Madam Speaker, it is with pleasure that I rise today to speak to Bill C-32, the budget implementation act for the 2000 budget.
It is important to take stock of where we are as a country and how we have achieved our current financial position. This is the third budget in which Canada has had a surplus. While the Liberals opposite will crow and take credit for this fiscal achievement, the very policies that were required to lead Canada to this point in economic history were vociferously opposed by the Liberals prior to their forming the government. I will refer to a few of them specifically: free trade, the GST, the deregulation of financial services, transportation and energy. All of those things the Liberals campaigned and fought against. Prior to 1993 they were completely and diametrically opposed to them.
Since then, unburdened by the yoke of principle, the Liberals have embraced these policies and in some cases have claimed some level of originality in introducing them or spearheading them.
It is important that we raise this issue at this time because on Thursday of last week McGill economist Tom Velk and historian A. R. Riggs released a paper evaluating Canadian governments back to World War II on economic criteria. It should come as no surprise to members of my parliamentary caucus in the Progressive Conservative Party that the best economic record of any Canadian prime minister since World War II was held by none other than Brian Mulroney. I think it is important that we recognize the vision and courage of a prime minister who actually took the big steps, who did not ignore the global trends and made the structural changes to the Canadian economy that were necessary to lead Canada into the 21st century.
The headline in the National Post on Thursday was “Mulroney ranked first, Chrétien dead last as leaders of the economy”. The Ottawa Citizen said “Recession beating Mulroney as economic champ, study says”. The study referred to a number of specific criteria upon which the economists based their judgment.
In applauding Mulroney, the professors said that he presided over a general fall in interest rates that lasted more or less the entire term of his office. Inflation took a beating during the Mulroney years. Mulroney, unlike the present Prime Minister, inherited a troubled economy with tremendously high interest rates and high inflation. They said that low income Canadians fared better under Prime Minister Mulroney than they did during the Liberal administrations of the present Prime Minister or under Mr. Trudeau. That may surprise some of the members opposite, but the numbers speak for themselves.
The study credited the vision and the courage of the Mulroney government in embracing the policies of free trade and the GST. These were not easy policies to embrace or to spearhead at a tumultuous time in Canadian political history. In fact in what was referred to as the free trade election in 1988, over half of Canadians voted against free trade. The question of course should not necessarily be what policies are the most popular, but what policies will lead to the greatest level of economic growth and prosperity for Canadians.
That was a government that was not focused on next week's polls as much as the present government is. It was focused on the challenges and opportunities facing Canadians well into the next century. The record of that government speaks for itself not just in terms of what it achieved during its years in office, but what its policies have achieved since then and are destined to achieve well into this century.
In studying the record of the current government, it said that under the tenure of the current Prime Minister and Minister of Finance, the dollar is lower than it has every been in Canadian history. Productivity is comparatively low and its growth has lagged behind that of the U.S. Per capita GDP is lagging comparatively to our trading partners. In the last 10 years Canada has had a GDP per capita growth of about 5% while countries like Ireland have had a 92% growth in GDP per capita. The U.S. and Germany have had a 15% growth in GDP per capita.
As our neighbours to the south and our trading partners elsewhere are improving their productivity, production and success, we are lagging behind. As citizens in other countries are getting richer, the Canadian citizenry is getting poor. Nowhere is that more exemplified than the dramatic and significant loss in the value of our dollar since 1993. Under the Mulroney government, the dollar lost one cent in nine years of power. The dollar has lost around nine cents since the current government took power.
Every time the dollar drops, Canadians effectively have a pay cut. We depend on our trading relations with other countries for many of the goods and services that Canadians need and enjoy. When the dollar drops, the purchasing power of Canadians drops and their standard of living drops. There has been a significant drop in Canada's standard of living over the past several years. In the 1990s, take home pay in Canada decreased by about 8%. This was during a period when Americans enjoyed a 10% increase. An 18% gap has erupted between Canada and the U.S. in terms of disposal income or take home pay at the end of the day. That is disturbing.
One of the impacts of that has been an unprecedented level of brain drain. The number of Canadians who are going to the U.S. to seek greater levels of opportunity and prosperity has grown from 16,000 per year eight years ago to about 100,000 per year last year.
It is not just the number of people who are going. The most disturbing area of this trend is who is going. In evaluating the type of people who are going we see that some of our young, bright talents, some of the best and brightest we have in Canada, are choosing to pursue their futures and opportunities in the U.S. Ultimately the loss will be to Canada not just in terms of future tax revenue, but in terms of the ability for these individuals to build stronger companies and ultimately a stronger country. It will ultimately benefit the U.S. and not Canada.
We should be doing more to keep these individuals and talents as opposed to driving them away. Before we decide what policies we should be implementing to keep them here, we should be evaluating what specific current policies are having such a deleterious impact on our ability to keep those people.
Certainly the Canadian tax system represents one of the largest impediments to growth and prosperity. It is not the only clue to the brain drain crisis but it is a very important area of public policy that we need to be concerned about. I can give a couple of examples of the degree to which our tax system affects the brain drain.
Let us say a technology worker, a programmer in Vancouver, makes about $70,000 per year. That individual is in the top marginal tax bracket in Canada. We hit our top marginal tax bracket at $70,000, even after full implementation of the budget's initiatives. In the U.S. one does not hit the top marginal tax rate until about $400,000 Canadian. As a result, the software programmer in Vancouver will be paying federal and provincial taxes combined of about 52% of his or her income. At the same level of income, about $70,000 Canadian, about an hour and a half away in Seattle, that same individual would be paying about 26% of his or her income, effectively half the level of taxation that he or she would be paying in Vancouver.
