THE FINANCE ACT

Dominion, Volume 10, Issue 3143, 28 July 1917, Page 8

THE FINANCE ACT

AN INTERESTING ANALYSIS

EXCESS PROFITS CLAUSE

SOME SUGGESTIONS OFFERED

Tho Financo Act, 1910, was tie subject of a lecture given in tho Accountants' Chambers last evening by Mr. AV. H. Hemingway, F.P.A., F.N.Z.A.A. Mi - . Hemingway made special reference to the excess profits clauses of the Act. Tho Act, ho said, should in part be read with t!Yo Land and Income Tax Act. Ho did not wholly condemn tlio excess profits legislation, but pointed out soino of tho weaknesses in the luejsuro. Tho excess profits provisions might be all right provided at the tamo timo we could get at the big man who lmd made a huge profit, but who paid no oxce»s profits tax, because ho was able to fall back on a big standard income. Despite what now may bo said to tho contrary, tho original desire—if not the original object—was to get at profits made out of the war. As an ideal that was excellent. • No man should bo ablo to mako profit out of bloodshed and suffering. Yet it was soon perooived that, as a subject within tho realms of practical politics, tho taxation of war profits was a practical impossibility under presont conditions. To tax war profits directly had been found to be practically impossible, even in England. How much inoro so in New Zealand, where tho conditions' were quito different, and far less so applicable? In England hugo profits had unquestionably been made directly ont of tho war; for example, by shipping companies, manufacturers of munitions, purveyors of military and naval supplies, etc. The only peop'lo who had perhaps benefited by war conditions in Now Zealand had been the farmers, and even then it was doubtful whether considering tho cost of production and the risk and expense of putting their products on the Home market, thoy should be asked to pay ft direct war tax on their profits. "It is then practically imDOSsible to follow war profits," said Mr. Hemingway, "particularly so in New Zealand. The only method would bo to work on a present selling value.. Evon then the increased cost of production would be reflected in the selling value, so that value itself would not point the way to the defining of 'war profits.' To base a system of taxation on such values would lead to a more unsatisfactory result than tho Excess Profits Act was responsible for. Can we say that the profits made during the last three years by the banks and insurance companies ore profits made out of the war? It is questionable. If, so, could we trace them? We must, therefore, perforco Tecognise the difficulty of discriminating between profits made out of tho war and profits made during the war or in spite of the war.

"As an 'excess profits' measure, the Finance Act of 1916 was undoubtedly a wonderfully clever piece of work. Almost all contingencies were provided for, and it is a matter for congratulation that, in the faoe of so much difficulty, a really workable Act was designed.

"Again a serious weakness of the Act was the power left in the hands of'tho Commissioner both undor this Section XIX and also under the section dealing with the fixing of personal remuneration —Sub-section (d) of XI. Tho position was unfair both to the Commissioner and to the taxpayer. It was an obligation cast upon the former that he should not allow his sympathies to eway him in deciding whether or not certain cases came under Section XIX. The position was even more aggravated when it camo to deciding what personal remuneration to allow. No Judge of tho Supremo Court, no Magistrate,_ and no Justice of the Peace would decide such a matter on the incomplete evidence which alone was available to the Department. A. Commissioner, to bo fully competent equitably to decide all_ such, cases, would require to have an intimate personal knowledge of all trades and professions, as well as of the ability of all taxpayers claimine his consideration. Such a responsibility was too heavy to ask any ono man to carry—it was unreasonable and absurd. It was also bad legislation, for it is a principle of public finance that a Taxing Act shonld,_ so far as humanly possible, stand on its own feet without aid of this character. And the position wds likewise unfair to the taxpayer—a man who could state his case clearly was given an advantage over the man who could, not. I do not say that this obtained, but the position was certainly made possible by tho provisions of the statute. ■ "Tho Act has undoubtedly proved itself a hindrance to nnd undue tax upon industry. :Of courso all . is such toia greater or lesser extent, but the penalty is seldom to tho_ extent of 45 per cent. Farmers aro taking up the attitude that, if tho Government is going to take 45 per cent.'of excess income, then there is not going to bo any excess income. Of course, tho farmer gets 55 per cent., but this is only at the expense of long hours nnd hard work. If an average income with average exertion is possible, then thnt is all he is preparedto wsrk for. Such' an attitude may be deemed unpatriotic, but we must remember that even patriotism will not bear more than a. certain strain especially wh°n that strain is on the pocket. "Those responsible, for taxation measures should bear in, mind that the economic and industrial conditions of countries vary considerably. Different circumstances and different stages of nationnl evolution call for varying degrees of the principles of State interference. Thus it follows that, a young country is in a different position to an old ono so far as regards the practical incidence of taxation. It is for reasons such as those indicated that' a general scheme of Imperial taxation throughout tho British Empire would be impracticable. The practical problem is to r-scertain the least objectionable and most c-uectivo 'system to suit the particular conditions of the people to be taxed. Generally speaking, it is recognised that in any evstem of public finance—and by this term I mean the principles of Stato expenditure of State revenue-taxation should fall as nearly as possible upon income only. Capital, which is the source of futuro wealth, should not bo • discouraged in its growth by taxation. Following this principlo I may say tfcat hitherto the death duties havo praoticnlly been the only important tax, which, under tho British system, has fallen upon capital. Nothing but a serious national crisis justifies taxation so heavy as to absorb tho free income of a country and reduce the sum of its n_ccu initiated wealth—particularly its capital—that portion of wealth utilised to produce further wealth. Wo must -never forgot that taxation is essentially a practical prob-lom-it is not for us to inquire into the ideally best system, but to treat the subject in an empirical wa?. llio pnnciples of taxation may not differ, jet the circumstances of their application may bo vastly dissimilar. A young c °h}ny with a scattered population may find import duties tho most convenient and most economic mode of raising revenue whilst an incomo tax at such an ear y stage of national development may well bo difficult of assessment, and perhaps impossible of application. Later, with a view to fostering local industry, impoit duties and protective tariffs may bo mended."

Mr. • Hemingway followed up his .criticism by making tho following suggestions

(1) An increaso in' tho land tnx by omitting the deduction of mortgages (allowing, as at present, the interest in tho income tax return, but not deducting the interest from the 5 per cent, allowance). (2) Tho adherence to the method of collection «of revenue through incomo tax. (3) Leave tho .£3OO exemption as at present. (4) Abolish tho "exress profits principle altogether nntl substitute an extension of tho graduated rate of incomo tax, which a'fc present stops at 25., to oven 6s. and 7s. in the J!; with a 33 l-3rd per ccnt. super tax.. (5) Grade the tax as nt nreseut provided for under Section 5 of tile "Finance Act on a scale rising to ?s.

(fij Differentiate between income accruing from propertv and incomo 'the result of personal exertion. 'A' hearty voto of thanks was accorded Mr. Hemingway for his interesting lecture.