OTTAWA — An NDP plan to give tax relief to small businesses will actually end up giving wealthy Canadians a tax cut, some economists said Tuesday.
“[It’s] something to make the rich richer,” Jack Mintz, the director of the University of Calgary’s School of Public Policy, told The Huffington Post Canada.
NDP Leader Thomas Mulcair announced Tuesday that his party would lower the small business tax rate to nine per cent from the current 11 per cent in two steps. The NDP said its first reduction — to 10 per cent — would cost $600 million a year in lost revenue. The goal, Mulcair told a business crowd at an Economic Club of Canada luncheon, was to help small businesses grow and create new jobs.
“[We’ll provide immediate and permanent help for Canada’s hard working small business people, who are the backbone of the local communities and the creators of 80 per cent of all new jobs in this country,” Mulcair said, in announcing the nearly 20 per cent tax reduction.
“With this one practical measure, small businesses can better weather the current economic climate, hire more employees and help their local communities prosper for years to come.”
But 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.
Kevin Milligan, an associate professor of economics at the University of British Columbia who sits on Liberal Leader Justin Trudeau’s economic advisory council, tweeted a graphic Tuesday from another paper from economists at the University of Ottawa, McMaster and York University, showing the top one per cent of Canadian income earners making large use of CCPCs.
“If you have a company making $500,000 a year and you go into a tax lawyer’s office, it’s very likely that a CCPC will be part of your tax planning,” Milligan said.
Most Canadians may think of small businesses as mom and pop operations, but that is not reflected by the majority of individuals using the tax break, Milligan told HuffPost.
“It’s a central point of tax planning in Canada for high-income individuals to use CCPCs, so I think it’s a mistake to ignore that.”
“For me, if I was a left-leaning progressive guy, I’d be looking at cutting back on the tax break given to CCPCs. So, I am a little bit confused by that,” he said.
When asked about the CCPC loophole, NDP finance critic Nathan Cullen told HuffPost the NDP has fought against tax havens and closing up loopholes, and supported tax relief tied to job creation.
But Cullen acknowledged that the NDP plan announced Tuesday doesn’t tie any strings to the tax break. No jobs have to be created to take advantage of the lower tax rate.
“This case, it is an across the board [cut],” Cullen said. “We believe that especially in times of economic fragility a lot of the innovation … comes from those same small business entrepreneurs, because they have the ideas of what that new value-added economy can look like,” he said.
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