Chapter 20 - Taxing the Shareholder

One of our greatest temptations in a democracy is to accept a slogan as if it contained "the truth, the whole truth, and nothing but the truth". If some proposal is superficially attractive, we are not very disposed to examine it closely. It is unhappily true that we do not examine and criticize ideas half so strenuously as we examine and criticize men.

The recently announced intention of the Government to limit company profits to four per cent on shareholders' capital is a splendid example of the kind of superficially attractive proposal which, when examined, proves to be utterly and incurably unsound.

It is supported by two very popular notions: First, that in time of war, four per cent is quite enough for any man to earn on his money. Everybody sympathizes with that. Indeed, most men with money would be quite happy to be sure of earning four per cent on it. Second, the vague notion that most companies are rich and that, as they have a sort of separate existence of their own, you can tax them almost to the limit and no great harm will be done to any ordinary man or woman.

You may go beyond these two ideas and tell me that it comes with ill grace from the capitalist who has so large a stake in the country to complain about losing some of his profit in order to support the war.

Having thus looked at some of the arguments which underlie this proposal, let me now turn to what I believe to be the truth on this problem.

I am not a bit concerned to defend the position of the rich. As I have said to you on previous occasions, they can as a rule look after themselves, and their hardships are in any case relative and not absolute. But I am concerned, and increasingly concerned, with the ordinary middle range of people in this country - those who are not rich and yet, urged on by a spirit of independence, endeavour in spite of every parliamentary discouragement, to provide for their own future. These people are the salt of the earth, and if the moral future of this country is to be saved it must be saved by them. They are the most precious element in our nation, and I shall hope to fight their battles so long as there is anybody to listen to me.

Let me, in order to test the proposal now under examination, take a typical case of a small shareholder in a company. John Jones has worked hard all his life. He has never enjoyed a large income, but on his salary of a few hundreds a year he and his wife have acquired a home. They have brought up a family. They have undergone real sacrifices in order to give the best possible education to that family. They have been good citizens, and have contributed a family of good citizens to their country. Year after year they have put a little by for their old age, because they look forward to an old age in which they will look the whole world in the face and stand on their own feet. As their small funds have accumulated they have invested them - not speculatively, but in solid and successful Australian undertakings conducted by well-established companies.

In the case of John Jones, he has invested in a leading industrial concern which has been paying a dividend of eight per cent for a number of years and whose shares he has from time to time bought, not at a pound each but at market prices ranging from thirty shillings to two pounds a share. This has meant that the funds John Jones has invested for his and his wife's old age return to him, not eight per cent but perhaps, on the average, five per cent, taking into account the price he has paid for the shares. He has, at the time of his retirement from active work, achieved an income from his shares of £200 a year, on which he proposes to spend the evening of his life.

The Government comes along and, in the sacred name of an attractive slogan, tells his company that its dividend must be reduced to four per cent. John Jones's effective dividend is at once reduced to two and a half per cent, and his income from £200 to £125. He and his wife are at once brought to a point where they are given to understand that they might just as well have saved nothing, and drawn an old age pension from the Government.

This is not an uncommon case. If it becomes common, the results will be disastrous to Australia. If we are to retain our virility, our pioneering spirit, for the labours that lie in front of us, we must put a premium on saving and on independence; we must not penalize them.

Now, if you have accepted the view of the soap-box orator that most shareholders are rich men, you may say to me that my example of John Jones is such an unusual one that no conclusions can be founded upon it. My reply to that is that all the records show that the average shareholding of the individual in a company is a small one.

The whole point of the company system, the joint stock system, was that it gave to small investors an opportunity, in association with hundreds or perhaps thousand of other small investors, to have an interest in a big concern.

The whole development of manufacture and of commerce on the grand scale dates from the introduction of the joint stock system. We have much for which to thank it. It is a most important element in the whole of our modern industrial growth. It provides vast numbers of people with employment. And the more successful the company the more continuous will be the employment that people derive from it.

You cannot build increased and happy populations on a foundation of unsuccessful enterprises.

In brief, a very wealthy individual may build up his own business and carry it on successfully. But the vast majority of successful companies are nothing more or less than aggregations of individuals, ninety-five per cent of whom are not wealthy at all, and none of whom would have the opportunity of investing in business except through purchasing company shares.

In result, therefore, we see that, though a company has an independent and separate existence in point of legal theory, it has in substance no existence apart from its shareholders. Its profits are of no moment except in so far as they pass into the hands of shareholders through dividends.

It is of course true that the capital value of shares might be built up by a company accumulating excessive reserves out of profits. But the taxation authorities have for years known the answer to this. Parliament has taxed company profits and war profits in the hands of vast companies themselves, and they have directed particular attention to special forms of taxation upon undistributed profits.

Beyond the setting aside, therefore, of reasonable reserves to meet future rainy days, companies have no inducement not to distribute a large proportion of their profits to their shareholders. So you will see that the best and fairest way of taxing profits is in the hands of the actual human beings who get them. And when we tax human beings in respect of their income, we try to do so on the basis of their ability to pay.

A shareholder with many thousands of shares and an income of some thousands a year may be properly asked to pay an income tax of fifteen shillings or more in the pound. But would it be fair to ask another shareholder with an income of a few hundreds a year to pay a tax of fifteen shillings in the pound? Of course not. One's sense of justice would be revolted at such an idea.

Yet this proposal to cut down dividends of ten per cent or eight per cent or six per cent to four per cent is in reality nothing more or less than a proposal to inflict the same rate of reduction, which is in substance the same rate of tax, upon all shareholders, whether they have many shares or few and whether their incomes are great or small.

There are other aspects of this problem which are, properly considered, of great importance.

When you limit all companies to a profit of four per cent you are setting out to destroy that search for efficiency which leads to one company making eight per cent while a competitor makes only five per cent; and it is at all times damaging to a country to destroy or discourage initiative and efficiency.

When you take steps to prevent a company from building up effective reserves you are imperilling the future of that company, for difficulties are bound to occur in the future, and the company which has reserves is much more likely to weather them than one that has nothing to fall back upon.

It would, for example, be a foolish thing to prevent these hundreds of war industries which have been built up in Australia from establishing reserves adequate to carry them through the period of readjustment when the war ends. And when I say that, I am not primarily concerned with the company as such or with the shareholders as such, but with the capacity of the company to give employment at a time when there will be scores of thousands of ex-service men wanting employment and wanting re-establishment in civil life.

But the main point that I wanted to make to you tonight is that these proposals, superficially attractive as they are, violate the first principles of financial justice, represent an entirely unfair and unbalanced system of taxation, and amount to yet another attack upon those thrifty and independent people who count for so much in the solidity and progress of our country.

31 July, 1942