Brain Drain 

Brain Drain- What Is It?

Few topics currently facing Canadians have received as much debate within the media and among politicians in the past year as that of the brain drain. For those not familiar with this term, brain drain refers to the growing number of highly skilled Canadians, in fields ranging from health and sciences to engineering and information technology, emigrating to the US. Many people feel that our best college and university graduates are leaving Canada to take jobs south of the border, citing higher salaries, lower taxes and more opportunity as the reasons for this exodus. But not only graduates are fleeing according to these supporters of the brain drain argument. Entrepreneurs and even corporate Canada, discouraged by excessive taxation, are taking their money, their business and their jobs elsewhere. Consequently, most brain drainers advocate lower taxes as a significant part of the answer in stemming the tide of Canadian talent leaving this country. The flipside of the argument is that many other people feel the whole brain drain issue does not exist and is a fabrication by those seeking tax cuts for their own benefit. They claim that Canada actually imports more educated people than it exports.

Those disputing the existence of brain drain point to the small numbers of Canadians that actually leave each year. But I question the basis of this argument as it does not capture the magnitude of the loss to Canada. For it is many of these emigrants who go on to become the leaders in their respective fields or who create the jobs that will continue to drive the economy; this is the true loss to Canada.

This paper will attempt to demonstrate how brain drain became such a contentious issue in Canada, and that it does, in fact, exist. The paper will conclude with possible solutions to the brain drain problem.
 

Why Should We Be Concerned With Brain Drain?

Brain drain threatens to hurt Canadian economic prospects and competitiveness. Given a contracting Canadian labour force due to the expected retirement of the baby boomers, productivity growth must increase if our standard of living is not to decrease. Brain drain adversely affects both parts of the GDP equation. First, the size of the labour force is diminished. Second, it is agreed by most that it is the top Canadians being lured away to the U.S. for these greater opportunities and/or higher after-tax incomes. It is these employees that Canadian companies need to provide the productivity and efficiency gains to sustain their long-term competitiveness. And it is these same Canadians that go on to work for companies that compete with our own firms. Therefore, we see that the brain drain often results in missed opportunities, reduced growth, lower employment and reduced overall tax revenue.

The Canadian taxpayer should also be concerned about the brain drain problem as it is he or she that subsidizes these graduates' education, only to see them leave upon graduation for a more attractive opportunity in the US. Here, the US tax system is clearly the winner.

Finally, the problem can also be looked at from an ownership point of view. With many Canadian entrepreneurs taking their ideas and businesses to the US, there is a missed opportunity for wealth creation for Canadians. Instead, it is the US venture capitalists and investors, along with the entrepreneur, that benefit from the often meteoric rise in the value of these startup companies. And it is the US economy that further benefits from this increased wealth based on the multiplier effect.
 

A History of Brain Drain

The movement of Canadians to the US and Americans to Canada has a long history. At the turn of the century, large-scale Canadian emigration to the US occurred as a by-product of that period's large European immigrant inflows to Canada. After a 40-year hiatus, no substantial cross-border movement occurred until the 1950s. This time it was largely one way - Canada to the US - and this movement earned the moniker 'brain drain' since it consisted largely of highly skilled Canadians moving to the US. Immigration legislation in the US halted this flow in 1965. A robust Canadian economy and a Canadian policy of tax rebates to skilled immigrants rekindled a one-way flow of highly skilled American immigrants to Canada between 1965-1972. The next 20-year period saw no substantial cross-border movement. In the 1990s, with the advent of our two free trade agreements that brought a loosening of US immigration policies for highly skilled Canadian workers, and a continuing robust US economy, the issue of brain drain has once again reappeared. Based on US forecasts of a shortage of nearly 900,000 high-tech workers in the coming year, it is unlikely that the issue of brain drain will subside in the near future as US companies will continue to look to Canada to fill this shortage.
 

The Reasons Behind the Brain Drain

Those skilled Canadians who have left the country typically cite a combination of lower taxes, higher pay and more opportunity as the reasons for their departure. Post-secondary graduates also cite high levels of debt as another reason for leaving. These issues are expanded upon below.

Taxes

Some critics of Canada's tax system claim that Canada's high personal tax rate, including capital gains tax, and high corporate tax rate represent the biggest cause of brain drain. Business leaders have lobbied hard for tax relief, saying that high taxes create the single biggest impediment to recruiting for Canadian companies, especially in the context of the low dollar and lower salaries. A study from Vancouver's Fraser Institute asserts that the typical Canadian family now pays 46% of its cash income in total taxes. Income taxes are especially oppressive, with a top rate of about 50% (including provincial taxes) on an income of just $63,438. That is equivalent to an income of just $42,000 in US dollars. At such an income, a U.S. married couple filing jointly would still be in the lowest 15% federal income tax bracket; they would need an income of more than $283,000 before they reached the top bracket of 39.6%.

