HOW TO TAX INCOMES

Dominion, Volume 12, Issue 278, 20 August 1919, Page 7

HOW TO TAX INCOMES

THE CANONS OF ADAM SMITH

AN EXPERT'S REVIEW

In regard to taxation the four canons if Adam Smith are tmsurnassablo (writes m "oxpert: correspondent' of the London ."Daily Nows"). As these belong to tho category of things supposed to bo sr.own to nil, and forgotten bv most, lot mo set them forth 'in a slightly abridged fcrm.

1. The subject of every State ought to tcutributo towards the support of the Government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue •vhioh they' respectively enjoy under tho protection of tho State.

2. The tax which each individual is bound to pay ought to be certaiu, aud not arbitrary. Tho time of. payment, tho jmannor of payment, the quantity to be paid, ought all to bo clear and plain to the contributor, and to overy other person. 3. Every tax ought to be levied at tho time, or jn the maimer, in which it is most likely to bo convenient for the contributor to pay it.

! -A. Every tax ought to be so contrived '• as both to.take out and to-keep out of tho pockets of the people as little as possible over aml abovo what it, brings , into tho public-treasury, of the State, i • The point I wish to establish is tho possibility of r,o graduating the income tax as to fulfil the requirements of Adam Smith's canons, And to do this in- a way understandable by tho man in tho street. If I seem to write dogmatically, it is bacause limitation of space prevents me V developing my argument in'detail as I •should like.

Danger of Class. Division, The raising of the limit of exemption from income tax would- be a mistake. It Mould tend to divide classes sharply, end provoke a struggle between them, the upper classes' interest being to seo tnoro and more indirect taxation laid on the lower classes, while tho latter would be tempted to agitato continually for a raising of tho limit of exemption from income tax. Conscious solidarity of interest should be tho aim.

For theso reasons, I suggest the reduction of the limit of exemption to >£100 per annum, and tho merging of super tax and excess profits tax in one graduated income tax. Tho last-mentioned is in reality a specialised income tax, tho enactment of which implied that an impost of 16s. in the £ on income may be just. As it is levied on v profits irrespective of. their derivation from the war, (ho, principle inferred is that it is iust to tax incoines 15s. in the JSI, if of recent creation. In ; that case, it is hardly-tenable to maintain that with incomes of ancient creation a lessor sum than 16s. is just. A, merging, therefore, of the two taxes is the obvious way out of an untenable position, as the new merged tax could be averaged equitably over . incomes both of. recent and ancient ■ derivation.

The feature of the present scheme is a ■ division of income tax payers into four great- .classes: , .

I. Possessors of incomes' of ,£IOO to .-6500. "" 11. Possessors of incomes of .£5Ol to .£IOOO. . : . 111. Possessors of incomes of iilOOl to .£IO,OOO. » IV. Possessors of incomes of ,£IO,OOI to .£70,000. *..•*.

The scheme provides both for graduation by . class, and graduation- within class; and that upon an equitablo and scientific basis. Why Accentuation is Just, With each class, an 'accentuation of taxation is both just and wise,-for a 9 class succeeds class the' proportion of the unit's income that must be 6pent upon necessities falls, and the balance available for comforts and luxuries rises. This js the reason for the accentuated rise in taxation as class succeeds, class. But let. the ( .' tabjes Tor- themselves... CLASS I-POB IS COMES: KHOii £1M" ' ■i- TO ,£SOO. . . . Average rate PercentTax on la £ of age of respec- tax over Total incomo Tax live total in- tax payin £. £100. come, payable, able, d. £6. d.' d. £s. d. ist £100 ... 3 1 6 0, 3 1 5 0 1.25 2nd £100... 6 210 0* 4-} 315 0 1.87 3rd £100,... ! 9 315 0 6 710 0 2.5 4th £100... I/- -6 0 0 "7i 12 10 0 312 6t3i £100.... 1/3 65 0 9 18 15 0 3.75 Example: What la the tax on an income of £-365? .

£ b. d. On Ist £100, at 3 15 0 On 2nd £100, at 6d 2 10 0 On 3rd £100, at 9d 3 15 0 On last £45, at Is 3 5 0 Total 10 15 0 (An averago of just over 7d. and 2.94 of tho total income.) At every stage within the table it will be seen the principle of graduation works to a nicety, and the calculation is so simple,that the man in the street can work it out for himself ivith tho greatest ease. There ia not the incentive existing in the present system to "wangle" the income below a set figure,' for the graduation is devoid of sudden arbitrary jumps. 1 Steeper Steps. Wo now approach Stage II for incomes from itoOO to iCIOOO, wliero the graduation proceeds on the same principle, but in steeper steps. CLASS lI.—INCOMES OF £500 to £1000. The tax progresses successively by £-d. in the £ on every additional £100 of inoomo. Average rate I'ercentTax on iu £ of age of respec-tax over Total income Tax tive total in- tax pay- ' In £. £100. come, payable, able, s. d. .£ a. £ s. 6th £100 1 9 815 lid. 27 10 4.58 7th £100- 2 3 -11 5 1/1.27 38 15 5.53 Bth £100 2 9 13 15 l/3Jd. 52 10 6.56 9th £100 3 3 16 5 1/6 l-3d. £815 7.63 10th £100 3 9 18 15 l/9d. 87 10 8.75 Esamplo: What is tho tax on an incomo of £823? On £800 £52105. od.—an avorage of Is. 3?d. On £23 £3 14s. 9d. at 3/3 d. in the £. Total £-56 <3. 9d.. (An averago of just over 1/4 M.) Incomes up to £10,000: From Stage II we next proceed. to Stage 111 in tho following way. The tax now progresses by successive advances of Is. CLASS lII.—INCOMES OP £1000* TO £10,000. Average rate PercentTax on ia£ of ago of . resiiec- tax over Total income Tax live total in- tnx payin £ £1000. come, .payable, able, s. d. £b. £s.

