Trudeau's pandering small business tax cut will do nothing for the economy - Macleans.ca
 

Trudeau’s pandering small business tax cut will do nothing for the economy

Opinion: If the Liberals really wanted to help the economy, they’d design a policy with ambitious entrepreneurs in mind—not an army of small-business owners content to stay that way


 
Finance Minister Bill Morneau speaks to members of the media as Prime Minister Justin Trudeau looks on at a press conference on tax reforms in Stouffville, Ont., on Monday, October 16, 2017. THE CANADIAN PRESS/Nathan Denette

Finance Minister Bill Morneau speaks to members of the media as Prime Minister Justin Trudeau looks on at a press conference on tax reforms in Stouffville, Ont., on Monday, October 16, 2017. THE CANADIAN PRESS/Nathan Denette

I might be wrong. It was only Day One of Small Business Week, and Prime Minister Justin Trudeau said he intended to celebrate by meting out little announcements on tax policy for the duration. So there’s a chance that a footnote on Wednesday, a clarification on Thursday, or an asterisk on Friday will change things. But I think he might want me and all the other freelancers out there to incorporate.

The reason I think that is Trudeau and Finance Minister Bill Morneau rushed from a morning caucus meeting in Ottawa to an Italian restaurant in Stouffville, Ont. to say they will drop the small business tax rate to 10 per cent on January 1 and then all the way down to nine per cent at the start of 2019.

RELATED: The Prime Minister’s tax reform damage control tour

I got into the typing business because I was weak at math, but that looks like an arbitrage opportunity for the growing ranks of self-employed Canadians. Back in July, when Morneau released his star-crossed attempt at tax reform, I was under the impression he was worried about the spike in one-person corporations. But after listening to his boss on Oct. 16, I guess I have to admit I was wrong in that interpretation. Trudeau was asked directly about the wisdom of widening the gap between the tax rates paid by individuals and the rate paid by small businesses, which is pretty wide for all but the poorest of taxpayers. This is what he said: “We want to encourage people to become entrepreneurs, to start small businesses. We know small businesses are at the heart of the success of our economy.”

Trudeau’s voice rose when he said “heart of the economy,” so I guess he wants us to know that he means it. He continued: “It’s extraordinary to see the impact that a small family business like this one has, not just in the community, but in the overall economy as we add up the hard work of millions of Canadians from coast to coast to coast.”

Here’s the thing. Any economy that relies on the likes of me to keep its blood pumping will be at risk of cardiac arrest. I won’t be hiring anyone, and I won’t be helping the next Jeff Bezos launch his or her start-up. But a single-digit tax rate might finally inspire me to call a tax lawyer to consider my options as a corporation. Thanks to our summer-long debate over #taxunfairness, I know where to find some good ones.

You wouldn’t know it from listening to the disciples of Ayn Rand on Twitter, but not all entrepreneurs are special, and therefore not all of them deserve unique treatment under the tax code. For every Tobi Lutke, there are dozens of stay-at-home lawyers, consultants, accountants and the like who simply prefer working for themselves. Same for the owners of thousands of smaller companies. Some dream of doing great things. For others, it’s a lifestyle choice. They might end up employing some people, but their real motivation for starting a company is their dislike of managerial hierarchy. The contribution to the economy of these employers is no greater than that of a salaried manager at larger company.

READ: How Bill Morneau found himself at war with small business

But middle managers don’t have large lobby groups working on their behalf. By 2019, the average combined federal-provincial-territorial tax rate on the first $500,000 a smaller company generates will be 12.9 percent. The only other nation in the Group of Seven that taxes its entrepreneurs so lightly is France, where the comparable rate is 15 percent, according to background material provided by the Finance Department.

Trudeau and Morneau described their tax cut as creating a competitive advantage. Maybe. Germany is one of the most productive economies on the planet, yet it forces its smaller companies to pay a tax rate of about 30 percent. Ottawa will forego some $3 billion in revenue over five years, which will raise questions about whether Trudeau and Morneau might seek to recoup the money elsewhere, given they’ve also indicated they intend to narrow the budget deficit over that period.

The deficit won’t be an issue if Canada’s entrepreneurs actually use their windfall over the next couple of years to hire and invest, thus broadening the tax base and generating revenue. That’s far from certain. The International Monetary Fund for a couple of years now has tried to dissuade Canada of the myth that there is something magical about smaller companies. The IMF’s research shows that it takes ambitious entrepreneurs to create jobs at a rate the makes a difference, not an army of small-business owners who are content to stay that way.

