THE WAR LOANS

New Zealand Times, Volume XLIII, Issue 10138, 28 November 1918, Page 5

THE WAR LOANS

FREE OF INCOME TAX ■ FINANCE MINISTER DEFENDS HIS POLICY, j Sir Joseph Ward, in presenting his Budget to the House on Tuesday night, devoted some time to defending ■ his policy of issuing the war loans free of: income tax. He said: ..., i "As a.' considerable amount of comment has been offered by the public and in the press of the Dominion regarding the wisdom of issuing war, loans at 4i per cent, free of income tax, I will explain to the committee the reasons which actuated the deter- • mining of this question. Objection has been raised to the present practice on the ground that persons who now pay the highest rate of income tax —7s 6d in the pound—provide for themselves an investment which produces a rate of interest amounting to 7f per cent, by investing in the war loan. This position, however, applies only to 264 investors, as that is the number of individuals who pay the highest rate of income tax. A considerable number of those taxpayers are the largest employers of labour. I leave out'from those calculations the public companies, as it is impossible to : estimate the individual interests of the shareholders. The average rate of income, tax amounts to 3s Id in the pound, and, to a .person paying the average rate of tax, an. investment free of income tax in a loan would be equivalent to an investment at the rate of £6 7s per cent, subject to income tax. There are 35,000 taxpayers who pay the average income tax or less, not including public companies, and, . there are, only 941 persons who lihy income tax in excess of the average, of whom 264 pay the highest rate, as I have said. It will be seen, therefore, that as far as individual taxpayers are concerned there is not a great number ; who. profit to any extent by investing in a loan at 44 per cent, free of income' tax.' ’ ADVANTAGE CLAIMED. l; . If, we issued a loan at, say, 54 p«C • cent, to income tax. every Tenson who subscribed, whether liable to' income tax or not. would be entitled . to the higher rate. If a person who is subject to income tax at the average rate of 3s Id in the pound were to invest £IOO in a war loan at 6 per cent, subject to income tax., he would pay tax amounting to 17s in respect of his investment!, however, pay him 2bs per cent, inters ;qsjtyin excess;,o£ present .rate* oil4l. per cent; The countrv would -thus loss' 3s per cent., which would mean a to- , tal loss of £60.000. annually upon the amount of war loan borrowed in the Dominion up to the present time. This, however, is bv no means the full measure of the loss that would result, as many millions of the war loans have been, subscribed by persons who arc pot subject to income tax at all, and the Treasury would therefore have no means of recovering any portion of the additional 1 per cent, from them. It must also;be remembered that tho present income tax rate is a war rate, and may not continue for the full tom of the war loans, and the investment may not prove in future years such a profitable ohe ,to the comparatively few persons who pay the highest rate of tax as it appears at the present time. _The_ issue pf a loan at a higher rate "subject to income tax would riot, 'thetffore, prove an advantage from nn economical point of view, but* on the • contrary, it would prevo a considerable 1 •disadvantage. Another argument used against the present' practice is that we shall bo largely reducing our income tax revenue for a considerable number of years ahead. This argument does not seem to be sound, because we are-at the ;sarae time saving interest. by,.issuing the loans at a low rate. ; DEPARTMENTAL DIFFICULTY."'" There is, again, a very strong departmental difficulty .in'* regard to the , taxation of loan interest in cases v. where "Hie subscribers purchase bearer • bonds. Bonds pass on delivery, and it would be impossible for the Treasury , dr the Commissioner of Taxes to trace •; them. There would thus be check ,' on income returns of owners. To con-’ acieritious taxpayer wduld include.his interest, and the taxpayer who desired to evade payment could with perfect - safeiy omit the interest on bearer bonds from his income tax returns. On the other hand, investors in inscribed ■ stock can'always bo traced, os the transfers of this stock are registered‘in the Treasury, and the stock does not pass on delivery. The tax could, therefore, ho enforced against ’holders , of inscribed stock, but not against holders of hearer bonds, and tho inci- . donee would therefore bo inequitable. It cannot be,- questioned by tin veriest novice in finance that if I had authorised loans, even at the rate oi. V 64 per, cent, with income tax the cost v of money to all classes of the nity requiring to borrow would have gone up considerably, and tho annual ' loss to. those using borrowed money, and indirectly to the country, would have boon very groat. By the course followed, the rate of interest for money has been kept down tliroughout the war period, and money required in- Now Zealand to-day can be obtained at a much lower rate than.is the case in most other countries. ' : ’■ . A GREAT INCENTIVE.

There can bo no Question that the free-of-incomc-tax condition proved a very great incentive to investors and has greatly contributed to the success of our war loans. I trust, however, that it will not now bo necessary, to ■raise > verv‘much more war-money in.' the Dominion. Great Britain, Australia, the United States of America, and Canada have, ali found it necessary to raise n large portion of their war loans free bt income, tax.,,. The, last .Canadian war loan of £100.000.000 was raised at 5 Per cent, interest free of income tax. It should be recognised there must he some good reason for this. In our own case we required money of an unprecedented amount, and it was _ necessary to hold out inducements in order to obtain such huge sums. Many of those subscribing found it necessary to borrow money themselves at not less than 5J per cent.- interest, and I am of the opinion that the best and safest course hoa been adopted. • ■ ■

It will not, in my opinion, bo posable for the miblio of the Dominion ,to ,rea<jilv absorb tho Jnrce amount of war-loan,.securities issued,,in.New* .Zoa.

land, and when conditions again return to tho normal after tho war I anticipate that tho Imperial Government will not raise any objection to the quotation of our war securities on the Ixmdon Stock Exchange. I am of opinion that al lof our war securities should bear the same rate, and bo issued under tho same conditions as regards freedom from New Zealand income tax. and l do not thereforo propose to alter tho conditions when tho next loan is offered.