THE ECONOMY & THE CITY
Financial Policy Reviewed-1
By NICHOLAS DAVENPORT
Now that Bank rate has at last come down to 6 per cent without loss of foreign con- fidence—the credit squeeze having been tight- ened up—it is time to make a reappraisal of the Government's financial policy. As any reader of this column will know, I have been critical of some of the Chancellor's measures but I have always recognised that the main theme of his policy has been an excellent one. This was to carry through an overdue reform of the taxa- tion of company profits and private capital which can not only be seen to be fair but can persuade the employees and non-owners of capital to co-operate in a national incomes policy. I welcomed such a policy because it seemed the only way to heal the social split in our society and to make a mixed economy work. But so far it has failed to do so. The split re- mains and the private sector of the mixed economy is in a state of confusion. The entrepreneurs and the capital-owners, sensing the Finance Bill as an unfair attack upon business and savings, are beginning to lose their con- fidence while the workers are rushing ahead with wage claims in a foolish attempt to beat the jump in prices. At the same time the rise in mortgage rates and the credit squeeze are bringing great distress to the middle classes. In fact every class is becoming 'browned off' and disgruntled. Our society seems to me more split than ever before.
The Chancellor deserves our sympathy be- cause he never meant any of these things to happen. His Finance Bill has been given such a vicious twist by the academics and experts of the Inland Revenue that it leaves the im- pression that it is concerned solely with tax avoidance, not with a major tax reform. Of course there were abuses under the old tax system which had to be removed, and it was right and proper to remove them in the Bill, but it was plain silly to try to drive a wedge between the management of a company and its share- holders. Their interests cannot be separated. In the case of the 'close' companies--controlled by a few directors—their interests are identical but the penalties imposed—a full distribution of profits, restrictions on salaries and interest-
charging, etc.—would make the building-up of a new business for eventual resale not worth the hard work and enterprise. Managements are just as keen as shareholders to see their equity shares reach the highest possible market valuation through increasing dividends, because not only does this bring them personal wealth but the cheapest way to expand—new acquisitions being financed by share issues as well as cash. The equity share is the best device for obtaining risk capital in the open capital market which an ex- tremely sophisticated financial system has yet thought up, and it is foolish to attempt to under- mine it. The Finance Bill—by making the deben- ture or loan stock the cheapest way, tax-wise, to obtain company finance—is, of course, tending to raise equity gearing higher and so make equity shares more speculative than ever. Yet it has lessened the dividend rewards of the risk-equity shareholder, especially if his company is engaged in trading overseas or in mining or producing raw materials overseas. Sir Jock Campbell, chairman of Booker Brothers, has expressed 'dismay' at the effects which the Bill may have on British productive investment in the developing countries. It is a Little Englander's Bill and the valuable concession which the Chancellor now proposes for tax relief of the overseas company does not remove that impression. I cannot believe that it was neces- sary to attack the established financial system of the private sector in order to bring about a necessary reform of company taxation or to strike at the enterprise overseas of all companies registered in the UK in order to improve the capital side of the balance of payments.
The capital gains tax is another red herring. I have never thought this to be the right way to tax capital and I am glad to see that Mr. Harold Lever, MP, a member of the Labour party who has both wealth and great financial expertise, agrees with me. In an article in the Observer he pointed out that it is not strictly a capital tax. If a millionaire improves his capital position after April 6 he still does not become liable for tax on the increment. He incurs tax only if he realises his extra wealth, but pre- cisely because he is very wealthy it will be easy for him not to do so. The capital gains tax will therefore fall mainly on the less affluent who have obligations to meet and not enough ready cash on hand.
As Mr. Lever says, the capital gains tax will become, in effect, a tax on investment switch- ing. This is deplorable when it is applied, as it will be, to the switching of life funds, invest- ment trusts and unit trusts. Then it becomes a tax on the efficient management of a fund of savings. These life and trust funds are de- signed to mobilise the savings of the people for the national investment, but they will become far less attractive as a depository for savings now that there is tax on portfolio investment switching. The fact that the holders of life policies will not have to pay a gains tax on their 'with-profits' policies and that holders of investment trusts and unit trusts will receive a complicated certificate from the management of the net amount of capital gains tax paid, so that they do not have to pay twice, does not alter the fact that the capital gains tax is a tax which by discouraging switching will tend to lower the quality and profit of all portfolio in- vestment. That again strikes against the estab- lished financial system by which public savings are channelled into desirable investment for the national good.
Mr. Callaghan is not to be blamed personally for having a capital gains tax instead of a wealth tax or a tax on capital increment. His party was committed to it and his advisers told him that an annual tax on wealth or on capital increment was administratively impracticable because of the potential tax evasion. This ob- session with tax evasion which has been imposed on the Chancellor is likely to spoil his chances of making a success of the greatest tax reform of the century.
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