Politicians can’t shake the myth of small business

Posted on in Debates

TheGlobeandMail.com – Globe Debate
Sep. 19, 2015.   Jeffrey Simpson

Politicians love small businesses. Small is beautiful come election time. Across Canada, campaigning political leaders visit small businesses for photo ops and announcements of yet more inducements.

In the last federal budget, the Stephen Harper Conservatives announced a further two-percentage-point drop in the small-business tax rate to 9 per cent. The fall would occur over four years. It would cost the government $2.7-billion and apply to nearly 700,000 small-business owners.

Not to be outdone, the New Democratic Party has promised that, if elected, it would drop the rate to 9 per cent but over two years. Over and over again, NDP Leader Thomas Mulcair declares that since 80 per cent of new jobs come from small businesses, they deserve a tax cut. They are the job-creators, he insists. Big business, by contrast, would face a tax increase of two percentage points to 17 per cent from an NDP government.

Big corporations have always had a bad reputation among many New Democrats for being greedy, capitalist, polluting, union-crushing, multinational etc. Small businesses, however, have become the apple of the NDP eye. By handing more benefits to them, it refutes the charge that the party is “anti-business.”

Politics apart, is it true that small businesses are the engine of job creation? The evidence is decidedly mixed, and certainly not as definitive as political defenders assert.

In 2013, Industry Canada published a study that said 98 per cent of Canadian firms were “small” and had created 77 per cent of private sector jobs from 2002 to 2012.

Sounds great, except that it’s rather easy to self-incorporate or set up a company that employs a couple of people. Many of these small companies with only a few employees come and go. In a given year, X number of jobs are created by small business, but Y disappear.

Not many companies get large in a country that needs more firms to grow to serve an increasingly global market. Small companies export less, do less research, innovate less than big ones, although clearly exceptions exist. Similarly, some small firms depend on the supply chains of larger companies. If larger companies falter – the ones on which the NDP proposes to raise taxes – some small businesses will suffer.

In 2012, Statistics Canada tried to test the thesis that small business drives job creation. It concluded that the age of the company and circumstances specific to an industry were more important than size.

Said Statscan: “The size of a firm per se is not a contributing factor to employment growth. … It is really age that is the key distinguishing factor behind slow- and fast-growing firms.”

Unadulterated advocates of the theory that small business creates most of the jobs might pause to consider this from Statistics Canada: “Above a 20-employee threshold, little relationship is evident between firm size and employment growth.”

Or this, “There is little in the way of a relationship between job growth and the size of the firm, especially after age is considered.”

Lobby groups for small business have obviously successfully persuaded politicians, as in this campaign, to take positions that defy evidence, or at least that evidence would call into question. It just sounds so comforting to believe, evidence notwithstanding, that mom and pop stores and small manufacturers and individual entrepreneurs (most of whom are Canadian) are the heart and soul of job creation.

That they are certainly important, even vital, does not, however, justify assertions made for their contribution or the lower and declining tax regime under which they operate. The lower the “small-business rate,” the greater the incentive for individuals to incorporate their activities to take advantage of lower rates, which is completely at variance with the job-creation thesis of those who defend low small-business rates.

In tax and economic policy, there is no justification for rates being different for “small” and “large” companies. In an increasingly global world, where Canada needs more international “champions” in industry, the difference makes little sense. This is precisely the point made in a study just released by Canadian tax expert Jack Mintz who called for the same rate for all businesses, regardless of size.

In Britain, where such a difference existed, a 2010 review recommended its elimination. This suggestion was implemented by Prime Minister David Cameron’s Conservative government last April. All companies now pay at a 20-per-cent rate.

Judging by the Canadian campaign, our politicians haven’t got the British message and keep repeating assertions that are questionable at best, false at worst but music to certain voters’ ears.

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