As the Minister and the last speaker pointed out, the Bill before us contains little, if anything, that is not necessary to implement the Budget and there is nothing easier to criticise than a Budget. There never was a Budget that satisfied everybody. Perhaps I should have said that there never was a Budget which wholly satisfied anyone, even its author. But I have a great deal of sympathy with the last speaker. He was one of the most loyal members supporting the last Government and one of the most effective speakers for his Party under normal conditions. But I never saw him speaking under more difficult conditions, and whereas normally it is most easy to criticise a Budget, it is extremely difficult to criticise a Budget which is largely based on plans, or on a certain amount of misplanning, of the Government which one previously supported. I do not propose to follow him in detail. He told us a number of things which I did not know before, and I doubt if I know them correctly yet, because I think he was inaccurate in several respects; but as I have not got data and have no staff behind me, I can only say that I was puzzled by several of his remarks. Possibly the Minister will be able to deal with them.
A very large proportion of the people I meet in business and elsewhere are, unlike the Senator, not much interested in Party politics and as far as I can judge the general opinion of these people is that the Minister for Finance faced up to a very difficult situation with courage and imagination, and that, taken as a whole, the Budget received very general approval.
Optimists—there were quite a few of them—hoped that the new Government would repeal all the taxes imposed by their predecessors in the autumn including the extra 6d. on income-tax. Pessimists, seeing the figures published in the newspapers, thought that a large number of new taxes would be inevitable. The majority, who are neither optimists nor pessimists, were relieved to learn that the only new tax was 5d. on petrol. I do not like this increase any more than I imagine the Minister does. I am glad that he has been able to make a substantial concession to agriculture, and I hope that in next year's Budget he will find it possible to reduce this tax. In view of the extensive use of petrol in the distribution of goods I consider that 2/9 a gallon is too high a price.
The Finance Bill provides an opportunity for this House to consider general financial policy. The annual Budget in every country must be taken as a whole and the Government must stand or fall on it. Only minor changes can be made in a Finance Bill, and it has always seemed to me that when discussing the Finance Bill the Seanad should deal with general principles rather than with less important details in the hope that the views expressed may influence the Ministers and bear fruit in the following year.
I propose to deal with one aspect of general financial policy which the Minister has indicated that he has under consideration and which he may possibly deal with next year. I refer to the important though decidedly controversial question of the taxation of trading profits. There has been a good deal of somewhat wild talk on the question of profiteering during the past few years. Some of it has been justified by the facts and much of it has not. Many people believe that the Minister accused trade and industry generally of gross profiteering and that he threatened to reimpose the excess corporation profits tax invented by his predecessors and to make it retrospective in effect if certain things did not happen during 1948. Anyone who read his speech in reply to the debate in the Dáil will know that in fact he said nothing of the kind. He made it perfectly clear that he recognised that the standard set by the old excess corporation profits tax was a fictitious one— that it did not prevent excessive profits in certain cases and that it was an unfair handicap to new enterprises. He made it equally clear that if he decided to introduce a profits tax next year it would not be an excess profits tax but a tax devised to cut deeper into excessive profits.
I would ask members of the House to read the paragraph in the Minister's speech which deals with this matter. The reference is Dáil Reports, Vol. 110, No. 15, col. 2121, and I would ask them to give this as much publicity as possible. I would also ask the Minister to repeat the statement which he then made and hope, if he does so, that the newspapers will report it. None of the leading newspapers published in Dublin reported that portion of his speech and, in my opinion, a great deal of harm was done by this omission. A wrong impression has been created which may act as a deterrent on plans for new development.
A company which did not take excessive profits before the war and therefore had a low standard would hesitate before risking heavy expenditure on new development if it believed that the Government was even considering the reimposition of the excess corporation profits tax in anything like its old form. On more than one occasion I have given my considered opinion that the old excess corporation profits tax was a bad tax—unfair and inequitable in operation, hastily devised in the entirely false hope that it would keep prices down. It never was a genuine tax on profiteering—it encouraged rather than prevented high profits and high costs of production. As the Minister has made it perfectly clear that he does not propose to reintroduce this tax I need not take up the time of the House in giving further reasons why I consider that this tax should never again be reimposed.