L.xample.—What is tlio tax on an income of £1500?

»£ 8 d On tho firßt £1000, at Is. 9d 8710 0 On the next £500, at 2s. 9d ; 68 15 0 Total 6~ 0 (Averago tax par £-2s. Id.) What is on an Income of £5760? _ , £ s. d. On £0000, at an average of 3s. 9d. 937 10 0 On £750, at bs M. 2 j i Total £1,190 12 6 (An averago ot just over 4s. l-Jd.) ' For the Very Rich. From Stage 111 we go on to Stage IV, tho advance progressing by Is. 3d. INCOMES OF £10,000 TO £70,000. Average rate PercentTax on m £ of age ef respec- tax over Total incoiue Tax live total in- tax payin £. £10,000 come, payable, able, s. d. £ s. d.- £

Example.—What is the tax en an income of £15,000? £ s. d. On £40.000, at an average of Bs. 16,250 0 0 On £5,000, at Us. 3a 2,81210 0 Total £1W62 10 0 (An average of just over Bs. 6{d.) At incomes of .£70,000 it will be 6een we attain an average tax of ids. in tne s2. Beyond this limit it would be unwise to proceed a« the tendency would

■be for the tax to become more and more unremunerativo. With a -maximum tax of 10s. in tho .5 so the richest member of the community would know that if 'he had the luck or skill to make a sovereign, half of it would belong to himself. Taxation on tho scale ot tho Excess Profits Tax tends to kill the goose that lays tho golden eggj and is responsible for untold waste, and what may be termed legitimate fraud by those 011 whom it is levied. When taxation comes permanently above tho 50 per cent, level, a capital levy is probabiy best, for n reduction of taxation to a moro reasonable figure.

Workttblo on Any Scale, The scliemo should bo understood as embodying a principle; the details of tho tables might l.e very different, after examination of the data bearing on our problem. The increase in tho tax by multiples of threepence is to renderValculatiou easy touioae who are not accustomed to think in deuiitiaiß-ia highly important consideration., The principle ot graduation could, however, be equally wefi embodied if another scale were employed.

in the first group of incomes tho limit might bo made .i.2 a week instead of' 41UD a year, thus raising the limit of exemption to .fclW. Tins trilling modification ought to bo ot' great practical value, and sii.ro an infinity of work to both revenue officials anu the puohc, with little or no resultant loss to • the national revenue.

■ICeturning to my starting-point, the first canon of Adam Smith is fulfilled by Hie .principle of gtuduation aa projected in tho present scheme. The scliemo also accords with requirements of the second canon. The requirements of the third canon could be met in the great majority of cassa by the coileotion of income lax pro rata, as meume is received. For example, tho tax could ba oolleoted from tho wage-earning and salaiy-receiv-ing classes, through the employer when the money is paid over to them weekjjy week, month by month, or quarter. Incidentally, this would save . the Exchequer millions annually in discounts on Treasury bills, as money would flow in as fast or faster than it flowed out. Government would be carried on like a cash store, with resultant eoonomy. An income tax collected through tho employer on the insurance stamp principle wuuld fulfil the iourth oanon.

If relief from taxation bo desirable for the smaller income tux payor, it should lie givon not via the income tax but through a free breakfast table.

*nt £1000 1 9 87 10 1 9 87 10 8.75 2nd £1CC0 2 9 13710 2 3 225 0 11.25 ■ 3rd flOW 3 9 187 10 2 9 412 10 13.75 4th £1001) 4 9 237 10 3 3 660 0 16.25 5th £1000 5 9 237 10 3 9 937 10 18.75 6th £1000 6 9 337 10 4/3d. Utf 0 21.25 7th £1030 7 9 . 387 10 4/9d. 1,662 1 0 23.75 8th £1000 8 9 437 10 5 3 2,100 0 26.25 9th £1000 9 3 487 10 5 9 2,587 10 28.75 10th MOW 10 9 537 10 6 3 3,125 0 31.25

1st .-ei-.COO 6 3 -5.125 6 3 3,125 31.25 ?ml .£!'!,OKI 1 <S 3,7o0 .6 104 6,6/5 34.37 i'rfj .{;!!!,OOO 8 5 4,375 7 6 11,250 37. 5 <t,h ."10,000 10 0 6,000 8 li 16.250 40.62 6Ui £10,000 11 3 5,625 8 9 21,8/5 43.75 6th £10,000 12 6 6.2M 9 4J 28,125 46.87 7th £10,000 13 9 6,075 10 0 35.0C0 50.