April 23, 1952 (21st Parliament, 6th Session)

LIB

James Sinclair (Parliamentary Assistant to the Minister of Finance)

Liberal

Mr. Sinclair:

I am perfectly in order. If the hon. member will look at the rules he will find that if something in a previous debate is under discussion in a later debate, it is perfectly proper to quote the earlier debate. Otherwise the Speaker would have ruled out of order the amendment of the leader of the C.C.F. I should like hon. members to listen to see if anywhere in my statement I indicated the encouragement which the hon. member for Peace River implied. I quote from page 820 of Hansard of March 26 as follows:
The first suggestion is part of the suggestion made by the hon. member for Winnipeg North Centre: Why do we not remove the four per cent
average entirely? There are two or three fairly good reasons for that. First of all, four per cent is quite a bit less than the average medical and hospital expenses across this nation, so we are giving some allowance even to average costs. Our main tax exemptions of $2,000 for a married man and $1,000 for a single man are in part to cover actual expenses, such as the usual expenses of food, clothing and transportation. This specific exemption we are now discussing was put in for unusual expenses. Once that door was opened, then of course there would be demands for exemptions of other unusual amounts in the ordinary man's budget. The hon. member for Spadina (Mr. Croll) raised this proposal of removing or lowering the four per cent item, and pointed out that this would give the maximum help to the little man, the man with just enough income to place him in the income tax bracket.
A point-which X mentioned in the beginning-is the fact that this tax must not only be good in theory and good in the House of Commons but must be good in practice as far as the Department of National Revenue is concerned in the collection of the tax and in the verification that there is no abuse through fraud or evasion. When you expect the department to attempt to verify and spot check the endless amount of small bills which will be turned in if all medical expenses are to be deducted, you are imposing on them a large administrative

task, and a costly one by reason of the salaries of the civil servants who would have to be employed for what would be a comparatively small tax relief.
A third objection is the fact that in most of these medical schemes it has been found necessary- whether it be a state scheme, a company scheme, or a private scheme-to place some sort of check against too free use, which actually becomes abuse, of the facilities offered. For example, in British Columbia, in connection with the hospital insurance they have had to bring in co-insurance, a small initial charge in hospitals to prevent unnecessary use of hospital beds. Most of the company hospital health insurance schemes in my riding insist that a man pay half the cost of drugs, again to prevent abuse and waste of drugs if provided free. Most of them too make the request for a small payment from the man on his first visit or on his family's first visit to a doctor to check waste of the doctor's time with trivial visits. I think perhaps this present four per cent is in that category, of a check on unnecessary expenditures.
So much for the encouragement I am alleged to have given at that time.
In the rest of my speech I made mention of other objections. There is the objection to giving a broad exemption which applies all across the country because in giving such an exemption you remove from the taxable income of the country a certain amount of income, which of course immediately reduces the tax returns from that income. Taxes and expenditures are not in two separate watertight compartments. If we reduce taxes we still must meet the cost of operating the nation, and so taxes will have to be imposed in some other field to compensate for the loss of revenue through the tax exemption given.
In this instance, if the four per cent, which is less than the national average of hospital, medical, dental and drug care, was removed, that would remove four per cent of the present taxable income of this nation. It would result in a reduction in our personal income tax receipts of four per cent or approximately $48 million. That $48 million would certainly have to be recovered through increased taxation in some other field. So the net effect as far as the average individual is concerned would be zero. It would certainly be an illusion to say that they were getting tax relief in that way.
That applies to any particular exemption which extends across the taxpayers in the country. I pointed out the weaknesses in the proposal-this is perhaps the Department of Finance or a student of taxes speaking- of trying to do indirectly through tax relief what could be much better done otherwise directly. In this instance, there is no doubt that the better way for the individual to protect himself against this hazard of unusual medical expenses is for him to act as he does when he protects himself against the unusual hazard of losing his home by fire-by taking out insurance. I pointed out

