The Nineteen Twenty-Eight Budget

The guest of the day was introduced by PRESIDENT FENNELL, and spoke as follows: I cannot agree with the President that the budget is an interesting subject. It may be an important subject, it may be a subject that affects us more or less in our practical lives, but that it is interesting I cannot admit; even I cannot expect to be able to make it interesting. When I received your invitation an idea occurred to me. I realized that this is, as far as my knowledge goes, the first occasion on which a professional economist had been asked by a Canadian audience to express views about the budget, and that seemed to be an occasion worthy of recognition, so not on my own behalf but on behalf of my fellow economists, I accepted, and I welcome this invitation as one to the whole body of economists as a profession. It is after all reasonable that economists should have ideas on the subject of the budget, but it does not seem to have occurred to anybody before now that they might. (Laughter.)

I have a lot of views about the budget, and they are of a very mixed character. I do not think they have very much of a political character. I am not a politician; I am not regularly attached to any particular party. I have my sympathies, I have my leanings; you may be able to detect them, and it is possible again that you will not. (Laughter.) But I can see good in both parties and I am going to endeavour to indicate to you that I do manage to approve of the budget in some respects, and also to approve of the criticisms that have been hurled at it from some directions.

Unfortunately, budgets in Canada are an excessively political topic. They are almost the only political topic. The budget is almost the only thing that a political party can do in Canada in the way of influencing votes, and after all, influencing votes is the chief business of politicians. (Laughter.)

A budget is a thing that must be done annually; it is one of those things that a politician cannot avoid doing something about, and therefore it becomes the chief means of practically influencing votes, of attracting votes and repelling votes towards the next election. Now this is not the case in other parts of the British Empire. I look at the British Parliament, and I find that there are a large number of issues upon which the parties do cherish strong feelings and with which you could actually influence votes. It is, of course, much better for the country that governments should do as little as possible than that they should do as much as possible. The electors are wrong. They are always clamouring for the politicians to do things, and in the long run it is much better that the politicians should do as few things and as small things as they possibly can.

I assume that you do not want me to discuss the national balance sheet. You want me, as I take it, to deal with the budget as it effects changes in the fiscal system. These changes are not very numerous or exciting. As far as the tariff is concerned, the chief changes appear to be in the textile schedules, and one or two other smaller matters. Now I hope you will not expect me to discuss the textile schedules at any great length. I am not a textile expert. The changes in the textile schedules have been made after a fairly interesting enquiry into the operations of that industry, conducted by the Advisory Board on Tariff Taxation. And you will permit me to say that I do think it is better that the tariff changes should be made after some such preliminary discussion than that they should be made without any such preliminary discussion at all. It does appear to me to be a good thing that tariff changes should be preceded by a serious examination into the evidence in the case affecting a particular industry, an examination conducted in circumstances which allow a cross-examination of the various parties concerned, which will bring the various parties together so that they can check up on one another's claims, and which therefore make the discussion much more practical, much more effective, than any mere series of claims made by separate and more or less irresponsible people, not taken subject to cross-examination, could possibly be.

The mere discussion among electors, among ordinary electors, among ordinary people, about tariff changes, generally simmers down to an expression of two viewpoints, the viewpoint of the people who think that the tariff cannot possibly be too high, and the viewpoint of the people who think that a tariff cannot possibly be too low. In that discussion the people who think that the tariff cannot be too high have one slight advantage, there is no opprobrious epithet that is applied to them. People who think the tariff cannot possibly be too low, are obviously freetraders, because free trade is presumably the lowest possible tariff as far as protection is concerned, and therefore people who believe the tariff cannot be too low have to shoulder the burden of the epithet "free trader," slightly opprobrious in this country. Both those points of view are of course entirely wrong, and they are purely theoretical points of view. No practical person, no responsible person, no person actively engaged in the business of government, is going to go far on either of those views in practice. The tariff is something that can be too high in a particular item, and it can be too low. And the business of the government is to find out as approximately as possible, about where it ought to be in justice to the consumer and all the other interests concerned. There has been a good deal of discussion already, most of which you have probably read, about the effects of the changes in the textile schedules, which went into operation some four or five days ago. Much of that discussion appears to be slightly premature. It is difficult enough to form an opinion about the effects of the tariff changes that took place one year, two years, three years ago, and it must be slightly more difficult to form an opinion about the effect of those which took place a week ago.