The Minister was by no means so clear in his speech as to the means by which he considers that profits should be used in order to reduce prices. I take it that what he really desires is that associations representing industrialists and traders should consult with him and endeavour to co-operate in his efforts to reduce prices. I hope that they will do so fully, frankly and as soon as possible.
If the Minister is of the opinion that companies which have built up reserves should not distribute them but should hold them in order to meet the situation which will be created by falling prices or, alternatively, should use them to purchase new machinery which will reduce production costs—then I entirely agree with him. If, on the other hand, he thinks—as some people say he does—that traders who were allowed to make huge profits during the emergency should now use those profits to sell at or below cost in order to make trading difficult or impossible for other traders—mostly smaller concerns—who did not make excessive profits, then I profoundly disagree with him.
That profiteering took place during the emergency is well known and will not be disputed by anyone. This has resulted in the creation of a general impression that everyone in trade and industry made excessive profits which of course was not the case. To my own certain knowledge there were both manufacturers and traders who kept their prices as low as they believed to be possible without undue risk to their business and who did all they could to resist rising prices. Some people say that such companies were foolish and that they should have made hay while the sun shone. Personally I was brought up to believe that it was morally wrong to make abnormal profits in time of war or of scarcity, and I would strongly object to any suggestion that the profiteers should use their profits in a manner calculated to put the non-profiteers out of trade. People who were allowed to make excessive profits and still have them have an enormous advantage over those who did not make them. How and to what extent they should use that advantage in competition with others is not easy to decide. The circumstances can only be judged fairly by an examination of the accounts in each case. While strongly condemning the taking of excessive profits we should try to encourage those who work on reasonable profit margins and give good value to the public. It must be remembered that our economy is based on private enterprise and that private enterprise cannot be run without profit.
State-owned companies can be run at a loss if the public is willing to foot the bill. Substantial profits may be made by keeping prices low and having a large turnover, or they may—if there is no effective competition—be made by selling at high prices and being content with a small trade. Generally speaking, the first method benefits the community as a whole and the second only benefits a few individuals.
We are all agreed as to the necessity for a reduction in the cost of living. I believe that prices of most commodities will fall, but I do not believe that they will ever reach pre-war level. Supplies of many raw materials have improved and prices in many cases show a downward tendency. In several trades there is now a buyers' instead of a sellers' market. Unfortunately, up to the present, the reductions which have occurred in commodity prices have been to some extent offset by rising expenses and costs of production. Most manufacturers and traders are worried by the increase in costs of production or of distribution over which they have no control. Their prices or their profits are controlled in all essential goods and if there is a sudden fall in prices with a resultant fall in turnover value they may easily show a loss instead of a profit. I do not believe that the average manufacturer or trader in essential goods can possibly make high profits this year. Those who deal in luxuries or other uncontrolled goods or the favoured few who benefit largely from the tourist trade may possibly do so however, and if they do, they should in my opinion bear their fair share of taxation.
To secure a reduction in the cost of living there must not only be substantially increased production, but there must also be a reduction in the costs of production and distribution. The Minister, notwithstanding Senator Hawkins, has set an excellent example by his policy of economy and by his endeavour to reduce taxation by cutting out what he believes to be nonessential expenditure. The ideal thing would be a slow but steady fall in prices and a progressive increase in the real value of money. A sudden fall would cause serious dislocation of trade and consequent unemployment. The profits made by manufacturers and traders are only a part, usually a relatively small part, of the total price which the public has to pay for its goods. There is in my opinion a grave danger that over-emphasis on the evil of profiteering may defeat its own object and may lead the public generally to believe that if profiteering were stopped there would at once be a substantial fall in prices and that nothing else is necessary.
For this reason I would ask the Minister to tackle the question of the taxation of business profits as soon as possible and to endeavour to devise a basis of taxation which will be fair and equitable—which will encourage new development by keeping taxation as low as possible on normal profits and which will tax heavily only such profits which can properly be described as abnormal or excessive. In my opinion the present position is anything but satisfactory.
