Liberals' small business tax rate will boost revenue but reduce growth: watchdog

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The Liberal government's decision not to go ahead with further cuts to the small business tax rate will reduce economic growth and employment but boost federal revenue, according to new analysis from Parliamentary Budget Officer Jean-Denis Fréchette.

The Liberal Party promised during the 2015 campaign to follow through with a Conservative plan to gradually reduce the small business tax rate from 11 per cent to 9 per cent. However the Liberals have only reduced the rate to 10.5 per cent and the first Liberal budget made no pledge to cut the rate any further.

The PBO report was produced at the request of Conservative MP Pierre Poilievre, who accused the government Tuesday of breaking a key promise to small business owners.

According to the PBO, not following through with cutting the rate to 9 per cent will reduce real GDP by $300-million – or 0.015 per cent – by 2020-21. The PBO's economic modelling concludes that a reduction of that size would mean the number of jobs created or maintained that year would be 1,240 less.

The PBO analysis also provides the revenue impact of the government's decision.

Not going ahead with the full reduction will provide the federal government with an additional $815-million a year by 2020-21. Cumulatively, the PBO said the decision will increase revenue by $2.2-billion over five years.

Mr. Poilievre pointed out that the amount the government is raising from higher-than-promised taxes on small business owners is similar to the amount that the government may contribute to support Bombardier Inc. and its plans to expand production and sales of its C Series aircraft.

"I think it's ironic that the government is attempting to give $1-billion of other people's money to one company while taking a billion dollars extra from small businesses who earned it," he said. "Our view is leave the money in the hands of the people who earned it: in this, small business job creators."

Finance Minister Bill Morneau's March 22 budget announced the policy decision with a single sentence that offered no further explanation or rationale.

The government estimates that the overall impact of its budget measures – including personal income tax changes and billions in new spending – will raise the level of real GDP by 1 per cent in the second year and create or maintain 100,000 jobs by 2017-18. A previous report by the PBO projected that the growth impact of the budget would be slightly less than what the government expects and that employment would increase by 60,000 jobs in 2017-18.

The Canadian Federation of Independent Business said the PBO report highlights the fact that a higher tax rate will hurt jobs. The CFIB said the PBO analysis likely underestimates the employment impact and urged the Liberals to follow through with the cut as promised.

However federal Small Business and Tourism Minister Bardish Chagger defended her government's approach. She said the budget is focused on providing more money for consumers through income tax cuts.

"We need strong customers," she said. "Small business owners have great products and services that we know that they can sell. Middle-class Canadians who are getting the tax cut will be supporting our small- and medium-sized businesses."