CONSCRIPTING WEALTH

Otago Daily Times, Issue 17455, 25 October 1918, Page 6

CONSCRIPTING WEALTH

DANGERS OF THE PROPOSALS,

AN ECONOMIST'S "WARNING.

(Fbou Odd Own Correspondent.)

m . LONDON, July 26. Iho Hon. \V. Pcrnber lleeves, who is chairman of directors of tho National Bank of Now Zealand, dealt exhaustively, at the annual meeting, with tho various proposals for extinguishing war debt by "conscription of Mr Reeves said: — Tho panacea for lightening tho burden of JSational Debt which soems to enlist most support just now, perhaps bccause it is tho most sensational, is callcd by it 3 advocates sometimes tho conscription of wealth, and sometimes a levy on capital. -Lho lirst najrjo signifies the end aimed at; tho second tho means by which it is to bo attained. The method proposed is that a swingeing - tax, beyond precedent in severity, is to bo laid on the capital of tho country, ajid collected in tho lirst few years after the war. By this mourns a large part— say, from one-third to two-thirds—of the National Debt is to bo paid off, so that a considerable reduction in tho incomo tax may bo expected to follow. But royal roads to tho discharge of financial obligations aro never easy to find. Tlie more one examines this proposal tho more does it seem to resemble that old way of paying now debts—confiscation. The difference between taxation and confiscation is mainly a question of degree and equity. No one knows how large tho debt will bo after tho war, nor does anyone know at all clearly what tho taxablo value of the capital of tho United Kingdom is. I shall assume a debt of 7500 millions and a taxable capital—after allowing for a shrinkage of values, for exemptions for some leniency in assessment, and for a good deal of evasion —of 12,000 millions. This means that to pay off two-thirds of the war debt you would need a levy of abont 4-1 per cent, i on the capital, and, to pay off half of it, over 30 per cent. This terrific impost would have to bo collected in a very few years, or else the object of freeing our industries quickly from tho burden of debt would not be reached. What would be tho probable effects of such an exaction, paid m tlireo or four annual instalments, and coming- just after the end of the "war, wn-en tho gigantic artificial expenditure of borrowed money and war loans had ceased to stimulate and only tho burden of taxation remains ?

CREDIT AND CONFIDENCE.

ii " It . l . s , a s reet l ,°n all hands that perhaps tho chief financial problem after the war will bo how to keep up credit and confidence, and to provide a sufficiency of working capital for tho. great business of reconstruction. The country will want more capital not less. But would not the very proposal of a huge levy on capital—if, let 11s say, it came so near as to secure powerful support in Parliament—tend to shake confidence and impair credit? Is it not a fact of practical finance that the selling value of securities may bo seriously lowered by a general lack of confidence, and, therefore, their value to bankers and customers as pledges reduced. I think we may assumo that, with the gloom of a 20 per cent, to 40 per cent, levy impending over them, apprehensive buyers would not be disposed to give the same prices as before for stocks, shares, and bonds. They would wish to discount the impost, and they would be considering how to make Arrangements for the money to pay it. Next, let us suppose, tor the sako of argument, that a Jcvy is dccrecd, how is it to be paid? So far as Government securities are concerned, the revenue officers might simply dock them by the amount of the levy. For the rest, it is proposd in one quarter that, in tho absence of oash, every taxpayer should havo the right of 'paying m kind. It has been even suggested tliafr every man should havo the right of choosing which part of his property or which of his securities ho should hand over to the Government. The result of such a privilege would be, I imagine, to turn the Inland Revenue Department into something between an old curiosity shop and a lost property office.—(Laughter.) Even if the Government were allowed to discriminate and* refuse rubbishy property or very speculative shares, a little consideration, would show . the frightful confusion that would result from allowing payment in kind. ' It would make tho Government a temporary and unwelcome partner and shareholder—sometimes small, sometimes large—in thousands of firms, companies, and enterprises in the United Kingdom. It would be a partner, -moreover, whose object would be not to assist tho enterprise, but to sell out as quickly as possible regardless _ of the interests of the concern. For until tho Government did sell out, it/ could not pay off its war loans, and the object of tho levy would not be attained. It had been suggested again that, in the case of real property, _ Government might be content with becoming a mortgagee for tho amount of the levy. If it were to become a first mortgagee, what would the holders of the previously existing mortgages say? Moreover until the mortgages were paid off, the war debts would, pro tanto. remain. Furthermore, what would bo the effect on prices of the existence of such immense masses of property and securit.tis lying in Government's hands awaiting realisation. Would it not still furtiier depress prices and markets? It Ijas been suggested that the Government might get rid of much of the load of securities and properties by getting the holders of War Loan to take it in exchange for their bonds. But on what terms? I think I see difficulties thercp On the whole, it seems to me that the notion of allowing taxpayers generally to pay' a levy in kind may be ruled out as muddled and impracticable. BANKS' RESOURCES LIMITED. ''We may take it, I think, that in the event of a levy nothing can prevent a general resort to the banks, but the resources 01 the banks of the United Kingdom, though large, are lunited—their deposits are estimated at rather less than I £2,000,0c0,000 —and those resources will be taxed, and taxed to their utmost, during the years of reconstruction. Aware of this, certain ingenious supporters of financial conscription Have suggested that the Government will have to come in and guarantee the banks in making what in the aggregate must be immense loans to their clients to pay the levy. As the necessary cash may not bo forthcoming, tho banks aro to hand over their Government securities to their clients, who will .pass them on to the Government in payment oi tho fax. It is pointed out that tho banks aro very largo holders of Government securities. Certainly; but if tho War Bonds, War Loan, Exchequer, and Treasury Bills, etiS, of the banks were to be 'thus handed over and cancelled, tho result would, of course, bo that the ability of tho banks to give accommodation to the publio would bo lessoned, and their resources be seriously depleted jiist when they ought to be strong. Banks would lose their best assets, and bo left in the position of having immense advances locked up for years. These advances would not bo ordinary commorcial and industrial loans made to develop busi- 1 ncss ajid help the progress of the country, but they would be so much 'doad money.' They would be anything but liquid. Tho banks would havo to remain mortgagees on a vast scale for years —the last position thoy would wish. " Moreover, if, as I believe, most of the levy s bad to be borrowed by tho taxpayers from banlcs and other institutions, it would not relieve the industrial part of the community from debt. Tho War Loan might partly bo paid off, but the traders, industrialists, and others would owe most of the money to tho lendinc institutions. Above and beyond all this, please bear in mind tliafc, even if the means were found for providing tho money for the levy and enabling the Government to cancel half the War Loan,- tho working capital of the community would be pro ta.nto exhausted. No process, however ingenious, of swapping stocks would alter that. It seems to bo supposed by some friends of financial conscription that tho levy would bo merely a transfer from one pocket of the community to another. X, they say, pays in £10.000 tax to the Treasury—that' is, his share of the lew— and the Treasury thereupon hands thn money to Y, who holds £10,000 maturing War Loan, and pays him off. The money merely passes from X to Y. Yes, but Y's £10,000 of War Loan, a first-clsss piece of property, is extinguished. Y is 110 richer than he was before, while X is poorer by £10,000, and his ability to financo his business is proportionately 'It is true that the Government is less indebted Irr that amount, but that doos not .iHor tile fact that the working capital of the community is for tho timo £10,000 less.—(Hear, hear.) NATIONAL DEBT AS WORKING CAPITAL. "The national debt, in so far as it is held by persons and companies in this country, has become, for business and financial purposes, part of the working capital of the community, and is a first-class security for borrowing purposes. You cannot extinguish it by a forced levy on other capital without dicrgincc a hole which it swill take industry, labour, and a lightening of income tax many years to fill up. and. inasmuch as ..lie lending institutions would have to shoulder very much of the burden of meeting tho levy, their resources would bo drained and

