Use tax breaks to slow brain drain: study

Young and mobile most likely to go to United States

It's taking less of a financial payoff to lure Canadians south, according to a new study which says the real question is not why highly skilled Canadians leave for the United States but why so many stay.

"Canadians' staying power in the face of large prospective gains in income is extraordinary," the authors of the study say in an article appearing in the latest edition of Policy Options, a publication of the Montreal-based Institute of Research in Public Policy.

But their staying power is waning, warn Don DeVoretz, economics professor at Simon Fraser University, and Chona Iturralde, a senior researcher at Vancouver's Centre of Excellence on Immigration.

"In 1991, highly-trained Canadians would forego $75,000 Cdn in annual income gains before moving to the United States, in 1996 $46,000 Cdn," their article states, noting that's a 40-per-cent drop in half a decade.

Once the income gains exceeded those amounts "the probability of staying in Canada collapses ... regardless of household status or previous moving experience," which are other factors in determining who will leave and who won't.

Not surprisingly, those most likely to be lured south are "young, low-income but highly-skilled earners who are about to enter their high-income phase."

"At this stage of his or her life, there are few demographic constraints on mobility and, with several decades of employability ahead of the graduate, the lifetime income gain from moving to the U.S. is at its maximum," the article says. "Thus the incentive to emigrate is at a maximum, and conversely, the probability of staying in Canada is at a minimum."

"As the years pass, however, the cumulative income gain emigrating to the United States declines," it adds. "A shorter and shorter earning period remains.

"Thus, the probability of staying in Canada increases."

Even after age 30, the probability of a male-headed household staying in Canada until retirement is 90 per cent.

As a result, the article suggests giving tax cuts to those most likely to leave and then withdrawing them once they reach the age at which the odds of leaving are virtually nil.

"This suggests a less steep marginal tax schedule for professionals, one that delays the onset of high rates to much higher levels of income," it says. "Moreover, professional income paid in kind (for example, stock options), which may yield a large gain in the future, should be taxed less heavily or at least not be taxed until the gains are realized via disposition of the assets."

"Any age-specific tax policy that aims at retaining the highly skilled should be phased out for those over age 40," the article says, noting that once they reach that age there is little chance they will pack up and leave for the U.S.

It also suggests that Canadian companies wanting to keep their highly skilled workers from going south should pursue the same strategy on the income side --using aggressive wage bidding for those aged 25 to 38 "until the aging process raises the probability of their staying."

The authors say their research, and Canadian history, also suggest ways to lure back those highly skilled workers who have already left Canada, including the offer of a temporary tax holiday. "In the late 1960s, after a decade of the brain drain to the United States, Canada induced Canadian academics to return with a combination of attractive career opportunities and three years of federal income tax forgiveness."

The lost tax revenue from such a tax holiday would be recouped even if only a fraction of the repatriated Canadians remain in Canada.

Three years will give them time to put down roots here, and it would be less costly than luring highly skilled workers from other countries, the authors argue.