There were some changes in the duties in the automobile industry, I think, two years ago, and they still seem to be under discussion. On my way here I read, in the Montreal Gazette, a speech by my friend, T. A. Russell, in which he remarked that the tariff changes made two years ago by the Federal Government had placed serious handicaps in the way of the Canadian automobile manufacturers. At the end of the speech there was given a list of the persons who were present, and from this list I found that many of the eminent Conservatives of the Province of Ontario were on hand to hear Mr. Russell's speech. (Laughter.) It was not a gathering to celebrate the closing up of the automobile industry in Ontario, but to celebrate the opening of a new and enlarged plant--(laughter and applause)erected by Mr. Russell's industry. So I proceeded to read Mr. Russell's speech more carefully, for I felt sure that he could not have been in quite such a bald contradiction of the circumstances of the case. I found that he went on to say that while the changes had placed serious handicaps in the way of the Canadian automobile manufacturer, his company feels that "to a measure we have succeeded in overcoming those handicaps." A splendid item. If it had not been for those changes, I do not suppose Mr. Russell's company would have known that it could overcome those handicaps. It never would have been provided with the opportunity of patting itself on the back for having overcome them. This morning when I arrived in Toronto I examined your Toronto papers for further light on the same speech, and I found that one of the members of the House of Commons had been informing the company that while it was true that parts of the automobile industry were still flourishing, still they were the wrong parts. (Laughter.) "There can be no doubt," said the member (Mr. Anderson), "that the low tariff legislation of last year injured the early stages of manufacture of our products, and this will be equally harmful, let me say, to the automobile industry. A large number of parts that enter into the automobile truck are manufactured outside of Canada and are admitted free of duty. True, it has helped the secondary stage of manufacture, but it has changed our automobile industry altogether, and today it is becoming to a great extent an assembling industry." This, I said, is very sad, and is probably quite right. I looked back to the Gazette of the night before to see what part of the plant Mr. Russell was celebrating in this assembling industry, and I found that Mr. Russell is a little distressed at being called an assembling industry. "Mr. Russell resented the notion that automobile plants in Canada were mere assembling institutions. Although this might have been the case at one time, it was far from true today. The Willys-Overland manufactured the cars as well as the wheels, crank-shafts, clutches and engines, and the plant was in every sense a real manufacturing plant." I am very glad of it. That shows you how difficult it is to arrive at a correct and intelligible estimate of the effect of tariff changes made two years ago, unless one approaches them from the ready-made standpoint that a tariff cannot be too high or cannot be too low; then there is no trouble. I suggest that it is even more difficult, and you will not expect me to discuss with any serious effort at analysis the changes in the tariff which went into effect only a week ago; and the wise thing is to wait a little while and see what effect that will have. After all it will be some months anyway, perhaps a year or two, before we are called upon to express an opinion upon them at the polls.

There is another set of tariff changes about which I do know a little more. There is a change in the paper industry, about which I know a little, which affects the business of the publishers of periodical magazines, manufacturers of periodical publications. May I say here that I have felt for a very long time, and I think I have probably expressed to this Club the feeling that if there is any industry in Canada that is entitled to a certain amount of protection, at any rate enough protection to bring it up to the general level of protection in this country, it is that of the publishers of those periodical magazines and other periodicals which are actually affected by competition from outside. (Applause.) As an industry they may not be very immense in dollars and cents, but I think that their influence is out of all proportion, their importance to the country, their importance to our national interests, is out of all proportion to the mere amount of dollars and cents that they represent. Unlike the automobiles in which we ride, and the foodstuffs which we eat, they do influence the minds of ourselves and of the rising generation that is going to succeed us, and it is important for that reason that they should be placed in the best possible position to compete with the products rival to them which come into this country from outside and which exert no influence toward the development of Canadian national feeling. Now there are two obvious ways in which the periodical industry might have been aided. I believe that their application for aid took an alternative form, or took two successive forms, first an application for tariff protection--and for myself I am unable to see why that could not have been operated and second, for a reduction of duty on some of the raw materials which go into the manufacture. They obtained a reduction of duty, or a drawback of duty, on one of the raw materials which enter into their manufacture, namely, the paper which is employed in printing. May I point out to you that there are two types of periodicals which will be affected by this drawback on paper. There are the purely literary publications, that is to say, those that are devoted to the publishing of critical literary, imaginative work, fiction, critical writings, essays, and so on, which are directly and constantly subject to an immense competition from the United States, and some slight competition from Great Britain. And there is another type of periodical entirely, the technical trade periodicals, which are not subjected to any competition of the kind. The technical periodical is protected in its field by the very nature of that field itself. It is protected in its field as the local newspaper is in its field. Your newspapers in Toronto do not suffer from the competition of Montreal newspapers. You do not want Montreal newspapers, you want your own Toronto newspapers with your own Toronto news. All you import in the newspaper field are newspaper owners, not newspapers. (Laughter.) The technical papers, the agricultural papers, so far as they are technical, and agricultural, so far as they exist to circulate news, information of the trade of agriculture, or any other trade, are protected naturally in their field in precisely the same way. They do not need any further protection, and it would not do them any harm or any good if there were a tariff on outside American agricultural periodicals, because they are not greatly wanted in this country anyhow. They do not contain the news, the information, that the Canadian agriculturist wants; and the same is true of all the other technical periodicals. The effect of this drawback in the paper duties, therefore, will be on the one hand to give some slight advantage, not, I think, a very serious one, to those periodicals which are in actual competition, those literary and fiction and essay and critical periodicals which are in actual competition with periodicals from outside, and to give a very decided bonus to the existing technical and agricultural papers which seem to me to be getting on fairly well in Canada even as it is.

