September 12, 1939

FINANCIAL PROPOSALS PRESENTED BY THE ACTING MINISTER OF FINANCE

LIB

William Lyon Mackenzie King (Prime Minister; Secretary of State for External Affairs; President of the Privy Council)

Liberal

Right Hon. W. L. MACKENZIE KING (Prime Minister) moved:

That Mr. Speaker do now leave the chair for the house to go into committee of ways and means.

Topic:   THE BUDGET
Subtopic:   FINANCIAL PROPOSALS PRESENTED BY THE ACTING MINISTER OF FINANCE
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LIB

James Lorimer Ilsley (Minister of National Revenue)

Liberal

Hon. J. L. ILSLEY (Acting Minister of Finance):

Mr. Speaker, it is a matter of universal regret that since the presentation of the last budget the Hon. Mr. Dunning, the then Minister of Finance, has been obliged to resign by reason of ill health. Sufficient time

The Budget-Mr. Ilsley

has not elapsed since the appointment of his successor for his election to a seat in this house, and it is therefore necessary that the financial proposals of the government should be placed before the house by the holder of another portfolio.

The task before us to-day, like many a task in war, is a difficult and disagreeable one. Budgeting at the best of times is not a pleasant business, as it involves essentially the counting of the cost of what we do. In the situation to-day, when we are entering upon a war of whose nature and duration we can guess only a little, it is difficult even to foresee the order of magnitude of the cost we shall eventually have to incur, and to pay. Therefore, our financial plans can only be provisional and we must be prepared to adapt them to changing circumstances. But it is doubly important under these conditions that we act with care, and seek to avoid financial pitfalls as we would the stratagems of the enemy. We shall not make the mistake which was justifiably made when Canada entered the last war, expecting it to be a short and only moderately expensive one. We know that mechanized warfare on the modern scale is tremendously costly and we can be sure that if the war continues the cost will increase probably more than proportionately. Therefore we must make our plans now with the full realization that we may be in for years of strenuous national effort.

We enter this war at a time when Canadian business has been reviving from the recession which checked our recovery from the great depression. Without attempting to describe economic conditions in detail, I would draw your attention to the fact that conditions have improved substantially in the four months that have elapsed since the last budget. Our western farmers are harvesting a bountiful wheat crop, apparently much better than was expected a month ago when earlier, more roseate prospects were being threatened by weather conditions. Wheat prices have also risen considerably in expectation of increased war demand. Construction activity, not only residential but industrial and commercial as well, has shown a notable increase due in substantial part to the measures enacted by parliament to stimulate it. Our exports both to the United Kingdom and the United States have increased substantially. In spite of the acute political tension in Europe during the last few months, business sentiment in Canada had improved and there was mounting evidence of a new forward-looking attitude. Given peace, we might legitimately have anticipated a brisk recovery during the balance of the fiscal year. Now that war is upon us, its immediate effects may produce hesitation and quietness for a month or two in view of the shock to business fMr. Ilsley.]

confidence and the necessity of making readjustments to war conditions. This period should not last long, and once it has passed we may, I think, expect a more rapid expansion due to the insatiable demands of war.

It has been a matter of special gratification to note the comparatively moderate effect of the immediate shock of war upon our financial markets. It was only natural that certain reactions should take place in the opening days of a major war but there has been no closing of stock exchanges, no public hysteria, no wholesale liquidation, no strain upon our financial institutions. What a contrast with the cataclysmic events of the first two weeks of August, 1914! What has happened is, of course, a strong tribute to the vastly improved position which we enjoy to-day. True, we start with a much higher public debt, but in most other respects our economy is infinitely stronger. We are no longer dependent on vast imports of foreign capital on which the old pre-war boom was based. During and since the war, Canadian savings have increased enormously and we have built up a vast and efficient mechanism for the mobilization of these savings. The strength of our banking system has always been recognized, but the changes which we have made in monetary and banking legislation during the last few years have greatly improved its efficiency and flexibility and its ability to promote the public welfare in war-time as well as in peace-time. In recent years we have increased enormously the diversification of our industries, and in particular the remarkable expansion of our mining and metal industries will be of unique importance in a modern war. In every way we are far better able to undertake immediately the great economic tasks which war has thrust upon us.

Coming to my immediate task, I will endeavour first to review the outlook for our revenues and expenditures for the present fiscal year in the light of the new developments. You will not, I am sure, expect me to deal with these matters in the detail which is usual in an ordinary budget address, and I know that you will be ready to make allowances for the difficulties which inevitably present themselves to anyone who must attempt the role of forecasting the probable course of events during even th6 next few months. No one can predict with any measure of confidence precisely what lies ahead of us, and the estimates which I will give you should be regarded merely as rough approximations based on our view of the probable course of events.

You will recall that in April last the then Minister of Finance forecast total revenues

The Budget-Mr. Ilsley

of $490,000,000 for the present fiscal year. While during the first five months of the year the receipts from certain taxes, particularly income tax, were possibly lower than he had anticipated, I now expect that our present tax structure, without any revision, will probably produce a higher revenue for the year as a whole than he had estimated, because of the expansion of production and incomes which should result within a relatively short time from our own expenditures on war activity and the probable placing of substantial war orders in this country by one or more allied governments. For our present purposes it is now anticipated that, if there were no changes in our tax structure, our total revenues for the year would be of the order of $495,000,000.

On the side of expenditure it is far more difficult to forecast the final result of the year's operations. In the budget of last April the probable total expenditure for the year was estimated at $550,100,000, exclusive of any further losses in respect of wheat and exclusive of certain defence expenditures which are being capitalized under the special sinking fund plan. For many obvious reasons it is still not feasible or advisable to make any estimate of the probable financial results of the wheat marketing program, although it will be clear to everyone that the substantial change which has taken place in wheat prices will, to say the least, greatly ease the burden that might otherwise have had to be borne by the national treasury. Fortunately, also, the splendid wheat crop which is now being harvested in western Canada should reduce to rather modest proportions any expenditures that might otherwise have had to be made under the Prairie Farm Assistance Act. With the certainty of a good wheat crop and as a result of the gradual improvement in business which has already taken place, the appropriations already made by parliament for deficits of government-owned enterprises will, I believe, prove adequate. This leaves for consideration, in respect of the items budgeted for last session, mainly our ordinary and capital expenditures and special expenditures for unemployment relief and for projects designed primarily to alleviate the problem of unemployment.

In considering these expenditures there is one outstanding point which should be stressed, namely that the magnitude of the new burdens thrust upon us makes it imperative that we should do everything that is practicable to conserve our resources and to economize on any expenditures which are not urgently needed in the national interest. It would, of course, be "penny wise, pound foolish" to curtail expenditures so suddenly and so drastically as 87X34-10

to aggravate seriously the unemployment problem before the stimulating effects of war expenditures and foreign purchases in our markets have acquired that momentum which will almost certainly bring our economy ultimately to a position of maximum productivity and full employment. It is therefore necessary to distinguish between a policy that may be appropriate for the next two or three months and what should be done in the later months of this fiscal year or in the later years of war. Parliament can be assured that while our policy will be to conserve our resources to the maximum practicable extent and to secure the maximum possible economies in the appropriations already granted by parliament, that policy will not be carried out in such a way as to aggravate unemployment and retard the prompt expansion of production and national income.

Finally, we must take into account the sum of $100,000,000 which we have asked parliament to appropriate in order to meet the special expenditures necessitated by the existing state of war.

