INCOME TAX.

Waikato Times, Volume 97, Issue 15276, 28 June 1923, Page 8

INCOME TAX.

IN ENGLAND AND NEW ZEALAND. A COMPARISON. (By W. D. Hunt). ; Recently politicians have been drawing comparisons between the income lax systems or Great Britain and Now Zealand, and it seems to me that in their natural desire to reach preconceived conclusions, they have not made the differences between the two systems quite clear. The matter is of so much importance at the present time, in view of the promised revision of taxation in this country, that I think I shall be pardoned for attempting to elucidate a few of the points the politicians have left somewhat obscure. The Systems. Both Great Britain and New Zealand impose income tax on the graduated system in recognition of the principle that a large income can spare for State purposes a larger proportion of each pound sterling than can a small'income. In New Zealand the first £4OO of taxable income pays is jfri the pound. Every pound of taxable income in excess of £4OO Increases the rate of tax not only on that pound, but also on the whole sum that has- gone before, with the result that the lax gradually, advances until it reaches 7s 4d in the £ on a taxable income of £IO,OOO. Beyond this sum there are no further increases in the rate. In Great Britain the advances in the rate of the tax are made' on the zone system, each zone paying a particular rate, and this rate not increasing with the volume of the income as is the case In New Zealand. The system starts With what is called the standard tax, which at the present time is 4s 6d in the pound, while what is called a super tax begins with taxable incomes in excess of i&OOO a year. Taxable incomes up to £225 pay only half the standard rate.

Standard Tax and Super Tax. The following table will show how the payments progress:—

Total £30,000 These figures, it will be noticed, deal with incomes up to £30,000 a year. Incomes beyond that amount pay the standard rate plus a super tax of*Gs in the £, making a total of 10s (3d in the fl. It is only the amount of income above £30,000 that pays 10s Gd. All the previous income pays at rates according'to the zones set out in the above table, no matter how large the total income may be. British and New Zealand. Working the British taxation out on an average, it compares with New Zealand taxation upon what arc called unearned incomes, as follows: —

in individual Incomes beyond £20,000 a year. In both New Zealand and Great Britain there are allowances for what are called "earned'' incomes, and certain exemptions from taxation. It would be difficult to compare these exemptions in'a brief summary of this kind, since they vary with each individual' case. Speaking generally, however, on the lower incomes the exemptions are more ,than twice as large in New Zealand as they are in Brilain. On the higher incomes there is little difference. ' >'■

The Great Difference

The great difference between the New Zealand system and the v British system is in the manner of taxing companies. The very'radical nature of this difference can be realised from the fact that for the year' ended March 31st, 1922, which is the last year for which figures are available. 72* per cent of the total tax paid in New Zealand came from companies and only 28 per cent from individuals. In New Zealand the income of a company is treated as one individual income. All large companies, therefore, pay the maximum graduated rate of 7s 4d in the pound. ■ The dividends they pay are not taxable in tho hands of shareholders, and they are not added to shareholders' other incomes in determining their 'graduated rate. It is obvious, therefore, that as far as company investment is concerned all shareholders, rich and poor, are on exactly the same footing and pay exactly the same rale. The rich, indeed, get an advantage, because the fact that part of their income is drawn from company shares reduces the rate of tax on the remainder of their income they would have to pay were their total income from all sources taken into account. Method of Adjustment.

In Great Britain companies pay a standard rate of is 6d in the pound, but no super tax. They pay the standard tax as agents for their shareholders, and the shareholders subsequently adjust their liability with the Taxation Department. A, shareholder with no taxable income receives the whole of the 4s Gd as a rebate. A shareholder who pays only half the standard rale collects from the Department the remaining Is 3d. A shareholder who pays' the standard rate on part of his income has no adjustment to make, and a shareholder with a taxable income in excess of £2OOO a year has to pay to the Department, super tax in his dividends at the rate that applies to his income. It is obvious from this that the company actually pays the standard rate of 4s fid in the pound only on ils undivided profits. If it divides all its profits as dividends it pays nothing itself, but the shareholders pay in the manner explained. 11. is obvious, too, that in Britain there is a wide difference in the net dividend returned to rich and poor shareholders. The 1 poor get the whole dividend without any deductions, the rich have to pay the full graduated rate that applies to their income from all sources.

