Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Report on Business

Economy Lab

Delving into the forces that shape our living standards
Best Business Blog, EPPY awards, 2011 and 2012

Entry archive:

Economy Lab has moved

Only Globe Unlimited members will now have access to a wide range of insightful commentary
and analysis on the economy and markets previously offered on this page.


Globe Unlimited subscribers will be able to read these columns,
written by some of Canada’s most deeply respected economists,
such as Christopher Ragan, Sheryl King, Andrew Jackson, and Clement Gignac,
as part of our ROB INSIGHT section.


All of our readers will still be able to browse the Economy Lab archives and read our
broader coverage of economic data and news by accessing their 10 free articles a month.


Learn more about Globe Unlimited and how to subscribe.

(Nadezda Bugaeva/Nadezda Bugaeva/iStockphoto)
(Nadezda Bugaeva/Nadezda Bugaeva/iStockphoto)

Economy Lab

Not all small businesses deserve a tax break Add to ...

As part of the NDP job creation plan, Jack Layton has promised to lower the corporate income tax rate on small businesses from 11 per cent to 9 per cent, justified on the grounds that small businesses are more likely to create new jobs than larger ones. Unfortunately, the plan is based on a false premise and will likely do little more than put more money in the pockets of wealthy Canadians.



The idea that small businesses create more jobs than larger ones is commonly held, but it is misleading.

In a recent NBER study, three U.S. economists found that there is no relationship at all between firm size and job creation, once you take into account the age of the firm. It is not small firms that create new jobs, rather it is young firms. They find that there is an "up or out" dynamic with young firms -- most either expand quickly or go out of business.



Due to this effect, young firms face much higher rates of both job growth and job destruction than mature firms. The statistical relationship between small firms and job growth is due solely to the fact that younger firms tend to be smaller; a 15-year old firm with three employees is not likely to be creating many jobs any time soon.



If we are to use corporate tax rates as a tool to create jobs, a more targeted approach would be to lower the tax rate on new businesses, rather than on small businesses. Though it is not clear this would be the best approach either, as changes in corporate tax rates are not the most effective tool to use in job creation.



We need to also consider that many self-employed higher-income Canadians self-incorporate as a way to reduce their tax bill. The Canada Revenue Agency (CRA) does have some rules in place which deter this (such as making 'personal service businesses' exempt from the small business rate), but there are plenty of scenarios that do not violate the CRA's rules, and when the rules are being violated the CRA cannot possibly catch them all.



There is not a lot of evidence to suggest cutting the small business rate will create many jobs. It is clear, however, that it would provide a generous tax break to the wealthiest 1 per cent of the population -- a self-incorporated person making $400,000 a year would receive an $8,000 tax cut. This has to be considered more than a little ironic, as it is hard to imagine too many of those people being NDP voters in the first place.



Mike Moffatt is a chemical industry consultant and a Lecturer in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business



Follow Economy Lab on twitter

 

Topics:

In the know

Most popular videos »

Highlights

More from The Globe and Mail

Most popular