Including this amount, it is now estimated that our total expenditures for the year will aggregate approximately $651,000,000, not including the two items of capitalized defence expenditures and any further losses in the marketing of wheat. If we deduct from this sum the estimate I have given of $495,000,000 for our total revenues for the year, we arrive at an anticipated deficit of $156,000,000, exclusive of the two items just mentioned. In view of the magnitude of that sum and, if the war continues, of the additional sums which we may have to raise in subsequent years as well as the importance of the effects on our economy of the particular policies which may be followed, it is appropriate for me to make some comments on the general problem of war finance before I announce the specific proposals which I have to make.

First of all let me emphasize that however we finance the cost of the war, whether by taxation or by borrowing or by inflation, we cannot escape its real costs. By the real costs I mean the goods and services which have to be sacrificed out of our current production to meet the needs of war. We shall have to devote a vast quantity of materials and the work of many thousands of men to produce the foodstuffs, the equipment and the munitions which are used by those who are drawn out of peace-time occupations to serve the needs of defence. To destroy the menace of Hitlerism, we must be prepared to sacrifice what the use of these materials and the labour of these men would otherwise have

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provided for us in terms of better and more secure living. If we must devote a great deal of our labour to making guns and military supplies, we shall have to do without whatever would have been produced in their place in peace-time.

We can, however, lighten the burden imposed by this real sacrifice if we expand our total employment and production. To the extent that we can put our unemployed men and equipment to work producing what we need for war, we will have to divert less resources away from normal uses. In many cases we may need to use on war work specialized men and equipment which are already employed, but we can cut down the real costs involved in doing so if we can replace them in their normal work by somewhat less skilled labour or less specialized equipment which may now be unemployed. We can reduce the cost further by developing more skilled labour, by better organization and by more effective utilization of all our resources. Conditions of war will not only demand but probably also make possible the full utilization of our man-power and equipment. The urgent demands of ourselves and our allies for supplies of all kinds and the will of a united people to win the war, even at the cost of some regimentation which might not be acceptable to a democratic people in peace-time, will provide that impetus to expansion of production and capital investment which has been lacking in these recent years of uncertainty and fear.

In this connection we recall how rapidly Canadian business responded to the needs of our own and allied governments during the last war. Industrial capacity was rapidly expanded and at the peak one-third of our manufacturing industry was engaged on war orders for other countries. Similarly agriculture and the mining industry received powerful stimuli from the urgent demands of allied governments for foodstuffs, metals and minerals. Our exports increased enormously -from 432 million dollars in 1914 to 1,540 million dollars in 1918. Exports of shells and explosives alone rose from a few million dollars in the first year of war to 390 million dollars in 1917 and during the war period approximately one billion dollars worth of shells and explosives were shipped overseas. The new wealth of resources and capacities which the necessities of the conflict developed in Canada was an important offset to the enormous cost and wastage of the struggle.

Whatever such offsets may be, it is important to emphasize that, as I have already said, the real costs of war must come out of

(Ifx. Ilsley.]

current production, out of the goods and services produced during the war. It is true that some stocks of military supplies may be on hand at the beginning of a war, but their importance is slight for a war of any duration. Borrowing abroad may enable a belligerent country to supplement its current production with an excess of imports but such borrowing is usually difficult in war time and leaves the country with the need of making real payments abroad after the war is ended. Taking it by and large the fact is that the shells that are fired and the other goods and services that are used up in the course of a war must be produced during the period of the war. This being the case, it follows that, and I repeat it again, in real terms, namely, in terms of the loss to the nation of this production, a war is paid for substantially during its duration. Obviously this simple fact has very important implications for any program of war finance.

There may be some who feel that borrowing at home may enable us to shift part of the burden to the next generation. Ill-considered and excessive domestic borrowing, of course, may add .unnecessarily to the burdens of certain members of the present and post-war generations who will find it necessary to pay interest to those of their fellows who may be bondholders. But the war generation does not thereby shift its own real burden on to posterity because borrowing at home does not enable us to borrow from future production the physical goods and services that are used up during a war. Borrowing at home is merely one means of diverting our production into war requirements, a means which is less painful at the time but which ultimately requires a somewhat greater resort to taxation. When we borrow a hundred dollars from one of our citizens and spend it on war supplies, he is thereby prevented from spending that hundred dollars on his own consumption or investing it to enable someone else to spend it on some kind of capital production. In future years we will have to pay him not only the principal but interest as well. Obviously we could accomplish the same diversion by taxing the hundred dollars away from him. Diversion by this method alone, that is to say, by a 100 per cent taxation or pay-as-you-go policy would seem at first sight to represent the ideal policy of war finance; in principle it would appear to be the most logical, the most equitable, the least likely to create disturbances and dislocations. But, in the first place, this takes no account of, the desire, indeed the necessity, of individuals making some savings to provide for a rainy day, and an effort to take so much in taxation that individual savings would be practically wiped out, would

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become so disruptive in character as inevitably to produce disorganization and public discontent. In the second place, realism compels us to admit that a pay-as-you-go policy has to take account, of the psychological reactions to taxation. In other words, we must recognize that when diversion by means of taxation rather than borrowing is carried too far the average citizen begins to feel that there is no use in his working for any additional income and therefore he does not put his best effort into his work with the result that efficiency and production fall off. If we cannot maintain our production at maximum efficiency we may lose the war, and at least the real costs of the war will increase. It is by a reasonable balancing of these various considerations that we have to decide how much to tax and how much to borrow.

We can also divert our resources to war purposes by inflation. We can create additional supplies of money and use them to purchase what we need. In this case, just as in the others, what we take for war purposes someone else must do without. Instead of taking money from the individual citizen in the form of taxes or loans, we put our new money into competition with his old money and take the goods and services away from him by forcing prices up against him. Of course this new supply of money will then go into general circulation and will continue to compete with the former supply. Therefore to continue getting the supplies that we need we must necessarily continue issuing more and more money, thus driving prices up farther and farther. If it is replied that we should control prices rigidly, then, assuming that all prices under such conditions could be effectively controlled-a very optimistic assumption-we would have to prevent the public from spending its money by some other means such as a drastic system of rationing all commodities. In that case the citizen would get paid in money which he could not spend freely. In other words, he has in effect been compelled to make a forced loan to the government on which he receives no interest. It must be realized, therefore, that this inflationary method of financing a war is easily the most unfair and inequitable of all the methods of diverting labour and materials to war-time purposes. It represents merely a thinly disguised scheme of taxation of a most unjust type. It throws a grossly unfair proportion of the burden upon the person of small or medium income, the wage earner, the salaried man and those who have savings deposits, insurance policies or securities of any kind whose value is fixed in money. It represents a complete violation of the principle of taxation in accordance with ability

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to pay. It leaves in its wake a host of troubles such as chronic dislocations between industries, incomes and prices which are most difficult to cure, very serious damage to business and public morale, and high interest rates. If long continued, it can end only in complete collapse. These and other results of drastic inflation can be illustrated from the experience of many countries during the last war.

Canada's record in that war was much better than that of most other countries. But like the other belligerents she met the major portion of the cost of the war out of borrowings and credit expansion. We had no previous experience in financing a major war and in any case the imposition of a weight of taxation sufficient to pay for the whole cost of the war would have been too revolutionary a step to take. Prior to 1914 the dominion government had. relied for its revenues almost exclusively on customs duties and a few excise duties. It had no system of general taxation or established machinery for directly taxing the net incomes, profits and wealth of individuals. The sudden introduc- ' tion of such taxation measures on the scale required would have been too drastic to be either economically or politically practicable. Her own financial program and perhaps more importantly the influence on world prices of the inflationary financing of many other countries resulted in a drastic expansion of bank credit, a rapid rise in prices and a redistribution of the national income. Prices and the cost of living rose more rapidly than wages and interest on old debts. Industrial profits and property incomes increased while the real income of wage-earners and individuals receiving interest payments at fixed rates declined, or rose less rapidly. It was this reduction in the real income of one section of the community and the creation of large surpluses in the hands of other sections willing to lend to the government that in considerable part at least made possible Canada's remarkable record in mobilizing public savings through the various war and victory loan programs. The decline in the relative standard of living suffered by certain groups, the rapid increase in savings and the postponement of needed capital facilities made possible the enormous volume of war loans and represented the sacrifices necessary for the conduct of the war.