at the time that the problem in Canada is a diminishing one because each year a great many more Canadians are coming under such schemes, whether they be state schemes such as they have in British Columbia and Saskatchewan, industrial schemes such as many of the great industries of this country have set up, Blue Cross schemes or even insurance with private companies. Then I suggested, as reported on page 822 of Hansard, that the minister would be very glad to give still further consideration to the representations which had been made by the speakers who had taken part in the debate.
The position of the Minister of Finance is a little different from the position of other ministers as far as representations being made to him are concerned. I suppose every hon. member of this house has been part of a delegation which has called on other ministers to present projects or proposals. A trade delegation might appear before the Minister of Trade and Commerce and lay its problem before him; the minister would comment on it and say whether it was within his powers to deal with it. He might point out the weaknesses. If he could come to a decision, either favourably or against it, he might do so at the time, or he might say that the matter would be further investigated and the delegation would be informed of the results.
The Minister of Finance is in a very different position. When a delegation comes before him, or when members of parliament write him letters on tax changes, or when parliament asks for the consideration of tax measures before the budget is brought down, obviously he cannot indicate what he is going to do about it, either acceptance or rejection. Secrecy of the budget is one of the most important factors in the financial control of the country through parliament. It would be incredible if one group in the country knew of tax changes in advance of other groups.
Under our British parliamentary system great attention has been paid to secrecy in connection with the budget. We all remember how Right Hon. J. H. Thomas lost his position as chancellor of the exchequer because of a leak, apparently through his family. We have the more recent dramatic example of Chancellor of the Exchequer Dalton, who, just as he was coming into the house to give his budget speech, made a casual remark to a newspaper reporter that his smokes were going to cost him less. He immediately resigned when the issue was raised. If the minister was to indicate in advance of the budget that tax relief was to be given in any field it would put him in exactly the same position as the gentlemen
The Budget-Mr. Sinclair in the examples I have given. Therefore I say that the minister carried out the undertaking given by me on his behalf, in the only way he properly can. Consideration was given to the proposal when the minister and his budget committee were discussing the personal income tax field. Further consideration was given to it by the minister and his budget committee after the resolution had passed the house.
For reasons such as those I have indicated, and for other reasons, it was decided that the floor should remain but that the ceiling should be raised. That is an interesting thing because, as I pointed out in my last speech on this matter, last year only eight members got in touch by letter with either the minister, the deputy minister or myself on the matter of exemptions and deductions for medical expenses. There were six members on the government side and two on the Conservative opposition side. Five of those wrote about special cases in which people had abnormally high bills which were beyond the present ceiling. They asked if relief could not be given by increasing the present exemptions. Three of them asked for consideration in the case of the purchase of special drugs. Relief was asked by way of increasing the ceiling in order to meet the increased costs of medical services and drugs. This has of course been done in the present budget.
I want to draw attention now to one special remark by the hon. member for Winnipeg North Centre (Mr. Knowles) to be found at page 828 of Hansard. I had said that the minister would certainly consider the resolution, that it was not going to be defeated and there was no point in wasting the time of the House of Commons talking it out. The hon. member for Winnipeg North Centre had the opportunity to close the debate. I was listening very closely to what he said, because he is a very accomplished parliamentarian. He ought to be; he is on his feet every day. He had this to say:
The particular point that the house is voting on is the request that the four per cent floor be wiped out.
What happened? I jumped up immediately and said:
No, no. I must make this correction. What the house is voting on is that the Minister of Finance (Mr. Abbott) should give consideration to this proposal.
The hon. member for Winnipeg North Centre said, "That is right". He does not say that is right today. The Minister of Finance
1S26

The Budget-Mr. Sinclair gave consideration. After giving consideration a second time he presented the form of relief given in the increase of the ceilings on deductions.
I should like now to turn to the other point which is causing considerable debate, the matter of the changes in the personal income tax. Each speaker has questioned whether or not we are to get a reduction in income tax this year under the new bill which of course is not yet law. The difficulty perhaps arises because of two things. One is-and it is understandable-that the people who are dealing with taxes all the time take for granted that everybody understands them as quickly and easily as they do. It is a common failing with almost every group of professional men. The second difficulty arises because of two points in connection with our present income tax procedure. The first is the division of the tax year, and the second is the impact of the social security payment contained in the old age pension bill.
Let me deal with the first difficulty, the matter of the tax year. When we collected taxes from individuals in the same way as today we collect taxes from corporations, at the end of their fiscal year, there was no problem. We could make changes in taxes effective this year and the individual did not have to make any payment until next April. During the war however we turned to deduction at the source, payroll deductions each week, fortnight or month. I think both the taxpayers and certainly the government agree it is a great improvement. The taxpayer is not faced each spring with a debt he cannot pay, and the government is assured of even revenue throughout the year. But this system, has difficulties. For example, last year the income tax bill with the surcharge was not formally approved until June, but income tax deductions at the previous rate had been going on in that year since January 1. We approved a 20 per cent surcharge on the old rate.
Let me trace it through in. sums. I shall use the example the hon. member for Rose-town-Biggar used yesterday, the simple case of the married man with an income of $3,000. He has an exemption of $2,000. His first $1,000 of taxable income in 1950 was taxed at the rate of 15 per cent, and in 1950 he paid $150. That rate was also in effect for the first six months of 1951 until the change was made by parliament. We then voted a 20 per cent surcharge on that, which actually made the increase 20 per cent of 15 per cent, or a total of 18 per cent. If we had wanted that to apply to the whole tax year, having regard to the fact that deductions in the first

