These securities are mostly held by institutional investors, less affected by such taxation than are individuals. Approximately $6,250,000,000, or over 10 percent of them, are in trust funds of the Government or its agencies. There are many individual investors who have taken refuge from surtaxes by putting a portion of their funds in these securities, but the aggregate of securities thus held is not large as_compared with the total volume. In 1935, when the matter of taxing Federal and State issues was brought up, with some idea of doing something about it, Federal authorities estimated that taxing the securities could be made to produce additional revenue of about $80,000,000. It is doubtful if even with the $4,000,000,000 of tax-exempt securities now outstanding the additional revenue could be made to produce more than an additional $10,000,000. Hence, the indisposition of the Government to press the matter of taxing these securities at this time. TAX LAW AGITATION SEEN Nevertheless, so long as so great a mass of wealth goes without taxation or adequate taxation it is likely there will be agitation for a change in the tax laws. Instead of showing any improvement in the past few years, the situation is growing worse at a rapid rate. The change has been especially rapid in the past 2 or 3 years. Before the World War, in 1913, the amount of such securities wholly tax exempt amounted to $3,631,000,000 for the States, Territories, and their subdivisions, and $967,000,000 for the Federal Government. This gave a total of $4,598,000,000. By 1920 the securities of States, Territories, and their subdivisions amounted to $6,000,000,000; those of the Federal Government to $2,294,000,000 and the Land Bank System $210,000,000. Only a portion of the Liberty bond issues were free of surtaxes, which was the case with the issues of the States and their subdivisions, and of the land bank. At that time the wholly exempt securities amounted to $8,504,000,000. The Federal Government has issues outstanding free of normal tax in the amount of $21,767,000,000, making the total of such issues free of normal taxing, if not more, $30,271,000,000. During the twenties the indebtedness of the Federal Government decreased, while that of the States and their subdivisions increased at a startling rate. By the end of the fiscal year 1930 tax-exempt securities of the States and Territories amounted to $14,385,000,000 of the Federal Government $3,585,000,000 and of the Land Bank System $1,802,000,000, a total of $19,772,000,000. The Government's issues, which were free of normal tax, only amounted to $12,337,000,000, making a grand total of $32,109,000,000. Two years later the tax-free indebtedness of the States and their subdivisions had risen to $15,741,000,000; that of the land bank had fallen to $1,645,000,000 and that of the Federal Government to $8,063,000,000 or $25,449,000,000. The Government's issues free of normal tax amounted to $12,034,000,000, making a grand total of $37,483,000,000. As of June 30, 1936, according to Treasury Reports, the amount of wholly tax-free bonds outstanding was $37,611,000,000, including $20,021,000,000 for States, Territories, and their subdivisions; $15,272,000,000 for the United States and $2,318,000,000 for the land bank. $59,661,000,000 TOTAL In addition, there was $17,717,000,000 of the United States securities, $252,000,000 of the Reconstruction Finance Corporation, $2,856,000,000 of the Home Owners' Loan Corporation and $1,225,000,000 of the Federal Farm Mortgage Corporation outstanding free of normal tax-a total of $22,050,000,000, making a grand total of $59,661,000,000. Four years ago, say at the end of March 1933, the interest-bearing debt of the United States was $20,992,000,000. As of the 31st of last March, it was $34,728,000,000. In March 1933, outstanding obligations of the Land Bank System amounted to approximately $1,600,000,000. As of March 31, last, they amounted to $3,520,000,000. In 1933 the Home Owners' Loan Corporation had no outstanding obligations. At the end of last March its outstanding issues amounted to $2,993,000,000. At the end of March the Reconstruction Finance Corporation also had a quarter of a billion dollars of debentures in the hands of investors (banks). In March 1933, States and their subdivisions owed a funded debt of $19,265,000,000. Assuming that the outstanding ordinary issues of States and their subdivisions remained stationary-that is, that amortization offset new issues for roads, bridges, and other public works not arranged through the Public Works Administration-their funded indebtedness last March would have been increased by perhaps $25,000,000 placed through the Public Works Administration between June and March. This would give the States, Territories, and subdivisions outstanding issues of $20,046,000,000 as of March 31. Thus there is a total of outstanding tax-exempt securities of $31,538,000,000 as of last March 31, compared with $41,857,000,000 4 years previously. Substantially two-thirds of these funds are wholly tax-exempt as to all Federal, State, or local impositions. It is useless to point out that the taxation of approximately $55,000,000,000 would make considerable difference in the incomes of the Federal, States, and other governments, for there can be no practicable possibility of any considerable portion of this tax-exempt wealth being brought into the revenue picture at the present time or in the near future. Even a constitutional amendment, which would render such taxation possible, would certainly not meet with approval which did not protect present investors. At all events, it may be noted that since the Government had been engaged in heavy borrowing and refunding there has been no agitation on its part for a constitutional amendment. One significant feature of the situation, however, is that while the operations of the Land Bank System and the Home Owners Loan Corporation during the last 2 years have taken from the market approximately $7,000,000,000 of funds which have thus gone into tax-exempt securities, the most destructive effect upon the revenue standpoint is that this money has been directly