THE INCOME TAX

Otago Witness, Issue 3512, 5 July 1921, Page 5

THE INCOME TAX

ITS CRUSHING EFFECT. For some time the largo stock and station companies and farmers’ co-operative associations have felt aggrieved at the rate of income tax levied on them. They have oome to the conclusion that the facts in connection with the matter should be put clearly before the public, and particularly before the farming community, in order that they may see just what is happening and what the results are likely to be, and have published a pamphlet containing their views. A COMPARATIVE VIEW. v the great difference between the system adopted in i\ew Zealand and in Great Britain and the other dominions is in the. manner in winch the income of companies is treated. In New Zealand all incomes pay taxation on a graduated rate. the maximum rate is 8s 9 3-5 d in the £. In Great Britain and in the other British dominions income tax is a so paid on a gradurate, the point of difference is that in New Zealand a company’s income is considered as one income, and is taxed on the full graduated rate; shareholders are not taxed on their dividends, and do not include them in their income tax returns. In Great Britain and the other dominions it ’3 recognised that accompany is composed of interests lied by. many individual shareholders, a large proportion of them often of small means. It is the individual who is taxed, and taxed upon the whole of his income, including dividends on shares. The individual with the large income pays the high graduated tax, and the individual with the small income pays either a small tax or none at ail. Where the' direct tax is made qn a company it is a comparatively email one. The idea of the income tax practically the world over, except in New Zealand, is that every person should contribute in pro- * portion to nis annual income, or, in other" words, the tax should be levied on those who are most capable of paying it, and that it should be graduated in proportion to the taxoayer’s means. In Great Britain until recently there was no direct tax on companies. Recently the corporation tax was introduced, but this is email, and cannot exceed Is in the £, and may be a great deal less. In addition to this companies pay a tax of 6s in the £, but this is only regarded as being paid as agents for their shareholders. When a shareholder gets his dividend from the company in which he has invested he has to adjust his taxation himself with the Taxation Department; if he is a man with a small income below the exemption limit the department rebates him the whole of the 6s in the £ that the company paid on his account; if he has a larger income, and comes into the 3s rate, the Income Tax Department rebates him 3s in the £, being the difference between the 6s paid by the company and the 3s the shareholder is himself liable for. If his income is larger still, and comes into the 6s rate, no adjustment with the department is necessary ; if he is a x very wealthy man, he cornes under the super tax, and his income tax rate will be more than 6s, and he will therefore have to pay the Income Tax Department the difference between the 6s paid by the company and the rate at which his own personal income is taxed. IN NEW ZEALAND. In New Zealand companies are taxed direct, the tax being graduated in proportion to the income. The maximum is reached at 8s 9 3-5 d in the £ on an income of £IO.OOO a year. This means that practically all large companies pay on the maximum rate. When they get their dividends from companies, shareholders do not have to pay any further tax. but they gfet no rebate allowed them of any kind, except whc-re their income is below £IOO and their dividend less than 6 per oent. on the amount paid up on their shares when they get a small allowance. SOME COMPARISONS. In Great Britain a man can invest his savings in anything he likes, including companies, and he is taxed on his income as an individual in proportion to h:s means. The same Applies to Australia. In New Zealand a man can invest his savings in any form of investment that he likes —except shares in companies—and he is taxed as an individual in proportion to nis means, but (he moment he invests in a joint stock company his tax is graduated in proportion to the total income of the company and not in proportion to his own total income. This means that if he invests in shares in a large company he is taxed on his income on the highest graduated rate fixed for the millionaire. In Great Britain, too, Income Tax is paid on the average income of the three previous years, anjl this enables years vvlien losses instead of profits are made to be brought into account, whereas, in New Zealand, income tax is paid on the income of the previous year. If there is a loss instead of a profit no Income Tax is paid the following year, but no rebate of Income Tax is obtained on account of loss, nor can the loss be deducted from profits in subsequent years. EFFECTS IN NEW ZEALAND. Let us consider the effects of this taxation in New Zealand. We will consider it first from the fanners’ point of view. We think it is generally admitted that New Zealand is chiefly an agricultural and pastoral country, and that anything that affects the prosperity of the farmers affects the prosperity of the whole country. The farmers ha\a their business chiefly conducted by a number of large companies, such as stock and station companies, farmers’ cooperative companies, freezing companies, and others. The bulk of these concerns have a very large number of shareholders, and in most cases the shares are widely distributed amongst a large number of people of moderate or comparatively small means. There are comparatively few large wealthy shareholders. All these companies with a net income over £IO,OOO have to pay income tax at, the maximum graduated rato of 8s 9 3-5 d in the £. It really comes to more than this, because many charges which any well-managed company must place to the debit of its profit and loss account are not allowed as deductions for income tax purposes. _ The depreciation allowed i 3 never sufficient, and such import ant itetns as contributions to staff pension

