Your reply to my exchange2000.com
>>"Rubbish! The fact is that Canada's economy has performed the best of the OECD economies and is forecasted to do so for both 1997 and 1998. Internationally it is the U.S. largest trading partner.
U.N. studies also rate Canada as the most attractive country to live in on the planet. As for dumbing down... Canada's academic resulrt on any international score card are ahead of those of the U.S.
Notwithstanding the FACTS. It could be argued that PEI potatoes are better than Idaho potatos (sorry Mr. Quayle).
Your comments are about as intelligent as most of your evening sitcoms."
An intelligent and educated Canadian on the Canadian economy, in today's WSJ:
How Canada Scares Away Investors and Talent
By REUVEN BRENNER
In a recent seven-nation study, KPMG Peat Marwick ranked Canada as
the lowest-cost Western industrialized country in which to do business.
The study ranked Sweden second, Britain third, the U.S. fourth, Italy fifth,
France sixth and Germany last.
Unfortunately for Canadians, being a low-cost country does not mean that
their economy is competitive or that it is a good place to invest. If low cost
is the criterion for investment, why not invest in Newfoundland, land of low
incomes and low rents?
In October, Canadian Industry Minister John Manley hit upon the more
important factors for investment, economic growth and price stability,
noting in a speech that a shortage of skilled workers prompts companies
to leave Canada. He also noted that although Canada is one of the biggest
spenders on education, it experienced the lowest rate of productivity
growth among the G7 countries in the last 15 years, has low research and
development spending, and hosts a smaller share of high-tech
manufacturing than any other G7 country.
The financial markets confirm these observations, as does the performance
of the Canadian dollar. The Dow Jones Industrial Average has more than
tripled since 1989, whereas the Toronto Stock Exchange average
increased just 70%. After adjusting for the 20% depreciation of the
Canadian dollar since 1989, the return on the TSE in U.S. dollars between
1989-1997 falls to less than 50%. Much of the small gain in the TSE is
based on a recent pick-up in commodity prices, reflecting Canada's
resource-based economy.
Meanwhile, the Canadian dollar stays low while the country has record
surpluses in the current account of its international balance of payments
(whereas the U.S. has continuous deficits). The current-account surplus
merely reflects the fact that Canada is not a good place to invest, and
capital--both top-notch human and financial--is leaving the country.
One of the main reasons is high marginal tax rates. In Canada's most
populous provinces, Quebec and Ontario, the combined marginal
income-tax burden (federal and provincial) for earners in the $40,000
range stands at 55%. This punitive rate in fact taxes human capital, as
demonstrated by the fact that Canada's best talent leaves the country. A
number of CEOs have stated bluntly that they moved from Canada
because its high taxes limited their ability to attract talent. As Peggy White,
Royal Oak Mines' CEO, says: "High Canadian taxes made it very hard to
attract top-notch talent from outside the country and sometimes even to
keep top-notch talent home."
The emphasis is on "top-notch." Canada can attract the not too ambitious
or those denied entry visas to the U.S. But the "vital few"--those who can
move a company's market value by hundreds of millions of dollars, or, as
Michael Jordan, bring a team from oblivion to championship--matter the
most. This is the talent that Canada has been losing and fails to attract.
Canada taxes capital gains at approximately 40%, double the U.S. rate for
investments held over 18 months. If untaxed, a $1,000 investment
compounding at 20% brings $1.4 million after 40 years. If that investment
is taxed yearly at 20%, the U.S. rate, the owner ends up with around
$400,000. If it is taxed at 40% the net return is 12% per annum, and the
owner ends up with $93,000 after 40 years. Even the best ideas will not
find financial backing with this differential in returns.
With brains and capital moving out of Canada, only finance ministers
indulging in political calculations can claim surprise that trade surpluses
have not strengthened the Canadian dollar. Nor that low interest rates
neither brought about much investment or significant decreases in
unemployment (which has been holding at a stubborn 9% to 10%).
When businesses decide where to locate in the G7 countries, they are
measuring their ability to attract and retain skilled people to countries
whose currencies are expected to be stable. If Canada's labor seems
"cheap," that's because the authors of the KPMG report are comparing
apples and oranges. A recent CIBC Wood Gundy study calculated that
Canadian factories are 20% less productive than their U.S. counterparts.
It is not surprising that Canadians are paid less.
The KPMG Peat Marwick study also celebrates Canada's low land and
construction prices. But the price of a building is the present value of
anticipated rents. The smaller the after-tax rewards, the smaller the value
of the building, and the smaller the value of land and of construction costs.
Low interest rates are not the issue, either. When there is not much
demand for investment, real interest rates stay low (see Japan). No
wonder the spread between lending and borrowing stands at about three
percentage points in the U.S., and only two percentage points in Canada.
Of course, with lower interest rates, people may change consumption
patterns, buying more durables and fewer goods and services of
immediate consumption. But the substitution does not make them richer.
The smaller demand for funds to be invested in Canada means that the
future does not hold great options.
Last, but not least: The KPMG report mentions that Canada has the
lowest corporate-income taxes. Since corporations are only a complex
associations of contracts, any corporate income tax is of consequence only
in the sense that investors will evaluate who will pay it: consumers in higher
prices, employees in lower wages, or shareholders. Even low corporate
income taxes will be paid only if investors cannot negotiate a better
investment deal elsewhere in the world. Taxes on dividends, on capital
gains and on incomes are the issue, not the incidence of taxes based on
legal entities.
Some of Canada's provinces--Alberta, for example--have cut provincial
taxes. In Ontario, the new provincial government tries to dismantle its
disastrous fiscal and regulatory inheritance from its predecessor, Bob Rae.
But on the federal level the situation does not seem promising. With no
effective opposition, and forecasts that next year the federal government
may have a surplus in the budget, Paul Martin, the federal finance minister,
who never saw a tax he did not like, announced in an October speech
how the government will spend the anticipated "fiscal dividend."
The U.S. will be pleased to hear that it is among the major recipients: One
of the contemplated programs would spend an additional $800 million
subsidy to higher education, which will train, no doubt, some excellent
people--who will end up working in the U.S.
Mr. Brenner is a professor at the School of Management, McGill
University, Montreal.
interactive2.wsj.com
Superlative analysis. And why NN is more than seriously handicapped in (outside Canada) international competition.
Regards |
