TAXATION.

Shannon News, 23 September 1924, Page 4

TAXATION.

; ENGiasJB ANti'NEW ZEALAND-'

SYSTEMS RADICALLY 1 "'■'■- DIFFERENT.

(Contributed.) w ' J - It will have" been" gathered from vM't'aWaay had 'been" written on this subject'that there aire two radical differences between the English system of income tax and' the New Zealand .system. In England tOie tax is purelyan individual one, and is levied ac-' cbrdihgly, companies being regarded as the property of their shareholders, 'and each shareholder being responsible, at his rate of graduation, for the taxation of his share of the profits. The only tax levied: on companies is that on their undivided profits. As these profits could not be taxed in the hands of the shareholder*, the charge must'be' levied through the company, ultimately, of course, to be deducted ' from the shareholders' accruing profits. It already has been ex- ' plained tiow' shareh'bldera' dividends are taxed and how' each shareholder according to his graduation as an r individual.' In New' Zealand,' oh the other hand, a company is treated as ah individual and its profits are as if they all b'eloriged to an individual, with' the' exception that the company receives none of the tax ['free allowances concessions exI tended to th e individual. Taxing The Small Man. If an individual were entitled to all these allowances instead of paying at the rate-of, approximately, 9Jd on a taxable income of £4OO he would pay at the rate of Id. An income of £7OO, instead of paying 1/- would pay sid; an income of £IOOO, instead of paying 1/2 would pay' 10id; an income of £1,500; instead of paying'l/6 would pay 1/1, and'so on through all the stages of graduation. But under the present system of company taxation, the shareholder, even if his income is below the exemption of £3OO, does not receive his dividend until it has been reduced by'the amount' of taxation the company has been compelled to pay, in the case of companies of any considerable size 6/10 in the pound. | It has been shown beyond all dispute ] that the company tax is not borne by I a few wealthy people, but by a large number of people' of moderate and I small means who would be taxed very lightly, if taxed' at all, were tae English system in operation here. The other great difference between the English system and the New Zealand system is that while there are no tax free nor lightly taxed investments in Britain, there are & very considerable number of such investments in New Zealand, enabling people of large means to escape their adequate share of taxation.

A First Principle. In Britain iti is considered important that each individual should be taxed upon the whole' of his income from whatever source it may be 1 derived,, and to enable this to be done it it necessary that each individual's" income from all sources should be brought together in one amount and that there should be no difference in the rate of tax upon income derived (from different sources.- In New Zealand there is no method of aggregating the income of an individual for the of determining the rate of income tax he should be charged. Apropos of this the British Royal Commission on Taxation, which sat in 1920 made tn'e following pronouncement:.—

"We are ' satisfied that any attempt to measure taxable capacity by a system that is not based upon the amount of the income—by a system that looks to the way in which an income is earned, to the circumstances in which it is received, to the hours of labour or to the conditions under which the work is performed—would cause great injustice as between one taxpayer and another and would lead to indefensible results."

The excess profits tax and the corporation profits tax were the only exceptions to the principle laid down in this pronouncement. The excess profits tax was found' in practice to be wholly unsatisfactory in its operation and was speedily abolished. The corporation tax lingered a little longer. Originally it'was a tax of 5 per cent on the' net earnings of companies with an exemption of £SOO and with a that the tax should not exceed 10 per cent, of the balance of the profits after deducting fixed interest or dividends payable to debenture-holders and preference shareholders. These rates last year were, reduced by onehalf, that is to 2J per cent, and 5 per cent, respectively, and now the tax has been abolished altogether. Denounced by all Parties.

; Though, the corporation tax after i being denounced in turn practically by all parties;'is now repealed, it may beof interest' to add a f line or two to its' obituary, seeing that with the excess profits tax is constituted the only 'approach in'the English system to the; New Zealand system. Of the local amount collected by way of income tax in Britain something' less than 6 per cent, came; from this tax. Mr. Baldwin, who was then Prime Minister and. Chancellor of the Exchequer, in his Budget speech in the House of Commons on (April 15tih. last year indicated its impending doom. "I feel," he said, "that . I must make some change in the Corporation Profits tax. Everyone admits that this is not a good tax. Many people think it bears' exceptionally heavily on enterprise and industry. I-cannot give it up entirely, but I propose to reduce it by one-half, reducing the rate from 1/to 6d. in the pound in respect of profits arising after June 30th. next." Sir Robert Home, Chancellor of the Exchequer in a speech, reported in the X<ondon "Times" of April Bth. 1923, stated that he strongly advocated the repeal of "that most unjusto-, flable tax, the corporation profits tax." Since then the Labour Party has assumed office in' England and one of