If Trudeau and Morneau were serious about economic growth, they would have tied the preferential rate to hiring. They might also have lowered the rate bigger companies pay on income in order to give upstarts a reason to leave the Canadian Federation of Independent Business behind. Instead, the federal government simply sweetened an already generous advantage enjoyed by a noisy group of business owners. It might make those people happier, and it may even help my brothers and sisters in the gig economy. But there is little reason to think the tax cut will do much for the economy. That would have taken a policy designed with the most ambitious entrepreneurs in mind, not the ones interested only in preserving the status quo. However, there are more votes in the later group than there are in the former.

MORE ABOUT JUSTIN TRUDEAU:


 

Trudeau’s pandering small business tax cut will do nothing for the economy

  1. Oh, Macleans, if the Liberals didn’t cut the small business tax rate you’d be running opinion piece after opinion piece about how they didn’t keep this election promise and how small businesses were so hard working – 80 hours a week, no pension, no vacation days, no sick days etc. etc – and they separately needed this tax break.

    But no, they did it so you decide you must go the other way and attack them for doing it.

    Small businesses are the “job creators” after all and cutting their taxes will do great things for the economy… oops, sorry. They did cut their taxes??? Then this will do nothing to create jobs or help the economy!!!!

    • Just my take on this whole issue…. I’d love to only have to pay 9% tax on my income. It must not be forgotten that would be *after* related expenses. I worked as an employee for most of my adult life, and as I am now retired, I look back and see that I didn’t have the ability to deduct employment expenses from my income. And that was after paying almost double that 9% income tax. This tax reduction is not only unjustified, it is unjust. K L above notes that the business environment involves risk taking. Employees at non-union businesses have no recourse when raises are withheld for vacuous reasons, hours of work are arbitrarily increased with absolutely no compensation, and have no stability in the labour market at all. Talk to a Sears salesperson, or any other employee whose job evaporated because their management didn’t stay alert to changing conditions.

      I have to wonder how many front line employees have lost income, pensions and benefits in comparison to the number of owners of businesses that have failed.

  2. What small businesses really need is the ability to income sprinkle among family members, for professionals to incorporate so as to make personal investments under the shelter of lower small business taxes and to turn salaried income into dividends.

    Oh wait. That was last week.

    Now small businesses are not needed and people have them for the wrong reasons and just want to keep them as small businesses for tax reasons – not growing them into something bigger. You know, like all those doctors and other professionals who were able to convert would would usually be salaried income into corporate revenue – for tax reasons only.

  3. Noted the admission that “I got into the typing business because I was weak at math”. It shows.
    Also noted “their real motivation for starting a company is their dislike of managerial hierarchy. The contribution to the economy of these employers is no greater than that of a salaried manager at larger company.” Vacuous comment, showing no grasp what-so-ever of the risks-taking business environment.

  4. “The contribution to the economy of these employers is no greater than that of a salaried manager at larger company.”
    ————————–
    In 2015, the Canadian private sector employed over 11.6 million people. As shown in Figure 2.1-1, the majority of these employees worked for small businesses, constituting 70.5 percent (8.2 million) of private sector employment. By comparison, medium-sized businesses employed 19.8 percent (2.3 million) and large businesses employed 9.7 percent (1.1 million) of the private sector workforce.

    http://www.ic.gc.ca/eic/site/061.nsf/eng/h_03018.html#figure2-1-1

  5. I expect that soon our members of parliament will be single member corporations in order to take advantage of the special tax treatment.

  6. Now that the $50 Billionaire Class are now the$70- $80 Billionaire Class (60% increase) according to Forbes.
    This may help Bill Morneau MP (Finance) remember where all his Assets in the world are located. It is sad when you have so much and you cannot remember where all those Assets are located. So I forwarded this small present to the Liberal Small Business MP for a new tax to help the wealthy track their Assets.
    Net WORTH TAXATION like property tax, only the loans would be deductible. Assets minus liabilities.
    All citizens, born in the country and residence are taxable. Share owners and not the corporations are taxable.
    Leases, food, travel, clothing, child care, child education and etc. become deductible.
    Offshore and proceeds of crime must now be reported.
    Fail to claim assets, 75% penalty.
    $10,000,000 to $50,000,000 @ 1.0% ,,
    $50,000,000 to $100,000,000 @ 2.5% ,,
    $100,000,000 to $1 billion @ 5.0% ,,
    $1 billion to $5 billion @ 7.5% ,,
    $5 billion to $10 billion @ 10% ,,
    $10 billion to $15 billion @ 15% ,,
    $15 billion to $20 billion @ 20% ,,
    $20 billion to $25 billion @ 25% ,,
    $25 billion to $30 billion @ 30% ,,
    $30 billion to $35 billion @ 35% ,,
    $35 billion to $40 billion @ 40% ,,
    $40 billion to $45 billion @ 45% ,,
    $45 billion to $50 billion @50% ,,
    etc. ,, etc. ,, etc. ,, etc. ,,