U.S. bill would widen tax gap with Canada

$1.2-trillion cut would make 'brain drain become brain train'

While the debate over tax relief for hard-pressed Canadians continues, Americans are almost certainly headed for the largest tax cut in almost two decades.

By this weekend, Republicans and Democrats alike expect the U.S. Senate to pass a bill that slashes a massive $1.2 trillion from the government's tax revenues, widening still further the tax gap between the two countries.

It's part of a Republican plan to use the projected $4.4-trillion surplus over the next decade, by returning at least 25 cents on the dollar to the people who earned it in the first place.

In Canada, the federal government has proposed cutting federal income taxes by $16.5 billion over the next three years, a figure that is dwarfed by the proposed American reductions.

Yesterday, Canadian tax-cut advocates predicted that the size of the American cuts will be bad news for Canada, triggering more unemployment and exacerbating the "brain drain" of Canadian talent heading to the U.S. in search of higher salaries and lower taxes.

"If the government doesn't reverse this trend, we become a high-tax, low opportunity country," said federal Conservative finance critic Scott Brison. "The brain drain will become a brain train."

Through a combination of tax reduction and tax reform, he said, well-trained and highly educated young workers can be persuaded to stay in Canada instead of seeking tax sanctuary in the U.S.

He said the same approach would also reduce Canada's unemployment rate, which remains "stubbornly" twice as high as the U.S.

With Canada's economy bogged down by high taxation, deterring foreign investment and decreasing domestic capital flow, no new jobs can be created, he said.

The Tory MP warns that if the economy next door lowers taxes further and attracts capital that would have otherwise landed in Canada, the situation will grow worse.

"The tax gap is simply not sustainable and will have a significantly bad impact on our growth," said the MP for Kings-Hants in Nova Scotia.

With 55 of 100 votes at their disposal, Republicans are optimistic their proposal will muscle past any Democrat opposition, as well as overshadow a bipartisan plan to counter-offer a $765-billion tax cut, and ultimately end up in President Bill Clinton's hands for approval.

The Republican proposal offers tax breaks across the board for individuals, families, small businesses and others.

As written, it demands the reduction of the 15-per-cent income tax rate to 14 per cent, beginning 2001, and plans reduce the 28-per-cent tax rate on some incomes to 14 per cent by 2005.

Senator William V. Roth, chairman of the Senate Finance Committee and chief architect of the $1.2-trillion tax-cut bill, said that "for a middle-income family of four, these two changes will mean a tax savings of over ($690) a year."

"This is a happy day," said Senate Majority Leader Trent Lott as the bill entered the debate stages yesterday. "We are going to be talking about allowing the people to keep just a little bit more of their own hard-earned money."

But the plan could meet with fierce resistance once it reaches Mr. Clinton, who has indicated that he would veto the two proposed tax-cut bills because both are too large, would endanger the future efforts to save Social Security and Medicare, and leave no money for needed improvements in defence and education.

Federal Reserve Chairman Alan Greenspan, testifying before the Senate Banking Committee, cautioned yesterday that the U.S. would "probably be better off holding off on a tax cut" because of the uncertainty of budget surplus projections.

In light of the tax cuts' success south of the border, the Canadian federal government should have got a wake-up call to boosting tax relief a long time ago, said Sherry Cooper, chief economist for investment firm Nesbitt Burns.

And if the Liberals don't act soon, she adds, they risk throwing any competitive edge Canada has in the global market out the window.

"We have to cut taxes just to maintain our current competitive position," said Ms. Cooper. "More people leave, more businesses leave, and we underperform that much more."

She pointed to countries like Ireland as an example of how an ailing economy can boom when fed tax relief ingredients.

She said countries around the world have already adopted this boomerang expectation of tax cuts, where slashing taxes should result in economic growth that will spur overall gains in tax revenue.

Ms. Cooper said corporate tax cuts would pay for themselves through increased foreign investment, while individual tax cuts would lead to increased spending, saving, and a thriving stock market.

"The empirical evidence is very solid. ... it worked in Alberta and Ontario," she said. "The federal government is always asking 'would you like to have tax cuts, or would you like to have health care?' as if you can only choose one or the other, which just isn't the case."

The Liberal camp holding the federal purse strings is divided the issue of tax cuts

Industry Minister John Manley pledged in the spring to push Mr. Martin to quell the movement of Canadian professionals to the U.S. by enacting major changes to the country's tax system. But Mr. Manley was rebuked by Prime Minister Jean Chretien in subsequent question periods, making clear that the Liberal mantra of cutting $16.5 billion in taxes over the next three years would remain unchanged.

"We have already started to cut taxes," said Mr. Chretien. "We have reduce the (employment insurance) contribution from $3.07 to $2.55. We have reduced the tax by $16 billion over the next three years."

Last month, the prime minister deemed the so-called Canadian brain drain to be a myth concocted by "businesspeople who wanted to have tax cuts."

Meanwhile, in a recent edition of Time Canada, Finance Minister Paul Martin admitted high taxes might be hurting Canada's productivity and provoking a brain drain to the U.S. But he balked at the idea of cutting taxes any quicker than he promised.

"We're basically going as fast as we can," he told the magazine. "I wish we could go faster."