Mr. Stevens:

Therefore would it not be better to

have the conference prior to the passing of this legislation?

Mr. STEVENS:

Frankly I believe that the sales tax method should be reviewed and studied. I am not authorized by my leader or my colleagues to say what I am about to say; I am just throwing it out as a hint or suggestion of my own. For many years I have studied the sales tax with great care, and from time to time I have sought to find in my own mind and to my own satisfaction some substitute for it, because it is a very valuable tax.

I think at the present time it is producing about $120,000,000 or $130,000,000 a year.

Mr. STEVENS:

It is a valuable tax, which could not be discarded without substituting something for it. Admitting that it is inequitable, as I think will be admitted by anyone who has studied its application, I believe a turnover tax right across the board, say of two per cent in war-time and one per cent in peace-time, would be more equitable and less burdensome, would produce much more revenue and would injure no business. I realize what is said about the pyramiding, but you have pyramiding under the sales tax; the pyramiding is there. I have taken my pencil and worked it out many times; I have studied it very carefully. I think the pyramiding of the low tax of say one per cent would be so minute that it would be hardly worth bothering about, whereas the pyramiding of the eight per cent tax is quite substantial. The real point of it, however, is this: the industry which is the foundation of your productive activity suffers under the sales tax, whereas if you had a turnover tax that went clean across the board, with everyone paying a small tax, it would not bear down to the point of bankruptcy, as has sometimes happened under the sales tax. I know industries which in these last few years of distressed times have gone bankrupt under the sales tax. A tax of two per cent or one per cent could not vitally affect any industry or business. I know there are those who say that the cost of collection would be too great, but that is not so at all. You have your sales tax organization to-day, together with other media of collection that could be easily invoked. Furthermore, with, the class of individuals who might seek to escape it, the individuals carrying on small cash business, to the extent that it might be evaded, in the first place, the revenue would not be affected very much; and in the second place, with a

severe penalty attached and the ease with which you could discover such evasion-it is quite simply done by checking the invoices from their sources-an example could be made of a few of them and there would be very little evasion. In addition, the amount of the evasion would not be worth the risk.

I merely make that suggestion because these are parlous times and we need revenue.

I believe that in these days-and I am speaking solely for myself, and may be treading on the toes of some of my colleagues, since I have not discussed the matter with them

we might well try some of these things which perhaps in normal times we would not care to risk. I will admit that politically at first it might have some repercussions, and that might be a reason for not trying it. I do not refer only to this government but to any other government. Even so, I think it is well worth consideration.

I have spoken at greater length than I had intended, Mr. Speaker, and I shall not further prolong the discussion. I simply repeat that in the limited time I have had to consider them I am not inclined to offer any very severe criticism of the minister's suggestions. We know perfectly well that the government must bear down very heavily in taxation at this time, and I see no reason at the moment to criticize the government's policy of establishing, as far as possible, a pay-as-you-go basis, with limited borrowings. In that connection I was glad the minister confirmed what I said yesterday with regard to the possibility of borrowing money at reasonably low interest rates. I think he agrees with the opinion which I believe is held by many that there is no sanction for the rapid increase of interest rates on government security, and I was glad to hear him make that statement. In closing, however, I suggest that he carefully review the possibility of using the gold resources of Canada to a somewhat greater extent.

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

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Mr. Coldwell

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

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

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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.

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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;.

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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

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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.