transferred from taxable to untaxable wealth. I desire to read into the record, and have returned to me, the letter from Mr. C. A. Dunning, Minister of Finance for Canada, also mentioned in the opening of my statement, dated at Ottawa, Canada, July 13, 1937, as follows: DEAR SIR: On my return from England I find your letter of the 29th ultimo with reference to the issuance of tax-free securities by the Dominion of Canda. The Dominion issued bonds in the period 1916-18, exempt from Dominion income tax. The last of these issues matures in December 1937. About half of this issue has already been refunded into taxable issues and all other tax-free obligations issued during the war have been converted into taxable securities It was felt at the time these tax-free issues were floated that the Canadian investor, unfamiliar with bond investment on any large scale, required the taxfree feature in the bonds he purchased. It was imperative that the various issues be successful as cash requirments of the Dominion during the Great War were very heavy. There were some, even. at that time, who believed that the funds would have been forthcoming without tax exemption and in recent years, with the aid of hindsight, the number of persons who hold this view has greatly increased. It should be borne in mind that while these issues were exempt from Dominion income tax, they were subject to income taxes levied by a number of Provinces. I attach hereto a bulletin published by the Dominion Bureau of Statistics, giving the yields on Dominion and Province of Ontario bonds from 1919 and 1900, respectively. I also attach statement showing the yield on July 8, 1937, of Dominion, provincial and industrial bonds, all of which are payable in Canada only. This shows the differentials in yields on these three classes of bonds. I think you will be able to draw your own conclusions from these data. If there is any way I can be of further assistance, I wish you would feel free to communicate with me again. Yours faithfully, C. A. DUNNING. The material referred to by Mr. Dunning I submit for the record. Senator VAN NUYS. It may be incorporated in the record. (The matter referred to is here set forth in full, as follows:) [Published by authority of the Hon. W. D. Euler, M. P., minister of trade and commerce] DEPARTMENT OF TRADE AND COMMERCE, DOMINION BUREAU OF STATISTICSCANADA INTERNAL TRADE BRANCH (Issued June 26, 1937) Dominion Statistician: R. H. Coats, LL. D., F. R. S. C., F. S. S. (Hon.) [Price $1.50 per year; single copies 10c] SECURITY PRICES AND FOREIGN EXCHANGE, JUNE 18-24 (1926=100) INDUSTRIAL AND UTILITY COMMON STOCK PRICES Except for a few market leaders, industrial and utility common stocks moved predominantly downward during the week ended June 24. A one day rally on the 18th was followed by four days of irregular recession, and then another moderate recovery on June 24. Strength latterly in International Nickel and C. P. R. was the principal market feature of the week, and this served to offset the influence on market price averages of many minor declines. Milling and building material issues showed the only pronounced weakness that was apparent. Fluctuations of the Investors' daily index of industrial, utility and bank stocks were unusually narrow, showing a net gain lf 0.3 for the week at 128.7. Industrials advanced 0.6 to 208.5, while utilities closed unchanged at 63.1. The bank stock index moved down from 92.5 to 91.9. MINING STOCK PRICES Selling pressure forced prices for mining stocks sharply lower between June 21 and 23, before a moderate rally occurred on the following day. Both base metals and golds were affected, although movements in the gold section attracted most attention, with heavy sales of gold shares reported also from London and South Africa. The Bureau's daily gold index moved up from 105.2 on June 17, to 106.9 on the 19th, and then dropped to 101.6 on the 23rd, with recovery limited to one full point on the following day. Base metals advanced in the opening day of the week under review before falling from 255.1 on June 18 to 234.9 on the 23d, and then closing at 244.4 the next day. The general mining stock index recorded a net loss of 3.7 for the week ended June 24, the final daily figure being 130.2. LONG-TERM BOND PRICES AND YIELDS The Dominion Bureau of Statistics index number of Dominion of Canada longterm bond prices, on the base 1926=100, rose from 114.8 for the week ending June 17 to 115.0 for the week ending June 24. The success of the recent Quebec loan had a stimulating effect upon the market and the week opened with a good demand for selected issues. However, turnover was light in the main and price movements narrow. Provincials were generally firm with the exception of Saskatchewan and Alberta maturities. Saskatchewans showed the greater weakness and declines up to 4 points were noted. British Consols moved down from 741516 to 744 while the Dow-Jones average of 40 high grade United States bonds changed from 101.07 to 100.69. The index for Dominion of Canada long-term bond yields declined from 69.4 for the week ending June 17 to 69.1 for the week ending June 24. The average yield of the issues used in this index was 3.31 as compared with 3.32 for the preceding week. FOREIGN EXCHANGE The Canadian dollar declined fractionally in terms of most leading exchanges during the week ended June 24, with New York funds again moving to a slight premium and sterling rates at Montreal mounting approximately one cent to $4.944. Spot rates on the French franc were firmly maintained, but the discount on 90-day francs increased to 33 points, up 17 points during the week. The London market price of bar gold advanced two cents, closing at $34.71 on June 24. Argentine peso free rates have recently been firm, and are currently more than three cents above levels of a year ago. Monthly index numbers [From data issued by A. E. Ames & Co., Ltd.] [1926=100] DOMINION OF CANADA LONG-TERM BOND PRICES, 1929-37 DOMINION OF CANADA LONG-TERM BONDS YIELDS, 1929-37 Weekly index numbers of Dominion of Canada long-term bonds, 1937 1 1 Based upon an average of daily figures for the week ending on dates specified. |