Frankly for someone with a family and who is making student loan payments, car payments, mortgage payments and hockey costs for children, or whatever it is, that is not a lot of money. The notion that someone making $70,000 in Canada today is rich is probably wrong-headed. We are taxing those people as if they were fabulously wealthy. That is one of the reasons we are driving people, particularly within that critical $70,000 to $100,000 range, out of the country. Those are the people we need.
Another area where we need to address our tax issue significantly is at the lower end of the scale. Currently, our basic personal amount even after the budget is almost $8,000. That is far too low. The U.S. equivalent threshold in Canadian dollars at which an American starts to pay taxes is around $11,000. We call ourselves a kinder, gentler nation yet we start taxing people at about $8,000.
In the short term this should be increased to about $12,000 and over a period of time should be increased beyond that. In the short term we should be looking at an increase to $12,000. That would take millions of low income Canadians off the tax roles. It would reduce the tax burden of all Canadians in a fair and equitable manner.
In terms of impact on the new economy, there is probably no more negative tax in Canada than our capital gains tax regime. The recent budget and this budget implementation act would see a reduction in the capital gains inclusion rate from 75% down to 66%. That would still leave us with a 13% disadvantage over the U.S. in the critical area of capital gains. No form of taxation affects the new economy more than capital gains taxes.
The currency in terms of compensatory assets in the new economy is clearly stock options. Increasingly, whether it is in biotechnology or e-commerce, stock options are used to incent and attract talent and to keep talent. In Canada we have a 13% disadvantage even after this budget in the very critical area of capital gains taxation.
The reasons the government will not reduce capital gains tax further have very little to do with realities. It is very dangerous when we build public policy, as is often done in this place, around perceptions and not reality. Let me deal with a couple of those perceptions.
First, there is the perception that capital gains taxes are paid largely by the rich and it would be inequitable to reduce capital gains taxes and thus to reduce taxes on the rich. Over 50% of capital gains taxes in Canada are paid by people who make less than $50,000 per year. Individuals throughout the small growth companies, from the receptionists to the CEOs, are all incented and paid with stock options.
Also, with the level of market participation that exists today, more so than ever in the history of Canada, Canadians are investing in the equities markets through secure long term vehicles such as mutual funds. They are able to achieve diversification with a relatively small amount of investment and as such are participating in record numbers at this point.
The other perception is that somehow we cannot afford to eliminate the capital gains tax, which is what I would like to see done. A Progressive Conservative government would eliminate personal capital gains tax. Some people say we cannot afford to do that.
The capital gains tax only brings in around $1 billion per year. Estimates I have heard in terms of personal capital gains tax in recent years are revenues ranging from $700 million to about $900 million. If we assume that there will be some shift in the way employees are compensated as a result of the capital gains tax elimination, let us say if it goes from $1 billion to $1.5 billion, that is a very conservative estimate of the loss of revenue to the Canadian government. Ultimately that revenue would be made up significantly by the increased level of activity and by the unlocking of capital.
Effectively one of the most pernicious impacts of capital gains taxation is the degree to which people make decisions not based on economic or business realities and criteria, but instead on tax criteria. People hold on to investments far longer than they would have normally and do not make the types of investments they probably should be making in some of the new economy vehicles and opportunities. That locking up of capital denies many of Canada's growth industries, particularly in the knowledge based sector, access to the needed capital.
We live north of the greatest capital markets in the world, the U.S. We cannot afford to penalize and to handcuff our technology sector. In any of the knowledge based areas of our technology sector, whether it is biotechnology or information technology, we cannot afford to deny these players, the individuals who are building their companies and who are building a stronger and more competitive Canada, the opportunity to access capital.
Effectively by locking up this capital in Canada's capital gains prison we are actually preventing these companies from growing here in Canada. Ultimately in many cases these companies are gravitating south of the border in trying to raise capital.
The venture capitalists, whether it is Perkins or the Sequoia capitalists of the world, are investing in these companies and are then encouraging these companies to move their research and development activities and manufacturing south of the border.
While we would like to think that these investments can be made—and do not get me wrong, I encourage foreign investment in Canada's growth industries, we need the investment—I do think there is a significant risk which is borne out by the fact that when this foreign investment is made, it quite frequently leads to a movement or a migration of the companies and the innovators to the U.S. It stands to reason that over a period of time that would have a significant cost to Canada.
The fact is that by unlocking this immense pool of capital to reduce or, as we are proposing, eliminate personal capital gains tax in Canada, we would actually be able to fund and raise capital for these innovators here in Canada.
There are innovators in the financial service sector now who are already doing that. The one which comes to mind, Yorkton Securities Inc., has demonstrated that it is Canada's top investment bank in the knowledge based industries. We are putting in front of the Yorktons and in front of the McLean Watson Capitals, which are raising money for Canadian knowledge based industries, the barriers to success which ultimately threaten their ability to raise the capital they need to invest in the innovators who we as a country need to grow and develop greater successes here in Canada.
If we are not competitive in that new economy, a lot of these arguments are effectively moot. Our ability to afford the social investments that Canadians value and treasure, whether it is our health care, our social safety nets or the transfers to the provinces, become moot if we cannot afford them. It is critical to build a tax system around growth, not greed, so that we can afford the types of social investments that Canadians want well into the next century.
For some Canadians there is a belief that these investments, whether it is in our health care or equalization systems, define us as a country. It is very important to get our fundamentals correct, that we reduce our debt in real terms, that we reduce over a period of time not just our tax burden but that we use a system of tax reforms to do what is required to make Canada more competitive in the new economy.
I believe we can achieve success with visionary policies that will lead Canada proudly into the 21st century, but we have to move now. This caretakership government, which is taking baby steps when other countries are taking gigantic leaps, is clearly not appropriate or helpful.