WAR FINANCE

Dominion, Volume 9, Issue 2819, 10 July 1916, Page 6

WAR FINANCE

UNFAIRNESS TO NEW BUSINESSES (To Hie Editor.) Sir,—The following is tlio exact position a trader finds himself ill under tho arbitrary definitions of "war profits" or "excess profits" in tile Finance Bill.

In l'Jlo lie started in business (private limited liability company), and during tlio five years lie hits drawn only a small salary, n>»d his profits (which have never exceeded .£IOOO in any year) have been utilised in increasing the capital of the business. After live Years' hard work and self-sacrifice his pfohts for 1918 are .£2IOO, and the increase represents the natural result of building for the future, and 'the amount of profit that could reasonably be expeeted from a business after being five years in existence. I

I'he extra profit is due to an increase in turnover, and has not been debited with an increased salary; but if he were to reckon his salary at JCSOO instead of Ji.loo per year for five, years during tho tirno he has been toiling to build up the business and draw tho difference as a bonus, the extra profits would be JMOO instead of XMOO. However, lie lias balanced his books, and tho £1400 shows as extra profit. Knowing that lie was having a good year, he increased his commitments for year ending MaTcli 31, 1017, aud as his profits aro in stock and l.ook debts, he is working on a bank overdraft, and as ,he sells his stock and realises his book debts, new stock for which he has already contracted is comine_ forward and must be paid for. Now, what is his position as regards taxation ? Profit ; 2^o n So-callcd "standard" income ... 1,000 Excess profit 1,400 Taxation. < ~ . Ji s. d. Is. Id. in j; on .£2,400 160 0 0 .Plus 33 l-3rd p.c 53 6 8 Extra 5 p.c. on "Standard" income ' 50 0 0 45 p.c. on "excess" profit ... 630 0 0 593 G 8 A man who started business a few vears before him, and who worked his profit up to JC2400 during years 1012 or 1913 or 1914, and who makes the same amount in 1916, pays no excess profits tax, and his taxation therefore works out as follows:— • £ s. d. Is. 4d. in the XI on ,£2400 eq. 160 0 0 Plus 33 p.c. eq.. fi3 6 8 Plus 5 p.c. on- .£2,400 eq. 120 0 0 War tax nil. . ' 333 6 8 J! s. d. In other words, the newer lusiness pays :.... 893 G 8 In other words, the older business pays' 333 6 8 Difference 560 0 0 on exactly the same amount of profit for 1916. The man. who started business in 1912 pays just on 275 per cent, more taxation than the man who started a few years tarlier.

Looking further ahead, what are his prospects? The Finance Act is retrospective, and he has already committed himself for goods which are coming forward for twelve months ahead to the full extent of his rcsourees. He has practically no chance of getting further capital into his business, because this year he has to make a cash payment of .£893 Gs. Bd. for 1916 income tax, and if the "excess profits" tax remains in force he must provide for 1917 income tax, which, if he can maintain his past year's business, means a provision of for taxation during this year's trading. In. view of this, can he take the risk of continuing in business? Would it not be more prudent for him to close up and realise his capital and take a salaried position with another firm who started business early enough to get their business worked up in time to escape the excessive, taxation?. 1

The Finance. Act as it stands at pre. sent gives him no redress. Does the Government wish to extract such a large amount of taxation from a small concern which has not made "war" profits? If not, is there not a statesman in the country who can devise means of preventing such gross injustice? Allow nie also to quote another glaring instance of the injustice of the proposed taxation. A man recently started in busiuess with a capital of .£IOOO, and .without drawing salary niado .£IOOO. Ho is assessed as follows:—

Maximum amount allowed under Finance Act by Commissioner as salary .£SOO, £ e. d. Salary .£SOO, exemption .£3OO, taxable at Is. in J! ... 10 0 0 Surtax 3 6 8 5 p.c. extra 10 0 .0 Balance profit .£SOO at Is. in .£ 25 0 0 Surtax S 6 8 5 p.c. on "standard" income^ which is C p.c. on capital of ■ .£IOOO eq. JI6O 3 0 i) "Excess" profit JM-10 at* 45 p.c. 198 0 0 257 13 4 ■ Against this, compare a mail who is not in business on his own account, and has no capital at stake, but lias a salaried position at iiIOOO per annum: ' £ s. d. *£1000, exemption £100.. taxable .£7OO at Is. in ;£ 35 0 0 Surtax ~ 11 13 4 S p.c. on .£7OO 35 0 0 81 13 4 Note— If this man lias JGIOOO available, he can invest it in a company and get 6 per cent. eq. ,£6O on wliich lie pays no income tax, and thus he is another i£6o better off. Why should the man who risks his money by going into business on his own account (or by taking up a farm) pay 217 per cent, more income tax than the salaried man ? The whole trouble occurs through the Government being led away by the cry of "war profits." They say they cannot define "war profits," and they have therefore set up some arbitrary definitions of "excess ■ profits," and such a course cannot but inflict great hardship by not distributing the taxation equitably amongst those best alio to bear it.

A graduated war tax on all incomes overJE3oo'' would be more equitable, and would catch both profit made on account of the war and also profit made by those who were fortunate enough to ha.ve" a good year in spite of. the war, without inflicting any undue hardship such as will be caused by an arbitrary tax of enormous proportions on certain traders compared with others whoso incomes are just as large, or larger, and who, on account of having been in business longer, absolutely escape the alleged "excess" profits tax. As an alternative to protect young businesses, and at the same time give tho Government a large amount of taxation, 1' would suggest that a clause lie inserted in the Finance Bill providing that in the case of companies and businesses started since December 31, 1911, the total tax on "excess profits" shall not exceed a sum equal to 6 per cent, on the average yearly capital. Thus a business employing an average capita! of .£SOOO would pay as a maximum ,£3ofl as "excess profits" tax, and its total taxation would be approximately J3583 (over 11 per cent, on capital).

Surely tins should, bo sufficient, ami while hitting a small business pretty hard, it would put a limit to the taxation of profits obtained under arbitrary definitions. The House needs remember that the "excess profits" tax does not get at the large and old-established capitalist whose business reached its approximate maximum some years since: lie escapes because, although making ■> large.profit, he does liot make an "excess profit"; but, on the other hand, it some safeguard is not put in the Bill limiting the amount that can be taken from young businesses, it means absolute ruin to, concerns I hat are just making headway after a few years' endeavour, during which they have had a fight against the conditions caused by war in the markets of the''world, while at the same time in many instances they have lost (lie services of some of their members and some of their stall's who have gone to the front. "Get the money rcnuired. but get it 311 an equitable basis."—X am. olc.. YOUNG BUSINESS.