By Neil Brooks

The most recent strategy of those who have been advocating lower taxes on the rich has been to invoke the spectre of a "brain drain." Allegedly, as a result of the much higher taxes in Canada on high-income, talented and mobile individuals, brainy Canadians have been leaving in droves for the United States.

Migration, however, is not a marginal decision: it is an all-or-nothing proposition. People either migrate or they do not. Thus, in making the decision to migrate, what is important to people is not the tax they will pay on the next dollar they earn, but the overall taxes they pay. Consequently, anxiety about the effect of taxes on migration does not reflect a concern about the progressivity of marginal income tax rates, but a concern about the overall level of taxes, or a concern about the progressivity of average rates of tax.

Admittedly, overall tax levels in the United States are lower than those in Canada. The OECD reports that in 1995 total taxes in Canada were 37.2% of GDP, while in the United States they were only 27.9%. Press reports, however, often overstate the differential by comparing, for example, the top combined federal and provincial income tax rate in Canada, about 50%, with the top U.S. federal income tax rate of about 40%.

For one thing, although seven states do not have personal income taxes, the rest do, and the highest marginal rates in the various states range from 5% to 11%, with an average of about 7%. Also, the American income tax system has numerous "phase-outs" that substantially increase marginal rates over middle-income earners and the average rate of high-income earners. The best known is the phase-out of the 15% bracket, but, in addition, the following tax concessions phase-out: the personal exemption, the deduction for contributions to IRS, the ability to claim net losses attributable to certain passive activities, and the child-care tax credit.

As well as these explicit phase-outs, the floor under a number of deductions, such as the deduction for investment and employee business expenses and medical expenses and casualty losses, can give rise to implicit phase-outs.

It should also be kept in mind that the U.S. has higher social security taxes than Canada, as well as a wealth transfer tax that falls exclusively on high-income individuals.

Tax comparisons are notoriously difficult to make and often depend upon the individual circumstances of the taxpayer. Nevertheless, although individuals are likely to pay less tax in the U.S. than in Canada, it is not as much as often contended.

Moreover, in addition to the taxes they pay, in deciding whether to migrate individuals presumably consider the benefits they receive from their taxes. Many goods and services that are paid for through taxes in Canada must be purchased in the private sector in the United States. Health care services are an obvious example.

In addition to goods and services that provide direct benefits, higher taxes also purchase less tangible benefits such as safe streets, livable cities, economic security, and a more equal distribution of income and wealth, all of which are valued --even, presumably, by high-income individuals. In other words, while it might be true that taxes are higher in Canada than in the United States, many people are likely to find their Canadian taxes to be good value. A low-tax country may actually be unattractive to individuals if low taxes mean an inadequate supply of the public goods and services that people value.

Sociological studies on migration behaviour suggest that the primary motive for moving is job-related. Some people move because of quality-of-life factors, some move to be closer to friends and relatives, and a few might move because they receive too few benefits from government in relation to the taxes they pay, but most move because of employment opportunities.

Medical and health professionals, for example, have reportedly been migrating in increasing numbers to the U.S., but flattening the tax rates would do little to keep them in Canada. The suggestion from the interviews with doctors reported in the press is that most of them leave Canada not because of the taxes, but to engage in more advanced and sophisticated research in the United States, and because of the uncertainty, frustration and anxiety created by the hospital restructuring and cutbacks in health funding in Canada.

Moreover, to some doctors medical practice in the U.S. is simply more exciting. One doctor described to a newspaper reporter how, on his first day at a New York hospital, "he followed the chief resident surgeon around the emergency room half giddy with excitement. There were gunshots and stab wounds and operations right through the crazy New York City night, and he thought, ‘Wow! This is wonderful’!"

Does Canada really want to create the social conditions that make such doctors "giddy with excitement" in order to keep them here?

Large numbers of nurses have also left Canada in recent years, but no one has suggested that they left because of taxes in Canada. They left because they could not find work in Canada, again due in large part to government health care cutbacks.

It appears that, somewhat ironically, many of those who stand to make the most important contribution to Canada’s future --research scientists, mathematicians and physicists--have been leaving in the past few years, not because of low after-tax salaries in Canada, but because of the government’s refusal to fund basic research or to otherwise show a public commitment to Canadian science and technology.

Finally, one has to ask bluntly: even if some high-income individuals emigrate to the United States in response to our higher taxes, is the loss to Canada so serious that Canadians ought to yield to the pressure their emigration creates and refashion their public policy to accommodate them?

In considering this question, the point that needs re-emphasis is that, in theory, the threat of emigration introduces a constraint not on the progressivity of the tax system, but on the total degree of redistribution that a country can hope to achieve by the combined effect of taxation and public expenditure. That is to say, the threat of emigration constrains not just the design of one policy instrument of government, but one of the most fundamental choices to be made by a society: what is the socially acceptable distribution of income and wealth?

It is worth noting, too, that, even with the increased emigration to the United States, except for health professionals, Canada remains a net importer of skilled workers from the rest of the world. Ivan Felligi, the head of Statistics Canada, has estimated that, between 1986 and 1996, the inflow of knowledge workers into Canada outstripped the outflow by a ratio of four to one.

As for many of the rich people who leave Canada, there is little evidence that they make much of a contribution to a country’s well-being. They seem to have an exaggerated sense of their importance to the well-being of other Canadians.

Canadian taxes, Canadian values
In summary, the arguments that flattening the tax rate will simplify the tax system, lead to less tax evasion, and generate new-found economic prosperity, are all without support. They are so clearly without merit that I rather suspect that even those who propound them do not take them seriously. Instead, they likely support flat taxes because they feel that progressive taxes are a form of stealing from the rich and that the type of society marked by large inequalities in the distribution of income is to be preferred to one in which resources are distributed more equitably.

This is the fundamental difference between flat taxers and those who favour progressive taxes: completely opposite views about what constitutes the good society. Flat taxers are likely to feel that the individual is the basic unit of society, that individuals differ significantly from one another, that some are inherently more motivated, competent, and self-reliant than others, and that the good society allows for, encourages and rewards these differences.

Those who support progressive taxes, on the other hand, are more likely to believe that a good society is one in which everyone is entitled to equal respect, that there should be some measure of solidarity among citizens, that equal membership in society is required to sustain a democracy, and that these values can only be achieved if economic resources are relatively equally distributed.

A progressive tax system by itself cannot turn back the rising tide of inequality. It will take concerted action on every front, including enriching earlier childhood education, providing increased economic security and bargaining power for workers, providing high-skilled labour markets with university graduates, and so on. But a progressive tax system is an important instrument for reducing inequality. Moreover, it serves the important symbolic function of reminding people that in our society we do not necessarily think that, for example, the CEO of a beer company is worth more than over 100 nurses, or that the chairman of an auto parts company is worth over 300 kindergarten teachers, in spite of the judgment of the "free market.

At a time when over 20% of the children in this country and almost 60% of single mothers live in poverty, to give relatively well-off Canadians another tax break, through the adoption of flat taxes, would not only be bad economic policy and perverse social policy. It would be immoral.

(Neil Brooks teaches tax law and policy at Osgoode Hall Law School in Toronto. This is Part II of an excerpt from the annual Horace Read Lecture that he was asked to deliver. Part I was carried in our July-August issue).