September 27, 2000
Use surplus to reduce small business tax burden
Amidst reports that the federal budget surplus could come in as high as $20 billion for the current fiscal year, it's time to take a new look at the onerous tax burden born by Canadian small businesses.
While it is true that almost all Canadians are taxed too highly and a strong case can be made for across the board tax cuts, political and economic realities make such a course of action unlikely, particularly in view of a possible fall election.
As early as last week, senior government officials were saying that a fall vote was impossible given the heavy legislative agenda before the House of Commons. But a recent poll showing the Liberals with a commanding lead in Ontario, and poised to repeat their sweep of that province's 101 seats has Prime Minister Jean Chrétien itching to go to the polls.
The immediate impact of a looming federal election is that there are unlikely to be any significant tax cuts in the near future for upper income Canadians - those who provide the bulk of federal tax revenues. Nor is there likely to be any significant corporate tax relief.
The Liberals are famous for running from the left and governing from the center, so any significant move in either of those areas is unlikely for the time being. Expect a lot of talk in the coming weeks about the federal/ provincial agreement on transfer payments for health care, as well as on other social issues.
Having said that, there are two measures the government could take in a possible mini-budget this fall, or in its regular spring budget, that could provide relief for the small to medium sized businesses who are responsible for most of Canada's job growth and economic innovation.
The first would be a significant cut in payroll taxes, in particular company shares of Employment Insurance and Canada Pension plan premiums. Payroll taxes are the most onerous and harmful taxes in the Canadian economy today, since they are invisible, and are levied as a percentage of salaries paid. This hampers job creation, as well as the public's ability to assess the impact of the tax - since they don't see it being collected.
"Invisible? But I see the deductions for EI and CPP premiums on my check stub each week," many people will tell you. But what you don't see on your pay stub, is that your employer also pays EI and CPP taxes to fund those programs.
Employers deduct EI premiums of 2.40 per cent of salaries paid from employees' paychecks. But they must also pay an additional levy of 3.36 per cent that employees never see since it goes directly to the government. That means the total EI rate is actually 6.32 per cent of salaries.
This may not sound like a lot, but there are a slew of payroll taxes levied on Canadian businesses by both the federal government and the provinces. For example the Canada Pension Plan alone cost employers and employees 3.5 per cent each for a total of 7.0 per cent of salaries. But there are other hidden payroll levies such as workmen's compensation, medicare premiums and so on.
These taxes make no sense, since employers must to pay them whether or not they earn a profit. One Quebec company I talked to paid more than $70,000 last year in EI and QPP taxes, when its profits were only $160,000. When those taxes are added to its corporate taxes of $38,000, the total tax bill comes to $108,000, which is a stunning 67.5 per cent of profits.
But you will never see an outcry over payroll taxes because the public does not see them deducted from their paychecks. Companies end up trying to come up with the money to pay off payroll taxes by passing the cost on to their customers, which reduces the competitiveness of Canadian businesses.
A significant cut in the company share of both EI and CPP premiums would make it significantly less expensive for businesses to hire new employees and would boost the competitiveness of Canadian companies. At a bare minimum these taxes should be visible on every employees pay stub so that Canadians know the true costs of these programs.
The proposed amendment to the Employment Insurance legislation introduced in the House of Commons last week, which would see the premium to cut to $2.25 is a step in the right direction but it is not nearly enough.
Employment Insurance benefits workers and therefor the program should funded mainly by them, not by their employers. The EI fund continues to show a significant surplus, and this should be given back to those who contributed.
Another measure that would significantly help small businesses, would be additional personal income tax relief targeted mainly at the lower to middle income tax brackets. Many small businesses, especially SOHOs, are not incorporated and thus operate personally under their own names. This means that they are also taxed under their own names, and are very sensitive to any changes to the tax code.
Tax relief could take the form of a boost in basic personal exemptions. Restoring certain small business deductions would also be a good idea, such as home office rent expenses as well as meal deductions for those who work through lunch. This is something small business owners are far more likely to do than say civil servants. Stronger tax reduction measures could follow after a mandate is obtained from the public in the next election.
The Chrétien government took the first step in its budget earlier this year, indexing income tax brackets to the rate of inflation. De-indexing, a relic of the Mulroney administration, increased Canadians' personal income taxes each year gradually and quietly through "bracket creep," a seemingly harmless measure that ended up costing Canadians tens of billions of dollars.
But indexing can be at best regarded as a positive first step. Finance Minister Paul Martin recently let it be known that he favors further cuts - an indication that further relief is on the way. It won't be a moment too soon.
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