The Limitation of Dividends and Taxation of War Profits

«The Economist», 25 novembre 1916, p. 1000

Turin, November 15

I have already describe the legislation for the limitation of dividends (decrees of February 7 and September 3, 1916). Since I wrote the matter has become somewhat involved by new issues. A section of the Press initiated a compaign against the “war profiteers”, proposing that the extraordinary reserve of war profits should be wholly confiscated by taxation at 100 per cent. The decree of February 7^th stated that the limitation of dividends was imposed in the interest of joint stock and other companies to ensure for them the financial means for the after-war crisis. The Socialist papers urged that no one should grow richer by the war, and that, as all excess profits were made at the expense of the State, they should revert to the State. The campaign was highly disturbing, as all companies which had made profits which they could not distribute to shareholders were left in the dark about the future. They could not say whether the reserves should be in cash or invested in buildings, machinery, structures, and implements for the production of munitions of war. Some directorates increased the share capital, and without distributing a dividend in cash gave to the shareholders a bonus in fully paid shares. Against this entirely legitimate proceeding, by which the company retained the profits and could invest the same in the interest of the production was raised a great outcry, as the distribution of a share bonus was considered equivalent to the distribution of a cash dividend. The industrial world was frightened, and expected new legislative regulations. Two new decrees were published today to regulate the matter. Firstly, the taxation of the war profits was raised. The rates of the taxation are at present as follows:

In addition, the income-tax was raised to 16 per cent, on the whole profits; so that on the first section the taxation is raised to 26 per cent, of the war profits. After paying the war profits tax the profits can be distributed to shareholders, in accordance with the decree of February 7^th, only up to 8 per cent, of the paid capital (or the mean of the best peace dividends) for the old companies, and up to 10 per cent, of the paid capital for the new companies, viz., companies born after the war. A third part will be compulsorily invested in public funds (Italian Rentes, war loans, Treasury bonds, and Exchequer bills). Two-thirds will be left to the discretion of the directorates. The directors may put the two-thirds to special reserve, and in that case they may invest the same as they please in public and private stocks, buildings, machinery, goods in stock, &c. The only limitation is that they cannot distribute the same. They can also increase the paid capital of the company, distributing to shareholders a corresponding bonus in wholly paid shares. They cannot, however, convert the two-thirds of reserved profits in new paid capital if they do not prove, to the satisfaction of the civil tribunal (the local judicial court), that they have invested the corresponding sum in the improvement of their industrial enterprises (new machinery, new buildings, or amplification of existing buildings). Up to the end of the war, however, only the holdings corresponding to sums effectively paid by shareholders can obtain dividends up to 8 or 10 per cent, as above said. The bonus shares will remain without dividends. All these regulations and all limitation of dividends will cease at the end of the year following the year in which the peace is made. The previous decrees did not put a term to the dividends limitation. Perhaps the fixing of the date at which all limitation will cease will be greeted by companies with most satisfaction. It is well to prevent the dissipation of profits; but an indefinite limitation threatened stagnation in the industrial world.