Martin's 2000 Budget

By any standard it was a meaty budget. On taxes, Finance Minister Paul Martin's first fiscal plan for the new century laid the table for five years of gradual cuts to corporate and personal rates. On spending, he injected money into long overlooked basics, like the cash-starved armed forces, and perennial priorities, like health. But among all the big moves, which was closest to Martin's heart? Finance officials who worked closely with him say there was one item that never lost its grip on their boss's imagination: the $160 million earmarked for research into genes. And sure enough, Martin gushed about the subject in a post-budget interview with Maclean's. "I guarantee you that just as 20 years ago nobody could tell you where the Internet was going to take us," he said, "nobody can tell us today where the study of genetics is going to take us."

His fascination with deciphering the gene code is more than a quirk. Martin has always yearned for a legacy beyond just balancing the books. Now that the deficit fight is behind him, he is determined to do something more imaginative than merely trimming taxes - important as that may be. So his budget speech was laced with breathless talk about "globalization and the rush of technology." When it comes to funding gene research, Martin touts it as getting Canada in on the ground floor of a biotechnology revolution - the sort of measure that he hoped would define his post-deficit thrust. It must have stung, then, when the sharpest attacks last week came from the very technology entrepreneurs whose ranks Martin says he wants to bolster. They were looking, not at neat ideas like the genome initiative, but at the government's long-term tax-relief plan. "It's just not fast enough," complained Ian McLaren, president and chief executive of CrossKeys Systems Corp., a software firm based near Ottawa. "Our life changes in quarterly cycles and they are talking in five-year plans. We can't identify with them."

That tone - a precocious adolescent griping about his staid parents - ran through much of the budget critique that flowed out of the world of dot-com and e-biz. The underlying concern: keeping up with the lower-tax U.S. business environment. Last week's spectacular Nasdaq debut of Seattle-based online firm Onvia.com, which made founder and Moose Jaw, Sask., native Glenn Ballman an instant billionaire, was a reminder that things are moving higher, faster south of the border.

Still, it's not as if Martin ignored pleas to improve Canada's climate for high tech. The budget made a start at easing the corporate tax rate that applies to technology companies, and offered more favourable treatment of stock options and capital gains - the key incentives for investors and prized employees in fast-growing technology firms. Martin admits that more has to be done to shrink the tax burden, but he firmly resists the notion that matching U.S. rates must be the ultimate goal. "I think we've got to get our taxes down further," he allows. "But I don't think that we have to be 100 per cent with the United States."

His critics, however, argue that Canada's tax rates should not only be sliced down to U.S. size - they must be pushed even lower. Contrasted with other countries, mainly in Europe, Canada's tax regime can seem attractive. But the tax hawks dismiss that as all but irrelevant. "It's a global village and all the rest," concedes Paul Hickey, a tax partner with KPMG in Toronto. "But the main comparison is obviously with our neighbour to the south." And by that benchmark, even after the budget, Canada still stands at a considerable disadvantage in pure tax terms. A young software engineer earning, say, $85,000 would pay a marginal tax rate of 47.9 per cent in Ontario - unchanged by last week's budget - but just 37.4 per cent if he got a job at the same salary level in California. Yet Martin does not agree with those who see that gap as the cause of any skills exodus. "Do I think there are Canadians who leave the country? Yes. Do I think that it is because of taxes? No," he declared, interviewing himself on the much-discussed "brain drain" issue. "Do I think it is because of opportunity? Totally."

Making sure there are new opportunities in Canada excites Martin more than driving for tax parity with the United States. Unlike the high-octane, high-tech executives like McLaren, Martin talks less about the next quarter than the next quarter-century. "The first quarter of the 21st century, 10 to 20 years at least, is going to be a period of very strong growth because of cascading technologies," he predicts. Among those technologies is the emerging science of manipulating genes - expected to drive developments in everything from pharmaceuticals to food production. Martin traces his interest in the field to a conversation with Michael Smith, the Vancouver-based Nobel Prize winner in chemistry. Smith had been lobbying Ottawa for a major boost in genome research funding. When he was in Montreal for a science conference, he let Martin's office know he was available for a meeting. "Lo and behold," Smith recalls, "Martin came down by himself to my hotel on a Sunday morning. So we sat down and chatted. I explained why I thought genomics was important."

Evidently, the avuncular, world-renowned chemist was persuasive. The budget allocates $160 million to fund five genome centres scattered across the country. Smith predicts Canada will reap rewards from biomedical breakthroughs, and train a cadre of experts who will apply new ideas about genes to "economically important areas" from aquaculture to forestry. Just the sort of talk Martin likes to hear. For similar reasons, he touts the $900 million the budget funnels into the Canada Foundation for Innovation, set up by the Liberals in 1997. Among the big projects already supported by the foundation is the University of Saskatchewan's $173.5-million "synchrotron" - a football field-sized facility for accelerating electrons to nearly the speed of light, allowing scientists to probe the structure of matter in ways useful in everything from inventing medicines to perhaps developing new polymers for disposable diapers.

After years of grimly battling the deficit, Martin seems relieved to have new stuff to talk about. His rhetoric these days harkens back to the sort of innovative-economy themes he hit when he was running his losing campaign against Jean Chrétien for the Liberal leadership a decade ago. "When you realize how the country was able to come together for something as arid as the elimination of the deficit," he says, "just think how much more exciting it is to come together to put our country at the leading edge of the basic, dominant technologies." But how does that excitement stack up against the thrill of a tax break - or the frustration of one denied? As Martin tries to shift the discussion to the economy of tomorrow, the economic champions of today want to talk taxes. "For some reason in Canada we think if we get close to the U.S. [tax rates], that's great," McLaren says. "Well, that's not great. We compete with them every single day head-to-head, and anything that puts us at a disadvantage is a problem." And as long as vocal critics like McLaren believe they have a problem, Martin is going to have one, too.

Budget Highlights

- Taxes of all kinds cut overall by $58 billion over five years

- Personal tax brackets indexed to inflation

- Child Tax Benefit increased by up to $595 for a first child by 2004

- Basic federal corporate tax cut to 21 per cent over five years from 28 per cent for the highest-taxed sectors

- $2.5 billion extra given to provinces over four years for health care and postsecondary education

- $1.9 billion extra over four years for the armed forces

Global Competition

In the past year, Britain, France and Japan have reduced corporate taxes, and Germany recently proposed major cuts as well. Here is how Canada's total corporate tax rate for 2004-down from 47 per cent in 1999-will compare with current or proposed rates in the Group of Seven countries:

- Canada (2004) 40%

- Britain 30%

- France 38%

- Germany 39%

- Italy 41%

- Japan 41%

- United States 40%

Maclean's March 13, 2000