No country had the courage to finance the great war solely by resort to taxation and borrowings out of savings. As already indicated, the record of some countries was much better than that of others but all suffered from a world-wide inflationary rise of prices of enormous magnitude. For the last twenty

The Budget-Mr. Ilsley

years the world has been paying the price-a colossal one. Indeed it is perhaps not too much to say that some of the roots of the present war are to be found in the world-wide unsound financing of the last war and the great economic dislocations and continuing burdens of which it was in part the cause. It is to be hoped that in the present war the world may be able to avoid a repetition of that experience.

All this is not to say that a small and carefully regulated amount of credit expansion may not be desirable in the early stages of the war in order to assist the increase of production and employment. It must be small and carefully controlled because its effects which may not appear immediately are cumulative and otherwise might get out of hand. If at the beginning of the war there are unemployed resources, some credit expansion may give an impetus to their prompt utilization. If it is carefully controlled, the expansion of production may prevent any abnormal rise in prices, confidence may be maintained and the initial impetus may be carried on and accelerated by the insistent demand that exists for supplies. However, as soon as the expansion of employment and production gets well under way and certainly before it approaches its limits, further expansion of the supply of money and credit must be stopped if the danger of progressive inflation is to be avoided. With an economy at full production and employment, the only result of expanding money and credit is to raise prices without increasing production. At such a point commences the cumulative spiral of inflation with all its deadly consequences to the economy.

It is with these fundamental considerations in mind that we have decided upon our policy of war finance. Because we believe it is the part of wisdom, we shall follow as far as may be practicable a pay-as-you-go policy. In imposing the new tax burdens which this policy will require we shall be guided by the belief that all our citizens will be ready to bear some share of the cost of the war, but we shall insist on the principle of equality of sacrifice on the basis of ability to pay. We shall not of course be able to meet all war costs by taxation, because, as already indicated, there is a limit to the taxes that can be imposed without producing inefficiency, a lack of enterprise, and serious discontent. As the first necessity is to win the war as quickly as possible and without undue cost, we cannot carry taxes beyond the point where they seriously interfere with production. But we are not prepared to be timid or lighthearted in judging where this point lies, if need arises. What we cannot meet by taxation we shall

finance by means of borrowing from the Canadian public at rates as low as possible. There may be some who expect or fear that interest rates will rise substantially, perhaps a few who are thinking in terms of conditions during the last war. Such a view completely overlooks the vast changes that have taken place. We do not expect that any material change in interest rates from peace-time levels will be necessary to attract a sufficient portion of the large increase in savings which should be produced by the expanding production and incomes under war-time conditions. And we refuse to believe that those of our people who will benefit from the new conditions would seek to take advantage of war necessities to demand any undue increase in the interest rates which we have paid in peace-time.

I have already indicated the basis for distinguishing two major periods in our program-the initial period of expansion and preparation and the main period of full war effort. We commence the initial period immediately, and the paramount need is to get things moving as rapidly as possible in the proper direction. Our own expenditure on defence and preparation will furnish an important stimulus to the expansion of economic activity. There will be two additional sources of stimulus, first, the orders which we expect some of our allies to place in Canada for essential foodstuffs, raw materials and munitions; and secondly, the private capital expenditures which will probably be necessary in order to place our industry on an adequate footing to meet war requirements. These expenditures will probably soon be large enough to bring a rapid expansion of employment and incomes. Out of these enlarged incomes the public will be able to contribute more tax revenues and more savings. During the next few months, while we are starting the process of getting all our available resources into useful employment, the expansion in tax revenues from either existing or new sources may not provide for any very important part of our increased expenditures. We shall have to do some borrowing but the initial operation will probably be of a very short-term character and be designed to promote the immediate expansion of productive activity. It would be unwise and probably impracticable to attempt at an early stage any large borrowing operation designed to draw heavily upon public savings. Only after the initial period of expansion is well under way should we find it necessary to offer a loan for general public subscription in order that savings may be put directly to use.

By the time we have achieved the second stage of full war effort our national income will

The Budget-Mr. Ilsley

have increased so substantially that our existing taxes will yield a much higher revenue than during the last year or two. Not only will there be a greater volume and value of sales but the rise in individual earnings will bring more incomes into the higher taxation brackets and there will be additional business profits subject to tax. Consequently, the increase in dominion revenues should be larger, proportionately, than the increase in the national income. Nevertheless, our special expenditures caused by war conditions will be substantially increased, and while certain expenditures that have caused heavy drains upon the treasury in recent years, such as those for unemployment relief and wheat marketing, may be largely or wholly eliminated, it can never be forgotten that we start the war with a dominion budget heavily unbalanced under peace-time conditions. It is obvious, therefore, that additional taxes should be imposed immediately. I am confident that the Canadian public as a whole will expect this parliament to have sufficient courage to impose upon them such new or additional levies as will demonstrate an immediate and resolute effort to pay our way.

In this spirit we have prepared the program of tax increases which I am now about to recommend to the house. They may be regarded in some quarters as drastic, but I am sure that the Canadian public will accept them as an inevitable incident of the vital struggle in which we are engaged and as essential to avoid greater evils and burdens at a later date. They are comprehensive in their incidence because we believe that no person will desire to escape some additional taxation. They have been carefully studied to make sure that they will be in conformity with our fundamental aim of providing for equality of sacrifice on the basis of ability to pay.

The main feature of this tax program is an excess profits tax of general application. If we are not to impair the incentive to maximum efficiency or retard the prompt utilization of our entire resources and the achievement of full productivity and employment we must be able to hold out to business men the opportunity of making a reasonable profit and also the chance of securing some compensation for exceptional efficiency and willingness to take the risks inherent in industrial enterprise in war-time. But under war-time conditions when important sacrifices are being asked from the humblest citizen and when human lives are at stake, no government can justify the making of profits that are excessive or unreasonable.

It is an extremely difficult matter to devise an excess profits tax which will be fair to all kinds of businesses. No one who has not attempted to draft such a measure can appreciate the range of thorny problems involved. In the first place the normal rate of profits is not the same for all industries. Risks are far greater in some businesses than in others and, accordingly, the rate of return must be higher if such risky industries are to obtain the capital they need and to survive. They would be severely discriminated against under a general measure which taxed all profit above a common level on the assumption that the annual rate of return should everywhere be the same. Furthermore, not all businesses require the same proportion of capital in relation to value of output. Thus under normal conditions with no excess profits being made, the ratio of profits to capital of a company in a business using relatively a small amount of capital will appear abnormally high even though there be no profiteering. Thus, while an excess profits tax based on rate of return on capital may be entirely fair and reasonable over a wide range of industry, there are instances where it would operate with undue hardship. This should be recognized at the outset and provided for.

