TAXATION.

Hokitika Guardian, 3 October 1924, Page 4

TAXATION.

GRADUATION DEFEATED. HOW IT IS DONE. VII. (Contributed.) Tax in;' companies on the graduated principle, ax if they wore individuals moans taxing all .shareholders in the same class of company at tin? same rate, and taxing tlie .small shareholder in a large company at a higher rate than the large shareholder in small companies. The principle behind the graduated Lax—that the person with a large income can spare for State purposes a larger proportion than can the person with a small income—is, therefore, defeated. It does not affect the position whether the company is passing on the tax or not. In either case it is a Hat rate, and no difference is made in this respect between the large shareholder and the small. They both pay either no tax at. all, or the same rate in the pound. As companies provide approximately two-thirds of the total income tax collected in the Dominion this anomaly, which requires the shareholder receiving Co in dividends to pay al the same rate as the shareholder receiving .Co,ooo, flouts and ignores the whole principle of graduation in what should lie Ks most extensive field.

A RY-WORD AND A REPROACH. Nor is this all ,bv a very long way. Company dividends are not included in income taxpayers’ returns. This has the effect of reducing in many cases the graduated rale taxpayers would have to pay were the whole of their incomes aggregated under ao equitable individual system. Tube the ease of a nerson with g large income holding a number ol shares in a big company. It may he assumed that his total incomes is Co.OOO from till sources L'L’.nOll drawn from shares in companies and CL’.of HI from investments that mahe it taxable in his own hands. The Cl’,."(Hi drawn from companies has paid the same rate ol tax as that paid by the smallest shareholder in the companies, but it is not returnable with his other income and, therefore, does not augment his rale of graduation. lie accounts to the Income r lax Department only for the C'-’dOO he has received from other sources, llis taxation rate on this CL’.otll) is thus reduced from ft- !!ld to fix fid in the pound, which apolies to a taxable income of Co.fKHI. to L’s 2d in the pound, which applies to a taxable income of L'2,000. The large shareholder, it will be seen, not only obtains the same net return from the coinpanv as the small shareholder does, but he also secures the additional advantage ot reducing the tax on his remaining LL’.oOO ot income by Is Sd to tlx od in the pound. With cases of this sort multiplied in the hundreds all over the country it is little wonder that ” graduation " in its application to the Dominion’s system of taxation has become a by-word and a reproach, and that small investors no longer are finding shares in cons panics' attractive investments. COMPANIES AND IN HI V l DUA I.S. It is sometimes argued that if companies were not taxed directly, as they are at present, the large individual trader, paying the highest graduated tax. could not compete with a company composed of small shareholders paying little tax. This contention is based upon either a misconception of the facts or a desire to .mislead. Individual incomes are graduated, lor the purpose of taxation, according to their sv-.e. II it is right that the individual with a large income should pay at a higher rate Ilian toe individual with a small income and this is adluilled oil all sides then it is right that the same print iole should apply to all incomes, irrespective of t lasource from which they are derived. It is the sire of the income. lioL I lie nature ol its -otiree, that should dotermiuo the tote at uhnli d i.- taxed. If the ill'll) ideal with large mean, bald- looney lent out al interest the principle of graduation demands that Inshall have a smaller proportionate net return oil his eanita! than shall the individual of small means who lend- Ids

money at the same rate of interest. If this principle is properly applied to motley lent out at interest, why should it not he applied to money invested in business!" If an individual with say

tlL’tlil.l It It I lends llis money on mortgage at ii per emit, the maximum graduated rale at the present, time will reduce his return to a shade over I per emit, while the individual with LL’llllll lent at li per emit, and with insullicimit other income to bring his total income to the taxable rate, will receive his 0 per cent net without any deduction. If it is right that the individual with L'2iai,(llll) lent on mortgage .should retain only two-thirds, of his income, for his own use, while the individual with 2201)0 retains the whole of his income, why should mil the same principle lie applied to incomes obtained from trader and commerce? Individual graduation would .not mean that the individual could not compete with the company, hut simply that he would have to accept a smaller net return for his money than would the small shareholder ill the company. ■COM I‘KTITION AND TAXATION. This prospect., as every one acquainted with sueli mailers is aware, would not deter the mail ol large means I rum going ioln business. Roth the men with l'L’oo,ooo and the man with .22000 wlimi asked to take shares in a company, will estimate the net return obtainable and compare it with the return they are receiving from their fixed investments. They both will

want, to sf<-n!•(.■ a larger rel urn I'roil! tr;u!i' or industry than they receive from loans with an :im|>!<■ margin of security. If lliey linlli might leol; lor tlu> same net return front I licit- change of investment, it is obvious that under tile present system ol taxation iL would bo more iitt rtietive to the man with L-J.'lf),ooo than to the man with L'20(l(). If, Oil the other hand. they liotll would lmve to pay graduated tux, at the rule proporl ionute to their inettmes, its in the ease of loans on mortgages, the change would he aholit e(|itallv attraetive to liotll. For exnmple, if they hath put their money into a company returning 111 per com. Itefore taxation was deducted, it would

mean a net return of 7 per cent to tin matt with f_’l)(l,(KI(l and a net return ol 10 per cent to the man with if-,000. It may he taken for granted that 7 per cent would he just as attraetive to the man now receiving I per cent., as 10 per c-ent would he to the man now receiving ti per cent, l-nder the present system of tompany taxation, however, the chalice of investment would yield a net return of only i per cent to hoth the I a rye and the small investor. In other words the large investor would have Ins net return increased from I I>er cent to 7 per rent, while tile small investor would have his increased Ironi fi per cent to i per cent. The change. in these circumstances, as already stated, would he more attractive to the la rye investor than to the small one.