Pertaining more directly to Canadian entrepreneurs and the high-tech industry is the tax treatment of capital gains. Whereas in the US, the top rate on long-term capital gains is just 20%, in Canada investors pay income tax on 75% of all gains. With a top income tax rate of about 50%, that puts the top capital gains rate at 37.5%. When the top US rate falls to 18% in 2001, the Canadian rate will be almost double. This gap will be narrowed somewhat as the new federal budget has adjusted the capital gains tax rate from 3/4 to 2/3. Nevertheless, the gap still persists. The high capital gains tax is a problem because it has a significant impact on entrepreneurs, especially in the high-tech sector. First, it lowers the after-tax return for seed/venture capital investors, making them less receptive to higher risk deals. Second, stock options are often the only way startups can attract talented workers. Since stock options fall under capital gains treatment, the capital gains tax has become a major factor in the brain drain. After repeated lobbying from the high-tech industry, Finance Minister Paul Martin finally eased the stock option tax in the last budget by changing the timing of the tax bite. Until this change comes into effect, the federal government will continue to require an employee to pay capital gains tax on a stock option when it is awarded, if the exercise price is below the prevailing market price, and again when the option is exercised if there is a further gain. As a result, employees have often been forced to exercise options and sell some shares to pay their taxes. With this new change, an employee will not have to pay taxes until the underlying shares are sold and the gain is realized in cash.

Other tax critics argue that cuts to corporate taxes, not personal taxes, are the key to keeping highly skilled workers in Canada as corporate taxes become a factor in investment which then creates opportunities and jobs. Industry Minister John Manley has said that to ignore the role of corporate tax rates is to take an out-dated view of the economy. He has argued that businesses in the new information world are no longer constrained in choosing their location by the proximity to their physical inputs and customer markets. Consequently, they will locate themselves in hospitable business environments. Canada's corporate taxes are particularly high in the service sector, which is the fastest growing part of the economy.

Clearly, the federal government recognizes the disparity between the Canadian and US tax systems and has taken several steps to bring them in line. However, the question remains whether these new policies go far enough.

Opportunity

While taxes and after-tax salary remain an issue for many people that are considering relocating to the US, there is no doubt that more and better opportunity in the US is one of the attractions to moving there. Opportunity means different things to researchers, workers and entrepreneurs.

For researchers, it means funding. A number of Canadian universities have looked at why their faculty members are leaving the country. The reasons most often cited, along with higher salaries, were more resources (in terms of research infrastructure and support), a bigger critical mass of research collaborators and a reduced teaching load. The reasons for this deteriorating environment are a lack of core funding for Canadian universities compared to US institutions and far greater charitable support of university alumni in the US. The federal government recognizes this differential and, in October 1999, unveiled a $250 million program to create 2000 new research chairs, calling it a 'plan for brain gain' aimed at reversing a flow of talent to the US.

For workers, opportunity simply implies availability of jobs that are appealing to them. The impact of Canada's corporate tax regime and its effect on job creation, or lack thereof, have already been covered earlier. The loss of Canadian entrepreneurs to the US only compounds the job creation problem. The Canadian unemployment rate remains several points above the US rate and part of this problem can be explained by the loss of talented individuals who have taken their job-creating genius to the US. The loss of one individual is not a tremendous one to the Canadian economy. The more painful loss is the loss of the jobs that could have been created by that individual.

For entrepreneurs, opportunity equates to immersing themselves in the whole entrepreneurial environment. This entails surrounding themselves with other entrepreneurs with whom they can share ideas and venture capitalists who can provide them with financing and much needed guidance in the early stages of their companies. Canada is certainly trailing the US in this regard. There is a growing gap between Canadian and US venture capital markets that has led to some dire predictions about this country's ability to fund the bright, new ideas of Canadian entrepreneurs. In today's Internet speed world, the need for capital is rising at an incredible rate. As that demand continues to increase, many Canadian entrepreneurs are looking to the US, where capital is more readily available and in greater amounts. In its defence, the Canadian venture capital community is growing and is expected to top $2 billion in investments for the first time in 1999. However, that still pales in comparison to the $70 billion in deals done in the US for the same period. Also, with the average deal size of $11.5 million in the US being almost six times the size of the average Canadian deal, it is clear that US venture capitalists are more comfortable with investing larger amounts of money. Until the Canadian venture capital community attains a level of comfort with risk and experience with assisting entrepreneurs that are on par with its US counterpart, it is likely that many Canadian entrepreneurs will be forced to seek financing in the US, and possibly relocate there.

