Today’s Fiscal Update from federal Finance Minister Bill Morneau will serve two key purposes. First is to put a happy pause, from the government’s point of view, on the controversy surrounding business tax proposals presented for comment during the summer, which have ended up involving an arguably deserved dissection of the Minister’s personal finances; second is to direct attention instead to more positive economic news.
The government’s initial tax proposals arose from a sound basis. After some decades of overall reductions in the general corporate tax rate, alongside federal and provincial cuts to the small business rate, a yawning gap has emerged between tax rates on small business income held within a corporation and employment income earned by most other people.
That gap has motivated a lot of tax planning, which is financially productive for the people who do it, not so much for the rest of the economy – it’s not a terribly useful social activity.
There were flaws in the government’s approach, as suggested by an explosion of outrage that is only now subsiding.
Among the flaws was an emotional plea for tax fairness, wrapped in a middle-class cloak, which to some critics smacked of ugly class warfare, and rightly so. Some defenders argued that only one in eight small businesses would be affected by fresh limits on the ability to sprinkle business income among family members. Others among us might think, as I did, “Wow, that’s a big share of businesses,” and many more aspiring businessfolk would worry that they would unhelpfully be caught up by the proposed reforms.
Finn Poschmann is President and Chief Executive Officer at the Atlantic Provinces Economic Council.