Brain Drain Cuts Our
Tax Take Too

The brain drain is more than a corporate problem. The growing flow of highly skilled and highly paid Canadians to the United States also undermines our tax base and threatens the services supported by that tax base.

A recent study by the C.D. Howe Institute highlighted one costly aspect of the brain drain: the vast sums of public money invested in educating and training those who leave. It also estimated the costs to the economy of having to replace highly paid emigrants with immigrants from other countries.

The study estimated that for managers and professionals alone, the net loss to Canadian society between 1982 and 1996 was $6.7 billion, and said the “churning costs” of replacing all those who left between 1989 and 1996 would have totalled $11.8 billion.

The best paid Canadians also pay the most tax, and they are the most likely to leave. According to the United States Immigration and Naturalization Service, more than half of all permanent immigrants from Canada in 1996 were admitted on the basis of employment-based preferences. This means that 8,391 Canadians were given permanent residence status so that they could fill jobs important to the United States economy.

In addition, large numbers of Canadians move south, at least initially, on temporary work permits. Also in 1996, the United States admitted 26,794 highly skilled Canadian professionals under the terms of the North American Free Trade Agreement. It let in another 7,037 people who were moved south by their companies, and a further 10,386 Canadians under various other classes of temporary work permit.

Those who get a taste of American taxes often decide to stay. The C.D. Howe study said that by 1996, more than a third of workers transferred temporarily to the United States by their companies refused to come home.

Those 52,608 permanent and temporary working emigrants in 1996 may sound like a few drops out of Canada’s bucket of 14 million workers, especially given our healthy flow of immigration. But these emigrants are almost all, by virtue of the United States immigration rules, highly skilled and therefore well paid. As a percentage of Canada’s upper-income workforce, they are much more significant.

The experience of Canadian companies suggests that most of the people they are losing to job offers from American competitors earn more than $70,000. It seems reasonable to assume that a good portion of those 52,608 highly skilled Canadians were in a relatively high income bracket in Canada. Their departure was therefore a major loss not only to Canadian companies, but to Canadian governments.

According to Revenue Canada, only 836,000 Canadians made $70,000 or more in 1995. This group represented just 4 percent of tax filers, 6 percent of taxpayers and 19 percent of total income, but it paid fully 31 percent of all federal income tax and 35 percent of provincial income tax.

This tiny portion of the population paid more than $30 billion in federal and provincial income tax alone. This is on top of all the other taxes they paid, from GST on what they bought to property taxes on their homes.

Each one percent of this group that leaves the country—each 8,360 such emigrants—therefore represents an average loss of more than $300 million in federal and provincial income taxes every year thereafter—not counting taxes on any money earned by spouses and children who leave with them.

If 8,391 highly skilled Canadians left permanently in 1996 while a further 44,217 were working in the United States on temporary permits, Canadian governments almost certainly lost more than $1 billion in income tax revenue in 1996 alone. And the C.D. Howe study found that six managers and professionals went south that year for every one moving the other way.

Even though highly paid Canadians can reap huge savings by moving south, lower tax rates alone will not stem the flow. Canadians have many good reasons to stay home. But they also have good reasons to go. Talented people, whether experienced or newly graduated, will go where they see the greatest opportunities for personal development. These opportunities, as always, will cluster around the leading lights in any field. Where the best-paid people in any profession work, others want to follow—and Canada’s taxation of higher-income earners is simply punitive.

In addition to discouraging job creation and investment, Canada’s high tax rates have another, more subtle effect. Some commentators suggest that the real problem is not Canada’s tax rates, but a lack of innovation and creativity. But the American tax system is far more effective in making creative risks worthwhile. It rewards those who succeed; the Canadian system encourages those who succeed to leave.

The caring society that all Canadians cherish must be built on a strong economic foundation. If we want that society to survive and to grow stronger in a global, knowledge-based economy, we must make sure that our tax system helps Canadians not just to get a job, but to get ahead. If it fails to do so, we can be sure that more of the people we need the most, will get out rather than stay at home.

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Last Modified: Wednesday, October 20, 1999.