half had been made at 'the rate of 15 per cent, we would have had to set up tables of deduction at the rate of 40 per cent surcharge for the last half of the year.
In January of the next year we would have to withdraw all those tables from every industry in the country, get them to change all their payrolls and substitute new tables going back to the 20 per cent figure. Therefore we only made the 20 per cent surcharge apply to the last half of the year, which was a gain for the taxpayer in that year. There was no change until the 20 per cent surcharge became law last June. On the first half year's income no surcharge was paid, and on the last half year the surcharge was 20 per cent, or an average over the year of 10 per cent. Therefore while in 1950 he paid $150, he paid $165 in 1951. The 18 per cent rate has been in effect since last July, and the present tax tables used for deductions this year are on the 18 per cent rate.
If the minister made no change whatsoever in the present budget in the income tax law our man this year would pay $180. Here again we have exactly the same problem because of existing tax tables and deductions already made. The minister has decided to remove the surcharge and get back to a revised scale. He has reduced the basic rate from 18 per cent to 17 per cent, but at the present time, and up until June when the present bill will be passed and become law, deductions at the rate of 18 per cent are being made. After July 1 deductions at the rate of 17 per cent will be made. Over the year therefore the individual pays 18 per cent on the first half of his taxable income and 17 per cent on the other half. The net change is that this year he will pay $175 in income tax, but next year when we will not have this division and will have got down to the 17 per cent for the full year, his tax will be $170, this is down 6 per cent on the $180 he pays under the present law. This taxpayer's tax before Korea was $150. The surcharge brought it up to $180 for a full year. The reduction in the budget brings it back to $170 for a full year. However, just as last year with the split between no surcharge and surcharge, this year with the split between surcharge in the first half of the year and the 17 per cent rate in the second half an intermediate stage will be reached where his tax is $175.
The other point is the matter of the social security tax. The social security tax, the old age pension tax of two per cent of taxable income, does not even appear in the Income Tax Act. That is by design. We all know the story of the demand and desire for social security in this country. We all know there