May I pass for a moment to the sales tax. The rest of the budget consists chiefly in changes in the various forms of direct taxation. The sales tax is a tax which we instituted some years ago with a great flourish of trumpets, and under the impression that it would be of great value in preventing us from spending money on things we should not, and that it would restore a depleted exchange. Well, it did restore the depleted exchange and the exchange is not now so depleted, and we can afford to do without some of the tax. If there is any tax we can afford to do without, it seems to me it is the sales tax. I regret that the reduction is so small, and also that the budget contains no intimation of any prospective further reduction. It may be that that is being treasured up for us as a gift for next year. I hope so. The tax is certainly a poor one in itself, but it is a nuisance tax that involves a tremendous amount of bookkeeping and labour, the whole cost of which is naturally added in the cost of the article to the consumer.

Then there is the income tax on which I cherish some strong and unorthodox views. They are not unorthodox among economists, but the views of economists have had no weight in this or any other country that I know of. However, it won't do any harm to voice them before you today. The income tax of this country is a good tax in principle, and if consistently applied would be a good tax in practice. It is the one tax which can be effectively graduated in such a way that the man who can well afford to make a larger proportionate contribution to the upkeep of the State can be made to do so. The personal income tax, as it affects direct personal incomes, graduated so as to rise to a higher level upon large and very large incomes, is a tax which is admired and favoured, I believe, by practically all schools of economists, and I have no hesitation in saying that I think it is unanimously favoured by all professional economists in this country, in spite of the fact that it has in the last year or so been subjected to an extraordinarily vigorous and noisy attack by persons without any economic professions. But the income tax as administered in Canada is a great deal more than an income tax. It contains elements which are not an income tax at all, and those elements are elements which the Government has not only not reduced--for I decline to admit that a reduction of one-tenth of one per cent is a serious reduction, it is merely an effort to make methods of calculation easier--these elements are not only not reduced but no suggestion is held out that they are going to be reduced in future, whereas the personal income tax we are told it is the policy of the Government to progressively reduce. The income tax in Canada includes the tax on corporations. Now a corporation has no income. A corporation consists of a body of persons who hold shares in it, or otherwise make it up. They have incomes. They derive part of their incomes from the corporation, if it is lucky enough to make a profit. Their incomes are taxed when they reach them. The corporation is incapable of enjoying anything; it not only has no soul, but it has no body. It has not the capacity for enjoying anything. True income, as you will find in any textbook on economics, is measured by enjoyments, by the satisfactions that the individual receives. Income does occur when the individual receives wealth and puts it to his own use. It does not occur when a corporation receives wealth and puts it to its own uses, until that wealth is distributed to the individual owners. The corporation income tax is a double taxation of a direct kind; it is a penalization of the more efficient corporation in favour of the less efficient corporation, tending to keep alive the less efficient marginal operator in a body of competitors, and to make it more difficult for the more successful, more able operators in that line to get along. And yet we hear no word of protest raised against it. I do not see in the entire debate, so far as it has yet proceeded, any indication that any party in this Dominion proposes to advocate the abolition of this corporation income tax, which, you remember, was originally instituted as a means of tapping the income of the individual recipient at its source, a very reasonable and proper thing to do. It is easier to get income at the source than after it has passed to the hands of the individual. But with the abolition of the exemption arising out of dividends, the exemption of dividends from corporations that pay the corporation income tax, that anticipation of the collection of personal income tax disappears, and the corporation income tax becomes simply a double income tax. More than that, the corporation income tax, as it exists at present is a very potent factor in the misrepresentation of the results of corporation activities in their financial statements. (Applause.) It becomes highly desirable, I might

