TAX ON COMPANY PROFITS

Press, Volume LXXIV, Issue 22434, 22 June 1938, Page 10

TAX ON COMPANY PROFITS

* “A Factor Increasing Cost of Living” STATEMENT BY CHAMBERS OF COMMERCE [THE PRESS Special Service.] WELLINGTON, June 21. “One of several factors responsible for the increases which have taken place in the cost of living in New Zealand is the increased taxation which has been imposed on companies ” says a statement by the Associated Chambers of Commerce of New Zealand. “Under the 1936 Budget the rates of taxation on companies were raised to a maximum of 7s 6d in the £. This maximum rate is met by the larger trading companies. The very considerable amount of revenue the State obtains from the graduated income tax on companies is shown by the fact that for the tax year 1936-37 £4,000,000, or 63 per cent, of the total amount of revenue that was collected in income tax, came from companies. “Herein lies one of the reasons for the increased cost of living. Briefly stated, the position is that the high taxation imposed on large trading companies means that the capital invested in them must contribute more to the State than does the great bulk of capital invested in other directions. The directors of these concerns have to show their shareholders that they are receiving as good a return for their money as they could expect to obtain from other investments involving similar risks. It follows that if a much higher tax is levied on the profits made by companies than on the profits derived from other sources, the directors of companies must aim at widening their margin of profit sufficiently to enable them to pay the additional tax and at the same time make a reasonable return to their shareholders. If a company fails to provide such a return the shareholders* will become dissatisfied. Company capital, however employed, must in the long run earn sufficient to justify the existence of the company in which it is invested. Tax Passed On “In estimating costs, therefore, companies must take taxation as much into account as wages or rents, so that ultimately the tax, or that portion of it that exceeds'the average tax on other investments, must as far as possible be passed on to the general public in' higher prices for goods and services. That is a general statement of the case. Not every company is in a position to pass the tax on. Higher prices may cause a reduction in demand, which forces the company to bear part of the tax, and other similar factors arise but, generally speaking, it is obvious that the aim must be to shift the tax on to other shoulders, or enough of it to enable the companies to give as good a net return as the average return on other investments. “Dr. J. B. CondlifTe. who was Professor of Economics at Canterbury University College, and who may be regarded as expressing a non-partisan view, was one who gave evidence on company taxation to the 1924 Royal Commission on Land and Income Taxation. In that evidence he said: ‘The assessment of taxation upon the income of an individual is a direct tax that can only in rare circumstances be shifted; but the taxation of profits earned by companies can in many cases be shifted either backward to the suppliers or forward to the consumers.” Variation in Incidence

•“To sum up, the incidence of the present company tax varies from industry to industry. A large part of it is borne by the farming community in the shape of higher prices for essential services. A large part of it has been passed on to the consumers in the shape of higher prices, which have increased the cost of living, and thereby stimulated demands for higher wages, thus starting a vicious circle. Some part of it has been borne by the shareholders, and this has been capitalised by the fall in the value of their securities. Different classes of consumers are affected in varying degrees, the worst effect being on farmers and receivers of fixed incomes. Wage-earners also suffer because wages lag behind the cost of living. “If the taxation on companies were lightened, the community could benefit through the lower prices that would be brought about. The 1924 taxation commission, it is to be recalled, recommended. ‘that the fiscal policy of the Dominion should be shaped so as to secure the abolition as soon as reasonably practicable of the present system of company taxation.’ The commission further expressed the view that the ideal graduated income tax was a tax upon the income from all sources of each individual. New Zealand’s method of taxing companies has survived to the present day. with the increased tax rates applied in 1936, to which reference has already been made, apparently for no other reason than that the tax is easy to collect, without regard being paid to its burdensome effect on joint-stock company operations and on the general public.” .