More about small biz

This small business owner  in Fredericton wrote a very interesting op/ed talking about the need to cut small business taxes to the bone and suggesting it as the way to generate economic growth and pay down the deficit.   Much of his data was either wrong or out of context but I am interested in this broader policy issue that has been fundamental to the conversation around economic development here since I moved back 20 years ago.

There are those who absolutely believe the way to economic growth is to cut small business taxes and red tape.

I can’t figure it out.  I have looked at reams of data and reports on this and I can’t square it.  Here is the latest set of data I have reviewed. It is a list of the top 50 small businesses in New Brunswick defined as organizations with under 20 employees.   There are 1,002 privately incorporated doctors’ offices in New Brunswick, for example.  I want you to go down this list and tell me how many of these companies will expand if you cut their tax rate to the bone -say zero. 

If small residential construction firms get a tax break, will they expand?  How about fast food?  Lawyers? Auto repair?  Owner-operator truckers?  Electricians?  Plumbers?  Go through this list – almost all of them rely on local markets for their business.  Cutting their taxes won’t expand their market potential.

There may be some that are ready to break out – start exporting – build global markets and bring that revenue back to New Brunswick.  That is economic development but I would argue there are far better policy tools to reach that 1% than a broad-based tax cut for all.

Others have said that a deep small business tax cut will allow them to compete more vigorously with Walmart and foster more import substitution.  There may be – and I stress may be – some potential here but I am not completely convinced. 

If each of the 763 small construction firms all pay 10% in income tax – none of them are at a competitive disadvantage against each other.  If you cut their income tax to zero – the same thing.  No new advantage or disadvantage is created.  You have freed up more profit for them to reinvest but, again, there is no increase in market so they will continue to compete against each other for the same size economic pie.

You could argue they will invest in equipment and become more efficient but if that is your policy objective why not tie the tax break to capital investment? 

We should strive to be a jurisdiction with competitive tax rates but I can’t see any economic development reason for cutting them to the bone. 

But I am willing to debate this with anyone who wants to because I could be wrong about this.  I just see 25 years of enormous focus on the small business sector in this province and I see a stagnant economy and population.   The best thing the government could do for these small businesses is to expand the size of the pie they are competing for.  If we build an energy sector, grow mining, rebuild forest products, expand exportable ICT industries, etc. we create hundreds of millions in new income that is mostly spent in local markets – at the small businesses listed below.

Top 50 Small Businesses in New Brunswick (# of firms with under 20 employees) (Source: Canadian Business Patterns June 2010)

114113 – Salt Water Fishing       1,260
621110 – Offices of Physicians       1,002
236110 – Residential Building Construction         763
813110 – Religious Organizations         563
722210 – Limited-Service Eating Places         417
541110 – Offices of Lawyers         351
811111 – General Automotive Repair         342
722110 – Full-Service Restaurants         337
813410 – Civic and Social Organizations         286
484121 – General Freight Trucking, Long Distance, Truck-Load         283
238220 – Plumbing, Heating and Air-Conditioning Contractors         277
238210 – Electrical Contractors and Other Wiring Installation Contractors         269
445120 – Convenience Stores         256
113312 – Contract Logging         243
238910 – Site Preparation Contractors         237
484110 – General Freight Trucking, Local         234
561730 – Landscaping Services         216
624410 – Child Day-Care Services         210
621210 – Offices of Dentists         198
531120 – Lessors of Non-Residential Buildings (except Mini-Warehouses)         192
524210 – Insurance Agencies and Brokerages         190
541212 – Offices of  Accountants         190
238350 – Finish Carpentry Contractors         180
112120 – Dairy Cattle and Milk Production         177
447110 – Gasoline Stations with Convenience Stores         177
551113 – Holding Companies         177
452999 – All Other Miscellaneous General Merchandise Stores         165
541330 – Engineering Services         159
531111 – Lessors of Residential Buildings and Dwellings         155
561722 – Janitorial Services (except Window Cleaning)         154
541510 – Computer Systems Design and Related Services         149
812115 – Beauty Salons         148
811310 – Commercial and Industrial Machinery and Equipment  Repair          146
113311 – Logging (except Contract)         138
811121 – Automotive Body, Paint and Interior Repair and Maintenance         138
722410 – Drinking Places (Alcoholic Beverages)         133
623310 – Community Care Facilities for the Elderly         129
111211 – Potato Farming         122
484223 – Forest Products Trucking, Local         120
722310 – Food Service Contractors         117
419120 – Wholesale Trade Agents and Brokers         111
238320 – Painting and Wall Covering Contractors         106
713990 – All Other Amusement and Recreation Industries         103
448120 – Women’s Clothing Stores         102
443110 – Appliance, Television and Other Electronics Stores           95
445110 – Supermarkets and Other Grocery (except Convenience) Stores           94
813910 – Business Associations           94
441120 – Used Car Dealers           92
561990 – All Other Support Services           91
623110 – Nursing Care Facilities           91
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11 Responses to More about small biz

  1. richard says:

    That op-ed by Luke Randall was pretty bizarre. He started out with the usual CFIB line re small business and how they create so many jobs (forgetting of course that nearly all of them are local service businesses that create low-wage jobs; and that most of them would disappear if the prime employers in their communities folded). He dismisses out of hand the point that tax cuts to small business in the past have not resulted in significant small business expansion. In other words, the tax cuts did not achieve their intended result. Then he ends up with a statement to the effect that it’s up to us to decide if we want the tax cuts now, knowing we will have to pay for them down the road. D’uh! Since those cuts are not likely to have the desired effect, why cut them at all?

