J. B. CONDLLFFE.]

105

8.—5.

considerably lower in the future. I submit that tho pressing financial problem of the moment is not so much the reduction of taxation as the: control of public expenditure. Payers of income-tax appearing before this Commission can clearly make a good case for reduction, but reduction of direct taxation at the present time is likely to prove embarrassing in the near future, and the: temptation will then be strong to retrieve the financial situation by increasing indirect faxes such as the Customs duties. Such an extension woulel be popular with certain industrial groups, and it woulel be an easy and quick means of raising revenue; but it would be inequitable, anel weiulel cause economic loss to the Dominion as a whole. 4. The Incidence of Company-taxation.- As argued above; I do not consider that the financial and economic situation warrants considerable: reductions in taxation at the, present time ; but I have been asked to express an opinion upon the incidence of company-taxation as opposed to the taxatiem of individual incomes. The administrative advantages eif company-taxation are obvious and considerable. More-over, any drastic ami sudden change of the basis of taxation would cause great inconvenience to the Department, probably loss to the revenue, and elisturbance to the business community. A business community adjusts its organization to a tax system and eliscounts its incidence. Sudden change is, therefore, never advisable. At, the same time, the assessment of taxation upon companies as if the:y were persons is in many respects inequitable and anomalous. These anomalies and injustices should be rectified as early as possible, and the general policy shoulel be; to tax ineiivieluals rather than corporations. The assessment of taxatiem upon the income of an individual is a elirect tax that can only under rare circumstances be shifted. But the taxation of profits earned by companies can in many cases be shifted either backward to suppliers or forwarei to consumers, (a.) Where companies have a monopoly, as in the case of illuminating-gas, taxatiem is simply treated as an item in the cost erf production, anel since there is no competition the immediate effect is that it is passed on in higher prices. The ultimate result may be: that higher price* cause, a reduction in demand, which forces the company to bear a part of the- tax. (b.) In the case eif an industry which must be carried, em in a large, way, where the units eif production are necessarily all upon the same level as rpgarels taxation, the greater part or all eif tho tax will be passed em or passeel back according to the relative- bargaining-power of the consumers er the suppliers. This case is illustrated by freezing companies, shipping companies, insurance companies, banks, &c, in New Zealand. There: is keen competition in sonic cases between the various firms, but they all start from the same levei of costs, and are not undercut by firms which have leiwer tax-costs. Where the demand is eiastic, and there are alternative, markets, the services rendered by these firms may be forced into less profitable channels. This seems to have happened with funds for investment. Where there is an understanding bevtween the firms the, passing-on of the: tax is even clearer, whereas in shipping and banking this understanding approaches monopoly, the ease; becomes the same as that considered in (a). The argument is not affected, by the, fact that taxation is levied upon banks according tei an arbitrary scale; nor by the fact that the overcapitalization eif the freezing industry at the- present time results in the- weaker concerns setting a level eif prices which proves uneconomical to the wheile industry. Since the prices of our e:xports are fixed in a competitive world market, there is little- possibility erf such companies passing the, tax forward in higher prices. But they are able to anel do pass the tax backwarel in the: shape' eif higher charge's to the farming oommunity. The high costs of farming production are; due in part to the' operation of this tax. In the same way, the manufacture of goods for export is seriously handicapped by the' manufacturing-costs being loaded with heavier taxation than has to be faced by overseas competitors. The company-tax will always be an insuperable obstacle to the manufacture of wool-tops for export, to take a concrete example. (c.) A more difficult problem is the incidence erf the company-tax where there is competition between large and small companies and private traders. Into this category fall most of the retail (but not the wholesale) distributing firms in such lines as drapery. If competition were acting freely between the various firms, the prices of goods would be fixed by the costs erf the firm that was just able to survive in business, and taxation which caused an increase in the costs of certain firms and not erf others would have to be, borne in large part out of tho profits of theise firms. The general impression of the business man that he always passes on a tax of this description fails to take into account the; reactions of any raising of prices upon the consumer. If the taxed firm attempts to raise, prices, there will be, a tendency for demand to shift to those firms that need not raise prices because they have not the same taxes to pay. The taxed firm may, in the alternative, sce:k means of reducing its costs rather than raising its prices. This case is clearest when a big enterprise such as the, quasi-co-operative companies in New Zealand has to compete through its many departments with many smaller businesses which pay lower rates of tax than it must pay on the departments as a whole. In this case the tax is a heavy burden on profits, anel the effect is discounted or amortized by a fall in the value of its shares. In this ease the tax is paid mainly by the' owners of shares at the time the tax was introduced, but if the burden is very heavy the ultimate effect may be to force the enterprise out of existence. The Lorenz curves produced show that there is a tendency for this effect to be; produced in New Zealand. The advantage given by lower tax rates to the smaller concerns does not necessarily mean that they make larger profits to the full extent of the tax. Their businesses will be extended, and other small enterprises will bo started, so that the, margin of efficiency will be lowered, and a greater proportion of the business will be done by relatively less erfficient fernis of enterprise. Competition, however, does not always act efficiently or promptly. In the case of drapery firms, for example, in the retail trade it is the big well-known firms that sot prices to a large extent. If customers always knew where prices were lowest, could gauge quality as we:ll as price, were independent erf advertisements, and were keen enough to seek the cheapest goods, and if the sellers were in perfectly free, competition with one another, the theoretical result, should be that the tax would lie upon the profits erf the firm. I have indicated cases where it does so lie ; but in a great proportion

14— B. 5.