almost say essential, for a corporation if it is making any money at all, to conceal from the Government, and incidentally from everybody else, how much money it is making. So far as the money it is making has to be distributed in dividends, to that extent of course it cannot be concealed, but this policy of taxing corporation earnings, and not exempting dividends, has led to the piling up of concealed reserves, to the making of enormous allowances for depreciation, and other forms of reserve allowances, which any reasonable person can see are extravagant and extortionate, but which allow the company to report its earnings as being apparently visibly much lower than they really are; with the result that many of our corporations are piling up substantial increases in assets, not stating them to the public, not stating them to their own shareholders, and the system intensifies that tendency which is inherent in all corporation organization, that tendency of affording much more information about the real state of the company to those who are engaged in its directing and operation than its shareholders can possibly obtain. It is a system which I as a financial journalist cannot but regard as exceedingly unhealthy, as affording a constant temptation to manipulation, and as unjust to the shareholders of the concerns. In addition to that, this corporation income tax is also a prime factor in the process which is now so very prevalent of repeated re-financing of industrial and other corporations, because unable to distribute the profits that they have made, unable to declare those profits, unable to show them in their balance sheet, storing them up year after year in the form of reserve or depreciation allowances, and so forth, the company eventually finds itself with an actual value so far in excess of the value exhibited in its balance sheet, the only thing that remains to be done is to sell it out to some new company that will provide it with a new balance sheet and a fat fresh stock issue which will enable it to make a balance sheet which will correspond more closely, more actually, with the real condition of affairs.

One word more about the income tax before I close. I have suggested that true income is a matter of enjoyments, of satisfactions. If I, by working very industriously in my capacity as a financial writer, manage to make $5,000 or $6,000 a year which I do in good years, not in bad--and by living very carefully am able to save a thousand dollars out of that enormous sum, which requires very careful living, I am taxed upon that entire amount just as if I had blown it all in, and actually enjoyed it, received satisfactions for it. I save a thousand dollars and I lend it to a bank or invest it in some kind of securities, and I do not lose it, and if the bank does not break, or the securities go wrong, what return do I get from it ? I get 3%, 4%, 5%, 6%, or if I am very lucky, 7% income for the remainder of my life, and have the privilege of leaving the thousand dollars to my heirs at my death. I am taxed on the 3%, 4%, 5%, 6%, or 7% income just as I was taxed on the thousand dollars, when I made it, but the 3%, 4%, 5%, 6%, or 7%, is the only real satisfaction I have got. It is not satisfaction to me to own the thousand dollars. It might be a satisfaction if I put it for instance into a house, and used it, but in the form of an investment it is not a satisfaction. By taxing me on that part of my income you are discouraging me from saving, more than I need at the moment, to provide for the future. You are taxing me on what I save as well as on what I actually enjoy. Is it possible, you will say, or the practical politician will say, to tax a man on what he actually enjoys, and not upon his cash income, including what he saves ? Yes, it is perfectly. May I say that in all these remarks on this subject I am quoting the opinions of Professor Irving Fisher, one of the most eminent of American economists, and a man illimitably optimistic because he has undertaken to convert the practical politicians and practical business men of his country to a correct conception of the nature of income, a great and hopeless task. It may be done, but I can hardly conceive that it will be done in his lifetime. He has undertaken to convince them, and I am starting the process of convincing you that a man's true income is that which he spends on his own enjoyments. This thousand dollars that I might last year, if I had been very thrifty, have saved out of my income, I might have put into mining stock, and that mining stock might have gone entirely wrong this year. The Dominion of Canada would have taxed me last year. Would it have rebated me on that loss this year ? No, you know that. Would I have derived any real income in the way of any real satisfaction from the temporary possession of the thousand dollars ? No. If I had lost it during the year in which I made it I might have escaped paying income tax on it, but by losing it a year after I made it, having had the pleasure of having it in my possession over Christmas and New Year's, I am obliged to pay income tax on it before I actually come into possession and enjoyment of it, and then losing it without ever coming into possession and enjoyment of it at all. A true scientific income tax is an income tax which would fall upon the satisfactions that a man secures during the year for which the tax is levied, the money he spends on the satisfaction of his personal desires and those of his family; not his gross income in the sense of every penny that comes under his control, because if he saves a portion of those pennies he may lose them next year, and in any case he is not enjoying them this year. You can tax them when he spends them. If he invests them and derives an income from them for forty years, or a thousand years, tax him every year on that income, but why tax him on them when he has not entered into any enjoyment of them at all ? The process is not difficult. You call on a man to return his actual income, but you call on him to make a return also of the amount which, out of that income he has put aside into permanent investment, in which, I think, should not be included the house in which he lives. It is permanent in a sense, but it is also a satisfaction. So automobiles. But stocks and shares in companies, certainly savings in the bank, certainly anything else which is in the form of deferred spending power, take that from his income as returned, and you have his satisfactions during the year, and you can tax him on that with perfect logic and accuracy and with perfect graduation in the rate at which he should be taxed, because the men who spend largely is obviously in a position to make a larger proportionate contribution for the upkeep of the country than the man who does not spend so largely.

The thanks of the Club were tendered by COLONEL FRASER.