For the Labour governments of 1945 to 1951 taxing business was important both for economic management and political strategy. Britain's post-war position required increases in output for exports along with the restraint of domestic consumption. Businessmen had to be given incentive to produce, but the need for wage restraint also meant that profits could not escape too lightly. Both the actual incidence of business taxation and its political impact, were going to play a part in Labour's tax strategy. The environment for this strategy was shaped by a number of factors. Labour inherited a certain momentum from the war which had seen the raising of large amounts of revenue from companies through Excess Profits Tax (EPT). Assessment of wartime profits continued to bring in revenue well into the post-war years.
The amounts collected under EPT and under the peacetime profits tax are given in Table 7.1. During the war profits taxes (the National Defence Contribution and EPT) contributed roughly 24 per cent to 26 per cent of direct tax revenue. Under the peacetime profits tax which operated strongly from 1948 the contribution was 12 per cent to 13 per cent. None of these figures takes account of the incidence of income tax on company profits, which is dealt with later in this chapter. The NDC was levied at 5 per cent on company profits down to 1947 and was then re-named the profits tax. This was levied at 12.5 per cent on distributed profits and 5 per cent on profits put to reserve. Both rates were doubled in November 1947. While the rate for profits put to reserve stayed at 10 per cent for distributed profits it was increased to 30 per cent from October 1949 and then to 50 per cent from January 1951. EPT figures take account of the 20 per cent post-war refund which was chiefly distributed in 1946-7.
Labour had done little preparation for maintaining this momentum into the post-war period. A memorandum of 1943 from the post-war finance sub-committee of the party assumed that both the National Defence Contribution (NDC) instituted in 1937 and EPT would be repealed and not replaced. 1 Labour's tax thinking prepared it more for dealing with the capital wealth of individuals than with the income of companies.