I had been fiddling with my last post in spare moments since the federal NDP convention. I fiddled long enough that Jack Mintz beat me to the punch in critiquing the proposal to eliminate corporate tax on small-business profits. His op-ed appeared in yesterday’s Financial Post.
His priority is to slash the general corporate tax rate down to the same low level as the existing small-business rate. I have opposed his advocacy of ever-deeper corporate tax cuts in many letters to the editor and blog posts.
But I have to give credit where it is due. Along the way to his appeal for lower corporate taxes in general, Mintz outlines three serious problems with cutting the small-business rate in particular:
1. Small businesses are not the main driver of economic growth and employment. Instead, they tend to either sell inputs to larger businesses and public institutions or sell goods and services to people who work for these larger employers. Although small-business activity may entail more jobs, it is mostly a spinoff from investments made by larger firms and governments.
2. Private corporations can divide into smaller corporations simply to make more of their profits eligible for the lower small-business tax rate. Progressive taxation makes more sense for individuals, who cannot subdivide themselves to take advantage of lower tax brackets.
3. A lower small-business rate creates massive opportunities for personal-tax avoidance. My post emphasizes this concern.
However, I cannot quite conclude that Mintz hit this issue out of the park. He understated the problem in a couple of ways:
1. He wrote that the federal small-business rate applies to only the first $400,000 of profit from a Canadian-controlled private corporation. In fact, Budget 2009 raised this threshold to $500,000. (Some provincial governments have kept their thresholds at $400,000.)
2. Mintz accepts that the dividend tax credit for personal taxes simply offsets corporate taxes already paid. In fact, as my post demonstrates, this credit goes well beyond the low corporate tax paid by small businesses.
So, let’s call his hit a triple.
- Don’t Privatize ISC (May 16th, 2013)
- Provincial Corporate Taxes: A 12% Floor? (April 23rd, 2013)
- Fairness by design: a framework for tax reform in Canada (February 14th, 2013)
- Effective Corporate Tax Rate Falling (October 18th, 2012)
- Do Corporate Tax Cuts Really Pay For Themselves? (September 13th, 2012)