Canada's big chance; President Obama's radical response to the recession could give Canada a massive economic advantage

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Appeared in the Financial Post

Yesterday, Prime Minister Harper highlighted his government's plans for dealing with the economic slowdown and presented the crisis as an opportunity for Canada: Ultimately, it is an opportunity to position ourselves so that when the recovery comes, we're among the first to catch the wave.

On one account, Mr. Harper is absolutely correct: There is a silver lining for Canada in this economic crisis. Unfortunately, his government's stimulus plan will not help us emerge from this recession in a stronger position. What will, is becoming more competitive than our southern neighbour. Given the U. S. response to the economic slowdown and President Obama's ambitious plans to remake the U. S. economy, there is a clear opportunity for Canada to create a lasting economic advantage over the United States.

In order to recognize the opportunity, one must understand the radical remake of the U. S. economy being promulgated by President Obama.

On energy and the environment, for instance, the President proposes an economy-wide cap-and-trade system that is expected to bring in $646-billion in tax revenue between 2012 and 2019. It will significantly increase the cost of doing business in any energy-intensive sector of the economy and increase the cost of living generally. Taxes derived from the cap-and-trade system will be used to fund government-selected clean energy projects. If these investments do not yield even modest rates of return, which experience indicates they won't, then the United States will have diverted significant capital to unproductive projects.

On health care, the President is moving towards a Canadian-style system by expanding government-paid health insurance, which is simply another step towards single-payer universal health coverage. The 10-year price tag of $633.8-billion is characterized as a down-payment on future programs.

And there are a host of other areas, such as education and transportation, where significant expansions of government have also been proposed.

Large tax increases on individuals and businesses have been proposed to pay for the new largesse. Among other tax increases, the top two personal income tax rates will both be increased as will capital gains taxes for high earners. Taxes on venture capital will also be increased. A series of tax changes will also result in an increase in the U. S. corporate income tax rate, which is already one of the highest in the industrialized world.

If past experience is any indication, these spending and tax increases will result in decreased work effort, investment and entrepreneurship, leading to slower economic growth.

These initiatives, coupled with the already fragile state of U.S. government finances, will place the government in a fiscal straightjacket for the foreseeable future. Under the current plan, the national debt (held publicly) is estimated to increase from $5.8-trillion in 2008 to $15.4-trillion in 2019, an increase of 165%. This burden doesn't include the fast approaching train wreck of Social Security and Medicare, whose future unfunded costs are estimated at $56.4-trillion.

An opportunity exists for Canada to create a lasting economic advantage over the United States based on the fiscal responsibility of the federal and many provincial governments over the last decade. As Prime Minister Harper correctly noted in his speech, we have the best fiscal position in the G7. Let's put it to good use.

Canada could, with a limited amount of pain, implement spending controls that would allow us to introduce historic tax relief over the next five years aimed at creating a distinct tax advantage.

The first and most pressing are personal income taxes. Canadian rates are simply too high and applied at too low an income compared to the United States. For example, the marginal personal income tax rate at $75,000 stands at 43% in Canada compared to 31% in the United States. At $150,000 the marginal rate is 46% in Canada compared to 34% in the United States. A multi-year plan to both reduce rates and increase the incomes at which they take effect is essential.

The second area is business taxes. The federal government and many of the provinces have made positive strides to reduce the burden of business taxes. Currently however, the marginal effective tax rate on capital investment is 29.1% in Canada compared to 26.5% in the United States. A series of additional tax cuts would make Canada a markedly attractive destination for investors and businesses.

The federal government should extend its decrease in the corporate income tax rate to 11% by 2012. In addition, the provinces should be encouraged to harmonize their sales taxes with the GST or implement standalone value-added taxes. Provinces should also follow the lead of the western provinces and reduce their provincial corporate income tax rate. Taken together, these two measures will help create a foundation for a real and lasting economic advantage.

Taxes alone will not suffice however. The federal government should move swiftly to invest in border-crossing infrastructure in order to reduce the time required to ship goods south of the border. In addition, the federal government should make every effort to improve the mobility of workers between countries as allowed currently under NAFTA. The more open and less congested the border for goods and services, the more attractive Canada will be as a destination for business investment and development.

Canada will also have to make a concerted effort to resist replicating the misguided policies being pursued in the United States. There is already, for instance, talk of getting Canada to replicate the U. S. cap-and-trade system for emissions.

As Prime Minister Harper noted yesterday, It is not a crisis Canada created .... But it is a crisis Canada can face and even take advantage. To do so, Canada should aim to establish an economic advantage over the United States. Such an advantage would lead to investment in and expansion of existing industries as well as the creation of new ones. This means jobs and opportunity for Canadians. The type of prosperity possible for Canada and the leadership role it could take internationally was almost unthinkable a generation ago and yet it is now within our grasp. It simply requires vision and dedication to a brighter, more competitive, more opportunistic future.

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