Hot! How Canada can cash in on the U.S. economic malaise

VancouverSun.com – Opinion/Blogs – The U.S. has $2 trillion looking for an investment home. Here’s how we could put it to work for us
July 30, 2010.   By Harvey Enchin and Fazil Mihlar, Vancouver Sun

“Sometimes we stare so long at a door that is closing that we see too late the one that is open.”  -Alexander Graham Bell

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Canada has the opportunity of a lifetime waiting to be seized.

Non-financial institutions in the United States have almost $2 trillion US in cash on their balance sheets but have no desire to invest there. Luring some of that money to Canada will help further modernize our economy, create jobs, generate more tax revenue and raise our standard of living.

This window of opportunity won’t be open for long, so Ottawa and the provinces should launch a major marketing effort now to turn American apprehension into economic gain for Canada.

What does Canada have to sell to those holding the $2-trillion US purse strings? A comparative advertising strategy would focus the minds of American investors on the advantages Canada offers, including some of the following:

– Lower corporate income tax rates. The U.S. statutory federal corporate income tax rate is 35 per cent, a number that is more likely to go up than down given the country’s debt burden. Canada’s is 18 per cent, down from 19 per cent in 2009. Scheduled tax cuts will bring Canada’s rate to 16.5 per cent in 2011 and to 15 per cent in 2012, giving Canada the lowest statutory tax rate in the G7.

– Competitive personal income tax rates. It may comes as surprise for Americans to learn that Canada’s federal personal income tax rates are lower than those in the U.S. The U.S. rate on income between $34,000 US and $82,400, US for example is 25 per cent. In Canada the rate on income between $40,970 and $81,941 is 22 per cent. On income from $171,850 US to $373,650 US the U.S. rate is 33 per cent. Canada’s rate reaches a maximum of 29 per cent for all income over $127,021.

Of course, most of Canada’s provinces and territories impose personal income tax as well, but so too do many U.S. states and some municipalities. It is true that Canada obtains slightly more personal tax revenue per capita than the U.S. does -$5,800 US vs. $4,700 US -but this difference is easily offset by the cost of health care that Americans incur privately and Canadians cover through taxation. It’s worth noting that the U.S. has inheritance taxes and Canada does not.

– Lower capital gains tax rates. Canadians pay tax on 50 per cent of their capital gains at their marginal rate. On a gain of $1,000, for instance, only $500 would be subject to tax. At a combined federal-provincial rate of, say, 35 per cent, the tax payable would be $175. Americans pay tax on the net total of capital gains. More importantly, the reduced rates introduced in 2003 by then president George W. Bush, initially due to expire in 2008 and extended until 2011, will finally sunset, raising the discounted rate of 15 per cent to 28 per cent. So, on that same $1,000 capital gain, an American investor would pay $280.

– Canada can maintain low tax rates: Because Canada is in better fiscal shape than the U.S., Ottawa can keep taxes low while Washington will have little choice but to raise them. The U.S. national debt is $13.6 trillion US, or $42,942 US per capita. Canada’s is $534.7 billion, or $15,715 per capita.

The ratio of debt to gross domestic product stands at about 93 per cent in the U.S., and the U.S. Treasury Department sees it rising to 102 per cent when debt is expected to reach $19.2 trillion US in 2015. Canada debt-to-GDP ratio is 33 per cent.

Government spending as a percentage of GDP has declined in Canada since hitting a peak of 53 per cent in 1992 and recently slipped below 40 per cent. In the U.S., it has turned sharply higher, rising to 42.7 per cent in 2009 from 39 per cent in 2008. It is expected to reach 45 per cent next year.

The White House has forecast the U.S. deficit for 2010 to be $1.6 trillion US or 10.6. per cent of gross domestic product, the highest level since the Second World War. Canada’s deficit is seen at $49.2 billion, or 3.7 per cent of GDP. Canada should be able to manage its debt and still lower taxes. The U.S. clearly cannot.

– Canada’s universal health care system is good for business. In Canada, health care is paid for mainly by employees through their income taxes. In the U.S., most companies pay for health benefits for their full-time employees. In 2002, automotive companies confirmed that Canada’s health care system saved labour costs.

About 70 per cent of all health-related spending is financed by the Canadian government, while the U.S. government covers about 46 per cent. Yet the U.S. government spends more on health care than the Canadian government does — 14.6 per cent of GDP in the U.S. compared with 10 per cent in Canada. And that translates into higher health care spending per capita — $6,714 US in the U.S. vs. $3,678 US in Canada.

A number of studies have concluded health outcomes are better in Canada, particularly on life expectancy and infant mortality measures, but these findings are controversial.

Canada can offer the stability of a universal health care system that has been in place for many years while the U.S. faces the uncertainty of new health care legislation passed this spring that will not be fully implemented until 2014 and carries a price tag estimated at $940 billion US.

– Canada’s banking system is sound. The credit crisis and recession that ravaged U.S. financial institutions caused barely a ripple at Canada’s banks. A cautious business culture and tough regulation steered them away from the toxic derivatives and lax lending practices that brought down major Wall St. investment firms and countless small banks across the U.S. Moody’s scores Canadian banks at the top of its ranking of the world’s banks and Global Finance magazine lists them among the safest banks of the 500 it reviews. The World Economic Forum’s Global Competitiveness Report ranked Canada’s banking system No. 1 in the world, ahead of Switzerland’s and Hong Kong’s.