Few things can be more injurious to trade than the kind of vague uncertainty that exists with regard to future taxation. Businessmen, who are endeavouring to carry on their trade in an honest manner and who are as genuinely desirous of getting prices down as anyone else, feel that they may be penalised by future taxation because certain persons or firms who have made large profits may fail to do certain things which the Minister wants. These people read the newspapers but few if any of them read Dáil or Seanad reports. They have already had experience of excess corporation profits tax and they know that it allowed some people to get away with big profits while it operated in a harsh manner against others who were only making normal profits. Personally I have confidence in the Minister and am satisfied that he will not allow himself to be stampeded by propaganda into hasty taxation which would be unfair in its operation. My fear is that false or misleading reports of his speeches may create a want of confidence in him or in the Government. As an instance I would point out that the Minister was reported in the newspapers of June 11th as saying that in 1946 all excess profits were handed back. This of course is not correct and is a complete misrepresentation of what he said.
The excess corporation profits tax applied to all profits made up to 31st December, 1946. None of this tax could be claimed as a refund unless losses could be shown or unless the profits could be proved to have been lower than the pre-war standard. The Minister says he knows that further excess profits were made after January 1st, 1947, and that those who made them got away without any taxation except income-tax and corporation profits tax. I presume he is referring to estimates made by the Revenue Commissioners. Most of the accounts for a full year after January 1st, 1947, have not yet been dealt with by the Inspector of Taxes. I presume also that by excess profits made after January 1st, 1947, he means excess profits within the meaning of the excess corporation profits tax which, I submit, is not and never was a fair standard. There are quite a few companies which had a low pre-war standard who have had to pay excess corporation profits tax from 1941 until 1946, partly because they had too low a standard and partly because they could not carry out adequate running repairs to their machinery. In these cases the State has collected 75 per cent. of what are really fictitious profits. It is no use saying to these people that they have been allowed to keep 25 per cent. when they know that the reserves they were able to accumulate were not enough to meet the accumulated liabilities for repairs. I believe the facts to be that in some cases the 25 per cent. of profits over the standard was adequate or more than adequate to provide the necessary reserves, while in other cases it was quite insufficient.
I dealt with this matter in detail in a speech in this House some time ago. I only refer to it now because I want to persuade the Minister that the only way to deal adequately with profiteering is to place taxation on trade profits on a fair and equitable basis. If he does so and then proceeds to tax heavily all companies who are making excessive or unreasonable profits, he will have. I believe, the support not only of the public generally but also of many manufacturers and traders, the majority of whom recognise that the only safe and sound way to build up and maintain a business is to sell as cheaply as possible. Businesses built up on high profits are like houses built upon the sand. When the wind and the storm of competition come they will fall and great will be the fall thereof.
The Minister, very wisely I think, decided not to impose a new profits tax in this year's Budget. He believes that he can get profits down to a reasonable level without it. I hope and believe that he will get the co-operation of the majority of manufacturers and traders, not so much because he wants it as because it is good policy for Irish industry. There will, however, always be some people who believe that they are entitled to make as much profit quickly as circumstances and the law allow them. I therefore urge the Minister to make use of the period between now and the next Budget to have an examination made of the whole question of the taxation of trade profits. Subject to various alterations, mostly of a minor character, taxation is based on the British Income Tax Act of 1918. This is 1948 and conditions both here and elsewhere are very different from what they were in 1918.
My suggestion to the Minister is that he should, as soon as practicable, appoint a small committee to inquire into and report on the present methods of taxing trade and industry. The committee should be empowered to suggest changes in the methods of taxation and in particular to consider how taxation can be devised so as to (a) encourage the retention of profits in business for use in extension or development, and (b) the best method of taxing abnormal or unreasonable profits. The basis of any recommendations of the committee should be to provide a tax yield as near as possible to the present. If the Minister adopted the recommendations he could then decide whether there should be any decrease or increase in the total yield. I suggest that the committee should consist of two or three businessmen with a broad and liberal outlook, two labour representatives who have actually been employed in a responsible capacity in business, and two or three accountants. I do not think that any civil servants should be members of the committee as the Revenue Commissioners would, of course, have to examine and report on any recommendations. If a retired revenue official of experience could be found willing to act on such a committee it would be an advantage. The committee must of course have access to figures necessary to estimate the total yield of any proposed alterations.
