New Governor General is up, up and away.

Canada has too many to get special treatment

Whatever else has divided the federal Liberals from their critics in the storm over their proposed reforms to the taxation of small business, the two sides have been united on one thing.

The Liberals may believe some people have “abused” the current preferential tax regime for small business, notably the small business deduction (which reduces the tax on corporations with less than $500,000 in income to a combined federal- provincial rate of just 15 per cent, versus the 26 per cent general rate), whether by “sprinkling” income on family members, or by using the income sheltered inside their corporation to play the stock market, or by other means.

But even as they are attempting to rein in such “tax- planning” techniques, they are as adamant as any of their critics in defence of the small business deduction itself.

Indeed, the two sides’ rhetoric in praise of small business is remarkably similar: backbone of the economy, cradle of capitalist dynamism, fount of growth, job creation and other good things. Surely it is selfevident they should be rewarded with a lower rate of tax than other businesses?

Well, no. That wouldn’t be self- evident even if it were true that small business were all these things. If a company, industry or type of firm is as much of a world-beater as all that, it shouldn’t need any extra leg up from the government.

But in fact the popular image of small business to which this appeals is mostly bogus. If anything, Canada suffers from having too many small businesses, which generally have much lower productivity than larger firms. Far from the growth-oriented dynamos of myth, most never grow beyond the tiny shop they started out as.

That’s their privilege, of course: no one’s under any obligation to grow beyond what they’re comfortable with. Most go into business for the freedom and self- determination, rather than any dreams of empire, and that’s as good a reason as any — for them. It’s just not a good reason to tilt the tax system in their direction, shoehorning capital and labour into a sector that is, on average, a drag-anchor on national productivity.

This is a theme taken up by businessman Anthony Lacavera, founder of WIND Mobile, which briefly attempted to crack the wireless telephone oligopoly, in his new book How We Can Win ( disclosure: his co- author, Kate Fillion, is a friend of mine). Businessmen’s books are usually a waste of time and Lacavera’s has its faults, but on the “glut of mom-andpop operations” he is bang on.

Of nearly 1.2 million businesses in Canada, he notes, 98 per cent have fewer than 100 employees, three- quarters have fewer than 10, while more than half have four or less. “Most Canadian star- tups never amount to much,” he writes: only half are even in business five years later. A tiny fraction, perhaps two per cent, turn into highgrowth firms, the so- called “gazelles.”

The rest stay small, too small to reap economies of scale or access new technologies but small enough to avoid competition. Not only are our small businesses less productive than larger firms — they’re less productive than their U. S. counterparts: “While American companies with fewer than 500 employees are 67 per cent as productive as those with more than 500 employees, in Canada smaller companies are only 47 per cent as productive as big ones.”

He quotes a study of Canadian small business by the Global Entrepreneurship Monitor: “only one- fifth aspire to provide 20 or more jobs five years down the road; two- thirds are not planning to have even six employees by then.” Their actual record on this front is even worse: a 1997 Department of Finance study found just one per cent of businesses grew from fewer than five employees to more than 20 employees over the period 1985 to 1992; only 12 per cent even had more than five.

This certainly isn’t for lack of encouragement. It isn’t just the small business deduction. Small businesses are eligible for all sorts of other tax perks, from the lifetime capital gains exemption to special exemptions from GST and payroll tax. Twenty years ago, the Mintz committee on business taxation, chaired by economist Jack Mintz, reported that Canadian small business had “one of the most favoured income tax regimes in the world relative to the general tax system.” Since then it has only grown more favourable. Some provinces barely tax them at all.

And tax breaks aren’t the half of it! Lacavera notes Canada also has “one of the richest sets of subsidies in the OECD” for entrepreneurs, a “tantalizing smorgasbord of federal and provincial grants (and) loans.”

Then there are all the government- funded agencies, more than 140 in all, that are supposed to nourish the next Facebook or Google: all those incubators and accelerators and mentoring outfits. They’ve surely persuaded lots of Canadians to go into small business. They just don’t have much else to show for it.

Is Canada’s sorry record on productivity and growth in spite of all this encouragement — or because of it? Like other economists, Mintz argues the small business deduction and other tax breaks discourage businesses from growing, or even encourage larger firms to arrange their affairs so as to look like small businesses for tax purposes. And if they do grow, well, Lacavera can tell you what happens to businesses that try to disrupt the status quo in this country. The best way to stimulate productivity isn’t by subsidizing the creation of a lot of tiny, uncompetitive firms with no hope of going anywhere. It’s by opening the economy to competition and market disruption. Only we’re not terribly keen on either.

We don’t need a pro-small business tax policy in this country. We need a progrowth policy. And the starting point is to get rid of the small business deduction.