TAXATION

Evening Post, Volume CVIII, Issue 79, 30 September 1924, Page 7

TAXATION

; GRADUATION DEFEATED HOW. IT IS DONE yii. Taxing companies on the graduated principle, as if they were individuals, ■ means taxing all shareholders in the same class of company at the same rate, and taxing the small shareholder in large , companies at a higher rate than the large shareholder in small companies. The principle behind the graduated tax' —that the person with a large income can spare for State purposes a larger proportion than can the person with a small income—is, therefore, defeated. It does pot affect the position whether the company is passing on the tax or not. In either case.it is a flat rate, and no difference is made in this respect between the large shareholder and the small. They both pay either no tax at all, or the same rate in the pound. As companies provide approximately twothiros of the total income tax collected in the Dominion, this anomaly, which requires the shareholder receiving £5 in dividends, to pay at the same rate ss the shareholder receiving £5000, flouts and ignores the whole principle of graduation in what should be its most extensive field.

A_ BY-WORD AND A REPROACH. Nor is this,all, by a very long way. Company dividends are not included in income taxpayers' returns. This has the eiiecfc of reducing in many cases , t h e graduated rate taxpayers would have to pay were the whole of their incomes aggregated under an equitable individual system. Take the case of a person with a large income holding a considerable number of shares in a big company. It "laLnnn af Umed that his total income is ±,5000 from all sources, £2500 drawn irom shares in companies, and £2500 from investments that make it taxable in his own hands. The £2500 he draws from companies has paid the same rate ol tax as that paid by the smallest, shareholder in the companies, but it is not returnable with his other income, and, therefore, does not augment his rate ot graduation. He accounts to the Income lax Department only for the £2500 he has received from other sources. His taxation rate on this £2500 is thus reduced from 3s lOd to 3s 5d in the P * U]?&™ ■ lch aPl)lies to a taxable income of £5000, to 2s 2d in the pound, which applies to a taxable income of £2500. J-his large shareholder, it will be seen, not only obtains the same net return from the company as the small shareholder does, but he also secures the additional advantage of reducing the tax on his remaining £2508 of income by Is 8d to 3s 5d in the pound. With cases of this sort multiplied in their hundreds all over the country it is little wonder that "graduation" in its application to the Dominion's.system of taxation has become a by-word and a reproach, and that small investors no longer are finding shares in companies- attractive investments. •

COMPANIES AND INDIVIDUALS. It is sometimes argued that if companies were not taxed directly, as they are at present, the large individual trader, paying the l highest graduated tax, could not compete with a company composed of small shareholders paying little tax. This contention is based upon either a misconception of the facts or a desire to mislead. Individual incomes are graduated, for the purpose of taxation according to their size. If it is right that the individual with a large income should pay at a higher rate than the individual with a small income—and this admitted on all sides—then it is right that the same principle should apply to all incomes, irrespective of the source from which they are derived. It is the size of the income, not the nature of its source, that should determine the rate at which it is taxed. If the individual with large means has his money lent out nt interest the principle of graduation demands that he shall have a smaller proportionate net return on his capital than shall the individual of small means who lends his money at the same rate of interest. If this principle is pro-, perly applied to money lent out at interest, why should it not be applied to money invested in business? If an individual with, say, £200,000 lends his money on mortgage at 6 per cent., the maximum graduated rate at the present time will reduce his return to a shade over i per cent., while the individual with £2000 lent at 6 per cent., and with insufficient other income to bring his total income to the taxable rate, will receive his 6 per cent, net without any deduction. If it is right that the individual with £200,000 lent on mortgage should retain only two-thirds of his income for his own use, while the individual with £2000 retains the whole of his income, why should not the same principle be applied to incomes obtained from trade and commerce? Individual graduation would not mean that the individual could not compete with the company, but simply that ho would have to accept a smaller net return for his money than would the- small shareholders in the company.

COMPETITION AND TAXATION.

This prosper, as everyone acquainted with such matters is aware, would not deter the man of large means from going into business. Both the man with £200,000 and the man with £2000, when asked to take shares in a company, will estimate the net return obtainable and compare it with the return they are receiving from their fixed investments. They both will want «$o secure a larger return from trade or industry .than they receive from loans with an ample margin of security. If they both might look for the same not return from their change of investment, it is obvious that under the present system of taxation it would be more attractive to tho man with £200,000 than to the man with £2000. If, on ,tho other hand, they both would have to pay .graduated tax, at the rate proportionate to their incomes, as in the case of loans on mortgages, the change would bo about equally attractive to both. For example, if they both put their money into a company returning 10 per cent., before taxation was deducted, it would mean a net return of 7 per cent, to the man with £200,000 and a net return of 10 per cent, to the man with £2000. It may be taken for granted that 7 per cent, would be just as attractive to the man now receiving ± per cent., as 10 per cent, would be to the man now receiving 6 per cent. Under the present system of company taxation, however, the change of investment would yield a net return of only 7 per cent, to both the large and the small investor. In other words, the large investor would have bis net return increased from 4 per cent, to 7 per cent., while the small investor* would have his increased from 6 per cent, to 7 per cent. The change, in these circumstances, as already stated, would be more>nttractive to the large investor than to the small one.