Are lower taxes for small businesses a good idea or bad idea?

Why small businesses and economists differ in opinion

small business, entrepreneurs, taxes, tax breaks, budget 2015, federal budget, Tories, CanadaAlthough the federal budget was largely praised by the Canadian Federation of Independent Business (CFIB) and by small businesses themselves, not everyone is on board with what the Tories are proposing. Lowering the small business tax rate is great for owners and entrepreneurs, but remains a sticky point amongst economists.

So, why the difference in opinion?

The reduction of the tax rate is something the CFIB and independent businesses have been lobbying for for several years. The reasoning behind the government’s decision is to help small business owners retain more earnings that can in turn be used to reinvest and create jobs. Over the four-year period, owners are expected to save about $2.7 billion in taxes. Almost 700,000 small businesses will benefit.

However, economists looking at the bigger picture and the greater Canadian economy have a problem with this reasoning. According to UBC economics professor Kevin Milligan, many people set up small businesses to avoid taxation on a personal level, meaning not many jobs will actually be created.

The new tax rate also increases the tax gap between large and small companies, providing an incentive for businesses to stay under the $500,000 profit threshold, which is bad for the overall economy, says Jock Finlayson, chief economist with the Business Council of British Columbia.

Regardless, small businesses still need support, but Milligan would rather see a simplification of their administrative burden, and imports and exports, or a reduction of tariffs.

The next post in the series looks at how the budget affects female entrepreneurs.