Avuncular Advice to Mr. Wilson—No. 2
By NICHOLAS DAVENPORT
EVER since Mr. Harold Wilson made his speech at Swansea pledging dis- criminatory taxation of company profits—more on the go-ahead, successful companies which are able to increase their dividends and less on the compla- cent, slothful companies which don't increase divi- dends but sit on retained and idle earnings—the stockbrokers' offices in the City have poured out clever memoranda showing what horrible effects this two-tier tax system would have on market values. This should give you a good idea of what is likely to happen in the company boardrooms when such a dis- criminatory tax is law. The directors will be closeted for days and weeks with their tax ac- countants and lawyers working out how the extra burdens can be avoided and the lowest possible tax wangled. They will be considering whether capital repayments should be made instead of dividends, which would not attract the tax at all, or whether tax-saving convertible loan stocks could be issued with rights of conversion into ordinary shares falling due after five or ten years when the chances of Mr. Wilson being in office are deemed slight or negligible. And so on. The best brains will be focused on tax avoidance. Precious time will be wasted which ought to be given to improving the organisation of the com- pany, the quality of its plant and the promotion of sales abroad. How can the private sector of a mixed economy be expected to produce its best results if the taxes imposed on it hamper and frustrate the most efficient managements and put a twist on the normal pursuit of higher profits?
If Mr. Wilson is seeking the maximum growth possible for the economy, this is definitely not the way to get it. Has he forgotten what his own Socialist allies said when they signed the memo- randum of dissent in the report of the Royal Commission on the Taxation of Profits and In- come in 1955? They were then objecting to an immediate uniform rate of profits tax and they added this rider:
Once capital gains are brought within the scope of taxation, however, the problem takes on an entirely different aspect. For in the long run a private-enterprise economy is likely to function more efficiently if neither higher divi- dend distributions nor the emergence of capital gains is prevented by discriminatory measures. We recommend therefore that after the intro- duction of the capital gains tax the corporation profits tax should be charged at a uniform rate on the whole income of companies.
As Mr. Wilson proposes to stiffen up the present capital gains tax there is no reason why he should not return to the excellent advice which the ex- pert Nicholas Kaldor and his colleagues gave on the Royal Commission.
I must confess that I find this advice mudh more palatable than that whidi Mr. Wilson appears to have been receiving from the new committee he set up,to consider taxation reform. If this leftish' committee is responsible for the Swansea proposals they should be asked to think again—even if it means asking Professor Balogfn to go back and approve Professor Kaldor. It has been assumed that as Mr. Wilson said he wanted to increase company taxation and reduce personal taxation, his discriminatory profits tax
would be worse than that propounded by Mr. Macmillan when he was Chancellor of the Ex- chequer in 1956. 'It is well known,' writes a well-known firm of stockbrokers, 'that the Con- servatives have used the profits tax far more penally than the Socialists. The latter only raised the distributed profits tax differential from 11 per cent to 21 per cent during the Korean war; the Conservatives never reduced it below 20 per cent and [Mr. Macmillan] raised it to 27 per cent in 1956.' This made a total of 30 per cent (dis- tributed 27 per cent and undistributed 3 per cent) until Lord Amory in 1958 merged the two into a flat rate of 10 per cent, which was later raised to 121 per cent and finally 15 per cent.
The stockbrokers I quote hazarded a guess that Mr. Wilson would seek to outdo the Mac- millan inflation by setting the two-tier rates at 30 per cent and 5 per cent respectively, which would increase the total burden of taxation on companies by about 11 per cent. If that turns out to be correct it would give still greater point to my contention—that the best brains in the company world would be devoted to the mini- misation of discriminatory taxation, not to the maximisation of output and exports. Mr. Wilson may protest that his aim is to 'galvanise our sluggish, fitful economy,' but he will galvanise it in the wrong direction. No private-enterprise sec- tor ever became dynamic by progressively taxing the rewards for risk-bearing.
There is a further inconsistency in Mr. Wil- son's approach to company taxation. He wants to encourage one company and discourage another. He desires in particular to favour the savers of imports, the promoters of exports and the introducers of automation and other labour- saving techniques. But apart from the special provisions for the scheduled territories, the in- vestment allowances are entirely non-discrimina- tory. I have long contended that the reason why this country has not matched the growth rates of other countries is because we have ignored the quality and concentrated on the quantity of industrial investment. A lot of investment has been made to secure the very great tax advan- tage of the investment allowance; it has taken the form of extension to or duplication of plant capacity without introducing a single new tech- nique to save labour or reduce costs of operation. The correct policy for Mr. Wilson should have been to discriminate in giving tax favours and to be non-discriminatory in taxing profit.
The complications, the evasions, the waste of energies Which will follow on Mr. Wilson's pro- posals at Swansea have convinced me that the only fair way to tax company profits is to adopt the American system and have a single corpora- tion tax in lieu of the present income tax (38f per cent) and profits tax (15 per cent). Start it at 55 per cent, if you like, in view of the present upsurge in profits. It can be raised further if profits rush upwards or reduced if they start slumping. It can be regulated so that the share of profits in the national income (which has in re- cent years been falling) will not rise at the ex- pense of the wages share. That would obviously make for social justice and encourage company efficiency. I am not putting forward a City view. A corporation tax would probably be opposed as bringing in a form of double taxation—divi- dends received after corporation tax being liable for taxation in the hands of the individual share- holder, as in America—but it would surely be a
blessing to have a form of company taxation which got the best results out of private enter- prise. In the long run that would benefit the twice-taxed private shareholder as well as the tax- gaining and, I hope, share-owning State.