TAX-FREE WAR LOANS

Otago Daily Times, Issue 17483, 27 November 1918, Page 4

TAX-FREE WAR LOANS

We are hardly surprised that, as is announced in the Budget, the Minister of Finance has decided, in issuing the additional war loans that will be necessary, to adhere to the policy of freeing the proceeds of the investments from the operation of the income tax. He is natarally indisposed to acknowledge that this is a mistaken policy. But the arguments which he has advanced at some length in support of it do not satisfy us of its fairness or soundness. Nor will they, we think, carry convisfcion to the public mind. Sir Joseph Ward admits that the persons vho are assessed for income tax at the highest rate are provided, under the policy in which he persists, with an investment returning them interest at the rate of 7£ per cent. He suggests however, that this is of small consequence because there are not more than 264 incuriduals who pay income tax at the highest graduated rate. It does not seem to occur to him that the principle is not really affected by the number of persons who benefit by it, or that, if it were affected, the smallness of the number of persons wl o enjoy the advantage of the preferential treatment would be condemnatory of it rather than other-

wise. But the effective rate of interest which persons who pay interest tax at tho maximum rate secure through investment in tax-freo war stock may excoed, and we have no doubt does actually exceed, 7\ per cent. Through a judicious disposal of securities that are not tax : free and the investment of the procoeds in war stock, a person may, by bringing his taxable income within a lower scale of graduation, derive over 8 per cent, and perhaps even 9 per cent, from his investment. Tho fact that this is so constitutes the conclusive answer to Sir Joseph Ward's curious contention that the price of money is kept at a low level through the issue of war loans at <U- per cent. The Minister cannot himself have much faith in this contention. If ho did, he would scarcely have committed himself to the statement that '" the free of income tax condition" has "proved a very great incentive to investors." That statement is wholly justifiable in its application to investors who are able to derive a substantial monetary advantage from the freedom of the procoeds of their investments from income tax, but the Government has conferred this advantage upon them at the cost of considerable irritation on the part of less favourably situated investors to whom the rate of interest upon their subscriptions to the war loan is limited to 4i per cent., and is not nominally that as it is in the case of the few or comparatively few. The tax-free system of raising- loans is objectionable not oniy because it discriminates unjustly between different classes of investors but also because it narrows appreciably the area of taxation of incomes for a long series of years in future. These are points involving an important principle. The Minister attempts to brush them aside by employing a string of detailed objections to any departure at the present stage from the course he has followed hitherto, but these objections are in reality somewhat trivial.