are many people on the hustings who claim that social security is free, that the government pays for it. Therefore we have a demand for bigger and bigger payments out of the treasury, apparently with blind ignorance of the fact that the treasury can only be supplied by taxes from the taxpayers. I think most people in Canada who are in favour of social security realize that there must be some direct connection so far as the individual is concerned between what he pays and the benefit he gets. That is why the old age pensions committee, which did such good work two or three years ago, recommended the method of payment they did, the 2-2-2 principle-two per cent income tax, two per cent sales tax, two per cent corporation tax.
It could have been done in another way. The cost of old age pensions at 70 to the federal government today is $322 million. Today in Canada there are about 5,200,000 people gainfully employed. If each man working in this country had to pay a direct old age pension tax, contribution, premium, whatever you care to call it, it would amount to $62 a person a year. We generally think, however, of taxpayers as those who pay income tax, and there are between 2,500,000 and 2,600,000 income taxpayers today. If only income taxpayers paid for old age pensions by direct contribution it would amount to $124 each a year. For very good reasons, however, the old age pensions committee did not want a direct payment as you would pay an ordinary private insurance premium and they arrived at the 2-2-2 principle. The two per cent on income is the premium for that insurance, and it is the only premium directly visible to the individual. If people want to lump that two per cent for old age pensions into the general income tax, then with equal logic they should lump the unemployment insurance premium into the general income tax, with equal logic workmen's compensation premiums, and with equal logic the payments they make for other insurance.
One obvious exception is family allowances, where we do not in any way attempt to separate the contribution, premium, or whatever you want to call it, from general taxes. There again I think the figures are interesting, because in the case of family allowances we do acknowledge in the tax tables that these are paid directly out of taxes and compensate for this in the children's tax exemptions. As you know, we have two different types of exemptions for children. There is an allowance of $400 if the child is not in receipt of family allowance. That is in the case of a child over 16 or a child of a family that has not been in the country for a year. Again
The Budget-Mr. Sinclair taking the example of a man with two children, that means that the man with two children not in receipt of family allowance actually get an income exemption of $2,800 a year. On the other hand, the man with children eligible for family allowance does not receive as big an income tax exemption. He receives only $150 a year for each child, therefore on the face of it his total exemption is $2,300. However, when the tax he pays to the government is equated against the family allowance he gets in cash from the same government we find that he has to earn more than $3,147 a year before he actually makes any net payment to the government. Just as a matter of interest, a man with five children, if they are not on family allowance, has no income tax payment to make until he earns $4,000. If he is in receipt of family allowance, he does not pay any net payment until after he has earned $4,750. These are, without a doubt, the highest income tax exemptions in the world.
Turning now to corporation taxes. It is true that we were only able to reduce that by -6 per cent. I think the businessmen and industrial leaders of this country still believe that, high though this corporation tax is, it is much better, gives greater encouragement to production and less encouragement to waste than if we had introduced an excess profits tax.
Another interesting point is the relief given to a certain class of corporation, those public utilities which are controlled by the provinces and regulated so far as their rates and profits are concerned. We already pay half of the corporation tax on the earnings of these public utilities back to the provinces. Of course, this comparison can only be made in some provinces because in others, notably Ontario, these utilities are for the most part publicly owned and pay no corporation tax. This puts the private utilities at a disadvantage. This 14 per cent reduction in corporation tax to them is a measure of relief because of that situation.
Then, at the other end of the scale the minister has commenced something which I think is very laudable. In this country today we have this combination, side by side, of privately-owned companies and crown companies. The great advantage these crown companies have, of course, is that they do not pay corporation taxes. When the corporation tax is 50 per cent in eight of the provinces and 52 per cent in the other two, that is a considerable handicap to private industry so far as comparison is concerned. This year the proprietary corporations of the federal government are going to pay corporation tax to the government. True, it is

The Budget-Mr. Sinclair only a matter of taking the money from one pocket and putting it in the other so far as the federal government is concerned, but for the first time it will put these corporations on an equal footing with private industry so that we can compare the relative efficiency of private corporations and crown corporations.
Turning now to the indirect taxes, there was an interesting comment made by the leader of the Social Credit party last night. On page 1491 of Hansard for April 22, 1952, he said that since the Liberal party came into power they have relied more and more on indirect taxes. Then he said:
It continues, as any study of the budgets down the years will show.
I would say that the hon. member's study was not a very deep one. I do not want to be unkind, since I have reformed, but he could have gone to the library and found the facts by looking up the last budget before we took office, that is the Rhodes budget on page 1989 of Hansard for 1935. In that year only $76 million out of the tax revenue of $336 million were direct taxes. In other words, 22 [DOT] 6 per cent of the tax revenues in 1935 were direct taxes. If the hon. member will then look at page 1259 of this year's Hansard, he will find ini the minister's statement that $2,600 million out of $4,095 million of this year's tax revenues are direct taxes. Today 63 per cent of the tax revenues of Canada are from direct taxes. We have gone from the 23 per cent we inherited from the Tories to 63 per cent this year-a remarkable change.
If the hon. member were even to study the present budget he would see that the only substantial tax cuts are in the field of indirect taxes, excise taxes, special excise taxes and the tax on cigarettes. Undoubtedly if we could have a single tax today, the best single tax would be the income tax. Fifty years ago they thought the best single tax would be Henry George's single tax on land. Their criterion was different. They thought a tax should be related to the benefit received, but today we think that ability to pay is the soundest criterion of taxation. At the same time I think most of us here appreciate the reasons why a single income tax to replace all other taxes, no matter how desirable it might be academically, is neither desirable nor practical. I remember Mr. Ilsley in 1944 or 1945 giving a very fine statement to the house on this matter.
In so far as excise taxes are concerned, of course the general excise tax has been cut back from 25 per cent to 15 per cent. I remember that last year the member for Eglinton

