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  • CCPA in Europe for CETA speaking tour October 17, 2017
    On September 21, Canada and the European Union announced that the Comprehensive Economic and Trade Agreement (CETA), a controversial NAFTA-plus free trade deal initiated by the Harper government and signed by Prime Minister Trudeau in 2016, was now provisionally in force. In Europe, however, more than 20 countries have yet to officially ratify the deal, […]
    Canadian Centre for Policy Alternatives
  • Twelve year study of an inner-city neighbourhood October 12, 2017
    What does twelve years of community organizing look like for a North End Winnipeg neighbourhood?  Jessica Leigh survey's those years with the Dufferin community from a community development lens.  Read full report.
    Canadian Centre for Policy Alternatives
  • Losing your ID - even harder to recover when you have limited resources! October 10, 2017
    Ellen Smirl researched the barriers experienced by low-income Manitobans when faced with trying to replace lost, stolen, or never aquired idenfication forms. Read full report here.  
    Canadian Centre for Policy Alternatives
  • CCPA recommendations for a better North American trade model October 6, 2017
    The all-party House of Commons trade committee is consulting Canadians on their priorities for bilateral and trilateral North American trade in light of the current renegotiation of NAFTA. In the CCPA’s submission to this process, Scott Sinclair, Stuart Trew, and Hadrian Mertins-Kirkwood argue for a different kind of trading relationship that is inclusive, transformative, and […]
    Canadian Centre for Policy Alternatives
  • Ontario’s fair wage policy needs to be refreshed September 28, 2017
    The Ontario government is consulting on ways to modernize the province’s fair wage policy, which sets standards for wages and working conditions for government contract workers such as building cleaners, security guards, building trades and construction workers. The fair wage policy hasn’t been updated since 1995, but the labour market has changed dramatically since then. […]
    Canadian Centre for Policy Alternatives
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The Progressive Economics Forum

1% Small Business Tax: A Bad Idea Returns

Liberals are proposing to slash Nova Scotia’s corporate income tax rate for small business from 5% to 1%.

We have seen this movie before. New Brunswick announced a 1% small business rate by 2007 only to instead restore a 5% rate that year. Nova Scotians might reasonably ask why their provincial neighbour abandoned the 1% plan.

Part of the story is that New Brunswick’s 2007-08 budget increased taxes overall, including personal income taxes and general corporate taxes. However, New Brunswick has since unveiled a tax-cutting binge that notably maintains the small business rate at 5%.

There are solid public-policy reasons for not slashing small business rates. A major purpose of corporate income taxes is to prevent business owners from incorporating simply to avoid paying personal income taxes.

If corporate tax rates equal personal tax rates, then the government collects the same revenue regardless of whether income is generated inside or outside a corporation. By contrast, a 1% tax rate gives small business owners a strong incentive to keep income within their corporations to avoid or delay paying significantly higher personal tax rates.

An ultra-low small business tax also encourages business to organize itself as many small corporations rather than fewer large corporations. In particular, it provides an incentive for large corporations to contract out activity rather than performing it in-house. Such contracting to small business not only reduces tax revenues for the public, but usually also reduces wages and benefits for the workers involved.

Even the C. D. Howe Institute’s tax-cutting gurus recognize the perils of an excessively low small business rate:

Tax reductions have also been targeted to small businesses, thereby creating greater opportunities for personal and corporate tax avoidance. A notable exception: New Brunswick, which is revising its far-too-low small business corporate income tax rate, boosting it from 1 to 5 percent.

The small business rate applies to every Canadian-controlled private company’s first half-million dollars of profit. (Nova Scotia’s threshold is currently $400,000, but the upcoming provincial budget will almost certainly raise it to $500,000 in line with the last federal budget.) Therefore, a lower “small business” rate delivers the largest tax breaks to relatively large and profitable private companies.

Why have Nova Scotia Liberals put forward this policy? One explanation is that they are heading toward a provincial election and small business is a very vocal and popular political constituency. The third paragraph of their press release provides another explanation: “a broad-based tax cut will do more to stimulate the economy than a tax credit for manufacturers alone.”

This shot is obviously aimed at the Nova Scotia NDP’s proposed manufacturing and processing tax credit. Such a refundable credit is, in fact, a far superior policy because it is tied to tangible investment and available to enterprises that are not currently profitable. Increased manufacturing investment would expand opportunities for small business to sell goods and services to manufacturers and their employees.

The NDP would provide a refund to every corporation that invests in Nova Scotia manufacturing, regardless of whether it is private or publicly traded. The Liberals would provide a tax break to every profitable private corporation, regardless of whether or not it invests in Nova Scotia.

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