The United Kingdom in its recently imposed tax on armaments profits adopted the method of imposing the tax on the increase in the amount of a firm's profits as compared with the average profit made by the firm in recent years. This method assumes that profits in the selected base years might fairly be regarded as normal, and therefore that any increase over this normal rate is the measure of excess profits due to war conditions. The United Kingdom taxes such abnormal profits at the rate of 60 per cent. The method may work with reasonable fairness in the United Kingdom for the limited number of companies to which it applies but in Canada it would not be satisfactory for a measure of general application because a number of our industries have not been making normal profits in recent years, and indeed in some cases have not been making any profits at all.

It is obvious, therefore, that each of the two general methods of taxing excess profits, which I have discussed, would operate unfairly in certain cases. After much study and careful consideration with a view to being fair to all types of business, it was decided to combine the two methods as alternatives in the measure which we are recommending to the house. Accordingly a business concern may elect to be taxed on either one of the two bases, that is to say, either on the basis of a graduated scale

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Mr. Haley

of rates of profit on capital employed, or on the increase in profits over the average of the past four years. Where one basis might give rise to injustice or hardship, the business concern may elect to be taxed under the alternative basis. It is believed that this arrangement will have the effect of reducing to a minimum any injustices or undue hardships which might be inherent in either of the two methods used alone.

With regard to rates of taxation, the following schedule will apply where the taxpayer elects to be taxed on the basis of percentage return on capital employed:-

On that portion of profits in excess of

5 per cent and not in excess of 10 per cent, a rate of 10 per cent.

On that portion of profits in excess of

10 per cent and not in excess of 15 per cent, a rate of 20 per cent.

On that portion of profits in excess of

15 per cent and not in excess of 20 per cent, a rate of 30 per cent.

On that portion of profits in excess of

20 per cent and not in excess of 25 per cent, a rate of 40 per cent.

On that portion of profits in excess of

25 per cent, a rate of 60 per cent.

Where the taxpayer elects to be taxed on the alternative basis, he will be required to pay to the treasury 50 per cent of any profits in excess of his average annual profits in his previous four fiscal periods. In view of the increase in the tax on corporate profits, to which I shall later refer, this will mean a tax of approximately the same severity as that applied to armament profits in the United Kingdom.

It should be pointed out at once that this tax on excess profits is to be levied on all businesses whether incorporated or not and whether increased profits are the result of war contracts or not. The reason for its application to all business firms is, of course, that under war-time conditions it is impossible to distinguish between the firm which is making larger profits directly because of armament orders and other firms whose profits are expanding as a result merely of a higher volume of business or possibly a higher price level due to war-time conditions. Furthermore, the excess profits tax will be in addition to all other taxes currently in force. In this respect the present measure differs from the Business Profits War Tax which was levied during the last war. At that time business corporations paid either the corporate income tax or the business profits war tax, whichever was the higher. Under the new measure which we are recommending, the corporate income tax will be regarded as an expense

in calculating the amount of excess profits for tax purposes. That is to say, it is the amount of profits left in the hands of a business concern after paying income tax which will be subject to the excess profits tax. This new tax will be applicable to profits earned in the year 1940 and in the fiscal periods ending therein after March 31, 1940.

I should add that problems arising out of certain special circumstances will be provided for in the bill. We must also contemplate that if Canadian industry is to be able to meet the urgent demand for war supplies that will arise, it will probably be necessary to provide for the construction of new plant or important extensions to existing plant and equipment. Particularly if business men expect the war to be of short duration they will not be willing to assume the risks of making the new investment required with an excess profits tax as drastic as that which we are proposing, unless they can see an opportunity of being able to amortize their costs over a reasonable period. Special provision, therefore, will have to be made for this problem.

The corporation income tax rate is also to be raised from 15 per cent to 18 per cent, and in the case of consolidated returns, from 17 per cent to 20 per cent. Thus, regardless of whether a corporation makes sufficient profits to bring it under the excess profits tax, it will in future be required to pay an additional 3 per cent on its net income.

All individuals subject to income tax will be required in future to pay a war surtax equal to 20 per cent of their ordinary income tax. That is to say, after calculating income tax under the present schedule of rates, an additional 20 per cent of the tax bill will be payable as a war surtax. This increase will be payable next year in respect of incomes earned in the year 1939 and fiscal periods ending therein.

As is usual in war-time budgets, we are also recommending certain increased levies on articles that are commonly regarded as being in the category of luxuries. Excise duties on spirits have traditionally played an important part in our revenue system and have been lowered in the last few years. We are now recommending that the present rates of S4 and S5 per gallon respectively on domestic and imported liquors should be increased to $7 and $8 per gallon respectively, the rates which were in force prior to the reductions in 1935. In the case of Canadian brandy, the existing $3 rate will be moved up to S6 with an equal increase on the duty on imported brandy. Beer will bear an additional levy by means of an increase in

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the rate of tax on malt from 6 cents to 10 cents per pound. On beer brewed from substances other than malt the existing rate of 22 cents per gallon will be increased to 30 cents. The rate on malt syrup is also to be increased from 10 cents to 15 cents per pound. Appropriate changes will also be made in the rates applying to imports of the foregoing. Wines which now bear the rate of 7J cents per gallon will in future pay 15 cents, and in the case of champagne and sparkling wines the existing 75 cents per gallon will be raised to $1.50 with equivalent increases on the imported product. Cigarettes will in future bear a tax of $5 per thousand, an increase of $1 per thousand over the present rates, and the tax on manufactured tobacco will be increased from 20 cents to 25 cents per pound.

As we are not recommending any lowering of the existing level of personal exemptions under the tax on individual incomes, it is considered that all our citizens may properly be asked to make some contribution to the treasury for the prosecution of the war, through their purchases of tea and coffee. Both are wholly imported commodities, and an increase in customs duties would therefore be wholly for revenue purposes. Accordingly, we are recommending that in the case of coffee, of which the greater part of our imports now comes in free, an increase of 10 cents per pound shall be imposed under all tariffs. With regard to tea, the greater part of our present imports now pays 4 cents per pound. It is proposed to add to existing rates 5 cents per pound in respect of tea invoiced at less than 35 cents per pound, 7i cents in respect of tea invoiced-at 35 cents per pound or more but at less than 45 cents per pound, and 10 cents per pound in respect of tea invoiced at 45 cents per pound or more.

In view of the increased levies on alcoholic beverages .and on tea and coffee, it seems proper that some additional taxes should be imposed in respect of soft drinks. It is proposed, therefore, to place a tax of 2 cents per pound on carbonic acid gas and similar preparations used in the manufacture of nonalcoholic beverages. There will be no increase in the sales tax but the base of this tax will be broadened by removing from the schedule of exemptions electricity and gas used for domestic purposes, salted or smoked meats, and canned fish.

All changes under the Excise Act, the Special War Revenue Act, and the Customs Tariff are to be effective as of this date, except in the case of the increases in excise and customs duties on spirits including brandy

which are to be effective as of September 3, 1939. I may say that that was the date of the declaration of war by Great Britain.

From these special war levies it is estimated that we shall derive approximately $21,000,000 during the remainder of the present fiscal year. In this connection it must be remembered that the revenues due to the increases in the individual and corporate income taxes and the levy of an excess profits tax will not be coming into the treasury until our next fiscal year. In any case it is impossible to predict what the yield of the excess profits tax will be in its first year of operation, and I shall not even hazard a conjecture. However, excluding this new impost, it is estimated that on the basis of a full year's operations but without assuming any increase in production and incomes as compared with, say, 1938 or 1939, the other new changes -being made in our tax structure should produce a revenue of approximately $62,000,000. I have already indicated our view that after a short period of hesitation and quietness it is very likely that business will improve and that under the impact of war demand productive activity and, consequently, individual and business incomes, will rise substantially. If such a forecast should prove to be correct it is clear that the new taxes and the tax increases now being imposed will at a somewhat later stage produce a substantially higher return than, the estimate which I have just given of their yield in a year like 1938 or 1939. Not only that, but if and when- our economy begins to expand to the stage of full production and employment, the yield from our existing tax structure will rise more than proportionately.