funds and other funds for the benefit of the employees are not allowed as deductions. In most cases the income tax will work out at nearer 10s in the £. Shareholders expect a profit and loss account that will warrant payment to them of a reasonable dividend, and they expect this profit and loss account to be supported by a balance sheet constructed on sound lines. If the management fails in this respect, even for a short time, all growth and development in connection with the company ends, and if the failure is continued the company must liquidate and cease to exist. FURTHER DISA BILITTES. The pamphlet proceeds to point out that companies have been further penalised by compulsory loans, and that many companies are being compelled to sell war loan stock at a discount of £l9 in every £IOO and of £l2 for soldier settlement stock, in order to find money to pay income tax. Tho excessive income tax, it is pointed out, also increases the rate of interest to farmers. ‘'To get a net- return of 61 per cent, from a loan to a farmer the farmer would have to be charged 12 per cent., because fs 9 3-5 d in the pound of the interest collected will have to be paid to the Government.” The tax also causes a high rate of interest on farm mortgages and increased charges to farmers il ;r freezing stock. Examples of the former are given, and the'’ results to companies and farmers if the present taxation is continued are set out at length In is urged that certain largo companies must continue to exist to servo legitimate requirements, and ns the farmers are paying the tax, Jdiey should carefully consider its effects. The taxation also increases the cost of living, and the view is asserted that war-time taxation in peace dries up the source of taxation. THE REMEDY. It may be said that it is all very well to point out faults, but it is very necessary to suggest a remedy, as the State must get revenue. The remedy is to do what is done in other countries; to do what is done in Great Britain and in Australia; to tax the individual in proportion to his means, mid not the company in proportion to its income ; to tax individual shareholders that are behind the company, and not the company itself. This means that the wealthy wili pay in proportion to their means; that peoples of small means will be taxed lightly, and will not be penalised if they mobilise their capital into a. joint stock company to carry on their necessary business; and tha‘ customers dealing with these companies will not have these excessive charges passed* on •to them. This is the one and only remedy It is. stated that this would not bring in sufficient revenue, as the tax on large individual incomes could not be made higher than at present, and the lower graduated rate on shareholders’ incomes would com®, so so much less than companies now pay. We ggree that taxation of the wealthy in New Zealand must bear some relation to taxation of the wealthy in other parts of the British Empire. Wealth is mobile and is easily moved, and there are none who can move it so easily as those who are wealthy. It would not be a good thing for New Zealand to lose cither its wealthy men or their wealth. The wealthy are generally the leaders in the country’s enterprises, limany case, when compared with tho standards of other countries, there are no very wealthy men in New Zealand. We agree that tho alteration we suggest would mean a temporary loss of income to the State from this particular source, but surely matters can be adjusted to meet this position. Surely what can be done in Britain, in Australia, and in every other part of the British Empire is not beyond the powers of New Zealand. Has not income tax been pushed altogether too far in this country? Consider the comparison of the revenue derived from the chief sources for the year ending March 31, 1914, which was the last pre-war year, and the year ending March 31. 1920, which is the last year figures are available for: Increase Account. 1914. 1020. percent. Customs £:i,420,744 £1,830,324 41 Stamp anct death duties 1,221 071 3,344,933 4 174 Post ami telegraph, net 86,654 1-55,263 ' "73 I.anrl tax 767,4.51 1.557 003 103 Income tax 554,271 6,369,765 1049 I. or rmty 127,041 355.403 180 Railways, net 1,070,445 1,490,051 37 The figures recently published for the 11 months ending February 28, 1921, show that the- net increase in railway revenue has been almost all swallowed up in increased charges, 3nd the railways, from a net revenue point of view, are about back to the 1914 position. The revenue from income tax shown on the foregoing table has been derived from, a rate showing a maximum charge of 7s fid in the £. Thjs has now been increased to a maximum ' rate of Cs 9 3 5d in (he £, which makes the position still worse. It is necessary for the State to explore other avenues of revenue to take the place of the less that must be made from income tax. It is also necessary for it to explore opportunities for economy. The State is like everyone else —it must cut its coat according to its cloth; it must not spend what it lias not got. It is only postponing the day of reckoning and malting it worse when it. comes, if it has to keep” up its revenue by grinding taxation that destroys the enterprises necessary for the country’s development, and thus dries up the very sources of revenue. THE INEVITABLE RESULTS. The present grinding taxation on large companies cannot continue without disastrous results to the country. The continuation of this taxation means:— (a) Ihat only those large companies that can succeed in passing the taxation on tn their customers can continue, and that all large companies that cannot do this must immediately cease to grow and finally liquidate and cease to exist, or withdraw from the country. (b) That tho source of income tax will thus be dried up and the heavy imposition will defeat its own ends. (cj*-"’‘*’'hat the destruction of large joint stoi-i companies which world-wide experience has shown to be the most efficient method of conducting trade and industry will cause further loss of taxation by depriving tho New Zealand public of the services that these companies now render. (d). That, in this country, it will be impossible to promote any joint stock enterprises having for their object' the manufacture of our products for export, such as the wool top making industry of Australia, because these companies would be m competition with companies in other countries that do not have to bear this excessive tax.