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Michael Laxer's blog

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Michael Laxer lives in Toronto with his partner Natalie and three children. Michael has a degree in history from Glendon College of York University. He is a political activist, a two-time former candidate and former election organizer for the NDP, a former socialist candidate for Toronto City Council in 2010 and 2014 and served on the executive of the Socialist Party of Ontario as its Spokesperson and Chair.

Tax cuts, income inequality and the NDP small business job plan

| January 29, 2015
Tax cuts, income inequality and the NDP small business job plan

Have you ever heard the idea that, if given "tax relief," business people -- those pillars of the capitalist economy -- will innovate, create jobs and eventually make our society and government wealthier even though they are being taxed less?

We all have, of course. It is a fundamental narrative of neoliberal right wing economics and its widespread acceptance and embrace by our political "leaders" has contributed profoundly to the growth of extreme inequality and corporate power 

But now, in a way intended to seem perversely folksy and beneficial to workers and the "middle-class," a version of this exact narrative is being peddled by Thomas Mulcair and the NDP as a cornerstone of their new "job creation" strategy in their promise of a "job creating" tax cut for small business.

The NDP, in its own release on the policy, claiming to wish to help "small businesses create good-paying, full time middle class jobs for Canadians," goes on to say:

Tom Mulcair also announced that an NDP government will cut the Small Business tax rate from 11 per cent to 9 per cent. “The Small Business tax cut will provide immediate and permanent help for Canada’s hard working small business people who are the backbone of local communities and the creators of 80 per cent of all new jobs in this country,” explained Mr. Mulcair.

To say that many of the premises that this is based on are manifestly wrong would be an understatement.

To begin with, as right wing economist (ironically) Jack Mintz noted at The Huffington Post, this tax policy will "make the rich richer." The article goes on to note:

Mintz and some fellow economists argue that the tax break will go overwhelmingly to Canadians who need it least and may not result in job growth at all.

“We find that 60 per cent of the small business deduction goes to households with more than $150,000 in income,” Mintz said, of research he has previously done on the subject. “That’s because you tend to have a relatively high number of high-income households who own small businesses,” he said.

“The worst part [of the NDP plan],” Mintz added, “is that it doesn’t have good economic impacts because small business deductions contribute to a wall of taxation, so if they grow, they lose some of their benefits and get hit with higher taxes… It tends to keep small businesses smaller.”

The small business tax rate, which is really the taxation rate for a Canadian-controlled private corporation (known as CCPC), is also used by high-income households as a form of income splitting with dividend distributions shared between spouses, Mintz said.

“So it’s also a good income splitting method that the NDP are recommending,” he said.

“[CCPC] is used a lot as a method of tax avoidance by upper income Canadians.”

He suggested that the NDP should perhaps rethink the policy, especially if the party was unaware of who the CCPC’s primary users are.

In case one thinks that this is all some right-wing attempt to stop this noble plan to help all of those struggling "mom-and-pop" small businesses that are supposedly such an important part of our economy and society (and we will return to this point shortly), Mintz's concerns were strongly seconded by leading left-wing economist Hugh Mackenzie, who wrote for the left-leaning Canadian Centre for Policy Alternatives (CCPA):

The widespread use of preferential CCPC rates as a tax avoidance strategy highlights an oddity in the way we think about equity in the tax system.

We tend to think of someone with an income of $500,000 as having a very high income. And based on equity principles, we tend to think that someone with a very high income should pay a higher rate of tax.

Here’s the rub: that same income level, earned through a corporation, is considered in Canada’s political reality today to be “small” and deserving of a much lower rate of tax than the norm.

In policyspeak, while a tax break for a real small business delivered via the mechanism of a preferential corporate income tax rate may or may not be effective in supporting small businesses that are actually growing and creating jobs in Canada -- and there’s lots of room for debate there too -- it is incredibly poorly targeted.

The evidence suggests that most of the benefit goes to individuals who use a corporate structure to avoid paying personal income taxes and that most of those individuals are at the top of the income distribution.

In other words, the substantial portion of the value of the preferential tax rate for small business completely misses its intended target and actually contributes to the growth in income inequality in Canada.

It’s time to pause and reflect on our policy love affair with small business.

People do not broadly understand that many of the "small businesses" who can benefit from this tax policy are, in reality, wealthy professionals, landlords, etc., who are actually attempting to avoid personal taxes by doing so, and that many small store owners do not really benefit from these illusory rates (especially those who, as many do, file as "self-employed" as they do not make enough to take the costly steps to allow for this to be worthwhile). 

But, at least as significantly, even if one accepts the highly dubious notion that tax cuts create jobs (which, one might note, has been used to justify corporate tax cuts of all type, large or small), the jobs created by the small business sector of the economy (especially those "main street" "mom-and-pop" stores the politicians and Mulcair are waxing poetic about) are with little doubt, overall the worst paying, least unionized, lowest benefit and most likely to be part-time jobs in the economy.

In fact there is a direct correlation between enterprise size and average wage, in that the average wage goes up with business size and rather dramatically. While average wages in Canada in 2013 were $910.74 a week, the average wage for those in enterprises with 49 or fewer employees was $768.00 contrasted to the average wage of an enterprise with over 500 employees at $1031.25.

Many small business jobs are anything but "middle-class" jobs and are where the highest proportion of minimum wage jobs are found; jobs which, as we all know, are poverty wage level jobs and will be indefinitely if our political class has its way.

Beyond this, there is the disturbing reality of how closely these policy ideas mimic the failed pro-business, anti-tax ideas of the right that have led us to where we are today. In fact, given that it is actually, often, larger corporations -- especially in the non-retail sector -- that are unionized, pay the highest wages to workers and provide the most benefits, if we actually believe, despite all the evidence, that tax cuts for business owners create jobs and spur innovation then this is where they should be directed and right-wing politicians have been right all along.

One can only think, as surely they must know it will not accomplish what they claim it will, that the NDP brain-trust's motive is not about who it helps but rather how the party thinks it makes the party look -- presumably, in favour of "innovation," "the little guy," "hardworking business people", etc.

We have heard countless -- and entirely justified -- condemnations of the Harper government's difficulty with fact and evidence based policy. We should not fall into the same trap, on the left, of placing political rhoetoric and perceived expediency ahead of reality.

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