Evening Post. WEDNESDAY, MAY 24, 1939. TO ENCOURAGE SAVING

Evening Post, Volume CXXVII, Issue 120, 24 May 1939, Page 10

Evening Post. WEDNESDAY, MAY 24, 1939. TO ENCOURAGE SAVING

We have stated previously thaHwe believe the Government's internal loan, which closes on May 31, should be supported by the public. It is, fair in its terms, offering a reasonable and assured return to investors. Of course, there are company shares and-other forms of investment on which the return is greater; but that has always been so. It is so (because of the different form of security, and because while a shareholder in a company may have a prospect of receiving more he must also take the risk of getting less. With gilt-edge stocks the interest is unvarying and the capital is secure. A holder who wishes to sell before redemption date must naturally take the chance of the market price falling a little in a nineteen-year teran, but there is also the chance of its rising. In this loan, too, there' is a novel provision applying to the (long-term stock (that offered at £96 per cent.) to guard against excessive downward movements. If the market selling, price falls below the price of. issue (£96) sums will be made available annually up to 5 per cent, of the loan outstanding at the end of the previous financial year to buy for cancellatiom stock on offer below the issue price. This will tend to steady the price and give stability to the capital of the investmentOther reasons for supporting the loan havesbeen stated. New Zealand is facing financial difficulties, and, without retracting anything we have said previously in criticism of the policy leading to these difficulties, we recognise that the most urgent task at present is to find a way out —or, "at least, make financial arrangements that will give time for reorganisation. In such circumstances, it is the welfare of the country that should be considered. An internal loan that will mobilise savings is a prudent measure, distinctly preferable to enlargement of the credit issue or other devices which some monetary theorists have advocated. Provided that a Government loan is moderate in amount, so as not to deplete the capital resources of the country and leave nothing for private or local government purposes, this use of savings has much to commend it. We must add, naturally, that the money when borrowed should be wisely spent so as to give * a reasonable productive return. '

A question has been raised regard- | ing taxation of interest on investiments in this loan, and it has been I suggested that when the Social Security contribution and income tax, pltts the addition of 33 1-3 per cent, on unearned income, are deducted the return does not compare favourably with dividends from industrial stocks which are not taxed in the hands of the shareholder. It should be pointed out, however, that, though company shareholders may not be directly taxed on dividends, companies themselves pay this taxation and often «at a much higher rate than if the were made on the income of the individual shareholder. It has been calculated, for example, that a big company must pay as much in taxation as it distributes to shareholders. It must earn at least 10 per cent, in order to pay a 5 per cent, dividend. Also, because it must pay the Social Security charge on all profits (including the amount used for payment of income tax) it really pays 2s in the £ as compared with Is in the £ if the shareholder paid directly on the dividends received.

Concerning the surcharge on unearned income it should -also be made clear that this applies to all income in this class—interest on Post Office Savings Bank deposits, interest on local government loans, and interest on previous Government loans/ It is not an innovation applying particularly and solely to this new loan. In fact, the Government could not have made the new loan exempt from it without making an invidious distinction. Moreover, in fairness it should be added that the charge did not originate with the present Government. There was a special addition of 10 per cent, to income tax on unearned income, and this was made 33 1-3 per cent, by the Coalition Government instead of legislating for a direct reduction of interest. When the direct reduction of interest was afterwards made the special tax was retained, quite inequitably and in disregard of the statement of the previous Minister of Finance. It should now be taken off, but the original obligation to

do .this lay with the Coalition Government.

While holding that this taxation in

no way presents an argument against subscription to the present loan, we do suggest that in its application to /all investment income it is inequitable and an unfair penalty on thrift. At one time the Labour Government disparaged thrift and placed its faith in credit issues. Recent

utterances, and the issue of an internal loan at a market rate of interest, indicate modification of this viewpoint. The Minister of Finance (Mr. Nash) told the Labour Party conference:

... the extension and development of New Zealand was not possible except from savings. That is, New Zealand could not expand and develop unless the country used some of its resources to build factories, equipment, transport services, and all types of physical capital.

The useful social purpose achieved by thrift is thus acknowledged. Clearly, then, there can be no valid argument for discouraging it by penalising the reward as "unearned income." The average taxpayer will say emphatically that his small "unearned income," far from being acquired more easily than his "earned income," represents greater effort in the provision of the capital sum by care and self-denial.