its 1 flrsf important steps in the financial field has been to remove from the Statute B66k' a ! measure which both Liberals and Unionists have ed. It is evident, therefore, that this comparatively slight departure from th e individual system of taxation had offended all parties. , New Zealand's Isolation. ' New Zealand is pursuing an exactly] opposite course in regard to the in- I comej'tax fom the one that has com- j mended itself to, all the, parties in J England and to,all the parties in other British countries. Here in the finan- I cial year 1920-21.-63.il per cent, of I the income tax collected was obtained! from companies, in 1921-22, 72.06 per \ cent, and in 1922-23, 66.13 per/cent., \ an average of 66.85 per cent. The ) figures for the financial year ended 11 March 31 last are not yet available, but they probably will show a some--what smaller:' proportion of the in-i come tax obtained from companies, there having been a reduction in the rate of this tax .and a large increase in the volume* of customs revenue. ; This, however will not affect the | principle at stake, any more than the i comparative insignificance of the corporation profits tax in England les--1 sene'd' the indignation of any of the. parties at" the character of the imBefore proceeding' to show, the j practical effect of this country's perj.sistehce in the company tax, it may ,be well to mention that no othej country in the world is employing a similar system. In Australia there are I two income taxes, the State Tax and j; the Federal Tax. All the States charge companies on a flat rate,, Victoria at ;l/-,in the, pound," Western Australia 1/sid., Tasmania- 1/6, South Australia 2/3,' New South Wales 2/6. Queensland 3/7 —1/6 public utility companies; and'4/9 —3/6 other companies. The dividends in all cases are exempt from State tax in the hands of shareholders. The Federal income tax'is a'flat rate of 1/- in the pound on all'company profits, but State r.ai is deducted from profits. Dividends are exempt from Federal taxation in the hands of the shareholders, unless, if included in their. assessment, they would pay at a higher rate than i"/in the pound. In' that case the tax paid by the company is credited.

This clears the way for an examination of the effects of the New Zealand system. _ ' It GRADUATION. THEORY AND; PRACTICE. IV. The principle embodied in the graduated income tax, that the person with a large income - can spare for »State purposes a larger proportion oi each pound he receives'than can ; the f person with a small income is now almost universally acceptea as a sound basis of taxation. The'Royal Commission ap'pointed' in England in 1920 to consider th'e whole" question of taxation set out this point emphatically. "We do not Ce'el called upon," it said, "to defend with arguments the principle of graduation of income tax. Direct graduation of the tax was .bitterly opposed for many years, but it is now almost universally admitted to be as .sound in principle as it is imperatively : necessary in practice. We, are, therefore, concerned! -not,so much with the principle <as with the means by which that principle can be translate'd into 'practice." /This conclusion applies 'as appropriately to the conditions existing in New Zealand as it does, to 1 the ■conditions existing in Britain/The 'problem here is to translate the principle fairly into practice, so that ■ both the large income and the small income, with all 'the graduations that lie between th'em, shall contribute their fair share to the needs of the State. As already shown in these pages, the Dominion has been seeking this goal by'adifferehYroute from the one pursued by, the Mother Country and it is time for the politicians and the public to consider whether or not it has been the right one. A fewoutstanding facts and figures may be offered as guidance.-. Facts and Figures.

The £8,026j997i0f company incomes left last year, after deducting the taxed exemptions, paid £2,406,728 in income tax, or ah average of almost 6/ iri the pound, while the £35,566,531 of personal, incomes left after deducting the exemptions, paid £1,143,875 in income tax, or an average of 7Sd in the; pound. The company incomes were owned in just the , same measure by individuals as were thepersonal incomes,.and probably by individuals of about the same average wealth. How does a system that 1 gives these results harmonise with the conclusion of the British Royal Commission on income tax, previously quoted, that "the amount of the income and not the manner in which it is earned is'the correct measure of the taxable capacity?" Of course, it is antagonistic to this conclusion in every particular:, It is obvious that if the sound principles '''-'of taaxtipn we sum up in this country in the phrase "Equality of Sacrifice" are to be' maintained there must be some system by which each individual taxpayer's incomes from all sources can be ascertained.* In the absence of such a system it is impossible to fix equitably the rate of taxation each individual should pay. If, instead of fixing the rate Of the' tax in proportion to the individual's income, it is fixed according 1 to the sources from which it is derived, regardless of the amount the individual is receiving from each, then the whole idea embodied in the principle of the graduated tax is defeated. ......... :_■ A Delusion and a Snare.

