On the journey to small-business tax reform, the Liberal government has arrived at its destination. Where are we? According to my GPS, approximately 180 degrees off of the government's original course.
Back in July, the Liberals said their goal was reducing the use and abuse of the tax benefits that come with incorporating a small business in this country. Right up to last week, Finance Minister Bill Morneau insisted that's what he was doing. And then he and Prime Minister Justin Trudeau – well, mostly the PM – took the mic at the Pastaggio pizza parlour and announced a U-turn. The government's key talking point, and the heart of its policy, instantly went from "closing small-business tax loopholes" to "cutting small-business taxes."
That surprise cut to the small-business tax rate, from 10.5 per cent to 9 per cent, will not just put more money into the pockets of those who are incorporated, it will create a new financial incentive for professionals and others to incorporate. It does that by widening the gap between the small-business tax rate and the personal tax rate.
This is exactly what the government, only three short months ago, said it would reform the tax system to discourage. Now, it's encouraging it.
One day the Liberals were going on about how upper-income earners using a corporate structure to enjoy tax rates and benefits not available to unincorporated Canadians; the next day, the government was touting the fact that its immaculate tax cut will put up to $7,500 extra in the pockets of that first group.
And that's not the only reversal. Back in the summer, critics accused the government of trying to foment a class war by pitting average Canadians against the wealthy. And yes, the government did have a lot to say about how, thanks to small-business incorporation, some people, mostly higher-income Canadians, are paying less tax than if they ran the same business, doing the same work and earning the same income, just without incorporation. Mr. Morneau didn't do a great job of communicating this story, and his ministry bungled some of the details of its proposed fix. But the pre-Pastaggio Finance Minister had a point.
The number of incorporated small businesses has exploded in recent years. This is not because Canada has suddenly turned into ground zero for global entrepreneurship. It's because lots of ordinary professionals such as doctors, responding rationally to the incentives offered by the tax system, decided to sign a few pieces of paper to legally redefine themselves as Jane Smith, Inc. rather than Jane Smith, unincorporated sole proprietor. Such moves benefit those taxpayers, but without providing any extra benefits to the economy.
But if some people thought the initial Liberal rhetoric sounded like Soak the Rich, the final Liberal policy delivers the opposite. If you are a small-business owner, the government is giving you a big tax cut. And the bigger your small business, the bigger the return – you have to earn $500,000 a year to get the maximum $7,500 a year tax cut.
That tax cut is likely to cost the government nearly $1-billion a year, according to a 2016 estimate by the Parliamentary Budget Officer. In other words, all of those people who screamed that the government was trying to strangle small business have just been rewarded. And the rest of Canada's taxpayers – that would be the middle class and those working to join it that the Trudeau government never stops invoking – will be paying for this tax cut. And yes, it largely benefits upper-income earners.
The turmoil of the past three months has ended up handing a giant political gift to the Conservatives, assisting them in their quest to rebrand the Liberals as the party of stealth tax hikes. And the final irony is that it's Mr. Morneau, of all people, who birthed this political millstone. He's been the progressive conservative Yin to the social-justice warrior Yang of the Prime Minister, his closest advisers and much of the cabinet. He's not just the Minister of Finance; he's the Liberal in Charge of Not Scaring Bay Street. But for the past three months, he allowed himself to become the chief sower of fear on Main Street.
Small-business tax reform: What a short, strange trip it's been.