U.S. Tax Plan Would Have Hurl Canada

Press, Volume CII, Issue 30192, 25 July 1963, Page 6

U.S. Tax Plan Would Have Hurl Canada

[Spacial to N-Z.P.A from MKLVIN SUFR. A] TORONTO, July 23. Canada’s annoyance with President Kennedy has turned to relief now that the United States has promised to exempt it from much of the impact of the new securities tax.

Perhaps just as imE artant is that the ennedy Administration has learned that what may appear to be sound policy in Washington can be a bombshell for the Canadian economy. Last week, President Kennedy announced he was seeking Congressional approval of an excise tax on purchases by Americans of common stocks and bonds of 22 industrial nations. The idea was to curb the excessive drain of United Spates gold and dollars as a step toward reducing the country’s balance of payments deficit now running ait a rate of more than tlhree billion dollars a year. The tax which amounts to 15 per cent, on tihe purchase o? common stocks, and ranges from 2.75 to 15 per cent, on bonds, is aimed chiefly at discuraging heavy ' borrowing in the United States by Europeans.

Effect on Europe

It is explained that while there is enough money in Europe to take care of bond issues, lower American interest rates tend to act as a magnet for Europeans watehing for a chance tn save money.

While Europeans may shrug philcsophicaTiy at Washington's moves to make borrowing in the United States less attractive. serious shock waves are felt in Canada. The first reaction was a sharp drop in the prices of industrial stocks on the Toronto . and Montreal exchanges. This was followed by expressions of serious concern in Parliament. The Opposition leader, Mr D.efenlbaker, suggested that perhaps the development marked the end of the good relations the Liberals felt they had established earlier during meetings between the

Prune Minuter, Mr Pearson, and Presddewt Kennedy. Mr Diefenijaker, who had been criticised fry the Liberals for his own relations with She Americans when he was Prime Minister, wondered whether this was the end of the "Honeymoon of Hyaamsspart,” referring to the site of the KemiedyPeansan meetings. It is more likely, however, that Washington simply did not know how hard the tax would Mt Canada.

It is true thalt Canadian provincial and municipal governments borrow quite heavily in the United States. It is also true that much American money comes to Canada to pay for common stocks bought by Americans. Balance of Payments Whait President Kennedy’s lieutenants seemed to overtook was that Canada has its own serious balance of payments deficit with the United States and that the inflow of money for bonds and stocks is essential to keep Canada’s reserves from fading. It was not until a highlevel Canadian Government delegation visited Washington last week-end to explain the situation to the Kennedy Administration that the Americans became aware the proposed tax could have a devastating effect on Canadian economy. As a result, a clause is to be inserted into the legislation giving President Kennedy himself the right to exempt new issues of Canadian securities offered for sale in the United States. It is generally understood this exemption will be applied liberally. Basic to the whole situation is that Canada buys considerably more goods each year from the United States than it sells to the United States.

Because of this and because it pays large amounts of money in dividends to American investors, it has an account deficit averaging a billion dollars a year. Canada borrows four to five hundred million dollars a

yea in the United States but the money is used to finance purchases ot* American goods and servtees and pay dividends

The imposition of the tax on Canadian bonds and common stocks would have forced Canada to increase its interest rates 1 per cent, or more in order to overcome the effects of the tax and make Canada attractive once again to American investors.

The effect of the higher interest rates would have been to discourage borrowing by Canadians as well and would have put a damper on economic expansion.

This, in turn, would have seriously aggravated Canada's already-high unemployment. Mr Pearson’s political opponents have been quick to point out that in curbing Am<arican investment in Canada Pret-ldent Kennedy was doing what Canada’s own Finance Minister, Mr Gordon, had tried to do in his Budget several weeks ago. However, what Mr Gordon wanted to do over a period of many years President Kennedy would have accomplished in weeks, or months. In this respect it is like aspirin: taken a little ait a time it is beneficial; in large amounts it can be lethal.