TAXATION.

Otago Daily Times, Issue 19282, 20 September 1924, Page 7

TAXATION.

GRADUATION

THEORY AND PRACTICE.

{Conthibctbd.) IV. The principle embodied in the graduated income tax, that the person with a largo income can spare for State purposes a larger proportion of each pound he receives than can the person with a small income, is now almost universally accepted as a sound basis of taxation. The Royal Commission appointed in. England in 1920 to consider the whole question of taxation set out this point emphatically. “We do not feel called upon,” it said, “to defend with arguments tho principle of graduation of income tax. Direct graduation of the tax was bitterly opposed for many years, but it is now almost universally admitted to be as sound in principle as d is imperatively necessary in practice. We arc, therefore, concerned more with the practical than with the theoretical aspect of the subject, not so much with the principle as with the means by wlac,that principle can be translated into prac tice.” This conclusion applies as appropn ately to tho conditions existing in New Zealand as it does to tho conditions existing in Britain. The problem hero is to translate tho principle fairly into practice, so that both the large income ami the small income, with ail the gradua tions that lie between them, shall contribute their fair share to the needs of the State. As already shown in these pages, the dominion has been seeking this goal by a different route from the one pursued by the Mother Country, and u is time for the politicians and the public to consider whether or not it has been the right one. A few outstanding facts and figures may be offered as guidance. FACTS AND FIGURES. The £8,026,997 of company incomes left last year, ..after deducting the taxed exemptions, paid £2,406,728 in income tax, or an average of almost 6s in the pound, while tho £35,365,531 of personal incomes left after deducting the taxed exemptions, paid £1,143,875 m income tax, or an average of in the pound. The com pany incomes were owned in just the same measure by individuals as were the personal incomes, and probably by indi viduals of about the same average wealth Now does a system that gives these re suits harmonise with the conclusion of the British Royal Commission on income tax, previously quoted, that “the amount of the income and not the manner in which it is earned is the correct measure of the taxable capacity?’’ Of course it is an tagonistic to this conclusion in every particular. It is obvious that if the sound principles of taxation we sum up in this country in the phrase “Equality of Sacrifice’’ are to be maintained, there must be some system by which each individual taxpayer’s income from all sources can be ascertained. In the absence of such a system it is impossible to fix equitably the rate of taxation each individual should pay. If, instead of fixing the rate of the Lax in proportion to the individual’s income, it is fixed according to the sources from which it is derived, regardless of the amount the individual is receiving from each, then tho whole idea embodied in the principle of the graduated tax is defeated. A DELUSION AND A SNARE. To show how the principle of graduation has been distorted in New Zealand it is necessary only to enumerate some of the provisions made for the treatment of different incomes: (1) Incomes from large companies, all charged at one rate, regardless of the sum received by each shareholder. (2) Incomes from small companies, charged at another rate, regardless of tho sum received by each shareholder. (3) Incomes from pastoral runs, free of tax, regardless of size. (4) Incomes from war bonds, free of tax, regardless of size. (5) Incomes from company debentures, taxed at a maximum graduated rate of a little more than half' the maximum graduated rate charged in other direc lions, and incomes from public body debentures, taxed at less than half the ' maximum rate paid in other directions. There is the further anomaly that incomes received from these sources of income are not added together for tho pur pose of fixing a graduated rate. The incomes from each source are taxed separately. The only incomes that are taxed at a graduated rate in the hands of individuals are those from personal exertion (otlver than farming) and interest on investments (other than company dividends). These incomes, again, are not aggregate:! for the purpose of taxation with the incomes just enumerated. PASSING ONAnother matter of importance in connection with the graduated income lax is that it should be paid directly out of the resources of the person responsible for its payment and should not be passed on to some other person. In Britain, where the individual system is followed, as already explained, it is held by authorities that the tax really docs fall upon the persons for whom it is intended, and is not passed on to other shoulders. The Economist, last year, after discussing this question closely, presented its conclusions in the following words : The incidence of a general income tax on all classes of income is regarded in economic theory as being capable of only a very slight shifting or diffusion. That is to say, it actually falls where' it appears to fall, and where it is in tended to fall.” There is abundant, evidence that the New Zealand system of levying tho income tax, with its discrimination between companies and individuals, its tax-free and lightly-taxed sources of income, and its other anomalies, does not operate with the same precision. There is not space to elaborate the point hero, mid a few lines must suffice. The chairman of the Bank of Now Zealand, Sir George Elliott, ad dressing tho shareholders at their annua meeting last year made plain what was happening in the sphere of finance. “In estimating costs,’’ be said, “it must not bo forgotten that income tax is as much taken into account as are wages or rents, and that in the end it is the public that pays the tax.'’ AND AGAIN. The same sorb of thing is happening iii the spheres of industry and commerce. A very apt illustration of this was provided a little while ago in an analysis of tho operations of the four large gas works m the dominion, those in Auckland, Welling ton. -Christchurch and Dunedin. The works in Auckland, Wellington and Christchurch are proprietary concerns and pay the maximum rate of income tax. Tho works in Dunedin are owned by tho mum cipality and so are exempt from taxation. In 1914, when the income tax for the proprietory concerns stood at Is 4d in the pound, the net average price of gas was 5s per 1000 feet in the four centres. In 1916 the tax was raised to 2s 8d m the pound, and the proprietary concerns advanced their price to an average of 5s Id, while the municipal works, exempt from taxation, continued to supply at ss. In 1918 the. tax rose to 7s 6d in the pound, and the Dunedin price still stood at ss, while the average price in Auckland, Wellington and Christchurch rose to bs 6 l-3d. The tax reached its maximum of 8s 9 2-5 d in 1922 when tho average price of gas in Auckland, Wellington and Christchurch advanced to 8s 6d, while ihe Dunedin price reached 6s Bd. With t.lo reduction of taxation in 1923, the average price of gas supplied by the three proprietary works was brought down to 7s Lid, and with tho further reduction of taxation in 1924 to 7s Bd. Here, it will he seen, the companies of necessity passed -n their taxation to the consumers, giving the latter relief directly their own payments to the slate were lightened. Company taxation as it is known in New Zealand obviously does not fall “whore it appears to fall and where it is intended to fall,” and to this extent defeats the whole purpose and intention of graduation.