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 Title

The Brain Drain and Fiscal Policy - An Open Letter to Paul Martin

 Synopsis

An open letter to Canadian Finance Minister Paul Martin following his budget speech, March 1998.

 Author

Herbert Grubel

 Author Notes

Professor of Economics, Simon Fraser University and Senior Fellow, The Fraser Institute. Dr. Grubel was the Reform Party Finance Critic during the 1993-97 federal parliament.

 Essay - 3/6/1998

Dear Paul:

Now that I am back in academia and can no longer react to your budget from the floor of the House of Commons, let me use this medium to get your attention. First of all, congratulations on getting the budget balanced and program spending lowered. You have assured yourself a place in history through this achievement. Congratulations also on the strategy of underestimating future surpluses to keep at bay the big spenders in your cabinet and caucus.

But your budget is bad for Canada in one respect. By not lowering taxes on high income earners, you sustain the brain drain. Your laudable support for higher education will get more Canadians to graduate from institutions of higher learning but I am sure many will take their Canadian education and use it abroad.

You also failed to react to the US lowering of the capital gains tax to 20 percent, which makes it half the rate Canadians have to pay. This gap will increase the emigration of entrepreneurs who develop new products, services and technologies. These people get their rewards mainly through capital gains and are sensitive to taxes they have to pay on them. The continued high support of Canadian research and development in your budget will make some more tax-paying American millionaires out of Canadians.

Canada needs the highly skilled and innovating entrepreneurs. It is your responsibility to create the economic and tax environment that will keep them here. And it would have been so easy for you to do this. All you had to do was lower tax rates on capital gains and top income earners. Whatever the cost, you could have still balanced the budget by making other spending initiatives just a little smaller.

The brain drain is a serious problem. Take just my immediate family. It saddens me to tell you that of our 5 adult children, 3 have moved to the United States. All three are graduates of Queen’s and McGill, two of them have additional professional degrees. How many Canadian families like mine are there?

As you well know, every year a representative of the high tech industry association tells the Finance Committee of the House of Commons that high taxes make it very difficult for its member firms to hire and retain top managers. One third of the graduates in computer science at the University of Waterloo last year were hired by just one US company - Microsoft - to work in Seattle. Doctors and nurses are moving to the United States in record numbers. In British Columbia not so long ago we had 37 neuro-surgeons. Now there are 14. Guess where they went. Guess who is suffering.

It is true that these brain drain migrants take along both the taxes they would have paid in Canada and their claims on the health-care, pension and education system. But they also take along the taxes that would have gone to servicing the debt and helping the poor. To the extent that they are among the best and leaders in their fields, Canadian society is diminished .

You have been quoted as saying that brainy and entrepreneurial migrants are motivated by factors other than taxation. I agree. They tend to move for three obvious and inseparable economic reasons: greater professional opportunities, higher incomes and lower taxes. Please take with a grain of salt the surveys which report that taxes play a minor role. Respondents to such surveys have grown up in a Canadian culture of political correctness. This culture encourages them to say that they emigrate to take advantage of greater professional opportunities. Few have the courage to admit that higher after tax income drove them to leave their country. They do not want to risk being seen ungrateful to those who raised them lovingly, paid for their education and provided them with a quality of life which everyone knows is the best in the world.

And perhaps for many or even most, professional opportunities were the main motivating force for leaving Canada. Certainly, it was for my step-daughter and her husband, both of whom work on challenging artistic endeavours as film animators at a large studio in Los Angeles. But in the final analysis, the exact motive is not important. Crucial for your policy agenda is the fact that you can do very little to affect professional opportunities and pay levels in Canada in the short run.

In the private sector professional opportunities and pay levels are determined by investment, productivity and comparative advantage in the long run. The belief in the ability of governments to change these through industrial policies, state-owned enterprises or direct job creation has gone with the fall of the Berlin Wall and the humiliating performance of the Swedish and Japanese economies. In Canada’s public health care system professional opportunities and pay for physicians and nurses can be influenced directly. But such policies are in the provincial jurisdiction and raise many other issues of cost and efficiency.

The fact of the matter is that taxation is the only policy for stemming the brain drain which is directly under the control of your budget. If you lowered taxes, some potential migrants would choose to stay even with better professional opportunities and pay abroad. Most Canadians love their country and are prepared to pay a price to stay here. It is just that the price must not be too high. You had it in your reach to make that price more reasonable. I criticize you for not doing so.

Recently your Department of Finance has released a trial balloon to test the public reaction to the idea that brain drain migrants should be taxed when they leave the country. I have great respect for your advisers, but this policy is a no-brainer. During the 1980s I have attended some academic conferences at which such a policy was discussed. The idea had come from governments of developing countries and has not been implemented for obvious reasons. Is Canada going to have border guards or possibly a wall stopping people from leaving unless they pay taxes, promise to return or leave family behind as hostages? If the emigrants will be taxed on assets will Canada introduce a government register of everyone’s assets? If foreign income is to be taxed will Canada send the Mounties for collection or will they ask the FBI to do the job for them?

No, Paul, if you want to spare our country the loss of some of the best, highly trained and entrepreneurial Canadians, you have to give them lower income and capital gains taxes. You will have to disregard the members of your cabinet and caucus who believe Canada can be made into an island of socialist egalitarianism in the sea of the global economy. The welfare of the country should come before ideology.


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