UNFAIR PENALTY

Evening Post, Volume CXXVII, Issue 118, 22 May 1939, Page 5

UNFAIR PENALTY

"UNEARNED" INCOME

SUPER-TAX

PRIMARY JUSTICE IGNORED

One of the most outstanding anomalies in the present land and income taxation law is the fact that persons who derive so-called "unearned" income ai-e heavily and most unfairly penalised as compared with taxpayers deriving incomes wholly from other sources, says a further statement by the special taxation committee set up by the Associated Chambers of Commerce of New Zealand. •

One of the basic principles of income taxation is that each individual should be required to contribute to the revenue requirements of the State in accordance with his relative ability (from an income standpoint) to do so, but the law at present in force entirely ignores this primary consideration. NO JUSTIFICATION LEFT. At the outset, it is to be noted that when the existing 33J per cent, supertax on unearned incomes was first imposed in 1931, it was specially designed to serve the dual purpose of effecting a reduction in the amount of 'investment incomes, and of providing ithe Government with much-needed I revenue. The argument advanced at the time was that business incomes and salaries generally had been substantially reduced as a result of the then prevailing depression, whereas investment incomes had not experienced any comparable diminution, and the contention of the Government was that it was fully justified in the circumstances in adopting this means of spreading the economic burden. In the following year, however, special attention w^as directed by the Government to investment incomes, a compulsory reduction of 20 per cent, in l-espect of such incomes being imposed by the National Expenditure Adjustment Act of 1932. With the passing of this Act, the. justification for the special 335 per cent, super-tax on unearned incomes no longer existed, but, despite this fact, the impost has been retained, and has resulted in a most unfair and entirely unwarranted disi crimination as between taxpayers | having similar incomes and the same relative taxable capacity.

The 33J per cent, disability imposed on the "unearned" income taxpayer is bad enough in itself, but unfortunately the position is aggravated by the operation of certain provisions of the Income Tax Act which appear to have been designed with the object of. figuratively speaking, turning the knife in the wound. For instance, the Act provides (a) that a special exemption— limited to £50—shall be allowed to a taxpayer in respect of amounts contributed to the support of his widowed mother, but that this exemption shall not apply in the case of a person whose income is wholly "unearned"; (b) that when a person derives both "earned" income and "unearned" income, all special exemptions shall be deducted firstly from his* "earned" income, thus ensuring that as much as possible of the taxable balance shall consist of "unearned" income, and thus be liable to the 33$ per cent, penal impost; (c) that when a person's income is in excess of £2000 and is wholly "unearned," no special exemption is

allowable, in respect of life insurance premiums paid. EXAMPLE 1. £ s. d. A's income is from salary 500 0 0 B's Income is from an annuity 500 0 0 Each supports a wife and widowed mother. Income tax payable by A 17 6 9 Income tax payable by B 29 17 4 EXAMPLE 2. £ s. cl. A's income in from salary 700 0 0 B's Income is from salary (£360) and from an annuity (£340) .. 700 0 0 Each supports a wife and three children Income tax payable by A 27 13 5 Income tax payable by B 36 17 10 EXAMPLE 3. £ s. d. A's income is from salary 2100 0 0 B's income is derived as beneficiary in an estate 2100 0 0 Each supports a wife and three children, and each pays life insurance premiums amounting to £200. Income tax payable by A 206 S 0 Income tax payable by B 346 9 0 GOVERNMENT'S OWN ACKNOWI LEDGMENT. Concerning example (1) it is to be [ noted that both taxpayers have similar incomes and similar obligations as regarts dependants, etc. As regards example (2), notwithstanding that ' the greater portion of " B's income is "earned," he is required to pay the 33 1-3 per cent, super-tax as though the whole of his income were "unearned."

A further most unsatisfactory feature of the discrimination between "unearned" income taxpayers and "earned" income taxpayers is that in relation to the difficulty which arises in many instances in determining whether a taxpayer's income is or is not "earned" income. If an illustration of this particular difficulty were required it is to be found in the fact that the Government itself acknowledges that incomes from "pensions" are properly to be regarded as "earned" income for taxation purposes, whereas a person who has, in effect, provided his own pension in the form of an annuity or by way of income from an investment, is treated as an appropriate subject for the 33 1-3 per cent, super-tax impost.

The paramount consideration in' connection with the whole question as we view the matter, however, is that income tax should be borne by individual taxpayers in proportion to their relative ability to pay, and if two persons each derive a similar amount of income, and have identical obligations in regard to dependants, etc., then the income-tax payable by each should be the same.