Respected Canadian political and economic affairs columnist Andrew Coyne has recently joined the ranks of iMac users, and this week used Apple's iMac-driven turnaround in his latest National Post column as a metaphor for how Canada might also reverse its current national economic distempers -- especially those related to Canada's punishing tax rates.

Mr. Coyne notes the large and growing gap in income tax rates between Canada and the United States, and its widely-alleged consequences including a productivity gap, an income gap, and the famous "brain-drain" that sees a significant proportion of Canada's best and brightest exit south each year in pursuit of the lower taxes and higher incomes.

Mr. Coyne thinks, and as a fellow commentator on Canadian public affairs I heartily agree with him, that these problems are going to escalate if they are not effectively addressed by drastic reforms.

Half-measures will not do. As Coyne puts it, "The forces at work drawing labour and capital into the industrial centers of the United States are as ineluctable as gravity, and much too powerful to be offset by a few piddling tax cuts."

And this is where Coyne's iMac analogy kicks in. "Canada today is facing very much the same threat as Apple in the early 1990s," he writes, noting that in those dark days of 1996-'97, Apple had seen its market share erode, resulting in less software being published in Mac format, which made consumers even less likely to consider buying Macs, which made it even less attractive for developers to write Mac software.

"The company was caught in a death spiral," says Coyne. "Incremental changes would not be enough: What was needed was a product so radical, so irresistible, as to generate the sort of sudden, quantum leap in sales that alone could reverse the spiral."

That product was of course the iMac, which as Apple-watchers know, catalyzed one of the most dramatic turnarounds in corporate history.

Coyne asserts that Canada is currently in a situation not dissimilar to Apple's in the mid-'90s. "Not only are American firms profiting from the 'lock-in' effect of early leads in any number of knowledge industries," he notes, but it appears that they benefit substantially from sheer physical proximity to one another.

Consequently, as with the chicken-or-egg matter of Apple market-share and third-party software development, high-technology companies and personnel tend to locate in places like Silicon Valley, in part because other high-tech firms and people locate there. This dynamic with regard to software development was potentially (and near-actually) devastating to Apple, and it is likewise potentially devastating industrially and economically to Canada. For instance, only 15 per cent of Canadian manufacturing is currently based in technology, compared with 35 per cent of the U.S. economy.

Andrew Coyne maintains that it's too late for incremental strategies such as modest tax cuts to help Canada's technology investment deficit and general economic competitiveness. Because U.S. pre-tax incomes are already so much higher than in Canada that even if Canada slashed taxes to U.S. levels, it would still fall far short of closing the gap. "To turn things around," he says, "we need the policy equivalent of an iMac: something so startling, so extraordinary, as to compel footloose capital and labour to once again give Canada a look."

So what is Coyne's iMac-esque prescription for fixing Canada's economic death spiral?. Abolish the income tax. Well, he said it would be startling! But would it work?

Coyne suggests that in order to replace the Can$100 billion or so that Canada's federal government raises annually through the personal and corporate income tax system, it would be necessary to increase the federal Goods and Services value added tax (GST) from its present 7 percent to roughly 35 percent, which probably sounds awful to most people, but the payoff would be that no one would have to fill out tax returns, record expenses, calculate capital gains or depreciation allowances. The national increase in efficiency in a lighter red-tape and paperwork burden alone would almost certainly boost the GNP a few points. There would be no income taxes deducted from paychecks -- personal income would be yours tax-free until you spent it. And you would not be taxed at all on money saved.

Proving himself a master of understatement, Mr. Coyne acknowledges that "this is an idea that requires more than one or two paragraphs to develop."

True enough, and there are also a number of other significant issues besides high taxes kneecapping Canada's economic competitiveness -- for example the fact that 33.1% of Canadian workers belong to labor unions, while less than 15% of U.S. wage earners are unionized. The rate of unionization in the Canadian public sector is 71%, with 18% of Canada's private sector workers unionized, compared with only 11.8% of the U.S. private sector labour force .

Canada also has one of highest strike rates in the industrialized world, averaging 407 strikes per year between 1990 and 1996, compared with just 38 in the United States, 191 in Japan and 306 in the United Kingdom - - all countries with much larger populations. Small wonder that Canada struggles to keep its head above the increasingly rough waters of international competition.

Successive Canadian governments have irresponsibly attempted to wallpaper over the productivity gap through that time-honored method of propping up failing economies -- currency devaluation -- which is why the Canadian buck, which traded at more than par with the greenback in 1976, is now worth about 68 cents, up a bit from its all-time nadir of 63 cents in the summer of 1998.

Still, I like Andrew Coyne's income tax abolition idea. Unlike many GST- hating Canadians, I have long believed that value added taxes are a much superior vehicle for raising necessary government revenues than the income tax so beloved of leftists, whose ideological orientation is to punish "the rich" and "big multinational corporations" with confiscatory income taxation. As for the argument that a flat value-added tax is not progressive and therefore discriminates against the poorer members of society, there are already graduated GST rebates in place that could be adjusted and enhanced to compensate for the burden a 35% value-added tax would place on lower-income people.

In any event, the present system is not working, folks. Canada has had the lowest productivity growth of any G7 country for the past 25 years, and continues to slip farther and farther behind her G7 partners in standard of living. Canadian real per capita income is about 25 percent less than in the U.S. A Canadian Imperial Bank of Commerce study recently found that Canadians are earning $900 Cdn. a year less per capita in real terms than a decade ago, while American disposable income has risen by $2,200 US per person over the same period.

Since 1996, annual U.S. pay increases averaged 2.0 per cent after inflation, compared with 0.2 per cent in Canada. Had Canada kept pace with U.S. productivity growth since 1979, Canadian per capita real income today would be more than $7,000 per year higher.

Canada's labor cost per unit produced rose 99 percent between 1978 and 1991, versus just 62 percent in the U.S. (the Canada/U.S. dollar exchange rate was the same at the start and end of that period, so currency fluctuations weren’t a factor in these data). That amounts to a 37 percent widening of an already significant productivity gap over one decade. Canada can no longer afford such inefficiency. Actually, we never could, as our 68 cent dollar indicates.

The Organization for Economic Cooperation and Development has warned that Canada's standard of living will fall sharply during the next 20 years unless we clean up our act. "We must work to sensitize Canadians that [productivity] is an issue that really matters and our standard of living, and that of our children, is very much at stake," commented Canadian National Corporation CEO Paul Tellier recently.

In a recent special issue focusing on Canada, The Economist magazine pointed out that Canadians should not resist a "growing recognition" that demands for lowering taxes, cutting national debt, and narrowing the productivity gap with the U.S. are reasonable. The Economist cautions that Canadians will have to become more like Americans to survive in an increasingly competitive world economy.

Even a Canadian government policy paper on productivity by the federal Department of Industry acknowledges Canada's pathetic productivity performance, and paints a grim scenario of a country in danger of becoming a low-wage appendage to the U.S. -- "hinterland status" -- unless we can clean up our productivity performance.

Given these sober evaluations, Andrew Coyne's "iMac fix" for Canada's economic ills is neither extreme nor outlandish. As he summarizes: "The point here is only that we need to expand the tax-cut debate, if we are to counter the pull of American economic gravity. We need to think big. Or to borrow a slogan, Think Different."

Charles W. Moore

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March 17, 2010