Leading financier calls for tax reform

Press, 22 September 1980, Page 28

Leading financier calls for tax reform

PA' Nelson A prominent financier has called for tax reform in an address to the combined conference of New Zealand Manufacturing Engineers and the Engineering Employers’ Federations.

Mr J. T. F. Francis, of Wellington, told the conference that the present shortage of capital threatened the entire economic system.

Finance was expensive, and unlikely to get any cheaper, with - enormous demands for short-term working capital making the money market increasingly competitive, Mr Francis said.

Higher profits, or lower taxation, were necessary. “With the cost of capital about 20 per cent per annum, it seems to me ludicrous to earn less than this on your shareholders’ funds. Indeed, you should earn a lot more if you want growth in real terms,” Mr Francis said. “Inflation is running at 18 per cent or more. This means that if it continues

at the same rate, the dob lars you have today will only purchase 50c worth of goods in four years.”

Inflation created a mood of speculation, Mr Francis said, but fast-moving speculative money did not go where the needs and longterm payoffs were greatest.

“Altogether, such factors add up to a serious situation: We have a great need for the implements of production, both human and material, if we, and indeed the whole world, are to get out of the mess we are in,” he said. Mr Francis said that the economy was controlled, not planned. Intelligent planning was needed to encourage the efficient use of capital, but the promotion of a higher savings rate and greater reinvestment of profits was also necessary. This meant tax reform.

“The present tax- load on companies makes for wasteful and inefficient activity,” he said. “A small company that competes well and increases

its earnings is actually punished by the tax laws. The company finds it hard to expand, because it cannot attract capital to replace the profits it has paid in taxes, but the firm’s inefficient competitors, if well capitalised, may continue without improvement for years because the small ’company cannot expand fast enough to have an impact on its markets.” Mr Francis cited Mos? giel as an example of a company that ‘‘should have been out of business a long time ago.”

He said that the double taxation of profit, once as earnings and again as dividends paid to the shareholders, had ■ created enormous distortions in the capital market.

“The effect is to reward the creation, or indeed the substitution, of debt, since interest is deductible, while dividends are not,” Mr Francis said. “So we have seen a rush to sell debentures at the same time that the equity markets are starved for

new issues. The ratio of corporate debt to equity is growing rapidly, and the result is a self-sustaining spiral.” Fair and equitable tax reform could correct this unhealthy position. he said. This could strengthen the capital market without reducing tax revenues, without rewarding the inefficient, and without punishing success. “What 1 have in mind is the replacement of a big part of our present corporate profit tax with a new tax on the value added to a product during the production process. In effect, this is a tax on the difference between what a company pays for its raw materials and what it receives for its finished product, a tax on the total of wages, salaries, profits, interest, and rent payments.”

This system was working well in the E.E.C. countries, and was arousing great interest in the United States, Mr Francis said. Some of the advantages of the value-added

tax svstem -would be that it would encourage producers to eliminate waste, since added costs would come almost entirely out of profits. It would not punish success, since the inefficient would pay almost as much tax as the profitable companies, it would inctease the return on capital, and so encour : age capital accumulation, and it would discourage the present artificial incentive to obtain new capital through debt instead of equity. “As an important byproduct. the value-added tax would return an immediate dividend in our balance of payments,” he said. “Under the rules of the General Agreement on Tariffs and Trade, such tax can be refunded at the border on exported goods. “We could then abandon the current export incentive scheme, which is suspect under G.A.T.T.. and indeed is regarded by many countries as the equivalent of unfair dumping,” Mr Francis said.