New fiscal order
Sir: As always, Christopher Fildes recog- nises the realities of owner-occupied capi- talism (City and Suburban, 9 February) by arguing that companies should pay out all their earnings in full as dividends each year — not a penny more, not a penny less. If they need new capital, that is for the market to provide.
There is another argument to support his theme: the tax effect of full pay-out. Companies nominally pay UK tax at 35 per cent; but when a dividend is paid to gross funds, such as pension funds, they are 'I suppose we should be grateful we've got a job to do.' entitled to reclaim tax at the basic income tax rate of 25 per cent. The effect of all this idiotic fiscal merry-go-round is that a com- pany wholly-owned by gross funds would pay tax at only 13 per cent. (100-35=65, which grosses up to 87). But here comes the conundrum: now that a majority stake in most British companies is held by gross funds, why don't they insist on this route to tax minimisation? Or, since the pension funds' gain is the Chancellor's loss, are they really too frightened of so blatantly re-emphasising the full extent of their fiscal privilege?
Under the Fildes system, we could abol- ish all taxes on companies, requiring only a full pay-out and a 13 per cent withholding tax. All we then have to find is a neutral playing-field for investors to receive their income — but that is another story.
Philip Chappell
22 Frognal Lane, London NW3
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