  2. I agree that he was serving up the standard commentary about small biz but I think we need to have a debate about this – a serious one – and those that believe small business tax cuts will lead to thousands of new jobs and tens of millions in new economic growth should put their data on the table. I haven’t seen it yet.

    I do think that sometimes people say ‘small business’ when what they mean to say is ‘Speilo’ or ‘Radian6′ or ‘Gogii Games’ or any of the entrepreneurs that do not base their business on local markets. But, if that is the case, we should look at the policy tools to encourage those few hundred entrepreneurs.

  3. mikel says:

    The logic is out of whack again. From an economic development standpoint, if the aim is increasing the NUMBER of small businesses, then the logic seems true that barring other factors, lowering the tax rate does not lead to that aim.
    However, what we DON”T know is whether the tax cuts led to the small businesses that existed growing into larger businesses. I believe that Lord’s tax rate has been redacted by the liberals, so the pertinent thing to do would be to ask those small businesses how many they employed under Lord, and how many they employ now. In effect to ask them to PROVE that lower taxes will lead to expansion.
    From a small business point of view, its a fine line. Expansion means more capital costs and more labour costs, which will obviously wipe out any tax savings. So the idea of ‘growth’ has to built into the model for it to be pertinent. Will salt water fishermen, for example, hire more people to catch more fish if their taxes are lower, or will they simply have more money?

    By the way, thats data I’d like to keep, is there a link to it, or an image (it doesn’t format with cut and paste)

  4. There’s no link. I had to buy it from Stats Can. If you copy and paste into an Excel spreadsheet you shouldn’t have formatting issues.

  5. mikel says:

    By the way (2), isn’t it kind of creepy that the fourth largest industry of small businesses is religious organizations? That explains so much!

  6. richard says:

    “but I think we need to have a debate about this”

    Sorry but there will not be a debate. The CFIB and their allies have no data to support their case; if they had, you would have seen it by now. They have established a meme that lower taxes promote growth, so from their point of view it would be counterproductive to have a debate over whether the meme is true or not.

    You could put your data in a TJ column and ask the question “where is the evidence that lowering the small business tax rate will promote job creation?” Keep asking that question; the CFIB won’t answer but perhaps a few readers will get the point.

    A more important question re tax policy would be: what tax regimes are most likely to promote the creation of significant numbers of high-wage sustainable jobs?

  7. mikel says:

    I’d agree with Richard for a different reason-there is simply no place for ‘debate’ to take place. There COULD have been, and we are partly at fault, there are three parties scrambling to form policy, that is where new ideas get introduced, but the public just sits back and watches.
    I’d echo Richard’s suggestion that David put this blog into his column, because thats virtually the only place these ideas can get ‘out there’. Perhaps emailing the suggestion to CBC reporters, or somebody following the campaign would be of some use-at least its never been tried. Politicians typically show up at places with set speeches, you can go look at the articles at CBC and notice that there is very little challenge to the politicians. I think Terry Seguin has a panel show, but I doubt many people even watch it.
    So again, its going to take somebody to stand on a soapbox and get the topic out there for it to have any effect.
    But my opinion is that there is NO tax system that will create sustainable value added jobs. In Quebec they are subsidizing game development, and that would vanish without the subsidy. In NB, the ‘religious organizations’ are not going anywhere, the fishing industry is heavily regulated-you can’t ‘grow’ much anyway. Doctors offices the same, tax policy has VERY little to do with it.
    Which of course is the main problem. We live in an era when government is told to ‘step aside’ the private market and essentially tax policies are the only ‘economic development engine’ they have access to.

  8. mikel says:

    By the way, at the CBC site right now-the NDP finance critic is saying that instead of business loans, under the NDP these would be replaced with job tax credits. Now, whose been talking about that for years? There’s your party man!:)

  9. richard says:

    “under the NDP these would be replaced with job tax credits”

    What they need to do is twig that policy to provide credits to businesses that are creating export-oriented high-wage jobs. This is still a subsidy, but at least we would be getting some dollars flowing into the province (from exports) as a result. Attach that to a policy that puts dollars into R%D, then perhaps we are starting to get somewhere.

    The CFIB would scream, but screw ’em.

  10. mikel says:

    Sadly, it doesn’t really matter as I think the People’s Alliance and Green parties seem to have more traction than the NDP lately. However, for a policy it would be worthwhile to set up a lobby and do exactly what Richard is suggesting-create a ‘sliding scale’ of world wide industries, and then attach a ‘value’ to the types of jobs that are more desirable than others, for various reasons, and then attach a tax credit schedule or even subsidy to each of these jobs. Then, of course, push the idea. If the taxpayers federation and CCIB can push a policy, there’s no reason anybody else can’t.

  11. Tom Rivington says:

    Its a very interesting list of industries, as you go down it one wonders how a lower tax could possibly stir economic development, most small business owners simply want more money in their own pocket (which I can understand).

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