The deficit battle has been won. Two legacies of our past over-spending are extremely high levels of debt and a very heavily taxed Canadian public. We do need to start paying down that debt, but our future growth prospects will depend fundamentally on how we rise to the challenge of overtaxation.

The forces of accelerating technological advancement and globalization have combined to change the structure of economies at every level of development. Now, and in future, economic growth will depend upon how we grow our knowledge base and how we deal with our key competitive resource — our human capital.

To be sure, capital for investment is extremely mobile. But people have also become more mobile over the past two decades. As Canada integrates into the global economy, and as the mobility of Canadians increases, our comparatively high level of taxation on personal income will be a greater hinderance upon growth than it is today.

As well, growing labour shortages in the United States (a recent estimate suggests some 340,000 high-tech job vacancies) and in Canada (some 20,000 vacancies), will doubtless increase pressure upon companies to enhance their recruitment and retention techniques as competition for knowledge workers heats up. One recent high profile example was the offer by a Halifax-based software company of a $1,000 reward to anyone who might refer a successful candidate for a job vacancy.

Some have suggested that Canada does not appear to have much of a problem with the so-called ‘brain drain’ and that it might in fact be a ‘myth’.

In this context, the views of the chief executives of Canada’s largest enterprises are instructive. At meetings of the BCNI, corporate leaders repeatedly have expressed concerns regarding skilled workers, the difficulty of keeping them in Canada, and the virtual impossibility of luring them back once they have experienced the staggering difference lower tax rates make to their real standards of living. This is no myth. It is a real problem for Canadian companies and it is only getting worse.

Labour shortages, combined with the low value of the Canadian dollar, and high levels of personal taxation, will make it increasingly difficult to attract and retain the creative ingenuity that Canadian companies need most.

The problem is compounded by the application of high marginal tax rates at relatively low levels of income. As indicated in the table, Canada has one of the highest marginal tax rates on personal income in the OECD, between 44 and 54 percent, and it is applied at an extremely low threshold of income. The United States top rate of 40 to 47 percent kicks in at much higher levels of income. Put another way, for an income of about Cdn $65,000, Canada’s marginal tax rate is 50 percent versus 30 percent in the United States.

In comparing high tax jurisdictions such as British Columbia and California, the difference in taxes paid begins at about $2,000 with $50,000 in income and rises to a difference of more than $20,000 at incomes of $250,000. In low tax jurisdictions such as Alberta and Texas, the difference in taxes paid begins at about $4,000 with $50,000 in income and rises to $22,000 at incomes of $250,000.

Marginal tax rates are also quite high for production workers with average incomes. The average marginal tax rate for a Canadian worker earning about $32,000, including social security taxes, is about 50 percent according to the OECD and the Canadian Tax Foundation. This compares quite unfavorably with the United States (a combined average marginal rate of 27 percent) and 35 percent for the United Kingdom.

Recent analysis by James B. Davies, in a C. D. Howe Commentary, confirms that average marginal tax rates in Canada are not only high, but in fact are continuing to increase. Why? In part, the absence of effective indexation of tax brackets ensures that more Canadians will pay more tax with relatively low increases in income. This form of taxation by stealth will need to be addressed, especially insofar as low to middle income Canadians are concerned. As well, recent necessary reforms to the Canada Pension Plan will further increase marginal tax rates.

At all levels of income, high marginal tax rates threaten our future prosperity because they are a disincentive for Canadians to work, save and invest. But at middle to upper levels of income, high marginal rates are a threat because Canadian businesses will be hard-pressed to remain competitive in an increasingly mobile, adaptable, knowledge-based world. Now is the time to begin thinking about the potentially very corrosive problem of high levels of personal taxation. Canada’s future prosperity depends upon it.