TAXATION COMMISSION.

Otago Witness, Issue 3662, 20 May 1924, Page 26

TAXATION COMMISSION.

THE AUCKLAND SITTINGS. AUCKLAND, May 12. Before the Taxation Commission Mr Hudson, president of the Chamber of Commerce, said the chamber suggested the following amendments to the Land and Income Tax Act:—That the present practice of assessing public companies for income tax be amended by being brought into line with that adopted in every other British community, by permitting deductions from companies’ assessable income, and instead including them in that of the individual share holders; State and municipal undertakings in competition with private enterprises should be subject to the same rate of taxation as pri-vately-owned ventures. The present practice in regard to company taxation was economically unsound, as it involved the immediate appropriation by the State of a very large proportion of surplus pro fits which otherwise would become available as working capital. Taxation of the same profits after passing out into the shareholders’ hands would permit the payment of better dividends and encourage reinvestment. It was further suggested that a closer combing out of small incomes would reveal further substantial taxable amounts. WELLINGTON SITTINGS. WELLINGTON, Mav 14. The sittings of the lvoyal Commission, which is inquiring into the system of taxa

tion in New Zealand, commenced in Wellington this morning. Tice first witness was Mr George Mitchell, who presented a. statement as president of the Harbours Associations. Summarising the general conclusions which he had reached, Mr Mitchell said that the following points came into prominence : (a) The true principles of income tax are largely being defeated. (b) There are so many exemptions and channels of escape that our system may appropriately be called the “income tax evasion system.” (c) By compelling companies to gather three-quarters of our income tax rich people are provided with channels for passing their tax on to the poor, who are supposed to be free. (d) The system thereby raises the cost of most services and commodities, and makes living dear. (e) The land tax, which was designed to prevent aggregation and burst up large estates, is applied to small farm holdings and town sections, to which it was never intended to apply. It is thereby imposing a tax on the small farmers and others with no taxable income, who should not- be taxed. He therefore appealed for a return to true principles of income tax, whereby—(a) Everyone with an assessable income would be called upon to pay a tax in accordance with that income, and not allowed to pass it on to others. lb) Income tax should apply to every person in the land, and apply alike irrespective of calling, class, or section, or whether they lived in town or country. (c) Companies should be taxed on their undivided profits, and not be made compulsory agents for the indiscriminate collection of taxes, because they violated every principle of justice by passing on the tax

to the poor who should not pay. Every investor in a company should pay his own income tax according to his income. (d) That the land tax should not be applied to farms and holdings not suitable for or capable of subdivision, nor to town sections, but solely for the purpose for which it was framed —namely, to prevent aggregations and to burst up large estates. The amount collected in taxation from the people should be the lowest amount necessary for the services and functions of the State. If it took more it was not just to those who paid, and if it took less it was not just to itself. If everyone bore his fair share it would allow the rate of taxation to be considerably reduced, and make it easier for all to bear. Mr W. B. Mathieson (president of the Wairarapa branch of the New Zealand Farmers’ Union and ex-treasurer of the Dominion Farmers’ Union), giving evidence on behalf of the union as a whole, said: 1. We are of opinion that the land tax, being a form of capital levy, is bad in principle, being a class tax. We are in favour of its abolition and the application of the income tax to incomes from all sources. 2. We consider that in the event of the land tax being continued the special exemptions should be raised to £3OOO, seeing that the income tax exemption is £3OO which, capitalised, is £6OOO. This suggested alteration in the exemptions is based upon a 10 per cent, profit on £3OOO invested in land. 3. We consider that the present system of debenture taxation should be amended so as to make the levy the same rate all round, giving no advantage to local bodies or any other section of the community. 4. Seeing that (a) during past years the farmer-borrower has been penalised under the present system, and that (b) the prosperity of the dominion so largely depends on the primary producer, and that (c) the

