Opinion Editorial | |
| Wednesday, June 23, 1999 | |
Canada's Brain Drain |
On a recent trip to Canada I learned two things. Vancouver is one of the most beautiful cities in the world and Canada has one of the worst tax systems in the world. As a consequence, despite the beauty of the country, Canada is losing its lifeblood as increasing numbers of its young and talented leave for the lower taxes of the U.S.
In my conversations, I found that almost every Canadian has family or knows someone who has left for the U.S. in recent years. Although the aggregate number of emigres is only about 50,000 per year, the impact on Canada is significant. The reason is that Canada is a much smaller country than most Americans probably think, with a total population of just 30 million, a little over 10 percent that of the U.S. With such a small population to begin with, 50,000 people a year quickly adds up to a meaningful share of the population.
Even more important than the number of emigres, however, is their composition. According to the C.D. Howe Institute in Toronto, Canada is losing is best-trained, most technically proficient college graduates in alarming numbers. As many as 40 percent of recent graduates in science, medicine and management left the country in 1991 alone. These are people that Canadian taxpayers have paid huge sums to educate. Now the returns to that investment will accrue to the benefit of American taxpayers.
There seems to be little doubt that taxes are the main reason for this brain drain. A new study from Vancouver's Fraser Institute documents this fact.
But perhaps the most significant problem with Canadian taxes, insofar as it affects the brain drain, is in the area of capital gains. Whereas in the U.S. the top rate on long-term capital gains is just 20 percent, in Canada investors pay the regular income tax rate on 75 percent of all gains. With a top income tax rate of 46 percent, that puts the top capital gains rate at 34.5 percent. When the top U.S. rate falls to 18 percent in 2001, the Canadian rate will be almost double.
The high capital gains tax is a problem because it hits entrepreneurs, especially in the high-tech sector, particularly hard. That is because startups in this area are very risky and it is difficult to raise capital unless investors have the prospect of an extraordinary return. If those returns are too heavily taxed the capital will flow into safer, less risky investments.
Even more importantly, stock options are the only way startups can attract talented workers. Since stock options ordinarily get capital gains treatment, the capital gains tax has become a major factor in the brain drain, as Canadian engineers and software developers head for the greener pastures of Silicon Valley, Seattle and elsewhere south of the border.
Tax reduction in Canada, therefore, is no longer a question of politics or even public policy. It is becoming a question of national survival. Unless action is taken soon, Canada will find that it has forever lost an entire generation of its best and brightest.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 23, 1999.
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