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|