settlement of unoccupied lands is so vital—we consider that if any differentiation is to be made it should be in the direction of encouraging investments in rural securities. Mr Mathieson added that there was a strong feeling in the Farmers’ Union that company taxation was thoroughly unwise and should be either diminished or abolished, but no decision had been arrived at as to the percentage of the immediate reduction favoured. May 15. Before the Taxation Commission, Mr A. Seed, secretary of the Dominion Sawmillers’ Association, presented a statement which set out that the tax on companies’ profits should be levied on shareholders or on the actual recipients of the income derived from such profits as individuals The association supported the contention that, by virtue of there being a large avenue of gilt-edged tax-free investments (Government loans), and probably a larger avenue of lightly-taxed investments (local body loans and company debentures), not onlv were wealthy investors able t/* escape their just contribution to the State, and thus a. heavier burden was placed upon companies and those in receipt of “earned'’ income. but. the development of the dominion and the community was retarded by discouraging investment in industries and development. Several factors in tin* present assessment were more severe in their incidence upon the sawmilling industry than upon any other industry. This was due to the fact that sawmillerg were dea! ing with wasting assets, not only in the bush, but in the mill—in fact, on every item on which capital was expended—with the result that the industry was suffering a distinct injustice.

Mr Seed continued that the present position would press unequally on different sawmillers. Those who had a comparatively short period to run would fee! it most heavily, whilst to those who had a long period of cutting in sight it would not be nearly so serious. The inclusion of tratnwnys in land valuation would furthermore result in some being locally rated on such tramways values, while others, situated •vhere the rating on unimproved value obtained, would escape the charge. There wa* now no way by which deductions could be allowed for the writing off of tramways other than by making no annual allowance tor depreciation, and writing off their whole capita* cost in the year they ceased to be used, if a miller were allowed to write off exactly the correct amount for tramways each year he would still continue to pay . J“|t share of income tax, for such writ* ing off would merely ensure that his actual prohts were disclosed each year, and in the iinal year he would also profit instead of spoiling a loss, if tho whole of the tramways \>eie written off in the year of their abandonment, Substantially the same arguments applied to buildings. There was the additioiial hardship that the miller was compelled by law to provide accommodation for ins workers, and all such buddings were just as rapidly vanishing an asset as the tramways. Dealing with the taxation of municipal trading concerns before the Royal Commission to-day, Mr Gerald Fitzgerald (marina engineer) said: “It is alleged by private trading concerns that it is unnecessary and un-fair to allow municipalities to trade m competition with them, and it is alleged that tho further special unfairness is seen in the freedom from tax enjoyed by the municipalities. This grievance has lately tended to become more acute as the activities of municipalities have extended beyond the usual public utilities and invaded the region, of direct trade. Thus the Christchurch City council is the exclusive agent for a certain motor vehicle that is being sold in competition with others, and the electrical department there, and also in other cases, undertakes the supply of electrical fittings and machines in competition with private tfade/s. Municipalities, of course, are not called upon to pay rates, nor usually rent, upon _ any of their premises, which is an initial advantage of great consequence, and trie freedom from income tax and land tax is such a further advantage as to make the complaint of the private trader in competition with such immunities a grievance of the first importance. Moreover, the loss to the State in not exacting tax from these illegitimate trading adventures is so great as to merit the closest scrutiny. It has been stated that municipalities if assessed for income tax would so frame their profit and loss accounts as to show little or no income and so evade assessment. This possibility is admitted; but- it is _ also plain that such evasions could easily be met by a special method of assessment under which no escape-would he possible. A special form of assessment would in any event be required if the company tax were abolished in favour of an individual tax; and in such event municipalities would probably have to bo regarded as individuals since they have no distributable profits as in the case of companies, and are the direct recipients of the income accruing from the result of their activities. “there is a generally accepted belief that it is a mistake for the State to enter into trading enterprises,” continued Mr Fitzgerald, “especially in competition with private undertakings of a similar character, but comparatively few people have taken the trouble to examine the foundations of this theory, and the slackness of the publio mind in this regard has made it easy for successive Governments to submerge the principle at several different times under the pressure of some superficially attractive financial expedient. It is usual when discussing this subject to meet with the preliminary concession that a few special departments such as Postal and Railways are properly State monopolies which it is implied are beyond criticism, the discussion then being carried forward to the consideration of other utilities. It is not here admitted that this view is correct or that it can be supported by material facts. Indeed, there has been from time to time a good deal of controversy upon the subject of State management of the railways, which are now slated authoritatively to find great difficulty, in earning 33 per cent. —a very poor result for a monopoly—and there are other more serious aspects of the case hereinafter appearing. The Postal Department has never had competition of any kind, so that there, is a dearth of evidence affecting its management, but if the competition in other directions is any guide to the formation of a correct judgment it is by no means certain that private management could not produce a better result. However, for the purpose of this submission it will be sufficient to consider the application of the principle to the concerns in which private trading is usually adventured. The greatest difficulty in the way of ali State trading is that large departments sooner or later have to adopt a classification scheme for its employees. All such schemes contemplate promotion in a particular manner, and practically eliminate dismissals except for grave misconduct. The result of this is that good men find the rate of promotion too slow, and are easily tempted to accept other employment, while upon the other hand the rate of promotion exceeds the merit of efficient men for whom no other employment is offered. This inevitably leads to the survival of mediocrities and incapahles, and reflects upon the administrative ability of the whole staff. “Such lowering of the administrative capacity together with the apparent impossibility of freedom from political interference probably accounts in some measure for the trading losses that appear to be inseparable from all Government trading adventures. There is, however, a more serious menace in the creation of large bodies of civil servants who have apparently discovered the advantage of banding themselves together in associations of various kinds which for all practical purposes are really indistinguishable from trade unions, and these several associations are not blind to the advantages to be obtained from mutual support for the purpose of furthering some common objects such as the rates of pay or the hours of work. It is easy to imagine an extension of such services that would practically enable the employees to dictate their own terms, particularly at times when there might happen to be a slender balancing of political factions. There have been several instances where such attempts have been made, and there can be small doubt that with a greatly