I would like to see a scheme examined under which the rate of taxation on normal profits would be somewhat less if the profits are not distributed and an additional tax on profits which are in excess of normal, graduated more or less like surtax. The main difficulty would be to define normal profits as the rate varies in different trades, but I am not convinced that it could not be done. Without some effective and fair method of estimating normal profits there can be no equitable taxation of excessive profits. It has been suggested that the standard or normal rate of profit should be based on the capital employed. If so, there would have to be some satisfactory method of measuring the real capital employed. Any accountant will tell you that the figures for capital which appear on a balance sheet rarely represent with accuracy the real capital. Personally I am inclined to the view that in order to assess what can be regarded as normal or reasonable profits it will be necessary to have regard to the turnover. These are, however, questions which could best be examined by an expert committee and I do not propose to attempt to deal with them now. An amendment was proposed in the Dáil which, it was said, would encourage the retention of profits in business. I could not understand the amendment, but naturally I am sympathetic to the idea and have on more than one occasion made similar suggestions in this House. I formed the opinion, however, that no Minister for Finance in any Government would ever accept such a proposal if it was taken by itself, as it would upset budget calculations.
What I am now suggesting is that a committee should see if it is not possible to provide that there will be an inducement for the retention of normal profits in business and make up the deficiency in the total yield by progressively high taxation on excessive profits. I believe that it is essential to future industrial development and progress in this country that profits should be used for increasing efficiency and keeping methods up to date. This cannot be done if reasonable and fair profits are taxed too highly. Whatever system may be devised for estimating fair or normal profits, it is of prime importance that the law should be revised so as to provide that the profits which are taxed are real profits.
It must be remembered that the profits of a company calculated for the purposes of income-tax, corporation profits tax or excess corporation profits tax are almost always considerably higher than the actual profits of the company. By actual profits I mean the balance of the income over expenditure in any year after provision has been made for annual depreciation and for the amortisation of all money spent on assets which will be used up in the making of profits.
If a company fails to make adequate provision for wasting assets, and pays out annually, whether in profit distribution or in taxation more than it can properly afford to do, it must sooner or later find itself in financial difficulties. No well-managed company could confine its reserves to the amounts allowed for wear and tear for the purposes of income-tax assessment.
I urge the Minister carefully to consider this aspect of the problem. I believe it has an important bearing on the whole question of excessive profits. When taxation is based on a higher figure than the real profits it forces companies to take a higher rate of profit than would otherwise be necessary. When the rate of tax is as high as 75 per cent., as it was under the old excess corporation profits tax, and when this tax is based on a figure higher than the real profits, it is bound to force up prices.
I am convinced that before any equitable method can be found of taxing excessive profits the British 1918 Act will have to be revised and a proper method of ascertaining the real profits will have to be found. I have already advocated at length in this House the abolition of the British system of income-tax and the substitution of two separate taxes, one an income-tax on personal incomes, and the other a tax on trading profits. In view of the circumstances which have arisen since the war I believe that the most urgent matter is that of the taxation of trading profits. The method of taxing personal income also requires amendment but this can be left over for the present.
There is another matter which is closely allied and which will have to be closely examined by the Government. I refer to the system of price and profit control. This is, I believe, operated by the Prices Branch of the Department of Industry and Commerce and is not controlled by the Minister for Finance. It may have been inevitable, but I think it was unfortunate, that one Department controlled prices and profits and another Department dealt with profits taxation.
I have only a limited knowledge of the system, but I think I am correct in stating that profit control was carried out in two ways. One method was to fix the wholesale and retail price for the particular article, and the other was to make a special arrangement with the particular company under which the total profit or total rate of profit was controlled. After an arrangement was made with the company the Minister made an Order which applied to that particular company, and, of course, such Orders were not published.
This system has many disadvantages, one of the greatest being that the public knows little or nothing about it and blames companies for making profits which have been approved by the Government as reasonable. Another objection is that firms in the same industry who are competitors may have different rates of profit fixed for them. The Prices Branch examined the audited accounts for each firm and after consultation fixed the maximum profit or rate of profit for the coming year.
In order to arrive at this profit they had to take into consideration all necessary expenses, provision for depreciation, taxation, etc. Where the pre-war standard was too low to provide what the Prices Branch considered to be a fair profit they had to allow for the estimated excess corporation profits tax which the company would have to pay. You had, therefore, a number of cases in which a company was paying excess corporation profits tax on a profit which the Minister for Industry and Commerce, through his Prices Branch, had decided to be a fair and normal profit. How often this occurred I do not know.
The total figures of excess corporation profits tax collected are available but no figures were ever published to show how much of this tax was paid on profits which had been approved by the Minister for Industry and Commerce. I suggest to the Minister that he should get these figures from his colleague. He will then know how much of the excess corporation profits tax was paid on profits which in the opinion of the Government at that time were excessive profits. I think that in fairness to Irish industry the total figures should be published if they can be obtained.