If there are any hon. members whose first impression was that our tax proposals were drastic, the estimate I have given of the moderate increase in revenue which will accrue to the treasury this year to meet the expenditures provided for in the war appropriation bill should serve to correct that impression. On the other hand, the estimate for a full year's operation of the new taxes and the considerations which I have mentioned in regard to the effect of expanding production and incomes on our new tax system as a whole should make it clear that we are endeavouring to avoid oft-repeated mistakes in war finance and striving to carry the pay-as-you-go policy as far as is practicable. The government believes that it has made sound and courageous decisions. It believes that the house will approve these decisions. It is confident that all sections of the public will bear the sacrifices asked of them in the knowledge that they are necessary to the successful outcome of the struggle to which we are committed.

The Budget-Mr. llsley

We are engaged in a grim and serious business. Modern war is a conflict in which whole nations are pitted against one another. The issue may be decided not by the relative strength of armed forces but by the magnitude and efficient use of economic power and by the test of human nerves, the strength of the will of peoples to bear burdens and stand strains. No one can doubt the courage and the moral strength of the Canadian people. But this courage and strength must be shown at home as well as on the field of battle. Our war effort on the economic side must extend throughout the country from the city factory to the farthest frontier farm and mine. Our people will, we are confident, bear their burdens with fortitude, and pursue their respective tasks with a determination to let nothing interfere with maximum efficiency. In carrying the financial burden, every one of our people can and will contribute to the victory of the freedom and the justice for which we fight.

Topic:   THE BUDGET
Subtopic:   FINANCIAL PROPOSALS PRESENTED BY THE ACTING MINISTER OF FINANCE
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RESOLUTIONS


Mr. Speaker, I beg to give notice that when we are in committee of ways and means I shall move the following resolutions:


THE CUSTOMS TARIFF


Resolved, that it is expedient to introduce a measure to amend Schedule A to the Customs Tariff and amendments thereto, and to provide: 1. That there shall be levied, collected and paid on the following goods, whether dutiable or not dutiable, when imported from any country, the additional rates of duties of Customs hereinafter specified: (a) Whisky, brandy, rum, gin and all other goods specified in Customs Tariff Items 156, 156a and 156b-$3 per gallon of the strength of proof. (b) Ale, beer, porter and stout-9 cents per gallon. (c) AVines of all kinds, except sparkling wines, containing not more than forty per cent of proof spirit-74 cents per gallon. (d) Champagne and all other sparkling wines -75 cents per gallon. (e) Manufactured tobacco of all descriptions except cigars, cigarettes and snuff-5 cents per pound. (f) Cigarettes weighing not more than three pounds per thousand-$1 per thousand. (g) Tea, when the value for duty thereof under the provisions of the Customs Act: (i) is less than 35 cents per pound-5 cents per pound. (ii) is 35 cents or more but less than 45 cents per pound-74 cents per pound. (iii) is 45 cents or more per pound-10 cents per pound. (h) All goods specified in Customs Tariff item 25a-10 cents per pound. (i) All goods specified in Customs Tariff Item 26 except coffee, roasted or ground-10 cents per pound. [Mr. Ilsley.l (j) Coffee, green, and coffee, roasted or ground-10 cents per pound. 2. (1) That any enactment founded upon the foregoing resolution relating to item (a) shall be deemed to have come into force on the third day of September, one thousand nine hundred and thirty-nine, and to have applied to all goods imported or taken out of warehouse for consumption cn and after that date, and to have applied to goods previously imported for which no entry for consumption was made before that date. (2) That any enactment founded upon the foregoing resolution relating to items (b), (c), (d), (e), (f), (g), (h), (i) and (j) shall be deemed to have come into force on the twelfth day of September, one thousand nine hundred and thirty-nine, and to have applied to all goods imported or taken out of warehouse for consumption on and after that date, and to have applied to goods previously imported for which no entry for consumption was made before that date.


EXCISE ACT


Resolved, that it is expedient to introduce^ a measure to amend the schedule to the Excise Act, 1934, as enacted by chapter thirty-seven of the statutes of 1936 and to provide:- 1. That the duty of excise on spirits distilled in Canada be increased from $4 to .$7 per proof gallon. 2. That the duty of excise on Canadian brandy be increased from $3 to $6 per proof gallon. 3. That the duty of excise upon all beer or malt liquor brewed in whole or in part from any substance other than malt be increased from twenty-two cents to thirty cents per gallon. 4. That the duty of excise on malt manufactured or produced in Canada or imported be increased from six cents to ten cents per pound. 5. That the duty of excise on malt syrup suitable for the brewing of beer manufactured or produced in Canada be increased from ten cents to fifteen cents per pound and malt syrup imported into Canada and entered for consumption be increased from sixteen cents to twenty-one cents per pound. 6. That the duty of excise on tobacco of all descriptions manufactured in Canada, except cigarettes, be increased from twenty cents to twenty-five cents per pound actual weight. 7. That the duty of excise on cigarettes manufactured in Canada, weighing not more than three pounds per thousand, be increased from $4 per thousand to $5 per thousand! 8. (1) That any enactment founded on resolutions 1 and 2 hereof shall be deemed to have come into force on the third day of September, one thousand nine hundred and thirty-nine. (2) That any enactment founded on resolutions 3, 4, 5, 6 and 7 hereof shall be deemed to have come into force on the twelfth day of September one thousand nine hundred and thirty-nine.


SPECIAL WAR REVENUE ACT


Resolved, that it is expedient to introduce a measure to amend the Special War Revenue Act, chapter one hundred and seventy-nine of the Revised Statutes of Canada 1927 and amendments thereto and to provide:- 1. That subsection 1 of Section 83 of the said Act be struck out and replaced by the following: The Budget-Mr. Ilsley "1. There shall be imposed, levied and collected the following excise taxes: (a) a tax of fifteen cents per gallon on wines of all kinds, except sparkling wines, containing not more than forty per cent of proof spirit; (b) a tax of one dollar and fifty cents per gallon on champagne and all other sparkling wines." 2. That Schedule II to the said Act be amended by adding thereto as paragraph 4 thereof the following: "4. Carbonic acid gas and similar preparations to be used for aerating non-alcoholic beverages.. .two cents per pound." 3. That Schedule III to the said Act being the list of articles exempted from the consumption or sales tax be amended (a) by striking out under the heading of "Foodstuffs" in the sixth line the words: "Fish and products thereof;" and replacing them by the following words: "Fish and products thereof, not to include canned fish;" (b) by striking out under the heading of "Foodstuffs" in the tenth and eleventh lines the words: "Meats, salted or smoked (not to include the same when chopped, ground, parboiled or spiced);" (c) by striking out under the heading of "Miscellaneous" in the first line the word "Electricity" and replacing it by the following words: "Electricity, except when used in dwellings;" (d) by striking out under the heading of "Miscellaneous" in the fourth and fifth lines the words: "Gas manufactured from coal, calcium carbide or oil for illuminating or heating purposes;" and replacing them by the following words: "Natural gas and gas manufactured from coal, calcium carbide or oil for illuminating or heating purposes, except when used in dwellings;" 4. That any enactment founded on this resolution shall be deemed to have come into force on the twelfth day of September, one thousand nine hundred and thirty-nine and to have applied to all goods imported or taken out of warehouse for consumption on and after that date and to have applied to goods previously imported for which no entry for consumption was made before that date.


