October 18th, 2000
Martin mini-budget deficient in key areas
Although Finance Minister Paul Martin's mini-budget has received praise from a variety of interest groups including the Canadian Federation of Independent Business, the document is lacking in key areas affecting the country's small businesses.
Let's start with the good. The Liberal government's belated conversion to tax cuts, although clearly motivated by their impending election battle with the Canadian Alliance has got be seen as welcome news.
If you believe finance department numbers, the $42 billion in tax cuts proposed today, when added to the $58 billion announced in the February budget, bring total cuts announced to $100 billion -- less than those proposed by the Alliance, but clearly a positive step.
Of special interest to small business owners is the reduction of the capital gains inclusion rate from 66 per cent proposed in the February budget, to 50 per cent. In addition the rules on tax-free rollovers have been loosened, with the eligible limit increased from $500,000 to $2 million, and the size of small businesses eligible for the rollover, will be increased from $10 million in assets to $50 million. The measures announced with respect to personal income taxes must also be seen in a positive light, especially cuts in the lower brackets and the elimination of the surtax.
There was also an initiative on corporate income taxes, which will be reduced from 28 per cent to 21 per cent with a one-point reduction in 2001, followed by a two-point cut in each of the following three years.
Although some measures were taken to relieve the home heating fuel burden on low-income families, many small business owners such as truckers, farmers and taxi drivers will be angered by the government's inaction on fuel taxes. However since provincial governments also levy high taxes on fuel, it made little sense for the federal government to act unilaterally without asking the provinces to also kick in cuts of their own, nor is encouraging the use of non-renewable fossil fuels necessarily good public policy.
But as far as the tax cuts go, they do not go far enough, nor were they appropriately targeted to simplify the tax code and stimulate productivity.
This is particularly evident at the upper end of the income scale where a new, unnecessary, fourth income tax bracket was created on income between $61,509 and $100,000, which will now be taxed at 22 per cent. The bracket, which touches those earning more than $100,000 a year was left unchanged at 29 per cent, although it should have been lowered to help bring combined federal-provincial marginal income taxes in line with those south-of-the-border.
Also absent from the proposal was a move to rebalance EI premiums. As tough as it is for small business owners to pay excessive income taxes, at least these are only levied when the business or individual is making money. Employer EI taxes are levied on top of employee salaries and must be paid whether or not the company earns income.
For every dollar in EI premiums that is deducted from an employee's check, the employer must kick in an additional $1.40. These taxes make employing individuals more expensive. For that reason they are often labelled "job taxes." The employer portion of EI premiums should have been reduced and rates lowered, far further than those proposed in the EI reform proposals. This would have been particularly appropriate in light of the fact that the fund has been showing massive surpluses for the past several years.
The lack of a significant re-balancing of EI premiums goes to the heart of the problem with the mini-budget: credibility. The budget was titled an "Economic Statement," but it could more easily described as a "Political Statement," designed to ward off the increasing threat from the Alliance.
EI premiums were left untouched in the mini-budget because the fund has been used to buy the Liberals votes in the Atlantic provinces, where the party needs to win seats if it hopes to form another majority government.
The recent EI reforms, which loosened eligibility requirements for repeat users have the effect of turning the program into a regional subsidy scheme of transfer payments to the Atlantic provinces, that is funded in large part by Canada's small businesses.
This mini-budget is no more than a political platform, announced in Parliament, where it would get free television and media exposure at Canadian taxpayer expense. The Canadian Alliance had to pay to rent a hall when it announced its platform two weeks ago. Other parties will incur similar expenses.
It will be interesting to see how the Canadian public responds to this cynicism.
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