small business

Cutting B.C.’s small business tax rate will discourage businesses from growing

Every extra dollar of net income earned by any business that steps over the $500,000 threshold will be taxed at a rate five and half times the small business rate.

The Decline Of The American Entrepreneur

The United States continues to suffer from a historically weak economic recovery. Monthly GDP and employment numbers remain near anemic. From a historical perspective the economy should be roaring by now given the pronounced contraction in 2008.
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There is ongoing interest both inside and outside the United States regarding the nation’s tepid and abnormally slow recovery from the pronounced contractions in 2008. A number of scholars have explained components of the slow recovery but almost no analysis exists that provides a larger understanding for the country’s dismal economic performance. The collected essays in What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity provide just such a framework, which allows readers to both understand the nature of the problem facing the United States and equally as important the path to recovery and prosperity.

Edited by Donald J. Boudreaux, the book is comprised of five essays by U.S. economists, that connect the dots between entrepreneurship, economic freedom, and economic growth, detailing their interrelated roles in America’s sluggish economic recovery.

Liya Palagashvili of New York University and George Mason University begins by detailing how entrepreneurship is central for both economic growth and long-run prosperity.

Russell Sobel of The Citidel builds on Palagashvili’s chapter, providing further details on the relationship between entrepreneurship, high levels of economic freedom, and growth.”

Robert Lawson of Southern Methodist University examines the decline of economic freedom rankings in the United States since 2000.

Robert Meiners of the University of Texas at Arlington and Andrew P. Morriss examine the roles of the U.S. legal system and how special interests corrupt the legal and economic framework.  They also explain how market competition is impacted by regulation.

Clyde Wayne Crews, Jr. of the Competitive Enterprise Institute captures the extent to which U.S. regulation has reached absurd levels.

In summary, the information and arguments presented here demonstrate unmistakably that the growth of government stymies entrepreneurship and threatens prosperity—a demonstration that, it is hoped, will help inspire efforts not just to slow, but to reverse, this growth and return to prosperity.

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Business start-ups, and entrepreneurship more generally, drive productivity and economic growth. But the rate of business start-ups in Canada is declining. Since it peaked in 2004, the rate of business start-ups as a share of existing firms has declined by 16.2%.

The rate of decline in business start-ups increases as the size of the firm (measured by employment) increases. Over the last decade, from 2003 to 2012, the rate of business start-ups for firms with 5 to 20 employees declined 41.3%, compared to a drop of 8.0% for firms of all sizes over the same period.

There is increasing evidence of a relationship between entrepreneurship and age. Specifically, younger people are less risk averse than older people and are more prone to question the status quo. These characteristics are key to the entrepreneurial process. Like all industrialized countries, Canada’s population is aging; a greater and greater share of the population is over age 65. Statistics Canada expects the portion of those over age 65 as a share of the population to increase by 74.1% between 2008 and 2035.

Can governments use policy levers to influence entrepreneurship so as to mitigate these demographic effects? This essay focuses on the benefits of capital gains tax relief since it both improves the incentives for entrepreneurs and assists those financing business start-ups. Currently, Canada has the 14th highest capital gains tax rate. Canada has an opportunity to supercharge its entrepreneurial environment by reducing the capital gains tax rate, creating a rollover as has been done in the United States, or simply eliminating the capital gains tax, as has been done in many OECD countries.

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This paper examines a barrier to the growth of small businesses in Canada. As businesses grow beyond what is deemed to be small business (income in excess of $300,000 to $450,000 depending on location) they face large increases in business income-tax rates. Economic research outlined in this paper indicates that such increases act as a strong disincentive for growth and expansion.

The federal government and every province except Quebec currently (2005) offer reduced business income-tax rates to eligible small businesses. Quebec will implement preferential treatment in 2006. The current preferential income-tax rates for small business range from a low of 2.0% in New Brunswick to 6.5% in Prince Edward Island. This compares with general business income-tax rates ranging from 11.5% in Alberta to 17.0% in Saskatchewan. The federal government also offers a substantial discount: 12.0% for small businesses compared to 21.0% for general businesses.

The combined federal and provincial preferential small business income-tax rates, while designed with good intentions, have resulted in steep increases in statutory business income-tax rates for successful businesses that grow and expand. The smallest increase experienced by growing firms that move from the preferential small business income-tax rate to the general business income-tax rate occurs in British Columbia, Ontario, and Prince Edward Island, where the applicable statutory rates double. The largest increase occurs in New Brunswick where the statutory rate jumps 142.9%.

Published research indicates that such steep increases in business income-tax rates create a powerful barrier, or disincentive, for entrepreneurs to expand their businesses. The large increases in business income-tax rates as firms move from the small business income-tax rate to the general business income-tax rate creates strong incentives for firms to avoid increases in taxation by reorganizing or by paying out additional monies in salaries and bonuses rather than growing and expanding.

The way to remove this barrier is to eliminate the preferential business income-tax rate for small businesses by reducing the general business income-tax rate. Given the overwhelming evidence of the damaging and costly impacts of business taxes on an economy, it makes little sense to equalize general and small business income-tax rates by raising the small business income-tax rate. The optimal solution is to reduce the general business income-tax rate while aggressively increasing the small business income eligibility threshold in order to reduce the steep increases in business income-tax rates at both the federal and provincial levels.

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