Friday, October 05, 2012

Loopholes and leverage

I've previously wondered whether we'd see many substantial policy differences between Saskatchewan's NDP leadership candidates. But Erin Weir hasn't taken long to challenge what's often seen as party orthodoxy:
NDP leadership candidate Erin Weir is proposing to focus Saskatchewan’s Small Business Deduction on genuinely small businesses with taxable profits of up to $100,000. This policy would increase provincial revenues and fund targeted tax measures directly linked to investment and employment.
... 
“We should close business tax loopholes that are not connected to investment or employment,” said Weir. “To help create jobs, I would rebate workers’ compensation premiums for the first four years that a newly hired worker is employed and restore the Saskatchewan Film Employment Tax Credit.”

To encourage investment, Weir is proposing a tax credit equal to 2% of the first $100,000 of capital invested by any corporation. Under this plan, a genuinely small business that reinvests its profits in Saskatchewan would pay no provincial tax.
...
[The change in the small business deduction threshold] would recoup at least $200 million of annual provincial revenue. The premium rebate would cost $30 million when fully phased-in and the investment tax credit would cost $70 million, leaving a further $100 million to fund other public priorities. 
Now, Weir's proposal doesn't entirely close what he identifies as a loophole. (Nor would it entirely fix what strikes me as the most obvious problem with a small-business threshold in encouraging the proliferation of multiple corporate entities to avoid growing to a particular size - as the per-business tax credits and premium rebates would mimic the same effect to a lesser extent).

But it's well worth asking whether it actually makes sense to provide more favourable treatment to some businesses based solely on their size in the name of small-business jingoism.

Instead, Weir's plan provides incentives for growth in both capital investment and hiring. Which means that incentives would then be directed toward the activities that actually increase economic development, rather than falling into the all-too-frequent trap of declaring "we want X to like us, let's give favourable tax treatment to X".

Needless to say, there's reason to doubt that the small business tax proposal will be met with the same universal agreement as Weir's previous push to eliminate corporate and union donations to provincial political parties. But how the other candidates respond will say plenty about both the role they see for the provincial government in economic development, and their willingness to deal with that question based on principle rather than political expediency.

Update: Scott has more here. And as Erin notes in comments, Cam Broten and Ryan Meili have already responded - but have done so by falling back on the "small business" mantra without substantively addressing the question of whether more targeted incentives can encourage growth for less cost than broad loopholes.

3 comments:

  1. Thanks, Greg. Your point is well taken about not fully sealing the loophole. A high-income professional could still incorporate to take advantage of the 2% provincial “small business” tax on their first $100,000 of annual income. But at least they would pay the 12% general corporate tax on all additional income.

    A classic argument for “more favourable treatment to some businesses based solely on their size” is that small businesses have difficulty accessing financing. A lower tax rate is an (imperfect) policy response to a credit-market failure.

    I think that argument has some validity for genuinely small businesses. I do not think it applies to businesses with millions of dollars in assets and hundreds of thousands of dollars in profits. That’s one reason to draw the line at $100,000.

    Anyway, as you note, the thrust of my proposal is to shift away from rewarding businesses for being small toward rewarding them for investing and hiring in our province. Responses from other candidates are in today’s StarPhoenix (page A8):

    http://www.thestarphoenix.com/business/Erin+weir+unveils+plan+small+businesses/7347616/story.html

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