R. FINCH.]

57

8.—5.

and these dividends are distributions of net profits after- the company has paid income-tax. The examination e>f a list erf share-prices issued by a stock exchange will bear out this statement. Is this shareholder entitled to a, refund of tax, or is it not rather an attempt on his part to obtain more than that to which he is entitled ? "2. Turning now to the: small shareholder in eiass (a) (original shareholders) anel this argument also applies to the' shareholder in class (b) —he has recognizee! that union is strength, and so he; has taken up share's with the idea of deriving benefit from combining his small sum with other amounts in order that he may obtain a, higher return from his money than he- woulel receive' from an ordinary small safe: investment, The purchase of shares being a speculation, he knows the' risk he runs ; he; knows that the company may fail, and he would then lose the whole of his venture ; and he knows that, companies ate legally, in every way, separate- entities and have been taxed as such for many years past. As he undoubtedly receives the benefits from his share' in the; ' union,' so also must hi' accept the disadvantage's. " For the reasons riven above', the writer contends that any amendment to the' system of taxing companies as separate entities is not equitable, the more so because any decrease in revenue from this source will probably have to be made up by either payers of income-tax whei should not justly be called on for such extra contributions, "A glance at the official figures of new companies registered will give sufficient answer to the argument that the incidence of taxation which has been adhered to for years past is having a restricting influence on this form of business control." Those statements dealing with a, question of fundamental principles are equally true to-day as they were when written. I now propose to deal with some of the effects that would arise in practice if the: incidence of taxation were changed. Take the case: erf a company having a paid-up capital erf £550,000, made up of 300,000 ordinary shares of £1 each and 250,000 preference shares of £1 e-ach, both classes erf shares being taken up under the existing law. Let us assume that this company makes a profit of £48,000 for the year ending 31st March, 1923. Under the; present incidence this amount could be allocates! as follows : — £ Amount of carry-forward considered safe for distribution .. .. 4,750. Profit .. .. .. .. .. .. .. .. 48,000 ' Total .. .. .. .. .. £52,750 £ Income-tax, 7s. 4d. in the pound . . .. 18,000 Ordinary shares : Dividend .. .. .. 21,000 — 7 per cent, tax-free. Preference shares : Dividend .. ... .. 13,750 = sJper cent, tax-free. Total .. .. .. £52,750 We will now assume that the incidence of taxation is altered according to the ideas of the authors of tin; majority report. The preference shareholelers will then receive their £13,750 subject to taxation instead of tax-free, while the ordinary shareholders will receive £39,000 that is, over 13 per cent. — also, erf course, subject to taxation. This result woulel, 1 have no eloubt, elelight the ordinary shareholders ; but would the preference shareholder be equally pleased ? His rate of income-tax woulel be materially increaseel on account of the loss to the public revenues, as I have previously explained, and in addition the rate of tax on the whole, of his income, quite- apart from these dividends, woulel alsei be increased, because their inclusion woulel affect the graduation of his income-tax. The wide differences of effect en the; various classes of shareholelers in companies is a point that has not been sufficiently stressed anel gone into. Take the- e:ase: of a man with an income of £600 per annum who wishes to invest £5,400 in the company I have; mentioned. If he take's up sf-per-cent. preference shares he- will then pay, according to the present law, £15 income-tax em his wheile income (£900), anel the same tax if he takes up I,he- ordinary shares paying 7 per cent, (total income £978). This would give'llllll a iie-t income of either £885 or £963. Now, change: the incidence of taxation in the manner urged, and what is the result ? 1. If he has bought preference shares, his income-tax will then amount to £63 155., leaving him with £83 ss. —that is, an aelditional tax of £48 15s. 2. If he' has bought ordinary shares, his income will then be — £ («.) Ordinary income .. .. .. .. .. .. 600 (6.) 5,400 ordinary shares at IS per cent. .. .. .. 702 Total .. .. .. .. .. £1,302 Less tax . . .. .. .. .. .. .. 114 £1,188 —an additional gain of £225. Where is the equity ? The result would be that the preference, shareholder would be penalized by an additional £48 155., without any additional income, while the ordinary shareholder made an additional clear profit of £225. To my mind, it would be almost, an impossibility to so frame an Act, which must necessarily deal with general principles, to avoid creating serious injustices and inequalities

B—B. 5.