Another Difference. Another great difference between the British and the New Zealand system is that in New Zealand we have many either tax free or lightly taxed investments, while in Britain there are no investments of this description. For example, in New Zealand we have considerably over £40,000,000 of tax free Government war loan stock. The tax on incomes derived ;from local body loans is limited to a maximum graduated rate of 2s Od in the pound. The tax on income derived from company debentures, where the tax has been made payable by the debenture holder is limited to a maximum graduated rale of 3s in the pound, debenture holders paying less than the 3s rate, being rebated the difference. Where the tax on the company debentures has been made payable by the company, the company pays the whole 3s in the pound, plus 7s 4d in the pound on 3s, or a total of 4s 1 l-sd, and there is no rebate to debenture holders. These tax free or lightly taxed investments are of great advantage to individuals with large incomes. The income received from them is not only tax free or lightly taxed, but it also is excluded from the investor's other assessable income, and keeps down his rate of graduation. In Britain there is no avoidance of taxation in this way. Each individual pays the graduated rate which applies to his income from all sources no matter from -where it comes, and income drawn from companies pays the same rate of tax as does income drawn from other sources with one comparatively small exception which will be mentioned presently. The Companies' Curden. Put in other words, in Britain the average pound of income drawn from companies will pay the same rate of tax as the average pound of income drawn from other sources. In New Zealand, on the other hand, the great bulk of the income tax is collected from companies, and the average pound of income drawn from companies pays approximately ten |and a-half times as much tax as does the average pound drawn from other sources. The latest analysis of income tax available to the public in New Zealand is the "Classification of Income Tax Payers," published by the Taxation Department for the year ended March 31st, 1922. In that year companies with a total assessable income of £12,722,865 paid income tax amounting to £4,515,561, or an average of 7s Id in the pound. Individuals with an assessable income of £25,623,804 paid income lax amounting to £1,751,116 or an average of Is 4d in the pound. i Some Facts and Figures. Nor is this the end of the comparison. The whole of a company's income in New Zealand is assessable, there being no exemptions from the assessable tax, while with individuals a very large amount is not assessable for tax at all. The Commissioner of Inland Revenue, in his evidence before the Taxation Committee of last year, slated that the non-assessable income of individuals was approximately equal to the assessable income, Tlio tax of £1,751,116 received from individuals 'was, therefore, derived from a total individual income of approximately £51,000,000, and-the tax worked out at an -average of approximately 8d in the pound. If company income had been, taxed in the hands of individual shareholders, in the same way as it is taxed in Britain, approximately the same proportion would bave been non-assessable as that in the individual return. Company income, however, is just as much individual income as any other sort of income, because companies are owned by large numbers of individuals each with a certain share. The British system recognises this fact, and taxes all income at the same rate no matter from what source it is derived. The New Zealand system charges Income drawn by individuals from companies as previously slated at approximately ten and a-half times the rate at which it charges individuals on incomes drawn from other sources;

The Corporation Profits Tax,

I have stated that there is one difference in Britain between the taxation of incomes drawn from companies and the taxation of income drawn from other sources. This difference is the Corporation Profits Tax, which is a special tax on companies made for war purposes. This tax, however, is comparatively small. At its highest point it was Is in the pound, and it could not exceed 2s in the pound on the undivided profits. Its average, therefore, was generally under Gd in the pound. Recently it lias been reduced to 6d in the pound and Is not to exceed Is in the pound on undivided profits.

What British Statesmon Think

The difference in Britain between I tie tax on income derived from companies and on income derived from other sources, it will be seen, is very small compared with the huge difference in New Zealand, but even this small difference has provoked more irritation and criticism than lias almost any other form of taxation. The late Chancellor of the Exchequer, Sir Robert Home, in a speech quoted in the London Weekly Times of April 5 last, stated that he strongly advocated the removal of the most unjustifiable lax, the Corporation Proiits Tax. By the abolishing of this tax a great incentive would be given to enlcrprise. The present Prime Minister of England, Mr Baldwin, who was Chancellor of the Exchequer in the Bonar Law Government, in his Budget speech in the House of Commons on April 16 last, stated: " I feel that I must make some change in Hie Corporation Prollts'Tax. Everyone admits that this is not a good tax; many think that it bears exceptionally heavily on enterprise and industry. I cannot give it up entirely, but I propose to reduce it by one-half, reducing the rate from Is to 6d in respect of profits arising after June 30 next.

London Press Opinion. The London Bankers' Magazine of last month, in its leading article, commenting on the Budget says: "The only small surprise in the Budget really was that contained in the immediate halving of the Corporation Profits Tax. The unsoundness and inequity of that measure has, of course, been universally recognised, but it was feared that any relief would be deferred for another twelve months. The great advantage, however, of his so doing lies in the fact that the general intent, of the Government towards the impost is clearly revealed, so that its absolute remission within a reasonable space of lime is now a foregone conclusion. Thai being so we have at once the effect which no doubt was the object, of the Chancellor, namely, of business enterprise in joint stock form receiving a further stimulus from the Budget statement. In fuel, it was quite clear, both from Ihe matter In the Budget and the manner of its delivery, that stimulus to industrial activity, quite as much as actual relief to the taxpayer, was foremost in the minds of those who framed the Budget."