increased public service such instances would tend to multiply. “If it could be shown that notwithstanding the above-mentioned difficulties in the way of State trading the outcome in publio benefit justified the acceptance of risk, then the question would perhaps be determined by the measure of practical result. This, however, is very far from being the case, ilnee the contrary is now being published in several countries. England, Canada, Australia. U.S. America, and even New Zealand have all had to admit, more or less, losses in State trading—some running into many millions —and against this there are no instances recorded where gains have been made or where superior efficiency has been achieved. “ Statements are now being published that one country after another is abandoning State trading as fast as possible, and frank recantations of such heresies are being bracketed with admissions that trading adventures are most successful and most useful to the public when they arc left in private hands. The essential vice of all State trading seems to be the fallacious doctrine that profits may be disregarded in favour of a service giving certain conveniences to the public, and in pursuit of this entirely unsound principle the safeguards tisually required in the establishment of sound business are seldom erected. This method of conducting a business sooner or later result- in losses that have to he passed on to the taxpayers—an wholly unjustifiable proceedings. “ For many years it was contended that State trading should not he subject to taxation, but the palpable injustice of competition with private traders upon such terms gradually forced itself upon the public notice, and now the principle that irtate trading should fce taxed upon the same terms as private undertakings is generally recognised, and in most of our State trading departments income tax is now payable. There are still some exceptions vliich it is submitted should be eliminated If the system of State trading is to be maintained. The State, however, still refuses to pay local body rates even in cases where it has compulsorily acquired large blocks cf land for housing purposes, upon which rates were paid by the pervious owners. It is submitted that this manifest injustice should receive consideration. There is another very important fact connected ■with the payment of taxation by the State trading departments in that the amount of such tax when paid bv the State concern is very much less than the amount that would be assessed to a private trader.’’ May 16. Before the Taxation Commission Sir John (Findlay. dealing with progressive income tax, pointed out that there could be no ideal tax —none to which serious objection might not logically bo made. However, it appeared clearly to be the best form of taxation which the State could adopt. He could suggest no improvement on the method of graduation employed in the present system. He agreed with those who thought that the present land lax should he abolished altogether, and a progressive income tax imposed on the farmers, as it was imposed on other businesses. If there were any class of the community that deserved the indulgent consideration of the taxing authorities it was the small farmer. If he made no profits beyond the minimum cf subsistence and mortgage reduction he should not pay a tax. So to tax him was to tax his capital, and this offended against one of the most firmly established canons of taxation. Sir John Findlay said he favoured the retention of the graduated land tax. He thought it would be disastrous if wealthy land-owners were left free in the absence of the graduated land tax to go on aggregating their holdings until the amount- of cultivable land available for closer settlement was enormously reduced. However, the .Commissioner should have power to reduce or remit the tax where large holdings were necessary owing to the quality or character of the land, but only on the application of the owner and on proof that largeness of tho holding 1 was necessary for profitable farming and that the area was unsuitable for closer settlement, me graduated tax was never meant to apply to city lands which were occupied for commercial or industrial purposes, and should be limited m operation to rural lands, and to the aggregation of town and suburban lands which were held for speculative nurposes. 