never mentioned the increase in the general sales tax to take care of old age pensions from 8 per cent to 10 per cent as being a 2 per cent increase, but always mentioned it as an increase of 25 per cent. I hope that this year the hon. member will not mention the reduction from 25 per cent to 15 per cent in excise tax as a reduction of 10 per cent but on the same grounds he used last year will call it a reduction of 40 per cent. The reasons, of course, for the increase last year and the decrease this year were given in the two budget speeches of the minister. This tax was put on last time when war came in Korea, and it was primarily for revenue. A secondary reason was the shortage of steel and copper and the need to restrain spending. Well, in the past year the country has been more buoyant, production has been greater, prices and wages have been up, and so of course, tax revenues have been better. The second thing is, of course, an increase in the ability of the steel mills and copper mills of Canada and the United States to meet the demand for steel and copper, and this, to a degree, has relaxed pressure. Moreover the cost of living has levelled off. I do not want to prophesy, but I think that this level will continue, because of the fiscal and monetary actions which were taken by this government to curb inflation. All these factors give the opportunity to give this relaxation in excise taxes.
The customs tariff changes are best discussed when the schedules are before us. Here again there is a very interesting pattern. I came across it because of the remarks of the member for Peace River (Mr. Low) on indirect taxes. In 1867 over 90 per cent of the revenue of this country came from customs tariffs. In 1914 it was 57 per cent and in 1935 it was 26 per cent. In this budget it is down to 9 per cent. In the old days it was a principal source of revenue. It was also a weapon for protection, but primarily it was for revenue. Today it is a minor source of revenue. Because of our adherence to the general agreement on tariffs and trade, and because of the policy of this party towards reducing tariffs especially on primary production, we have steadily reduced the protection aspect of our tariff schedule.
The other comment I would like to make is on the opening remarks of the hon. member for Rosetown-Biggar (Mr. Coldwell) when he recalled the budget introduced when he first came into parliament in 1935. The minister in his budget speech made an analysis of the present expenditures on page 1249, and I think it is interesting to compare 1935 and 1952. This year we are spending

roughly $2 billion on defence, and that of course was unknown in 1935. This $2 billion defence expenditure has been acknowledged as a necessity by all parties in this house, and some parties would go farther than that. There is $900 million for social security which the minister mentioned, and that was almost unknown in 1935. Today old age pensions, old age assistance, family allowances, veterans benefits as a consequence of the war, unemployment insurance, and national health grants are with us and I think every party in this house approves of those things. The greatest check, and I think a necessary check from a taxation point of view, is that with the social security benefits there should at all times be a realization of the cost. The best way to do that is to directly associate the benefits with some definite contribution as we have done with the old age pension.
There is $180 million for provincial subsidies and tax rentals. Subsidies, of course, were known in 1935 but tax rentals were unknown. Tax rentals have been, for eight provinces at least, a very forward step in spreading across the country extra revenue because of increased national production and increased population. There is $440 million for interest on debt. The main reason for that great increase was the last war. The only way to reduce that burden is the way the Minister of Finance has been following since the end of the war. There has been $2,300 million taken off the principal and $62 million a year off the interest. We have actually paid the total cost of the first three and a half years of the last war.
Then, finally, there is $100 million in grants and subsidies, subsidies on freight rates, coal, lime and all these various subsidies which the groups in this country urge upon us and which members of parliament, especially the opposition, think are too niggardly. Of all these amounts almost $1,500 million are transfer payments and not expenditures by the federal government. They are actual transfers of cash passed to the provinces and individuals for them to spend. That leaves out of our present budget about $580 million for direct operating budget, and $157 million for capital construction and replacement. In relation to 1935, when you take into account first of all increased costs and prices and, second, the expansion of this country, that is not at all an unreasonable expansion, in direct operating costs. It is in the other directions -directions approved by this parliament- that our budget costs have gone up so greatly since 1935.
In conclusion I want to turn back to the financial critic of the opposition.
The Budget-Mr. Sinclair

Topic:   THE BUDGET
Subtopic:   ANNUAL FINANCIAL STATEMENT OF THE MINISTER OF FINANCE
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