INCOME TAX


Resolved, that it is expedient to amend the Income War Tax Act to provide- 1. That a war surtax of 20 per centum of the total income tax otherwise payable under the said Act be imposed upon all persons other than corporations. 2. That the rate of tax applicable to corporations and joint stock companies, except those filing consolidated returns, be increased from 15 to 18 per centum. 3. That the rate of tax applicable to corporations and joint stock companies which file consolidated returns under the said Act be increased from 17 to 20 per centum. 4. That voluntary donations to approved patriotic organizations and institutions in Canada during the present war be allowed as a deduction from income, up to 50 per centum of the net taxable income of the taxpayer. 5. (1) That the amendments proposed in resolutions 1 and 4 hereof be applicable to the income of 1939 and all fiscal periods ending therein and of subsequent periods. (2) That the amendments proposed in resolutions 2 and 3 hereof be applicable to the income of 1940 and all fiscal periods ending therein after March 31, 1940, and of subsequent periods.


EXCESS PROFITS TAXATION ACT


Resolved, that it is expedient to enact an Excess Profits Taxation Act to provide



1. That an excess profits tax be levied on . the profits of all businesses, whether incorporated or not, the said tax to apply to profits in excess of 5 per centum of the amount of capital employed by the taxpayer in the business, and to be graduated at the following rates: on profits in excess of 5 per cent but not exceeding 10 per cent of the capital employed -10 per cent; on profits exceeding 10 per cent but not exceeding 15 per cent of the capital employed-20 per cent; on profits exceeding 15 per cent but not exceeding 20 per cent of the capital employed-30 per cent; on profits exceeding 20 per cent but not exceeding 25 per cent of the capital employed-40 per cent; on profits exceeding 25 per cent-60 per cent; and that the said excess profits tax be in addition to the tax imposed upon the taxpayer under the Income War Tax Act, but that any tax payable by the taxpayer under the Income War Tax Act in respect of the profits of the same business for the corresponding period be deductible as an expense for the purposes of computing the profits to be assessed under the excess profits tax. 2. That an alternative excess profits tax be imposed upon the profits of all businesses, whether incorporated or not, taxing at the rate of 50 per centum all profits or income in excess of the average income of the taxpayer for the four years 1936, 1937, 1938 and 1939, or the four fiscal periods of the taxpayer ending in such years; And that the said alternative excess profits tax of 50 per centum be in addition to the tax imposed upon the taxpayer in respect of the same profits under the income War Tax Act, but that any tax payable by the taxpayer under the Income War Tax Act in respect of that portion of his profits which is in excess of the aforesaid average profits shall be deductible as an expense for the purpose of computing the net excess profits to be assessed at the aforesaid rate of 50 per centum. 3. That the tax proposed in resolution 2 hereof be an alternative to the tax proposed in resolution 1 hereof, and the taxpayer shall have the right to elect to be taxed either upon the basis of the tax proposed in resolution 1 hereof or upon the basis of the tax proposed in resolution 2 hereof. 4. That the governor in council may provide by regulation for the depreciation and amortization of new plant and equipment which may be deemed necessary to fulfil orders for war purposes. 5. That this act shall be applicable to the year 1940 and fiscal periods ending therein after March 31, 1940, and all subsequent periods. The Budget-Mr. Stevens


CON

Henry Herbert Stevens

Conservative (1867-1942)

Hon. H. H. STEVENS (Kootenay East):

Mr. Speaker, my first words must be to join with the minister in his expressions of regret that the former Minister of Finance, (Mr. Dunning), was unable, because of impaired health, to be here to present the budget, and indeed has been compelled to resign the office of Minister of Finance. I am sure that all will agree with me when I say that we regret not only his absence but also the occasion of it.

Obviously one is at a distinct disadvantage in having to face a formidable document of this kind, the presentation of which has been so excellently made by the minister, without having had time to study and consider it. I am sure the house will bear with me if I run over rather rapidly, and I confess in a more or less casual way, the remarks which have been made by the minister.

I feel we have had in the statement which has been presented an excellent analysis of the economic factors involved in the problem with which we are faced at this time. The minister reviewed the situation as it is and as it has been during the past number of years, particularly within the last few months. I think his presentation was a fair one, laying an excellent foundation for the proposals which followed. The minister made one statement which I should like to emphasize. He pointed out, very properly, that any provision made at this session for increased revenue, and indeed any presentation regarding expenditures, must necessarily be of a provisional character. With that statement we agree, and it is largely because of this consideration, together with the conditions with which we are confronted, that we now withhold any criticism in regard to the government's proposals.

I was glad also to note that the minister emphasized the fact that under the present circumstances the government would necessarily have to proceed with care. I commend the minister for taking that attitude and simply add that we strongly urge the government to exercise the greatest care, not only in the administration of the new taxes but particularly in regard to expenditures. We say that with all kindness, and in that connection we find ourselves in harmony with the view expressed by the minister.

It was indicated also that in all probability the war will not be a short one. I understand that the British authorities are acting in the light of a war period of a minimum of three years; indeed, in many of their utterances they suggest that the period may be even longer. As much as we should like to see an end to this strife, I am sure it would not be

wise on our part to proceed on the basis of the war coming to a conclusion within a short time.

It is encouraging to note that in recent times, there has been some improvement in conditions, but the undertaking of my leader and of ourselves as a party prevents me from analysing these conditions. However, I should not like to agree entirely with the minister that preceding the outbreak of the war there was a condition, to use his own words, of brisk recovery. It is not my intention to dispute that statement beyond indicating a slight disagreement.

Reference was made to the last war period, and I am pleased to note that the government have studied what happened during that time. When Canada entered the great war of 1914 she had nothing whatever to guide her, but at this time the archives of the various departments of the government are filled with records of blunders, shall I say, and of achievements, which should be extremely helpful to the government in the present crisis. In the budget it is indicated that the government is taking advantage of this information, and this is something that should be approved.

I agree with the minister when he says it is impossible to indicate what the exact revenues may be from the proposals now before the house. It would be obviously impossible also to say what the total expenditures will be. However, the minister suggests that the expenditures for the current fiscal year, which I presume include war expenditures, will amount to approximately $651,000,000, plus the capital expenditures which were voted at the last session for militia and defence purposes. I should like to suggest to the government that the so-called capital expenditures for defence purposes can scarcely be considered as capital expenditures, because without doubt they will be absorbed in the general war expenditures of the period. Therefore the estimated deficit of $156,000,000 for the current year, which would be decreased by the anticipated increased revenue, should in my opinion be increased by the amount of the capital expenditures. I think the government ought to keep this in mind, because there is no doubt that that will be the case.

It is true that we cannot escape the costs of the war. We are in the war and we must face the issue as it is. In his closing remarks the minister properly - pointed out that the people of Canada will have to square up to the task. I think the house as a whole will agree with me when I say that there is every possible need, not only for sacrifice but for cooperation on the part of business interests

The Budget-Mr. Stevens

and of the public generally. This will have to be tendered to the government in the great task with which it is confronted.

I shall turn now briefly to the proposals which are being made. The analysis made by the minister of the three methods of financing was, I think, excellently done. He referred to the three methods of financing, borrowing, paying as you go, or inflation. The minister has discarded inflation and has partly discarded borrowing. He has adopted a method of "pay-as-you-go" as far as the revenues of the country will permit, the balance to be absorbed by borrowings.

