The Economy
Investment After October
By NICHOLAS DAVENPORT
AT the moment of writing equity shares on the Stock Exchange are toss- ing about in a fever of indecision induced by our political situation. If it were not for that fateful day in October they would be active and strong— buoyed up by the wonder- ful company reports which mark the present phase of our economic re-expansion. The quinquennial (or so) upset to our security markets is, of course, the price we have to pay for belonging to a free Western democracy. Some cynics in the City may protest that it is too high a price to pay for so mixed a blessing, but it is even worse in America where a new President has to be elected every four years and nearly half the Congress come up for election every two. The milder differences between Democrat and Republican parties may make a change of gov- ernment in America less upsetting for the in- vestor than the prospect of a Socialist successor to the ex-fourteenth Earl of Home but socialism has changed even in conservative Britain and Labour is now committed to a mixed economy with public and private sectors still working to make a profit and with very little extra national- isation to come (steel, water and some more road transport). A Wilson administration could be very like a Kennedy administration—with an academic brains trust at No. 10 similar to the professorial brains trust lately at the White House. The only vital difference would be taxa- tion policy, which under the Democrats is de- signed to please and under Labour to annoy the capitalist-investor.
These questions have lately been discussed at an investment conference organised by the Investor's. Chronicle. The speakers arrived at the foregone conclusion that the equity share mar- kets would do better under a Labour government than they are doing today, but not so well as they would under a Conservative. The speaker who stole the conference was Mr. Jack Diamond, our Labour MP for Gloucester and in business a chartered accountant. So ignorant are City people of Labour policies that the gathering was stunned by Jack's 'revelation' that a Labour government would bring in not a differential profits tax, not a statutory limitation of dividends, but a straight corporation tax combining the existing profits tax and income tax. I advocated such a tax in the articles I wrote in this journal last November on 'the split society' and the change has long been considered at the Treas- ury. It was first recommended in the minority report of the Royal Commission on Taxation of 1955. It has immense advantages if you are trying to convince the workers that they must exercise restraint in wage claims because company profits are subject to 'control' by taxation. But it has awkward complications. It involves double taxation in that individual taxpayers who re- ceive the dividends net of corporation tax would have to pay income tax and surtax on them. And it penalises the pension funds and charities, including the universities and colleges and sub-
standard taxpayers, who have been able hitherto to claim back on the dividends they have received the income tax paid by the company.
It is obvious that a Labour government would have to pass new legislation to help or protect the charities and educational bodies (but not necessarily the pension funds), but I see no reason why it should start the corporation tax at a specially low rate of 30 per cent just because that would bring in—together with the 'double taxa- tion' of dividends—much the same as company income tax and profits tax combined. If City people really believe that a Labour government could institute a new corporation tax on com- panies and then tell the workers that under it their bosses will pay less they will believe any- thing. Income tax at 7s. 9d. and profits tax at 15 per cent take 53+ per cent of company profits and I cannot imagine corporation tax starting at anything less than that figure. If double taxation of dividends brings in so much extra revenue there is a case for reducing income tax, especially on what is absurdly called 'unearned income.' Seeing. that America, the most success- ful exponent of the capitalist system, operates a corporation tax and the double taxation of dividends, I cannot feel very upset by the Labour Party's proposals. What should worry the Stock Exchange more is Mr. Harold Wilson's warning about the investment allowances. These are to be confined to companies' investment expend- itures which help exports or reduce imports or cut labour costs. They are not to be handed out indiscriminately to companies seeking to extend their home trade or manufacture new luxury goods. The amount of dividends now dependent on the tax relief afforded by investment allow- ances has become indecent. Withdrawal of that boost could play havoc with equity share markets.
I am sorry to hear that Jack Diamond told this investment conference that a long-term capital gains tax was an 'absolute must' for the Labour Party. Any capital gains tax which is resented by the body of investors will distort the capital market. And it will defeat its object, for large investors will simply refuse, as they do in America, to realise their profits. Jack Diamond assured the conference that the tax would take account of realised losses. I can tell him that it will take account of more losses than profits, for security holders will merely sit on their profits. Has he not heard of the old invest- ment rule---cut your losses and run your profits? A capital gains tax is an unscientific and out- moded instrument of taxation. If Mr. Wilson is serious about taxing wealth he should tax capital increment, whether realised or not, shown on annual capital returns. A small tax of this nature would not be resented and it would do nothing to disrupt the free capital market which is one of the great assets of the City of London.
It will be an anxious time for equity shares, if Labour is returned in October, waiting until April to see how the axe of taxation falls. I don% think the market is likely to be impressed by Jack Diamond's assurance that Labour stands for faster growth, a stronger £ and a more `stable financial situation.' That smacks too much of Tory promises.
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