ISSUE OF WAR LOANS FREE OF INCOME TAX.

Hokitika Guardian, 28 November 1918, Page 1

ISSUE OF WAR LOANS FREE OF INCOME TAX.

(Prom tlit' Financial Statement.)

As a considerable amount of comment lias been offered by the public and in the Press of the Dominion regarding the wisdom of issuing war loans at 44 por cent, free of income-tax. I will explain to the Committee the reasons which actuated the determining of this (|uestiou.

Objection has been raised to the present practice on the ground that persons who now pay the highest rate of income-tax—7s (ill. in the pound—provide for themselves an investment which produces a rate of interest amounting to 71 per cent, by investing in the war loan. This position, however, applies only to ‘2(54 investors, as that is the number of individuals who pay the highest rate of income. A considerable number of these tax-payers are the largest employees of labour.

I, leave out from these calculations the public companies, as it is impossible to estimate the individual interest of the shareholders.

| The average rate of income-tax amounts to .‘3s Id in the pound, and to a person paying the average rate ot tax, an investment free of income tax in a 4.1 per cent, loan would he equivalent to an investment at the rate of To 7s per cent, subject to income tax. There are do,ooo taxpayers who pay the average income-tax or less, not in- . eluding public companies and then* are only 941 persons who pay incometax in' excess of the average, of whom 2(54 pay the highest rate,. as 1 have said.

It will he seen, therefore, that as far as individual taxpayers are concerned there is not a great number who’profit to any extent by investing in a loan at 4) per cent, free of income tax. If wq issued a loan at, say, 'o.J per cent, subject to income-tax, every person who subscribed, whether liable to income-tax or not, would he entitled to the higher rate. If a person who is subject to income-tax at the average rate of ,‘ls Id in the pound, were to invest £IOO in a war loan at 5) per cent, subject to income-tax, lie would pay tax amounting to 17s. in respect of his investment. 'Hie Government would, however. pay him 20s per cent, interest in excess of present rate of 4} per cent. The country would thus lose .‘3s per cent., which would mean a total loss of TOO,OOO annually upon the amount of war loan borrowed in the Dominion up to the present time .This, however, is by no means the full measure of the loss that would result, as many millions of the war loan have bceiisubscribed by persons who are not subject to incometax at all. and the Treasury would therefore have no means of recovering any portion of the additional 1 per cent, from them. It must also he remembered that the present income-tax is a war rate, and may not continue for the full term of the war loans, and the investment may not prove in future years such a profitable one to the comparatively few t persons who pav the highest rate of tax as it appears at the present time. The issue of a loan at a higher rate subject to income-tax would not, therefore, prove an advantage from an economical point of view, hut, oit the contrary, it would prove a considerable disadvantage. Another argument used against the present practice is that we shall be largely reducing our income-tax revenue for a considerable number of years ahead. This argument- does not seem to be sound, because we are at the time saving interest by issuing the loans at a low rate.

There is again a very strong departmental difficulty in regard to the taxation of loan interest in cases where the .subscribers purchase bearer bonds. Ronds pass on delivery, and it would lie impossible for the Treasury or the Commissioner of Taxes to trace them. There would thus he no check on income returns of owners. The conscientious taxpayer would include his interest, and the taxpayer who.desired to evade payment could with perfect safety omit the interest on hearer bonds from his in-come-tax returns.

On the other hand, investors in inscribed stock can always be traced, as the transfers of this stock are registered in the Treasury, and the stock docs not pass on delivery. The tax could therefore he enforced against holders of inscribed stock, but not against holders of bearer bonds, and the incidence would therefore he inequitable. It cannot be questioned by the veriest novice in finance that if I had authorized loans, even at the rate of 5] per cent., with income-tax the cost of money to ail classes of the community requiring to borrow money would have gone up considerably, and the annual loss to those using borrowed money, and indirectly to the country would have been very great. By the course followed the rate of interest for money has been kept down throughout the war period, and money required in New Zealand to-day can he .obtained at a much lower rate than is the case in most other countries.

There, can he no question that the free-of-ineome-tax- condition proved a very pji’ont incentive to investors, and lias greatly contributed to success ot our war loans. T trust, however, that it will not now he necessary to raise very much more money in the Dominion. Great Britain, Australia, the United States of America, and Canada have all found it necessary to raise a large portion of their war loans free of income-tax. The last Canadian aat loan of £100,000.000 was raised at 5J per cent, interest free of income-tax. It should be recognized there must ho some good reason for this. In our own case we required money of an unprecedented account, and it was necessary to hold out inducements in order to obtain such huge sums. Many of those subscribing found it necessary to borrow money themselves at not less than 51 per cent, interest, and I am of the opinion that the best and safest course has been adopted,

It will not, in my opinion, he possible for the public of the Dominion to readily'absorb the large amount of war loan securities in New Zealand, and when conditions again return to the normal after the war 1 anticipate that the Imperial Government will not raise any objection to tlie quotation of our war securities- on the London Stock Exchange. lam of opinion that all of our war securities should hear the same rate, and ho issued under the same conditions as regards freedom irom New Zealand income tax. and 1 do not therefore propose- to alter the conditions wiien the next loan is .offered.