I should like to say just a word or two in regard to the matter of inflation. In my opinion the term "inflation" has been grossly abused in recent years. It is generally accepted-I mean by other than experts in economics, like my hon. friend across the way-that the term "inflation" refers to the issue of paper currency without regard to its background, whether that be a gold reserve or some other form of security upon which it may be based. That form of inflation which was adopted by some of the European countries particularly following the last war is of course inimical to the interests of any country and should be avoided. But there is a danger, as we have experienced in recent years, of adopting the attitude of deflation, which is just as injurious to a country as one of reckless inflation.

I should like to draw to the attention of the minister and of the government a very simple fact. During the last twenty years, by and large, Canada has had in circulation currency to the extent of about one-half per capita the amount of currency in circulation in the United States and in Great Britain. If the minister would be good enough to give his attention to this point I would appreciate it. The per capita circulation in Canada has been approximately $20, sometimes $21, and for a short time it went up to $22; but over a period of ten or fifteen years it has been about $20 per capita, while in the United States it has averaged from $40 to $42 per capita, and in Great Britain about the same, something over $40 per capita. This indicates that there has not been in Canada an excess of circulation at any time in the last twenty years. Indeed, in my opinion there has been definitely something less than an adequate amount of currency in circulation in Canada.

The figures which I have just given are susceptible of verification by the records of the bureau of statistics, the Bank of Canada, or the banking and commerce committee of this house, and in my opinion they constitute ' a definite challenge to the financial authorities of Canada. Please understand me; I am not criticizing the financial system of Canada at all, because I believe, as I have stated on previous occasions, that we have one of the soundest and best managed financial systems in the world. But I do say that there is danger . in erring on the side of care and restriction and deflation just as much as there is danger in erring on the side of inflation or expansion of currency. The cold fact is this, and I repeat it because I should like the minister (Mr. Ilsley) and his colleague the Minister of Finance (Mr. Ralston), who is not able to be with us, to study the question. It is an economic fact which challenges attention in this country that, apart from the needs of the war, the amount of currency in circulation in Canada for the last eighteen or twenty years has been approximately one-half per capita of that in circulation in Great Britain and the United States. As I intimated the other day, our extensive gold production in Canada, providing as it does what is still the best medium of reserve in the world, together with our present per capita rate of currency circulation, afford to us the opportunity of financing by a method which cannot by any stretch of the imagination be termed reckless, unorthodox or inflationary.

I should be the last to suggest anything that would be likely to undermine confidence in Canada, but I cannot under any circumstances conceive how, by taking advantage of these rich resources of ours and this obvious degree of under-circulation of currency, we can possibly risk any interference with our economic structure. I hope the minister will give careful study to the matter, because I believe in this alone we have an opportunity for financing in these early days of the war, to which the minister very properly referred a moment ago, without at this stage increasing the debt of Canada.

The minister has rightly stated that during the next few months, before the new revenues come into the treasury in substantial quantities, and when there is a heavy demand for immediate expenditure, the revenues available to the government will not be sufficient to take care of expenditures. Obviously so; and the minister may rest assured that we shall make no critical approach to that situation because we recognize it as a perfectly natural one and we desire to assist the government in every way in meeting it. But any government is entitled to examine its revenues to see whether there are not some reserves upon which it can draw to help it over such a period. Without going into any detail I should like to lay down a principle which we have to face in these modern days.

The Budget-Mr. Stevens

There has been a tendency in some quarters to look upon a reserve as something sacrosanct, something that must not be touched or invaded at all. Insurance companies, for instance, and other financial institutions of the kind, have built up reserves which they seem to consider they must keep always at a given level; but these reserves are built up by a corporation or bank or financial institution to be made available when they are required. I am not suggesting that reserves, whether they be gold or other reserves which we may have at our disposal, should be invaded recklessly. I am not aware just what the gold reserve is at the moment, but I imagine it is around fifty. It is recognized and acknowledged by international conferences and international agreement that a twenty-five per cent gold reserve is acceptable as adequate. Again I am not sugegsting that we should immediately go to the extent of invading the gold reserve until we are down to the twenty-five per cent level, but I do submit that between the twenty-five per cent level and the fifty per cent level there are reserves which we may legitimately use. Again I say to the government that, apart from our reserves in the way of increased taxation, we have in our gold a reserve which can be drawn upon for use in time of stress without violating-and I emphasize this because I do not wish to be misquoted or misrepresented-without invading or violating any of tie orthodox and accepted principles of sound finance, so called.

The minister has stated that he proposes to proceed on the pay-as-you-go principle, plus borrowing to make up any deficit. To this principle I take no exception. I think it is a highly laudable objective for the government to have in mind. I well recall the difficulty of financing in the last war. I think the house should do justice-possibly the minister did something less than justice- to those who were saddled with the responsibility in those days, because they were entering an entirely new field. I well remember when the then minister of finance issued his first victory loan. It was done with fear and trembling. We had no idea what the resources of the country were in that regard. We feared it might be a failure. It went over, to use a slang expression, with a bang, but it was a surprise to every financial authority in the country, and it was not until after the first victory loan that we obtained some realization as to the reserve resources of this country. We were faced with difficult times in those days. Now we know our position; we have our people well educated to public loans and also, through the concentration in trust, loan and financial institutions, banks

and insurance companies, of the control of liquid capital, we pretty well know what those resources are. To-day it is a much easier task. The effect of the minister's policy of pay-as-you-go can be pretty well calculated by proper analysis of the financial resources of the country.

I intend now to refer to this policy. As to the taxes proposed, I am not going to criticize them. I give my hon. friend a sort of blanket "God bless you; go ahead and do the best you can" and anything I shall say with regard to those taxes is in the way of suggestion rather than criticism.

First with regard to the excess profits tax. I well remember when it was first introduced in the last war. The minister referred to it as a thorny problem, and indeed it is. In this matter he has my sympathy and, I know, the sympathy of all who have had some experience in that task. It is a tax which it is extremely hard to apply equitably. In just glancing over the proposal in the moment or two I have been able to examine it, it appeals to me as reasonable under the circumstances; and I am quite certain that, with the very able staff he now has, with their very wide experience in these matters-some of them, I think, had experience of the old excess profits tax-he will be able to administer this tax in a way which will be satisfactory. I feel that I should add to what the minister said in his closing remarks and appeal to the business public of Canada cheerfully to cooperate with the government in the collection of this tax. Upon one thing the people of Canada are perfectly clear; they will not tolerate excess profits in this time of stress. But I should like to add this, that I believe the great body of the business public, particularly in the industrial realm, are equally desirous of avoiding anything in the nature of undue profits.

May I give the minister one illustration of the undesirability of hasty judgment and condemnation of firms? I recall that a particular firm in Canada was examined in 1919 by a committee of this house which was known as the high cost of living committee. I imagine that in a year or two we shall be having a similar committee again. I remember that this firm, brought before this committee, showed a profit of some seventy-two per cent, and it was looked upon as very high, because they had had some large and valuable government contracts. But when we examined into it this is what we found. The firm happened to be a woollen manufacturing concern. They had been operating their woollen plant and manufacturing different patterns of woollen goods. They would have their looms operating for maybe a day or two, or some limited period of time, on one kind of pattern;.