Cost of Post-Secondary Schooling/High Debt Levels

With continuing reductions in post-secondary funding from the federal government, students are graduating today with higher debt loads than ever. I can personally attest to this fact, graduating from the Richard Ivey MBA Program in the spring of 2000, as many of my classmates have incurred debt levels approaching $100,000. I certainly do not mean to argue here for greater government subsidization of post-secondary education as I actually favour the user-fee direction in which we are heading. But that is an entirely different issue altogether. The point is that after-tax income matters that much more to these graduating students. And it is more often than not that their debt can be repaid much earlier in the US than in Canada - something that is very appealing to a 30-year-old who is still looking at a number of years until he or she has a positive net worth.
 

Some Empirical Evidence of the Brain Drain

It can certainly be acknowledged that each side of the brain drain argument has their own agenda and, consequently, releases study results that support their respective sides. Looking for a more unbiased source, Statistics Canada released results from a comprehensive study in March 1999 that looked at 1995 Canadian post-secondary graduates. It revealed that only 1.5% of the more than 300,000 graduates from a Canadian post-secondary institution in 1995 moved to the US after graduation. However, those who moved tended to be high-quality graduates in certain key fields. 51% of those who moved had a university bachelor's degree, 25% were college graduates, 15% had a master's degree and 8% held a doctorate. In contrast, among graduates who stayed in Canada, 7% had a master's degree and only 1% had a doctorate.

Looking at the quality of these graduates, nearly half of the graduates who relocated to the US ranked themselves near the top of their graduating class in their field of study.

Graduates who moved were highly successful in the US labour market. They were better able than their counterparts who remained in Canada to find work in high-skill occupations that paid well.

20% of those who left had a degree in the health field (compared with only 8% of university graduates who remained in Canada) and 13% had a university degree in engineering and applied sciences (compared with 7% of those who remained in Canada).

Looking at whether these graduates had moved permanently to the US, it was found that, by the time of the survey in March 1999, about 830 (18%) of graduates had moved back to Canada. Of those still in the US, about half plan to stay permanently, while another quarter are undecided. Thus, for those who argue that brain drain is typically only a short-term problem with Canadians likely to return home after several years away, we see from this evidence that this argument is simply not valid.
 

Some Possible Solutions to the Brain Drain Problem

The fault for the brain drain problem lies not only upon the government but also upon the private sector. For the government's part, a rational starting point for change would have to be our country's tax system. First, one can argue that innovation and hard work are not sufficiently rewarded in Canada. With Canada's top marginal tax rate of 50% for income above approximately $63,000, there is little incentive to work beyond this point. In Canada, I suppose one is considered rich at this level and thus should be taxed so. In the US, the highest tax rate is imposed on income of about $425,000 (in Canadian dollars). Clearly, the US rewards risk-taking and effort more than does Canada. In terms of helping post-secondary institutions retain their faculty, the Canadian government could assist these institutions in their fund-raising with alumni by making the tax treatment of donations to these schools more in line with that of the US, especially as it relates to estates.

The government and the private sector should be working together to ensure they are making adequate investment here in Canada in terms of research and development and creating an environment with attractive opportunities for our graduates and researchers.

The private sector, for its part, must start to realize the disparity of salaries, even pr-tax, between Canada and the US for the same job.  Canadian CEOs are underpaid when compared to their US counterparts, but it is not the only the CEO level that we should be concerned about. Most post-secondary graduates are able to command a higher salary in the US than in Canada if they are able to find employment. With competition for these jobs, it is usually the brightest that are successful and leave. The private sector could also do more to develop a hospitable environment for entrepreneurs, in terms of building clusters, as has occurred in Ottawa with a growing high-tech industry, and visà-vis venture capital. Until this happens, we will continue to experience and read about more brilliant entrepreneurs and their ideas leaving this country.

A Final Comment

In conclusion, it has been my intent to demonstrate that, albeit small in numbers, the problem of brain drain does exist and that it should in fact be addressed by policymakers and the private sector. If ignored and the US economy continues to thrive, thereby fuelling the brain drain, it is highly possible that we will see Canada's position deteriorate in regards to its global competitiveness and the standard of living of its citizens. While by no means a comprehensive list, I do believe that some of the suggested solutions to the brain drain problem would have a positive impact on stemming the flow of highly skilled Canadians out of this country.