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Thursday, April 13, 2017

Does Canada Have More Economic Freedom Than the United States?

Canada may be America's "socialist neighbor to the north," but could is it possible that the country experiences more economic freedom than the United States?

When speaking of Canada, conservatives laugh at our “socialist neighbor to the north” with its lavish social programs. The main point of contention is, of course, Canada’s infamous “socialized healthcare,” which has been viewed as the epitome of a system NOT to imitate because of its high costs and long waiting times.

While, yes, Canada is dangerously close to Bernie Sanders’ dream of a single-payer system, the very structure of its system explains why Canada constantly ranks higher on the Heritage Foundation’s Index of Economic Freedom – #7, compared to the U.S. #17 ranking. And that structure is federalism.

Indeed, Canada’s 1867 constitution explicitly stipulates that hospitals – with a few exceptions – are under the exclusive care of the provinces.

Despite many of Ottawa’s incursions in the domain, one of the only major pieces of legislation from the federal government is the Canada Health Act. It has only 18 pages – nine if it were written in only one language but all laws in Canada are written both in French and English. Including this legislation, there are eight federal laws regarding health care, totaling about 137 pages.

To put this in perspective, in the United States, the Affordable Care Act (a.k.a Obamacare) has 906 pages, Title XVIII of the Social Security Act (which established Medicare, the government health program for the elderly) has 1,149 pages and Title XIX of the Social Security Act (which establishes Medicaid and CHIP, respectively government health program for the poor and children) has 414 pages.

Canada ranks higher than the U.S. on the Heritage Foundation’s Index of Economic Freedom.

Education works in a similar way. Section 93 of Canada’s Constitutional Act gives exclusive powers to the provinces – minus confessional protections for Catholics, Protestants, and Natives – to rule over education.

However, only two federal acts exist, totaling 33 pages: one creates a savings account for higher education while the other gives special grants to children of deceased veterans. There has been (and still is) controversy around the Millennium Scholarship Foundation, which grants federal money to students, but it’s the only major intervention still effective.

Again, if we compare Canada’s federal acts to the United States, there is a full-fledged Department of Education whose presence has done nothing to improve results despite a (real) fourfold increase in the budget.

In fact, one could argue that federally-sponsored education programs, such as Common Core, are dumbing students down since skills must be accessible to most or none at all. Federal programs like these complicate simple problems, are very expensive and, from the few assessments about the program’s success, have proven to be a failure.

A Less Choking Federal Taxation

Canada’s federalism is also showing in its taxation system. Since Ottawa doesn’t try to micromanage the provinces like Washington does with the states, it, therefore “needs” fewer revenues.

As a result, there are only five income brackets and the highest is set at 33 percent. The lowest bracket – 15 percent – affects revenues until about $45,000.

The U.S. ranks at the bottom of OECD countries when it comes to tax competitiveness.

For corporate income tax, the rate for income earned in Canada is 28 percent, although the Canadian Revenue Agency claims that the net rate is closer to 15 percent – 10.5 percent for small businesses.

In the U.S., there are seven federal personal income tax brackets, and they are unfair for those with lower incomes (notwithstanding their deductions).

Indeed, there is already a 25 percent income tax rate for people earning a little less than $38,000. Its high progressivity is also unfair to higher income revenues, which may explain why so many people renounce their citizenship. As for corporate taxes, there are eight brackets, with the lowest rate standing at 15 percent.

It’s, therefore, no surprise that the U.S. ranks at the bottom fifth place among OECD countries (35 in total) where it comes to tax competitiveness – only Italy, Greece, Portugal and France do worse. In comparison, Canada ranks 19th.

Will Trudeau Repeat His Father’s Mistakes?

This happening could be considered an accident of history, considering how centralized Canada’s constitution is.

With Justin Trudeau in power, Canada’s fiscal advantage could very well wear out.

Contrary to the Tenth Amendment to the United States Constitution, residual powers in Canada were granted to the federal government. Also, early administrations – especially John A. Macdonald’s – abundantly used their powers of disallowance, i.e. the power to void provincial laws.

Pierre Elliott Trudeau (the father of present Prime Minister Justin) also pushed the centralization agenda very hard. From his National Energy Program, which sought to nationalize oil resources, to the vast expansion of social programs through cost sharing with provinces, he greatly increased Canada’s debt.

The debt was reined in under Jean Chrétien in the 1990s, after which Canada lost its infamous “honorary membership card of the Third World.”

But with Justin Trudeau in power, Canada’s fiscal advantage could very well wear out. During his very first budget, he transformed a $2 billion surplus into a $30 billion deficit with no real plan to balance the budget in sight.

Like his father, the younger Trudeau believes that government spending can help the economy – his first two budgets increased spending by nearly 15 percent. And yet, after two high-deficit budgets, GDP growth isn’t much different from the previous conservative administration’s performance. He also created a new income tax bracket at 33 percent for revenues higher than $200,000 – the previous highest bracket was at 29 percent.

This is all opposite of what Donald Trump wants to do. Should he keep his fiscal promises, he will reduce the number of income tax brackets to three, lower corporate taxes to 15 percent and eliminate the estate and gift tax.

Combined with his desire to slash through red tape, this could very well mean that he could spur economic growth like Ronald Reagan was able to do with his tax plan.

Canadians will have to face difficult choices in the coming election. They can stay on the current path of illusory short-term prosperity with increased spending with the Liberal Party and the New Democratic Party, or they can choose short-term pain for longer-term prosperity.

If libertarian-leaning Conservative Party candidate for leadership Maxime “Mad Max” Bernier wins the nomination, that latter choice will definitely be available.