By hit­ting en­trepreneurs, Ot­tawa is putting the econ­omy at risk

Re­mov­ing the in­cen­tives for en­trepreneurs to in­vest could tip the econ­omy

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS - David Rosen­berg


I had a wish list from the fed­eral gov­ern­ment, the fo­cus of it would be squarely on mea­sures that will en­hance do­mes­tic com­pet­i­tive­ness, and to re­frain from ini­tia­tives that will curb prof­itable and job-cre­at­ing in­vest­ment such as the tax pro­pos­als that seemed to come out of thin air in mid-July. I fear that Ot­tawa may shoot it­self in the foot on this score.

How can you claim to be the party of small busi­ness, to have made so much noise over the need to pro­mote en­trepreneur­ship, and then in­voke changes to the tax sys­tem that will re­move the tax in­cen­tives to ac­tu­ally take on the risk of be­ing a small busi­ness op­er­a­tor?

The self-em­ployed de­serve bet­ter tax treat­ment be­cause of the in­her­ent risks they take on com­pared with an at-will worker, full stop. Com­par­ing tax struc­tures be­tween the two is truly dan­ger­ous and mak­ing any rash changes, as seems likely, could very well tip the econ­omy into re­ces­sion. From what I see and hear, this is a very poorly thought-out strat­egy and one that can end up hav­ing far­reach­ing neg­a­tive im­pacts. Keep in mind that the fed­eral gov­ern­ment seems in­tent on mov­ing to a sys­tem that will level the play­ing field be­tween small pri­vate busi­nesses and the work­ing class, some­thing that is very rare around the world, and for good rea­son.

Not all of the Lib­eral gov­ern­ment poli­cies are anti-growth, and I whole­heart­edly sup­ported the poli­cies aimed at en­cour­ag­ing a freer in­flow of en­trepreneurial im­mi­gra­tion into the coun­try. But why then off­set this with an in­creas­ingly unattrac­tive tax struc­ture? The prob­lem as I see it is that Ot­tawa is far too con­sumed with dis­tribut­ing the eco­nomic pie rather than en­tic­ing the pri­vate sec­tor to ex­pand it. In the past five years, the top mar­ginal per­sonal in­come tax rate in On­tario has jumped from 48 per cent to 53.5 per cent.

And if the Fi­nance Min­is­ter ends up car­ry­ing through with his pledged tax at­tack on the self-em­ployed, I guar­an­tee that all we will be left with is less eco­nomic ac­tiv­ity, and there­fore a more de­pleted rev­enue base, be­cause com­pa­nies that have mo­bil­ity will pick up and leave and es­tab­lish their op­er­a­tion in a friend­lier pol­icy cli­mate.

Any­thing Ot­tawa does also has to be taken in the con­text of the Bank of Canada en­ter­ing a new regime of higher in­ter­est rates, and cou­pled with that, a 13-per-cent surge in the Cana­dian dol­lar in the past sev­eral months. That will per­haps help pull down im­port costs, which is a pos­i­tive, but will still be a shock to ex­ports and a clear hit to our cost com­pet­i­tive­ness.

Tack on the planned min­i­mum wage hikes in On­tario (un­be­liev­ably, from $11.40/hour to $14 in Jan­uary, 2018, and then to $15 by Jan­uary, 2019, for a 32per-cent in­crease), Al­berta and B.C., and one can en­vis­age some re­ally tough times ahead for the small-busi­ness entrepreneur. This is the pro­vin­cial gov­ern­ment’s way of help­ing out the low-end worker, but in­stead what hap­pens is ei­ther less em­ploy­ment or higher prices, which then pinches real in­comes and de­feats the whole pur­pose – and again, a neg­a­tive hit to prof­its in the small-busi­ness sec­tor.

All this comes at a time when we have NAFTA un­cer­tain­ties as well, not to men­tion an in­co­her­ent en­ergy pol­icy. (This is no time to be curb­ing pipe­line ex­pan­sion through stricter reg­u­la­tory rules, when they are be­ing eased south of the bor­der, but that is ex­actly what is be­ing done.) In com­ing months, we will also be feel­ing the ef­fects from the Fed’s shift to quan­ti­ta­tive ta­per­ing south of the bor­der, which could rep­re­sent a sig­nif­i­cant pull­back in liq­uid­ity and risk ap­petite on its own. The Bank of Canada, even as it tight­ened pol­icy a few weeks back, and hinted at more, did men­tion a se­ries of risks in its news re­lease that should not be ig­nored, in­clud­ing the im­pact of the rate hikes them­selves on debt-heavy con­sumer bal­ance sheets, as well as global geopo­lit­i­cal un­cer­tain­ties.