I do not know whether or not there were any industries whose profits were not controlled, either by having their total profits controlled, or by fixed prices for the goods they produced, but I may say that I do not know of any manufacturers who were not controlled in one way or the other. As far as my experience goes—I admit it was limited —the profits fixed by the Prices Branch were not excessive and were nearly always less than the companies felt they should be allowed to make. I am not criticising the Prices Branch—as far as my knowledge goes its members did their best under difficult circumstances and tried to fix a fair profit. Their task was not an enviable one.
I do not, however, believe in the system of individual profit arrangements and think it should be ended as soon as practicable. The system of fixing profits by means of fixed margins or fixed prices was, probably, better in some respects, but it also had serious drawbacks. A profit margin which may be sufficient for a large company with a big turnover may be quite insufficient for a smaller company. A margin of profits which is just sufficient to allow a country shop to carry on may enable a large shop in a city to make a handsome profit on its trading.
Fixed prices have to be maximum prices based on an average of what is necessary to allow both large and small to continue in business. Fixed margins of profit have had the effect of encouraging the sale of the higher priced article as the higher the cost price the more the profit. They also prevented the system of averaging profits, by which the profit on the lowest-priced articles was low, and the deficiency made up by a higher rate of profit on the more expensive articles.
When prices were rising, turnover in money value increased and a margin which was fair and reasonable when it was fixed soon became too high and had to be altered. Now the position is reversed and, as prices fall, I believe the system of profit margins will break down, as many of the margins fixed will become too low as the turnover in money value falls. This may place traders, especially in the country, in serious difficulties. From what I believe to be reliable information it would appear that this situation has already developed in some trades.
I may be wrong, but I doubt if it is possible to devise a really satisfactory method of price control by the State. While there is scarcity the State must make the attempt but, as soon as supplies are sufficient to meet the demand, it is better to rely on competition to adjust prices, and rely on taxation to deal with excessive profits. This is another reason why I should urge the Minister to appoint a committee on the lines I have suggested. If it were found possible to devise a method of taxation which would not penalise normal or reasonable profits, but would get at excessive profits, it would then, I believe, be possible to abolish the present unsatisfactory methods of price and profits controls, except, perhaps, in cases where there is still acute shortage of supplies.
There are many people who like myself are puzzled and rather bewildered by the large sums collected under excess corporation profits tax. We wonder why it occurred when profits were controlled by the Government. I can think of four possible explanations (a) that the Department of Industry and Commerce fixed profits at too high a rate which, I know, was not the case in many industries, or (b) that the excess corporation profits tax was collected on profits which were not in fact excessive profits.
As I stated, this was true to some extent, or it might be that there was a large number of manufacturers or traders whose profits were not controlled in any way, or it might be that a large proportion of the trade of the country was diverted to a number of very large companies which made profits because of a turnover which was abnormally large, and gained at the expense of smaller concerns. Where profit margins were fixed they had to be at a rate which would allow smaller traders to carry on, and these margins, though low for a small trader, may have yielded substantially increased profits to very big concerns.
The whole problem is one of the most difficult with which the Government will have to deal. The suggestions I have put forward may be briefly summed up as follows: first, that steps be taken to see that the assessment of business profits is on an equitable basis; second, that taxation be arranged so that it will be as low as practicable on reasonable profits and high on excessive profits; third, that profit and prices controls be removed except where acute scarcity still exists.
Where profit controls must still be maintained, the rates should be the same for all companies in any industry instead of individual arrangements. It is my considered opinion that a policy on these lines would contribute substantially to the lowering of both prices and profits by increasing production and thus reviving healthy competition. If it failed in some cases to keep profits at a reasonable level, the State would get its proper share of excessive profits, which could be used to reduce taxation.
While I do not agree with everything the Minister has said in his recent speeches, I have nothing but admiration for the courage, energy and ability which he has shown up to the present and which, I am certain, he will continue to show in the future. I have endeavoured to provide constructive criticism of the kind which ought to be helpful to the Government. The ideas I have expressed are my own, and in putting them forward I do not speak on behalf of anyone else or on behalf of any association of traders or manufacturers. All I ask is that they should be seriously considered and examined.
