Canada sprints forward

In the mad global race to cut taxes, Canada is sprinting forward. Never mind that this burst of energy is clearly motivated by fear - this autumn brought reports that university graduates are migrating like crazy to Seattle and Detroit. What's important is that the Liberal government is pushing hard to cut taxes, a big change for the Land of Envy.

As finance minister Paul Martin Jr outlined in his October mini-budget, the ChrÈtien government will pull effective rates on capital gains down into the 20-plus percentage point range, just about even with US rates, when you include state levies.

(I say "effective rates" for Canada because Ottawa complicates matters with its habit of treating capital gains as taxable income, then reducing the levy by exempting a share of the gain from taxation - but that's another story).

Because the provinces also tax capital gains, precise charges will differ from province to province, with Albertans paying the lowest, just below 20 per cent, and Newfoundlanders the most, a bit over 25 per cent.

Moreover, when it comes to capital gains, Canadians will actually enjoy one competitive advantage over their southern neighbours. In Canada there is no holding period for stocks. So the lower rates will apply even if citizens want to sell their Intel the same year that they bought it, an understandable impulse these days, given Intel's gyrations.

Americans by contrast must wait a year before selling a stock priced at more than its basis. If they don't they pay a punitive higher rate, up to 50 per cent in some states, for having committed the sin of what is still known, quaintly, as "speculation".

Canadian income taxes too are coming down. Unfortunately, the government's reduction of the all-important top marginal rate is a small one: by moving closer the planned date for the elimination of a decades-old "temporary" surtax, the government reduces the effective top rate to 29 per cent.

But the finance ministry also plans to raise the threshold for the top rate from its frighteningly low C$64,000 to C$100,000, as well as bumping down the other statutory rates in the schedule. This change will reduce the overall tax bill for most earners, but its main effect is to smooth out the punishingly steep section of the tax schedule that deters Canada's younger workers and sends them south.

(Under Ottawa's current tax schedule, a new professional can find himself in the top bracket only two years after starting out; in the US, by contrast, a professional must earn the equivalent of more than C$420,000 before the top rate kicks in.)

More important than all these specifics is Mr Martin's declaration that it is time for Canada to make an "economic culture shift". This is a big step for the party of Pierre Trudeau, a legendary expansionist.

Only last spring Mr ChrÈtien's Liberals were telling themselves that a smaller tax cut, announced on budget day, would suffice to keep them in power.

"In 1994, the government turned a big corner when it decided to reduce the size of government to eliminate the deficit", says Jason Clemens, fiscal scholar at the free-market Fraser Institute in Vancouver. "With this budget it is turning another corner, toward making the economy competitive".

Not to mention shaking off the old bogus obsession of "harmonising" rates with other OECD countries. Canadian Liberals long used the fact that its tax rates weren't higher - or much higher - than Europe's as an excuse not to reduce taxes. Writing tax policy to accord with Canada's main trade partner, the US, makes more sense.

To be sure, many will dismiss the new tax cuts as transparent politicking. By twinning its tax cut with a call for new elections, the government is visibly positioning itself for its late November vote.

In politics, though, as the UK has seen, there's a limit to how many ideas you can steal from the opposition without effecting true national change. The ChrÈtien government appears to have crossed that point.

Now the opposition Canadian Alliance and its leader, Stockwell Day, will do their part and push for changes that would make Canada even more competitive. The only question is - what country will try for the lead in the tax cut race next?

© Copyright 2000 Financial Times

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