Mintz Hits a Triple
I had been fiddling with my last post in spare moments since the federal NDP convention. I fiddled long enough that Jack Mintz beat me to the punch in critiquing the proposal to eliminate corporate tax on small-business profits. His op-ed appeared in yesterday’s Financial Post.
His priority is to slash the general corporate tax rate down to the same low level as the existing small-business rate. I have opposed his advocacy of ever-deeper corporate tax cuts in many letters to the editor and blog posts.
 But I have to give credit where it is due. Along the way to his appeal for lower corporate taxes in general, Mintz outlines three serious problems with cutting the small-business rate in particular:
1. Small businesses are not the main driver of economic growth and employment. Instead, they tend to either sell inputs to larger businesses and public institutions or sell goods and services to people who work for these larger employers. Although small-business activity may entail more jobs, it is mostly a spinoff from investments made by larger firms and governments.
2. Private corporations can divide into smaller corporations simply to make more of their profits eligible for the lower small-business tax rate. Progressive taxation makes more sense for individuals, who cannot subdivide themselves to take advantage of lower tax brackets.
3. A lower small-business rate creates massive opportunities for personal-tax avoidance. My post emphasizes this concern.
However, I cannot quite conclude that Mintz hit this issue out of the park. He understated the problem in a couple of ways:
1. He wrote that the federal small-business rate applies to only the first $400,000 of profit from a Canadian-controlled private corporation. In fact, Budget 2009 raised this threshold to $500,000. (Some provincial governments have kept their thresholds at $400,000.)
2. Mintz accepts that the dividend tax credit for personal taxes simply offsets corporate taxes already paid. In fact, as my post demonstrates, this credit goes well beyond the low corporate tax paid by small businesses.
So, let’s call his hit a triple.
I was on the corporate minimum tax committee of the Ontario Fair Tax Commission along with Jack Mintz and some corporate vice-presidents, Andrew Jackson, and others. One of the more astute members was a senior tax accountant, a woman, who did not speak very often. In conversation she mentioned that the best way to increase fiscal capacity was to eliminate the small business exemption. A lot of small businesses make a lot of money she said. Her business was doing their books.
Back then, the “small business†deduction was much wider (a 29% general rate versus a 13% small-business rate) but applied only to the first $200,000 of profit. It cost about $2 billion annually in lost federal corporate-tax revenue.
Today, this deduction is narrower (a 19% general rate versus an 11% small-business rate) but applies to more profits: up to $500,000. It costs about $4 billion annually in lost federal corporate-tax revenue.
Parallel provincial deductions must cost at least a couple billion more in lost provincial revenue.
Scaling back these tax preferences is unlikely to make it onto any party’s political agenda, but would indeed be a sensible way of raising public funds. Let’s just hope that we can avoid further cuts to the small-business rate and further elevations of the threshold below which it applies.