The Budget-Mr. Stevens

then the loom had to be changed over to another pattern, and when they took from the government a contract for khaki cloth they gave a figure based upon their actual cost of production according to their books, plus a small profit. But they found, when they ran the same looms twenty-four hours a day, day in and day out, month in and month out, that the cost of production was materially reduced, which of course is quite understandable. At the end of the year the plant, to the amazement of those who operated it, showed a profit of seventy-two per cent. They were not to be condemned for that, although I confess that at the time there were those who bitterly criticized them. I cite that as an illustration only; there are many others. Conditions will arise in the industrial realm where concerns will show at the end of a period a profit far beyond what they ever expected to make. I believe that in the set-up the minister has given us to-day there is reasonable protection for such firms and at the same time justice will be done to the treasury and to the sentiment of the country by the avoidance of undue profits. Therefore, I see little, indeed nothing, in the excess profits proposal of the minister which I would criticize, but I should like to emphasize that in its administration great care should be taken not to do injustice in cases where obviously no offence was contemplated or intended.

The alternative method is, I think, a good one. We shall have to wait and see how it works out. I have not had time to study it. We usually find that after proposals of this kind are introduced and the practical business men to whom they will apply have had an opportunity to study them, certain things develop and certain representations are made. I am quite certain that if after a study of the application of these new taxes the minister is shown that they bear with undue severity upon certain classes of industry, he will come to parliament at the next session and seek the necessary amendments to adjust them. But from the opportunity I have had of examining them I am not disposed to criticize them.

There is one point about these taxes, however, which strikes me as a little dangerous. We have had up to the present a very heavy corporation tax, of fifteen per cent, which is now increased to eighteen per cent. The excess business profits tax is to be applied above that figure, and it may work out all right; I have not had time to study it. But it struck me at the moment that possibly there is danger in carrying along the ordinary corporation tax and the excess profits tax on top of it. I suggest that that phase of it should be studied with great care in the next

few months, so that if it is clear that in some instances an injustice is being done, amendments or adjustments may be made.

There is one thing we do not wish to do. The minister himself referred to it in his excellent speech. We must not discourage people from carrying on active industrial operations in this country. I know there are some who look upon industrialists almost as evil-doers; but that is not so. There are men in industry and in business who are guilty of malpractice, but comparatively speaking they are few in number. The general industrial public as well as the mercantile and financial public is anxious to do the right thing. Generally speaking that is so, and I have had opportunities of studying the question, perhaps under very critical conditions. Therefore we must not jump to the conclusion that because a firm is making a little profit it is an evil thing; because capital will not be invested in industry if there is nothing in industry, and if you talk about the alternative, the nationalization of industry, you will have chaos and collapse in front of you. In my opinion there is no escape from this, that if we sought to nationalize industries during these times and under present conditions, and placed in control of industry men, whether they have had training or not, who are under government control, we would face the collapse of the industrial structure of the country. Or perhaps I might put it in this way. We have a magnificent economic structure in Canada. I admit at once that it is not working with complete equity not by any means. I repeat, however, that we have a splendid economic structure. We have factories and corporations organized for the carrying out of certain lines of business under a trained personnel who know their business. And we have financial institutions with certain duties to perform. There is one thing that parliament and the government must always do; they must always safeguard the public against exploitation. But it does not follow that these institutions are anything but of great value to the country. And so, whatever we do, as the minister indicated in his analysis of the situation, we must not discourage or destroy the instrument of production in Canada in its present form. _

There is another point which the minister made and which I would emphasize. The demand for war material will present itself in various forms, and it is futile to discuss now the question whether a person should put his money into the production of armaments. We have to have armaments; we cannot escape that. Unfortunate as it is, dislike it as we will, we have to have armaments. But for an industry to expand ita

The Budget-Mr. Stevens

plant, to put in new machinery and enlarge its buildings at this time for the purpose of fulfilling the imperative needs of the country, it must make provision for the risk it is taking, and fairly generous allowances will have to be made. The minister cited the United Kingdom. The United Kingdom has a definite plan which is followed in that respect. I have not that plan before me and I am therefore unable to present it here. But I gather from the minister's remarks that either he or the department has carefully studied the British system. I know however that in Great Britain they do make generous allowances for plants that will be out of use when the war is over. All we have to do is walk down Wellington street and we shall see buildings there to-day some of which have been idle, in whole or in part, for years. Those buildings were put up to meet the demands of the last war. You cannot erect such buildings and equip them with the necessary machinery without loss when their usefulness ceases. There are two avenues of approach to this question. One is to make reasonable allowances for the disuse of such buildings, and if the government could have some of its experts keep in mind the possible use of these buildings after the war for the production of goods for peace-time, a useful purpose would be served. In the old land and in Europe considerable advantage was taken after the last war of many plants for peace-time production after their usefulness in the production of armaments had ceased. That question might be studied in Canada.

Another point must be considered. We should avoid giving contracts to persons who are inexperienced in the line of business represented by the contract. I do not know whether it is true, but it was told me by a responsible person the other day that someone who had a furniture factory got a contract for clothing or goods of that class. We want to avoid that sort of thing, and I am warning the government against giving contracts to persons who are not fitted or qualified to carry them out. And it can be done; it is not difficult. The principle should be laid down that these contracts with respect to iron and steel products, clothing, boots and shoes and so on should be given to firms engaged in those respective lines of business.

I am not going to criticize at this time the increase in the corporation income tax or the surtax on incomes. We had a surtax on incomes in previous years and we shall have to stand it again. I see no objection. There is a substantial increase on tobacco and liquor and I believe 1hat those who indulge in the use of these things, either

tobacco or liquor, will cheerfully bear the tax. As regards tea and coffee, I apprehend that there may be some criticism of the tax; but again, these are commodities that have usually been taxed in different countries in times of stress. I do not recall the British tax on tea, but I know that it is quite highland to the Britisher tea is almost, if I might say so, the breath of life. The tea tax is high. In the last war there was a tax of 10 cents per pound in Canada; the minister proposes now to tax tea 5, 7i and 10 cents per pound on the higher priced commodity, and there is to be a tax of 10 cents on coffee. I take no exception to these. I see no escape from this form of taxation.

The tax on soft drinks is not a new one; we have had it before and it will work again. But it is one of the most annoying taxes that can be imposed, and there is some difficulty in connection with this class of goods. A five cent bottle is sold; when the tax is raised it is impossible to produce the drink and sell it at five cents a bottle, and the price usually jumps to ten cents. I remember the difficulty that was experienced in this regard before. If the tax does not produce a substantial revenue it is not worth the trouble which its imposition and working out will entail. I leave that suggestion with the minister.

It is expected from these increased taxes to get an increased revenue for the rest of the fiscal year of $21,000,000, and I understand that the total increase in revenue anticipated in any full year in the future, to be derived from all the taxes including the income tax will be $62,000,000.

Topic:   EXCESS PROFITS TAXATION ACT
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LIB

James Lorimer Ilsley (Minister of National Revenue)

Liberal

Mr. ILSLEY:

That is correct, unless business increases.

Topic:   EXCESS PROFITS TAXATION ACT
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CON

Henry Herbert Stevens

Conservative (1867-1942)

Mr. STEVENS:

Frankly, I do not think the increase is exorbitant. It should be at least that.

There is one thing I should like to say to the minister, and it is this. I am very glad that he has not increased the sales tax, and in case between now and the coming session he should be tempted to do so I will tell him why I make that statement. The sales tax works inequitably on different lines of business. Let me illustrate that briefly. Here is one class of industry that has a turnover we will say every two months, equal to its capital. Therefore at the end of the year it would have a forty-eight per cent tax as compared with its capital. Another class of industry has a turnover comparable with the amount of capital only once a year. Obviously one class of business carries a greater weight of taxation than the other, though the rate is the same.

I think the minister partly recognized that

The Budget

Mr. Coldwell

principle when he imposed the excess profits tax; I believe that principle was involved in the choice given there.

Topic:   EXCESS PROFITS TAXATION ACT
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LIB

September 12, 1939