million taxpayers.

As Chancellor, William Gladstone described income tax as "an engine of gigantic power for great national purposes" - though he aspired to abolish it. But the engine was running at low power even at the start of the 20th century, when the Inland Revenue still had fewer than a million taxpayers in its trawl. The first step to progressive rates of income tax came with Lloyd George in his "people's budget" of 1909. His "supertax" was only eight per cent - charged on incomes equivalent to more than pounds 200,000 in today's money. But in the First World War top rates rose to over 50 per cent.

On the eve of the Second World War, those paying income tax still amounted to less than one in five of the working population. By the end the number of taxpayers had tripled to 12 million and the pay-as-you-earn system was devised, though the Inland Revenue had insisted that deducting tax before income was paid could not be done.

Today 25,700,000 people pay income tax, which accounts for a quarter of government revenue.

Paul Wallace