their activities hampered just at tho very tune when there would be the greatest need of them. No doubt the proccss of paying the levy might bo facilitated if tlio banks were allowed to issue &n immense mass of notes made legal tender > for long periods. But what tho effect of tliat might bo on credit and prices I leave to authorities on currency to explain. I d(> not advocate it. With reference to the effect of a levy on tho prices of securities anil property, it is argued that there c:m bo 110 fall, becnuso the publio creditors who are to be paid off must como into the £nark.et as purchasers n'w 1 mone y 'which they get from tho .Treasury, and that will any fall. But in oase of a levy, the selling- would como first; tho buying would como later, and might bo dilatory. Tho selling would . compulsory; tho buying would be optional. You know what that means. Remember, that any great fall in the price of Scxairities must mean a contraction of enterprise, because holders of securities will have less to offer their bankers when they ask tor accommodation.

CREDITORS OF THE GOVERNMENT. What, again, will bo tho moral position in the caso of creditors of tho Government who have lent their money 011 the laitn o. most solemn and reiterated promises that both principal and interest would be secure? What, in particular, will bo the position of tho holders of the 4 per ? ent - to be frco of income tax, should they discover that under a new ana undre-amed-oi impost, much of their principal is to be ssized? It is said that a levy on holders of war loan cannot bo eonrscation, because it is part of a general tax tailing on other largo classes of tho community. It is, however, no excuse for ncocing your creditors that you strip other peoplo also. The gross inequity of a levy ou capital is also plainly apparent when we consider that tho manufacturer, merchant, shopkeeper, and landowner, who require material capital to work with, are picked opt tor exaction, while professional men, civil servants, writers, actors, managers, and others who can earn their income without capital would p% little or nothing. Moro uniust still is tho diractemttack that such a levy makes on thrift. ' I doubt whether any prompt and comfortable m M n, extln £Uishing a huge debt is discoverable; but if -you wish to lighten the income tax in future' years one might venture to suggest that the first step will be to, maintain credit, confidence, and enterprise; and then for the chief Allied Governments, when they have to meet shortdated war loans as they fall in, to arrange to borrow tho large sums required to pay them off at lower rates of interest than those now ruling. Such a process might be difficult—it would '"be difficult, —but, given confidsnco, it ought not to be impossible ; and, so far as concerns annual taxation, tho result in the course of a decade or two would be nearly as much to oaee the yearly requirements of the Exchequer as a very heavy levy on capital."