Italy. The capital levy

«The Economist», 10 aprile 1937, p. 82

Turin, March 25. – Before March 31st the compulsory 5 per cent. redeemable loan must be fully subscribed. The loan was intended to give the Treasury the financial means to colonise Abyssinia. In fact, the loan is a capital levy on the owners of houses and land. Houses include all buildings used for dwelling, industrial, commercial and office purposes. Property belonging to State and public bodies is exempt from the levy; and proprietors possessing land and houses worth less than 10,000 lire are exempt. Proprietors are entitled to deduct from the value of their property debts guaranteed by a mortgage.

A levy equal to 5 per cent. of the capital value of land and houses must be paid in the form of a subscription at par to a 5 per cent. redeemable 25- year loan. For instance, the proprietor of land and houses valued at 2 million lire, on paying 100,000 lire, will receive a redeemable security. He must, however, pay on the same houses and lands a yearly tax of 7,000 lire (0.35 per cent. on the 2 million lire capital value), which tax is to last the 25 years allocated for the redemption of the loan. This is an ingenious plan for splitting the capital levy into its two constituent parts: the payment of the capital and the loss of interest. The man who prefers to keep the 100,000 lire security will, in effect, lose for 25 years the interest thereon and 2,000 lire in addition; but he will get back at the end of the period, or even before, the capital sum. The man who needs the 100,000 lire may sell the subscribed security, losing the difference between par and the current price, and pay the whole 7,000 lire tax yearly for 25 years. If the taxpayer prefers to pay the capital levy, he may compound it at 90 per cent. If the taxpayer has not the money, he can ask his bank for an advance up to 90 per cent. of his levy. The advance must be granted at the same 5 per cent. interest, and must be redeemed by instalments to begin after two years. The duty of subscribing to the loan (not the duty of paying the 25 years’ tax) can also be transferred to the National Insurance Institute or any other authorised insurance company if the taxpayer insures himself for the corresponding capital sum and period.

Pessimists feared that many taxpayers would prefer to ask for advances; in this case the capital levy would have had an inflationary effect. Actually it seems that proprietors prefer to pay with ready money, and only the biggest proprietors ask for advances.

The levy coincides with a period of abundant money. It may be that the abundance is temporary; and industrialists are lamenting their excess of cash, which they would prefer to convert into foreign raw materials. Whatever the cause, abundant money is a fact, which now enables banks to advance the necessary sums to capital levy subscribers without asking for advances from the Bank of Italy.

The Bank of Italy’s shareholders’ annual meeting, which is due in a few days, should throw light on the ways and means by which, notwithstanding the big war expenditure and the 1,500 million lire notes circulating in East Africa, the note issue was restricted to only 15,678 million lire on February 20, 1937, against 15,456 millions on December 31, 1935. In The Economist of March 13th it was asked if the item «gold deposited abroad due to the State, 1,773 million lire», was now included in the gold reserve. It is not. This item is more important from a legal than a practical point of view. The interpretations put upon it by the Treasury and by the Bank of Italy are probably not exactly the same; it is a sort of suspence account, partly connected with final liquidation of the war debt to Great Britain. But the figure was never intended to be added to the gold reserve.

Stock Exchange Optimism – March is rich in shareholders’ meetings. The undertone is mostly optimistic. The Banca Commerciale report states that profits were 18.3 million lire, against half that amount in 1935; that less than half the capital and reserves of the Bank (850 million lire) are now invested in buildings (146 millions) and foreign subsidiaries (252 millions); that deposits and current accounts increased during 1936 by 850 millions to nearly 6,000 million lire; that, against these liabilities, the Bank holds assets, all short-dated, distributed in advances and discounts averaging 100,000 lire per customer; that present profits do not take account of the effects of devaluation and are mainly due to economies in overhead costs, which are estimated at 30 per cent. of the 1932 level. This is more or less the tale of most companies, which are emerging from the crisis with increased efficiency. The bourses were not slow in registering the better feeling of the market. From December 31st to March 22^nd quotations continued to advance:

The most interesting feature is that the advance took place in spite of the Treasury’s strong opposition to speculation booms in variable-dividend securities. The Stock Exchange, it is true, is usually apt to exaggerate the position; but current opinion is that shares ought to be valued 50 or even 100 per cent. more than their present prices. After the monetary alignment, the valuations of assets must be substantially increased. The progressive taxation of dividend in excess of 6 per cent. can for a time keep down the distribution of profits; but in the end increased prices and profits must somehow find their way into the shareholders’ pockets. The same reasons explain why the capital levy on land and houses was received with comparative calm. It is true that land and house rents were fixed for two years from October 5, 1936; but owner are hoping for better days when the legal limits are lifted. In the meantime the market for intending sellers is better. Selling prices of land and houses are higher now, compared with pre- devaluation days, by more than the 5 per cent. levy.