Following Labour's election victory in 1945, the Chancellor, Hugh Dalton, sought to use differential profits taxation to stimulate production. His aim was to impose a higher rate of taxation on profits distributed to shareholders than on those retained for investment. The wartime expansion of taxation limited the war debt, so that economic recovery and the restoration of exports, rather than debt repayment, were the most pressing problems. Dalton believed that the 100 per cent Excess Profits Tax (EPT), in addition to the standard rate imposed on all profits, restricted industry's capacity to invest inwardly and expand production.
Dalton abolished EPT in 1946, but the National Defence Contribution continued as a profits tax at five per cent. In 1947 the tax was differentiated, with an increased rate on profits distributed to shareholders, rather than retained for investment in the business. Cripps increased distributed profits tax to 30 per cent in 1949. The aim was to discourage the distribution of profits to shareholders and retain profits for investment in improved production.
For many years, taxation of unearned income and property rents by capital levy had been a Labour policy objective. It was seen as a means of reducing social inequality. In 1944 the National Debt Enquiry, instigated by the Labour leader, Clement Attlee, decided against imposition of a capital levy. After 1945 the Labour government followed recommendations of the enquiry and did not impose a direct levy.
Dalton did, however, impose graduated death duties of up to 75 per cent on large estates and the Party remained committed to increasing taxation on large unearned incomes. Stafford Cripps's imposition of a 'special contribution' on investment incomes of over £2000 per annum was effectively a type of capital levy.
Against earlier policy statements, Labour retained the purchase tax so that revenue obtained from indirect taxation increased between 1945 and 1949. Given the costs of the newly established welfare services, it was difficult for the government to reduce or abolish this tax.
In his first budget, Dalton decreased the standard rate of tax on earned income from 50 to 45 per cent and increased personal allowances. As a result, over two million taxpayers were removed from the PAYE system. He maintained the surtax on incomes up to £10,000 per annum, with a steep graduation of surtax on higher incomes. Concessions were thus aimed at lower wage earners and eventually fuelled middle-class alienation from Labour.