In 1951 the newly elected Conservative government inherited exceptionally high levels of taxation. The Cabinet faced considerable problems in attempting to reform the tax system and cut taxes, because it would entail reduced spending on social services. There was opposition to tax cuts within individual departments, and the Budget Committee, which consisted of expert officials, decided the structure of taxation outside of Cabinet. The Cold War also required a continuing commitment to military expenditure, and so consequently, it was difficult for successive Chancellors to reform the system in any radical way. The favoured method of adjustment was to shift the dependence on high direct taxation of income and profits to indirect taxation on expenditure and consumption. This, it was argued, would encourage both enterprise and saving.
At the time, indirect taxes came from a narrowly based purchase tax, and duties on alcoholic drinks, petrol and tobacco. Purchase tax, which had been initiated during the wartime economy, was a means of directing consumption, as well as raising revenue. 'Utility' goods were exempt from purchase tax, while it stood at 100 per cent on luxury goods. Critics claimed that this distorted the economy away from the production of quality goods and badly affected exports. By 1952 the Board of Trade proposed the abolition of the purchase tax in favour of a flat-rate sales tax on all goods and services.
A general sales tax would have been regressive and unpopular, especially given the government's wish to end food subsidies, cut higher rates of income tax and increase contributions for social services. Conservative Chancellors were unwilling to attempt these difficult and controversial reforms. The Committee on the Review of Taxation Policy in 1962 advocated against the extension of indirect taxes, and so the Conservatives achieved little readjustment before the Labour election victory in 1964.
The Conservatives were more effective in reforming direct taxation. Chancellor Harold Macmillan wanted to decrease tax on earned income to encourage professionals and entrepreneurs. He increased tax on distributed company profits to approximately 30 per cent to fund income tax cuts. A simultaneous reduction in tax on retained profits to three per cent encouraged investment and saving. In practice, this regime encouraged companies to increase the value of shares leading to capital gains for relatively few individuals. Consequently, the Conservatives introduced a flat-rate corporation tax in 1958.
Selwyn Lloyd's 1961 budget raised the threshold of super-tax (an extra tax on incomes above a certain level) from £2000 to £4000, favouring the 'professional' class. Given the absence of a capital gains tax and recent increases in national insurance contributions, the budget was politically controversial. He attempted to offset this through the institution of a tax on short-term or speculative capital gains in 1961, which could be interpreted as a measure of social justice. Overall, the increasing reliance on income tax as a source of government revenue led to a decrease in the buoyancy of the tax system as its base became narrower.