The London Times' Engineering Supplement of April 14 last (before the Budget speech just quoted had been delivered), slated: "The view of the majority of those qualified to judge gives the unequivocal answer that the industrial interests affected would best be served by first repealing the Corporation Profits Tax. This tax is admitted by all who havs had experience of it, including the ex-Chancellor of the Exchequer, to be thoroughly unsound." If such criticism as this is levelled against a system which at its worst only increased the tax on income drawn from companies by approximately Gd in the pound beyond that on income drawn from other sources, what would be said at Home of our New Zealand system which, taxes income drawn from companies at 10* times the rate of the tax on income drawn, from other sources? The difference is approximately no less than lis 5d in the pound. Sources of Tax. A comparison of the sources of income tax in Britain and in New Zealand is interesting. In New Zealand according to the latest published analysis which is for the year ended March 31, 1922, 72 per cent, was paid by companies, and 28 per cent, paid by individuals. In Britain according t 0 the last Budget, the Chancellor of the Exchequer expects to collect under the present law 79 per cent from standard rate of tax, 18 per cent, from super tax, and 3 per cent, from corporation lax. Passing On. The New Zealand system of income lax departs entirely from the great principle of "equality of sacrifice." It is not a graduated system of income tax at all. The 28 per cent, which comes from individuals, while nominally collected on the" graduated principle, is really not collected in that way, many avenues being provided for individuals with large incomes to'escape the operation of the graduated system. The 72 per cent, of tax collected from companies is merely a levy on the people the companies serve. It is in fact simply taxation of the poor and those of moderate means, with the companies employed as tax-gath-erers. It is a recognised fact that ap individual tax on all individual incomes such as that in force in Great Brilain cannot be passed on to others, but must be paid by those on whom it is levied, whereas a sectional tax, such as the company tax in New Zealand, must be passed on. The London Economist, in an article dealing with income lax in its issue of April 28 last, stales: "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 fails where it appears to fall, and where it is intended to fall." This is the right sort of tax—a general income tax on all classes of inco.we. j The Inevitable.

In New Zealand the State says to its people " On alt income thai you derive from companies you must pay 104 times as much tax as on incomes derived from other sources." Companies are created by individuals, are owned by individuals, and remain in existence only so long as their individual shareholders wish. It is evident, therefore, that if shareholders must pay 104 times as much tax on their company income as on their other income, they will only put their savings into companies or let them remain in companies while these companies can collect this extra tax from their cuslomvrs, and thus pay to their shareholders at least as good a return as the shareholders could get by investing their money in other directions. Any company that cannot do this will not be allowed to remain in existence very long. It will bo wound up and its capital returned to the shareholders. No proposed company will come .nlo existence if it cannot show that it can pass this tax on to those whom .1 is organised to serve. The public arc now paying the bulk of the company tax in New Zealand through increased charges. If the present system Is maintained it will not be long before' the public pay the whole of the income tax, because only those companies that can pass the tax on will be allowed to remain in business.

Taxable Standard Super Total Income. Rate Tax Tax First £ . 225 2/3 nil 2/3 in £ Next 1775 4/0 nil 4/6' „ Next 500 4/6 1/6 6/-:' „ Next 500 . 4/6 ' 2/6/6 „ Next 1000 4/6 2/6 7/- „ N^JXt 1000 4/6 U7/6 „ Next 1000 4/6 3/6 8/- „ Next 1000 4/6 4/8/6 „ Next 1000 4/6 4/6 9/- „ Next 12,000 4/6 ->/- 9/6 „ Next 10,000 4/6 5/6 10/- „

Taxable British Rate N.Z. Income (average) Rate £ i 500' 3/6 1/1 1000 4/- 1/6 1500 4/2 1/11 2000 4/3 2/4 2500 4/74 2/9 3000 4/11 3/2 4000 5/5§ 4/5000 4 5/10i 4/10 6000 6/24 5/8 7000 0/64 0/1 8000 6/104 6/6 9000 . 7/11 6/11 10,000 7/4J 7/4 20,000 8/5T 7/4 30,000 8/11* 7/4 40,000 9/4J 7/4 50,000 9/64 7/4 New Zealand Is not much Interested