ECONOMIC SITUATION.

New Zealand Herald, Volume LXI, Issue 18713, 20 May 1924, Page 9

ECONOMIC SITUATION.

REDUCTION OP TAXATION.

EFPBOT ON STATE; REVENUE.

BISK K OF new; STBINGENOY.

By J. B. CONTOCTFE. (Profeseorof Economics, Canterbury College.) No. m. The Royal Commission which is; tak- ; ing evidence and preparing a report upon land arid income taxation is confined by the terms of its reference to .the consideration : of those particular direct taxes. It is, however, impossible to assess l][ the justice or wisdom of ; any particular sec tion of the tax system, of a country in this way without reference to the remainder of the system, and : still ;' less without reference to the public expenditure to which that ; country is committed. ; Business men naturally urge the necessity of lower taxation, and one expects that the commission will recommend, as the committee >of, 1922 recommended, further ■■. reductions. "'"'

v Yet it is surely clear that from the point of view of sound' public finance and of the community in general, such reductions should be made only Xas the result Of decreased governmental expenditure and not *in . anticipation of it. To take advantage ' of; a temporary easing, of ; the economic situation .to reduce taxation and increase expenditure would be inviting trouble. Previous articles have put forward evidence that goes to show the insubstantial nature of the present economic recovery arid the dangerous possibilities that lie in the near, future. ■ General Decline of Incomes.,, It does not need much reflection: to see that, irrespective of any reduction in rates, •> the yield of income tax, is likely to be considerably} lower in future. A lower level .of prices and the exemption of new taxpayers, such as farmers, have already reduced the yield considerably. s . In ; only; too many cases war profits are a thing of the past, and not even the increased price of wool (which was ::'■ worth only about three millions to the Dominion) ; can take-; their J place." : >;Any further tendency of prices' to fall must still further - reduce the yield, not only by reducing \ tho amount' of ; income upon which tax is payable, . but also '■ by making that income liable on the average to lower ■ rates' of tax. '. . " ' ; ;Added to the prospect of ; falling receipts there ;must be added ; : .the unpleasant "■'; fact : ihatj despite f recent retrenchment, there is 'a strong . tendency -for public expenditure to be increased. - This must be so j; as '■ long as the -■ Government of the day is besieged by v ; deputations anxious^forj public works and other forms of expenditure. -C' Sir Hi Harry Atkinson, when abolishing ; i the provincial system \ of government, /'referred to the provinces as "nine sturdy mendicants;" but tho sturdy mendicants who badger the Government for help in these 'days are legion. As long as a temporarily favourable turn of 'the economic cycle provokes a demand ' for \ inoreased ; expenditure there will be' no ; justifiable ground for reducing; taxation, however burdensome it may be.

Increasing Expenditure. r Much Governmental expenditure is hot capable "of .-■ reduction. • The service of the | publio debt ! ; calls 'i or i increasing ' amounts ) j ;of ;revenue,^and-there; seems no check as yet to the mounting T of ; the interest 'I bill. It is clear,: for example, that the latest loan of five ■• millions ;; at ■4£ per cent:; floated at 95, will, without any sinking fund :, or ■• flotation charges, y cost the > Dominion an ; extra £237,500.; annually. This is in addition to an annual bill for£ interest ad sinking ■ funds approximating >. 11 ■ millions. ;; There ?: are t many other > directions in which the 'Qoveniment is, being forced to increase expenditure. Practically all : the public servants ask "for increased salaries, the demands for public works were never greater, and Vit is evident i that the % surplus 4 this year will cause) ah aggravation of these demands. ; : There are, therefore, grave . risks :;. involved ;■ in the ■premature;! ' reduction of taxation \at the present time. : Unless ,; the j, expenditure, which ''is the cause of taxation, is first reduced, it twill need only a. slight stringency, such as occurs periodically because of an - unfavourable relation:between' imports .v and exports, 1 to •■ cause serious embarrassment to the public finances. ;:,:.:;.:.;; Control,-. ■ and £ Seduction.

The present problem, it must be .urged, is not so; much the reduction of taxation :_ as the ' control and reduction -of public > expenditure. '■: The ■ payers -of. -" income-tax who appeared j before the ; commission were able to make out a" good case showing ; the hampering influence of i taxation • upon business enterprise, its cumulative effect upon the ( cost of ; living, and upon the costs ' of production. But immediate reduction of taxation is no solution of the problem. It may on 'the other hand simplyJaggra-_ vate it in • the near future, .; if the :■■ public expenditure is in the; meantime not brought within bounds. It ; ought, ho waver, to be made *; clear, that merely; nibbling at the wages of the public servants will never. be sufficient to keep public expenditure down. % If it : results in a' discontented | and % inefficient service it may even increase expenditure. The _ whole ■■■. policy.*'■ of ;: expenditure ; needs revision. 'Public< works which are desir- ! able _ in themselves r and - attractive ias | politicial measures may in a time of difficulty be unprofitable . investments; - Hydro-electric schemes which are to-; pro- j vide cheap power and increase productivity may be: made to appear as; states*' manlike avenues of Expenditure; but in* actual practice' many of them - are * extremely costly, and cannot pay, at a/ay rate, for long periods. *•' Some of . thfcm, putting the cart before the horse, have reticulated ; ( large areas of i the countryside and are piling up overhead costs in a'-way that makes^ their -ultimate■.productivity a dearly-bought gain. ■ The Dominion seems in a fair ytay to repeat its history in the eighties in Regard to public finance. The sinking- funds are already being toyed with. Direct taxation is, ;as it was then, unpopular. -The odds are that when the finances become embarrassed after, taxation has been reduced and expenditure increased, resort will be ■bad;: as it was then, to the :■;easy expedient of increasing indirect taxation such as customs duties. Such a step would be popular with ; certain industrial :.., groups, and would be an easy and quick means pf : raising ; revenue; \ but -i; it ;-, would be inequitable, and would cause " greater economic loss to the Dominion'; as a -whole than the continuance* of .the. present taxation is likely to do. *