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Mountains and Molehills — Effects of the Small Business Deduction

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Defending the Small Business Tax Rate

Canadian small businesses depend on the Small Business Deduction (SBD) as a way to help level the playing field with larger competitors. CFIB has been fighting for this much-needed measure since its founding in 1971, and during the recent federal election, all major national parties committed to reduce the rate from 11 to 9%.

With a number of observers recently suggesting the SBD is a barrier to growth and not good tax policy, CFIB chief economist Ted Mallett looks at arguments for and against the SBD in the latest issue of the Canadian Tax Journal, and finds that, like any tax measure, it has some wrinkles at the margins, but overall it best meets the needs of ordinary small business owners trying to invest in and grow their businesses.

Mountains and Molehills – Effects of the Small Business Deduction (Highlights):

1. Is the SBD a way for the wealthy to avoid taxes?

The paper argues that wealthy small business owners are the exception rather than the rule –but that encouraging the successful creation and growth of businesses should be seen as a positive, not a negative, for the economy.

2. Does the SBD discourage growth?

The data suggest that there are far more serious growth disincentives at points far below that of the $500,000 deduction threshold. If there is such an effect, it only applies to a very small number of businesses, and may be temporary.

3. Does the SBD lead to decreased productivity for Canadian businesses compared to U.S. firms?

Direct causal linkages to Canada’s productivity performance are extremely difficult to prove. The evidence shows there are likely many reasons for this slow productivity growth.

4. Do small firms need the SBD to offset compliance costs?

Businesses with less than 20 employees pay more than $10 billion a year in compliance costs. The SBD only costs the federal government $3.2 billion a year.

5. Do small firms need the SBD to finance their expansion?

Bank financing and venture capital are much harder to access for newer small businesses. Most rely on personal and family assets to fund growth. By boosting retained earnings, the SBD helps, but is by no means a reliable source of capital.

Read the full paper at ctf.ca.