To show how the principle of graduation has ben distorted in New Zealand it is necessary only to enumerate some of the provisions made for the '■ treatment of different incomes:— (1) Incomes from.large companies,. all charged at one rate, regardless of'

the'' sum' received by each sh&re-' holder. I

(2) Incomes from small companies, charged at another.rate, regardless of the sum received by each shareholder. (3) Incomes from pastoral runs, free of tax, regardless of size. (4) Incomes from war bonds, free of tax, regardless of size.

(5) Incomes from company debentures, taxed at a maximum graduated rate of a little' more than half the maximum graduated rate.charged in public body debentures, taxed at less than half the maximum rate paid in other directions.

There is the further anomaly that incomes received from these sources 1 of income are hot added together for the purpose of fixing a " graduated rate. The incomes from each source are taxed separately. The only in- i comes that are taxed at a graduated I rate in the hands of individuals are those from personal exertion, other than farming, and interest on invest-* inents (other than company dividends) . These incomes, again, are not aggregated for the purposes of taxation with the incomes just enumerated. ! Passing On. ' Another matter of importance in connection with the graduated income tax is that it should be paid directly out of the resources of the person responsible for 1 its payment) and should not be passed on to some, other person. In Britain, where the individual system is followed, ,. as already explained, it is held by the authorities that the tax really does fall upon the persons for whom it is intended and is not passed on to other shoulders. The "London "Economist" last year, after discussing this ques- 1 tion closely presented its conclusions in the following words: K "The incidence of a general income tax on' all classes of income is regarded in economic theory as' being capable of only a very slight shifting or diffusion. That is to say, it actually, falls where it appears to fall, and where it is intended to fall." , There is abundant evidence that the New Zealand system of levying the income tax, with its discrimination between companies and individuals, its tax-free and lightly-taxed sources of income and its ..other anomalies, does not operate with the same precision. There is not space to elaborate the rpoint here and a few lines must suffice. The chairman of the Bank of New Zealand, Sir Cleorge I Elliott, addressing the shareholders' at their annual meeting-last year made piain what was happening in the i sphere of finance. ,"In estimating j cost's," he said, "it must not be fori gotten that income tax is as much I' taJken into, account as are wages or rents, and that; in the end it?is the public that pays the tax."

Antl Again. The same sort of thing i? happening in the sphere of industry and ? commerce., A very apt illustration'of this was provided a little while ago in an analysis of the operations of the four large gas' works in the Dominion; those in'Auckland, Wellington, Christchurch and Dunedin. The works in • Auckland,' Wellington and Christ's church are proprietary concerns and pay the maximum rate of income tax. The works in Dunedin are owned by the municipality and so are exempt from taxation. In 1914, when the income tax for the proprietary concerns stood at 1/4 in- the pound, the net average price of gas was : 5/ per 1,000 feet in the four centres. In 1916 the tax ,was raised at 2/8 in the pound, and the proprietary concerns advanced their price to an average of 5/1 while the municipal works, exempt from taxation, continued to supply at 5/; In 1918 the tax rose to 7-/6 in the pound and the Dunedin price still stood at 5/ while the average price in Auckland, Wellington and Christehurch rose to 5/6 l r 3. The - tax reached its maximum of 8/9 2-5 in 1922, when the''average price* of gas in Auckland, Wellington and i Christchurch was advanced to 8/6 while the Dunedin price "reached 6/8. With the reduction of taxation in 1923, ' the average price of gas 1 supplied ! by the three proprietary works was brought down to 7/11 and with the \ further reduction of taxation in 1924? to 7/8. Here, it will be seen, that the companies of necessity passed ori their taxation to .the consumers, giving the latter relief directly their own pay- • ment:; to the State were lightened. Company taxation as it is kriown in New' Zealand obviously does not fall "where it appears to fall and where; it is intended to fall," and to this extent defeats the whole purpose and intention cf graduation.