MACLEAN' REPORTS

BACKSTAGE IN OTTAWA

There are still some taxes the government hasn’t levied. But they’ll have to come

PETER C. NEWMAN August 11 1962
MACLEAN' REPORTS

BACKSTAGE IN OTTAWA

There are still some taxes the government hasn’t levied. But they’ll have to come

PETER C. NEWMAN August 11 1962

BACKSTAGE IN OTTAWA

MACLEAN' REPORTS

There are still some taxes the government hasn’t levied. But they’ll have to come

PETER C. NEWMAN

THE POLITICAL CONSEQUENCES of John Diefenbaker’s austerity program remain obscure, but an interim assessment of its economic effects can now be made.

The dramatic national belt-tightening introduced on June 24 has stopped the run on our dollar. No group of international speculators want to pit their resources against the billion dollars made available to Canada by the four most pow-erful banks in the world. But despite the fact that the hemorrhage of our reserves has thus been halted, there is little evidence that international confidence in Canada has been restored. The foreign investment community seems to be standing back, watching to see what the Canadian government will do next. We have yet to convince the world of our intention to follow a sane, long-term fiscal policy.

The one essential step which the government must now take — however reluctantly — to demonstrate its newly found sense of financial responsibility is to bring down a balanced budget. The intended $250-million slash in federal expenditures plus the expected $200 million in extra revenues from the import surcharges will cut by more than half the $745 million deficit forecast by Finance Minister Donald Fleming in his budget of April 10. That’s an excellent start. But it doesn’t ensure a balanced budget in the next fiscal year.

(Whether Canada will be able to keep the announced surcharges on imports won't be clear until the General Agreement on Tariffs and Trade council meeting next October. We’ll be at a disadvantage there, because at past GATT sessions Canadian representatives have

righteously attacked similar emergency measures taken by other nations, as violating the spirit of the trade organization.)

The real test of the government’s intentions —w hether it hopes merely to ride out the crisis or really to turn toward fiscal responsibility— will come with the re-introduction of the budget, probably in mid-October. (The election was called before the budget resolutions of last April could become law.) If the prime minister is serious about trying to restore confidence in his administration, the budget will almost certainly have to include some tax increases.

This means that the Conservative government will have to tap one of the five broad categories of tax sources:

/. Personal income tax: The fact that the current business upturn is based almost entirely on high consumer spending and that consumers have already been assessed the import surcharges, just about rules out the possibility of significant increases here. To go far enough toward balancing the budget, income taxes would have to be raised in the lower brackets, where an increased rate would bring in significantly higher revenues. That would be a hard thing to do in view of Diefenbaker’s stated concern with the welfare of “the average Canadian,” who would be hit the hardest.

2. Corporation taxes: With tight money already hampering industrial expansion, a further burden of added income tax would be difficult to justify. Besides, the fall budget will have to include the corporation cuts proposed in last April’s budget as incentives for added business production. (Under this scheme, corporations will be able to deduct 50 percent of their tax on the first $50,000 and 25 percent thereafter, on income which can be attributed to increased sales.)

3. Sales taxes: This seems to be the most likely (and in many ways the least painful) place for tax increases. There’s been no hike in the sales tax since the 1959 budget, when it went up from 10 percent to 11 percent, with the added revenue going to the old age security fund. Because it’s an indirect taxation, few Canadians are aware how important a source of federal funds the sales tax has become. Fleming forecast in April that for the current fiscal year sales tax will bring in $813 millions —that’s nearly half as much as the total revenue from all personal income taxes. The sales tax is applicable to all goods manufactured here or imported, except foodstuffs, building materials and most of the machinery

and raw materials used by industry, plus some items, like farm equipment, which arc specifically exempted. The main new area where the sales tax might be applied is in the service fields —such things as electricity and gas accounts, cleaning and shoe repair bills. A private calculation by the Canadian Tax Foundation, made two years ago, estimated that imposing the sales tax at its current rate on the nation’s service industries would yield the federal treasury an extra $H1() million, which would double the present sales tax revenues.

4. Excise taxes: These arc surcharges added on top of the sales tax on such items as television sets, cigarettes, liquor and playing cards. The major recent change here was the abolition of excise taxes on automobiles in the Conservatives’ 1961 budget. They might now be reimposed in a way that would hit only luxury, imported cars. Other upward revisions of the excise tax on made-in-thc-U. S. luxuries arc a possibility.

5. Estate arui f>ift taxes: While the Estate Tax Act was substantially revised in 1958, Finance Minister Fleming is known to have felt for some time that the gift tax (which allows a limited distribution of wealth to prevent higher succession duties) was being abused and should be made a lot stiller.

Whatever the Conservative cabinet finally decides to do in its efforts to balance the nation’s budget will be painful for a government whose leader repeatedly boasted during the recent election campaign that he had reduced the tax burden on 85 percent of Canadians since taking office. But eating words he spoke on the hustings has in recent weeks become a necessary part of the prime minister’s diet.

□ NELSON CASTONGUAY, the chief electoral officer, is one man who won't be caught unprepared for the next federal election. On June 19, just a few hours after the results of the last one became known, he placed a top-priority order with the Queen's Printer for the millions of forms needed to conduct an election. His deadline for receiving the new shipment is August 22.