§ I pass to another topic. Last year I announced in my Budget speech that the Excess Profits Tax would be finally repealed on 31st December, 1946, but that the National Defence Contribution, which was then rechristened the Profits Tax, would go on. I said then, a year ago, 84 that I had been carefully considering whether, when repealing Excess Profits Tax, I should either increase the Profits Tax or introduce some new form of tax on profits or excess dividends. I added that I should be guided in my decision, this year, by a number of considerations, by the general budgetary and financial situation to a large extent, and, to some extent, by the conduct of private enterprise in the meantime. I cannot pretend to be satisfied with the large increases in distributed profits and the higher dividends which have been paid out in so very many cases in the last 12 months. Too much, in my judgment, has been distributed, and too little ploughed back into the business. These increased dividends are the clearest case, anywhere in our national economy, of an inflationary element.
§ I am very doubtful of the wisdom of affording, in this inflationary atmosphere, to any section of our population, an increase of money income, without a proportionate increase in output or in services rendered in return. I make exception here for increased incomes through tax reductions or improved social services: that is part of public policy. But, generally speaking, we are entitled to think twice, in our present situation, before paying people more money even for the same work. And these increased dividends are a case of paying more money for no work at all—and that is very hard to justify, and, in my view, clearly calls for some fiscal correction. Therefore, I propose to leave the Profits Tax at its present level of 5 per cent., or one shilling in the pound, on undistributed profits which are added to companies' reserves or otherwise re-invested in the business. But I propose to increase the tax to 12½ per cent., or from one shilling to 2s. 6d. in the pound, on distributed profits.
§ The case for this increase of Profits Tax is threefold. In the first place, I must collect, as I indicated last year, some additional revenue to replace, at least in part, the loss of Excess Profits Tax. The second argument I have already given. Distributed profits have been too high and too inflationary. In the third place, this increase of Profits Tax does rough justice within the broad field of investment income. The cheap money policy has reduced, though with great advantage to the nation as a whole, the income of many 85 rentiers or other persons living on redeemable fixed-interest-bearing securities. The equity stockholder has suffered no such disadvantage, and in some cases, may have actually gained through capital reconstructions which have improved his relative position. There has also been, I am told, much switching from gilt-edged into equities in search of yield. An increased Profits Tax, therefore, whatever may be said about it generally, has a special justification in these days of cheap money, in order to do justice as between one section and another of those who receive income from investments.
§ I propose to exclude from the Profits Tax individuals and partnerships which are now liable to pay at the rate of 4 per cent. This is fair, I consider, because the profits of individuals and partnerships are liable to Surtax as well as Income Tax, but Surtax does not fall on the undistributed profits of a company. The cost of the concession is small, since individuals and firms provide less than 5 per cent. of the total yield of the tax.
§ This increase in Profits Tax will give me an additional £36 million in a full year. But, since Profits Tax, like E.P.T. is a deduction for Income Tax, the increase of the Profits Tax means a loss of Income Tax which I put at £16 million at the present rate; so that I get a net gain, from the increased Profits Tax on distributed profits, of £20 million in a full year. The additional yield this year will only be about £1 million net since the tax is Collected a year after the profits are made.
§ These three sets of changes in the Inland Revenue field—the increases in the Legacy and Succession duties, Stamp Duties and Profits Tax—all taken together, will provide a net gain to the Exchequer of £54 million in a full year and £18 million this year.