INCIDENCE OF INCOME TAX.

Auckland Star, Volume LIII, Issue 193, 16 August 1922, Page 9

INCIDENCE OF INCOME TAX.

i< i EITECT OP HIGH RATSS. < j C PRODUCER AND OOXSLMKIL \ f EQUALLY VICTIMS. \ i i AX ESCAPE FOR THE [ The manner in which the abnormal « rate cf taxation on incorporated com- i panics disastrously affects development of industry and bears heavily on pro- < ducer and consumer alike, is argued in 't detail in the report of the Taxation J Committee. This section of the report « should receive careful study by all \ those who are in any doubt as to the ' ultimate outcome of maintaining exL~t- c injj rates, and at the same time per- « sisting in the present system of col- I lection. The following is a summary of J <•■ the most interesting and vital points | s I made: — (a) The taxation of joint-stock j j companies at the present graduated sys- < j tern and at high rates will seriously f affect this form of enterprise. The tax I i is at a penal rate, far beyond any other I in the British Empire. Companies are faced with the alternative of passing the tax on to their customers or ceasing business. In either event it is a loss to the community. A BENEFIT TO THE RICH. (b) I'nder the New Zealand system of taxation, individuals with large incomes can, and do, esca-pe the graduated ] tax applicable to such incomes. On iv- ' come received from money lent| 5 at ittterest, or ueed in an in- j ' dividual trade or business, or in j * farming, or on income earned by personal | ( exertion, the spread between the small | C and the wealthy man is the full extent o/ [ * the graduated tax, which in this coun- " try at j.resent is K/'J 3-5 in tin* pound. ' | This is not, however, the position with ~ 1 respect to other classes of income. On J income derived from shares in com- | panics, or from Oovernment war bonds, ; or on income derived from lax-paid I ( company debentures that have neen j largely issued recently by co-operative j j companies and otheTs, then , is no j F spread at all, the small and the wealthy | v wing all on the same footing. <'n in- ] funic derived from .local-body debenture* \ tlu? spread in tax is only -, U in the j ] pound, and on income derived from 6 ordinary company delicntures 3/ in the | a pound." It ifl a-s well to examine the i t results tins system 'brings about. Take j, tho case of a wo alt by man whose tax- i able income is £10,001) a year. He pays I) £4400 a year income tax, but divides I j that he must avoid this, and accordingly I f calls in half his investments and buyejc tax-free war bonds. At the present |« market price thcdC bonds will return ; him over five per cent net, clear of tax; but in addition to that he has changed his taxable income from £10,000 a year ■ ■to £5000 a year, and his taxation rate from 8/0 3-5 in the pound to 5/S) 3-5 in the poiuid, so that hi* change of investment not only brings him over five per cent on the Ijest security the country lias to offer, but saves him £750 tax on his remaining £5.000 of income, which is e<jual to another J per cent interest I on hi-s war bonds, making his net return on these equal to 53 per cent. The same argument is applicable in the rase of investment in joint stock companies. i DISASTROUS TO PRODUCER A>*D I CONSUMER. J (c) The PlTect of the present system ' of taxation may U- demonstrated readily, and in the oa.*<' of freezing com- | panics it is quite clear that the whole of the taxation must of necessity 'be passed on. and will ultimately reach I ! the producer. Generally speaking,* the ' freezing industry can only be carried un by companies bearing the maximum amount of taxation, and thin is reflected \ tv the full extent in the freezing charges. To a very great extent, also. ' expenses incurred by those freezing com--1 panics--such, for instance, as the cost | of coal, and shipping charges (also \ affected by the present system of tax a- | t j on ) —adds to the burden which the I producer tinally pays. ' The evidence of gas companies affords j an example which indicates how wages and the cost of living are 'by j, income tax. These companies in cvi- |j » dence stated that, in costing their ga-s ■ income tax is a regular item in the cost- . sheets, and is worked ont at so much , ' per thousand cubic feet of ga=. Coa.l, | ! I which i.s also an important factor in j | • I their costing, and which U aflo-ctod in t ■'the same manner, also increases Hie i 'price of gas to the consumer, as also ; i . do the charges of the shipping com- 1 ■ paniee for the carriage of the coal. It i . will thus be -een that in the ciw of I ' these companies the whole of the taxa- i tion ia passed on to the consumer and i nraterially the cost of living. < ■ If the portion is examined it will be 1 , observed that in tJie end this high rate I of taxation on certain classes of companies must finally affect the cost of I living. ' SAPPING THE SOURCES OF CAPITAL. (d) Then there is the case of the companies on which farmers depend very largely for finance and various other services. Th« amount owing to stock j j and station (including farmera' co- I • ! operative I companies has been estimated i at approximately £25.000.000: but, un-j i like freezing companies, these concerns ' J cannot pass on the whole of the taxajiion. Tho effect on the producer, howj ever, is much the same. With income , ■ tax standing at 8/f) 3-5 in tho pound, ii | | means that in orde r to get the pre-war . 1 net rate of interas.; theso companies j I would have to charge from 11 per cent to 12 per cent for loans—rates which farmers cannot possibly pay. Consequently no farmer can get a new ■! advance from any such concern at the pres.cnt time. The companies a.s they collect the advances must therefore utilise the money for other purposes, and the farmer has to do without the , finance. Other lending institutions —such, for instance, a= fire nnd life insurance and I general investment concerns —would i have to charge 10J por cert on mortI gage to g<'t a reasonable return, a rate i which clearly could not be paid. Tho j effect is that finance is only being carried on by 'the aid of the Mortgages Extension Act—undoubtedly a most unsatisfactory position. If taxation were , piacrd upon the individual instead of the company a large amount of money would again become available for investment on mortgages at reasonable rates of interest, and do much to hasten the ) repeal of the Mortgages Extension Act. J (p) Manufacture for export—such, for instance, as the manufacture of wool into tops, and other desirable industries which might easily be undertaken with advantage to the country, cannot be i undertaken where heavy taxation is I placed on companies. Such companies | ooukl nor compete in the mufkcts of ■ ahe world competing companies t organised in other countries where the.! individual system of taxation is opera- ii tive. " I •

(f) the injustice of levying an income tax of S/I) 3-."> in the pound on a company with a large capital, when sue.i company may be earning a very small dividend, was frequently referred to in the course of the inquiry. It was pointed out that it was anomalous that a company with a fcapitai of, say, £200,000, earning £10,000 a year—i.e., .> per cent on its capital—should be taxpd at the same rate as a company with a capital of £50.000 earning £10,000 a year- —a profit equal to 20 per cent on its capital. lg) The present system of taxing companies, which id peculiar to New Zealand, has been in operation for many y&ars. In pre-war days income ta-V at the low rate of 1/4 in the pound, and was proportional and not graduated. The charge was th«n carried without dimcully. When the war came the graduated system was adopted, and companies continued to 'be taxed as one entity. It was, however, looked upon aa a waT measure only. (l>) A majority of the committee are of opinion that the country should adopt the individual system of taxation, taxing companies on their undivided profits only.