8.—5.

56

R. FINCH.

Trade and industry have grown beyond the ability of individual capitalists to deal with efficiently." For years past —and this still obtains to-day, in spite of the taxation being levied on companies as separate entities it has been the almost universal practice in New Zealand that when the individual has developed his business to any great extent he converts it into a company, either private or public. This custom, largely accounts for the, Commissioner's statement that 94 per cent, of all capital employed in trade is in the form of companies and only 6 per cent, in private; hands. In the face of the forecast contained in this paragraph, new companies are being formed daily in New Zealand, and continue to be registered in hundreels annually; anel I have yet to hear of any company that has ceased to progress solely from the effect of income-taxation and not from some defect in its internal organization or management. It was quite obvious that the reason why the large companies appeared to be> badly hit by income-taxation when the slump came was solely clue to the fact that many of them were either overlooking or ignoring the fact that as soon as profits are, made a definite liability is immediately created to the amount of the: State's share of that profit. The;y were carrying on the policy of letting the subsequent year's profit pay the tax that had actually become: a liability during the previous year ; consequently when they maele losses they had to use up their so-called reserves to pay the tax, when the actual position was that they had previously over-distributed profits, or, rather, that they had distributed amounts which were properly not available for distribution. Now, this result is not the effect of a faulty incidence of taxation, but is due merely to lack of ordinary foresight on the part of the management. Clause: 38 (h) : I think the argument advanced in subclause (h) that the taxation system is giving an unfair advantage to individuals over companies, when such are in competition, cannot be treated seriously. When 94 per cent, of all capital engaged in traele is in the form of companies, and of the remaining 6 per cent, the greater portion must be made up of the small trader, who, for all practical purposes, cannot be regarded as a competitor, surely the 94 per cent, can effectively eleal with the small opposition. The statement is also maele that the produce companies must cease to lend to farmers. The statement is not borne out by facts. I have here the, figures of a well-known company which show the following totals of book debts and bills receivable : March, 1921, £1,288,000 ; March, 1922, £1,204,000 ; March, 1923, £1,303,000. Does this go to show that the company is ceasing to lend to farmers ? Clause 38 (i) :" If the present specially heavy tax is continued on investors in companies the result will be that these investors must get a return from their company investments at least equal to that which they could get in other directions, otherwise they will not invest, and will attempt to withdraw that which they have invested. If, however, a general graduated tax were placed on the incomes of all individuals, no matter from what source derived, it would tend to stay whore it was put, for the reason that no change of investment would enable its avoidance. It is clear, however, that one country cannot tax investors for a lengthy period at a higher rate than that charged by another country within easy reach and equally desirable to live in or invest in." If these arguments were sound any change in the incidence of our taxation would have the effect, as shown by my comments on clause (c), that the bulk of our taxpayers wemld immediately migrate to Australia. Clause 38 (/<;) : " Take the case of a wealthy man whose taxable income is £10,000 a year. He pays £4,400 a year income-tax, but decides that he must avoid this, and accordingly calls in half his investments and buys tax-free war bonds. At the present market price these bonds will return him over 5 per cent, net, clear of tax; but in addition to that he has changed his taxable income from £10,000 a year to £5,000 a year, and his taxation rate from Bs. 9d. in the pound to ss. 9d. in the pound, so that his change erf investment not only brings him over 5 per cent, on the best security the, country has to offer, but saves him £750 tax on his remaining £5,000 of income, which is equal to another § per cent, interest on his war bonds, making his net return on these equal to 5| per cent." This first case given deals with a matter quite apart from the question of company-taxatiem, and depends wholly on the question as to whether the'issue of tax-free debentures was justified or not. Then, further on the subclause reads : " The same effect, but in a lesser degree, takes place if tho same man can change half his investments to local-body debentures carrying 2s. 6d. tax to company debentures carrying 3s. tax, or to shares in small companies carrying a moderate rate, of tax. The result is that men of large means are: gradually transferring their capital to those investments where there: is little or no spread between the small anel the wealthy." As regards the taxation on company and municipal debentures, this weakness has been to some extent adjusted by the Finance Act, 1923, section 6. Clause: 38 (I) attempts to illustrate: the e:ffect of the present system of taxing companies, and there is not the slightest doubt that some of the, statements wore, and still are contrary to fact. For example : " With income-tax standing at Bs. 9-|el. in the pound, it means that in order to get the pre-war "net rate of interest these companies would have: to charge, from II per cent, to 12 per cent, for loans —rates which farmers cannot possibly pay. Consequently no farmer can get a new advance from any such concern at the: present time. The companies as they collect the advances must therefore utilize the money for other purposes, and the farmer has to do without the finance." Now, will any of these companies admit that they have charged their farming customers a regular rate of 11 or 12 per cent, interest on their advances ? Then, again, the figures I have quoted above— 38 (h) —go to show that advances are not being steadily withdrawn. I elo not propose to deal with the minority report except to state: that, with the exception of one: or two small points, I can absolutely endorse what it says, anel in my opinion the logic; of the arguments it contains has not been anel cannot be effectively replied to. In some respects lam prepared to go even further, and will read a letter which I wrote in June of 1921 and which appeared in the Otago Daily Times of Ist July, 1921, when this question was first being freely discussed. I wrote as follows :— " Speaking in general terms, there arc only two classes of shareholders—(a) those who have taken up shares when such are issued by the company; (b) those' who have- purchased shares on the .open market. " I. To deal with the small shareholder in class (t>) : He has purchased share's presumably at the market price, and this price is actually governed by the amounts paid as dividends by the company,