The number of bank failures in Canadian history can be counted on one hand, while many thousands have collapsed in the U.S. Bank regulation in the U.S. is highly fragmented with as many as half a dozen federal and 50 state regulatory authorities involved, depending on a bank’s charter. In Canada, the regulatory responsibility rests with the Office of the Superintendent of Financial Institutions.

– Regulation is similarly stable and streamlined in other sectors of the Canadian economy, resulting in less uncertainty, better planning and a lower cost of capital.

– Canada is a safe country. The homicide rate in the U.S. is three times higher than Canada’s, the rate of aggravated assault is double and the incidence of robberies is 65 per cent higher. Seventy per cent of murders in the U.S. are committed with firearms, compared with 30 per cent in Canada.

Canada has first-class infrastructure. Road, rail and air, power grids, pipelines, fibre optic and wireless networks are all the equal of any in the world. Put it all together and, in the final analysis, the unit cost of doing business is lower in Canada than the U.S.

Some studies attribute Canada’s low — and falling — crime rate to social cohesion; a multifactor measure that gauges trust in people, confidence in institutions, respect for diversity, and a sense of belonging, along with more common indicators of poverty, income distribution, employment, health, mobility, literacy, education and housing.

– Canada has an educated workforce. In fact, it boasts the highest proportion of postsecondary graduates (46 per cent) in the 25-to-64 age group among member countries of the Organization for Economic Co-operation and Development and the G-7.

– Arguably, Canada is more welcoming to immigrants than the U.S. and newcomers to Canada have higher levels of education attainment than native Canadians. By comparison, the quality of the U.S. workforce may suffer, given the desperate budget problems many states face. If these fiscal challenges result in cutbacks and layoffs, school performance may suffer.

– Canada has abundant resources. The availability of affordable energy, rich mineral deposits, fresh water, arable land and thousands of kilometres of forests offers benefits to any company, whether a producer or consumer of commodities.

– Canada has first-class infrastructure. Road, rail and air, power grids, pipelines, fibreoptic and wireless networks are all the equal of any in the world.

Put it all together and, in the final analysis, the unit cost of doing business is lower in Canada than the U.S.

The 2010 KPMG study of 95 cities across 10 countries concluded that Canada was the best place to invest, with a five-percent cost advantage over the U.S. Out of the 35 major cities with populations of more than two million, Vancouver, Montreal and Toronto ranked in the top 10 in terms of cost of doing business.

We could provide further inducements by setting up processes that put out the red carpet for businesses — not wrap them in red tape — by having one number to call or an e-mail address that would deal with any problems firms encounter at the federal, provincial or local levels of governments.

Such a problem-solving clearing house would require that provinces and major municipalities be willing to play ball. And why wouldn’t they?

What tools should Ottawa and the provinces use to sell Canada?

For a start, we have to create product awareness. That can be achieved by running comparative ads on business news channels like CNBC, Fox Business News and CNN. Print and online ads should focus on business magazines such as Fortune, Forbes, Fast Company and site location magazines among others. Strategic use of social media would help carry the message to key decision-makers.

Once awareness is created, a successful marketing strategy would treat Canada as an industrial product, not a consumer good. So the primary sales tool should be personal selling. Specifically, that means Prime Minister Stephen Harper has to act as the chief salesman. He could invite the top 100 in the Fortune 500 to a lunch or dinner at the Harvard Club or Waldorf-Astoria for a talk on why investing in Canada makes sense. He could dispatch his industry minister or premiers to discuss not just the broad strokes but details to selected boardrooms across the U.S.

To succeed, however, there must be follow-through. If a firm is interested in investing in Canada, the relevant levels of government should hold their hands through the process, not tie them up in knots. If one investor has a bad experience and starts to bad-mouth us, all of the work will be for naught. Word of mouth advertising from peers is potent and cuts both ways. The more welcoming we are to investors, the more we will have lining up at our border.

We should be in for the long haul. That means whatever party takes over the government, there must be commitment to our national interest; the first being a prosperous Canada. To make that a reality, the leader of the official Opposition in Ottawa and in provincial capitals should be brought on board.

Better yet, they could be part of the delegation that hits the Fortune 500 board rooms. This will symbolically and substantively send the message to investors that they can rely on our hospitality despite shifts in the political winds.

This attitude on our part will be in stark contrast to U.S. President Barack Obama’s perceived or real hostility to business. In his demonization of business in general, and Wall Street in particular, Obama has alienated everyone from small-shop owners to the chief executive officers of the largest American — and foreign — companies. Before Obama smartens up and closes this window of opportunity, Canada should step up to the plate.

Admittedly, these are broad strokes. We will leave it to the smart bureaucrats in the Prime Minister’s Office and the Privy Council Office to hire the right people to develop a detailed marketing plan.

They should do it without delay.

henchin@vancouversun.comfmihlar@vancouversun.com

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