1 Tlie Commissioner of Taxes had given evidence that the effect cf the partial mortgage exemption had been greatly to proxnote the evil of speculation and traffick- ,*? a “ resulted. These conclusions were significant, and could not be greatly chalJenged. The logical conclusion was to abolish it or substantially reduce it-. Company taxation was unjust. The shareholder should be -taxed on the share of profits which he took, and no tax should be laid on the company itself as a company. The present company tax offended against every test of a fair progressive income tax. and chiefly against the main one of justice. The present difference of l-ates for company and local body debentures had no logical justification. Both should have the income arising from them regarded in the same way, and should be Included in the total income in both cases and taxed accordingly, . As to the incidence of taxation, he felt justified in saying that the incidence of progressive taxes was largely shifted from the taxpayer upon whom they were imposed. and upon whom they were intended to rest. In the course of the proceedings the Commissioner of Taxes (Mr D. G. Clark) Contradicted certain statements which have been made from time to time to the effect that an alteration in the assessment of companies for income tax haa been opposed by the Tax Department oil account of the inconvenience it would cause. The Commissioner said that an alteration of company taxation in the direction cf exempting companies altogether and assessing the dividends in the .lands of shareholders would enormously simplify the work of the department. Evidence w as. given by Mr John S. Connor. farmer, of New Plymouth, as to the “iniquity of the land tax’’; Mr R. S Abraham (chairman of directors of Messrs Abraham and Williams), who spoke of the injurious effect cf taxation on their business; and Mr P. J. O’Regan, who suggested the abolition of the graduated tax and increasing the flat tax. May 17. Evidence on behalf of the Wellington Chamber of Commerce, presented in the form of a resolution passed at the annual conference of the Associated Chambers last year, was given before the Taxation Commission this morning by H. D. Bennett, president, ns follows i

(a) The freedom from taxation and rating enjoyed by institutions controlled by the State and local bodies, thus conferring advantages over similar trading concerns in the hands of private citizens, is improper, and it is the opinion of this conference that all business should be placed on equality of footing, and that it should be obligatory that an annual balance sheet relating to each such enterprise be published, and that all lands owned by local bodies, and leased for revenue to persons, firms, or companies, should be subject to land tax in t’ne same manner as in the case of private owners. to) That income tax equivalent approximately to the average rate paid by companies should be paid by all public bodies and Government trading and publiclyowned utility undertakings, and the tax arrived at by assuming that the income should be based on a fixed percentage of the total amount of capital employed. (c) That the Government be urged to relieve the present unfairly imposed burden upon the general taxpayer by altering the incidence of income tax in accordance with the recommendations of the 1922 Taxation Committee by the inclusion of dividends in shareholders' individual assessments, instead of by a levy upon the total income of registered companies by providing that taxation upon the income derived from debenture securities be the same as that from mortgages. (d) That this chamber is of opinion that it is inequitable that the graduated principle, intended to discourage the aggregation of epunt-ry lands, should he applied to city properties employed in the production of assessable income. Mr Bennett also gave his personal views.