Frankly, what would get me ex­cited is if the gov­ern­ment just sat on its hands and did noth­ing. I am deeply dis­ap­pointed in what has al­ready been done with re­spect to taxes and the road back to run­away deficits. I have yet to be con­vinced that this gov­ern­ment has at­tempted to make the dis­tinc­tion be­tween debt used to fi­nance spu­ri­ous con­sump­tion and debt used for prof­itable in­vest­ment. And the bud­getary moves, both ac­tual and planned, to tax cap­i­tal in all its forms, are only go­ing to act as ma­jor con­straints on growth. Yes, we may well get more fair­ness, but in re­turn, less eco­nomic ac­tiv­ity. I’m not con­vinced that’s a very ef­fec­tive strat­egy if the aim in the end is for the tide to lift all the boats. And if Ot­tawa ac­tu­ally does pe­nal­ize these Cana­dian Con­trolled Pri­vate Cor­po­ra­tions by mak­ing good on its pro­posal to re­verse the tax ben­e­fits these en­ti­ties en­joy, for the ben­e­fit of the na­tional econ­omy, then we can ex­pect to see neg­a­tive fall­out on busi­ness in­vest­ment, job cre­ation and over­all eco­nomic ac­tiv­ity.

The tax sys­tem should be used in a way that re­wards risk. But the fed­eral gov­ern­ment’s pro­pos­als will in­stead re­tard risk and re­tard growth in the process. If Ot­tawa wants to re­duce the tax bur­den on the work­ing man, then cut per­sonal in­come tax rates in­stead of try­ing to level a play­ing field that has no ra­tio­nale for be­ing lev­elled. Why it is that the gov­ern­ment wants to level a play­ing field by ef­fec­tively rais­ing taxes and re­duc­ing in­cen­tives to in­vest is any­one’s guess. As far as I know, we are the only in­dus­tri­al­ized coun­try in the world mov­ing in such a di­rec­tion.

While there has been no short­age of sub­mis­sions and reports pub­lished by ac­coun­tants, lawyers, tax ex­perts and small busi­ness ad­vo­cates ad­vis­ing against Bill Morneau’s tax pro­pos­als, I have yet to see any eco­nomic im­pact stud­ies, from Bay Street to think tanks to the Bank of Canada or to the Fi­nance Depart­ment it­self. And we are just a short three weeks from end of the con­sul­ta­tion pe­riod. Can 75 days of pub­lic ex­am­i­na­tion re­ally be enough time to de­bate the most sig­nif­i­cant tax shift since the GST was in­tro­duced nearly three decades ago?

In­deed, go back to that time pe­riod in the late 1980s/early 1990s and see what hap­pened – a tax shock that oc­curred on top of a trade shock (FTA back then and now it’s the pos­si­ble un­rav­el­ling of NAFTA), a tighter Bank of Canada pol­icy, a scream­ingly strong Cana­dian dol­lar, an in­ter­ven­tion­ist and anti-busi­ness gov­ern­ment at Queen’s Park and a hous­ing bub­ble burst in the GTA. Does that have a fa­mil­iar ring to it? What came next was a re­ces­sion that was com­pletely pol­i­cyin­duced and un­nec­es­sary.

Through my lens, re­duc­ing tax in­cen­tives for risk tak­ing means we will get less of that risk tak­ing and sweat eq­uity, which in turn means we get less cap­i­tal for­ma­tion, less pro­duc­tiv­ity, less job cre­ation and less ag­gre­gate de­mand. The only ques­tion will be one of mag­ni­tude. Just as the econ­omy is start­ing to show some verve fol­low­ing the 201516 en­ergy-re­lated slump, it would be a shame to im­pose a po­ten­tially desta­bi­liz­ing and de­fla­tion­ary tax shock to the back­bone of the econ­omy, other­wise known as the small-busi­ness sec­tor. David Rosen­berg is chief econ­o­mist with Gluskin Sh­eff + As­so­ciates Inc. and au­thor of the daily eco­nomic news­let­ter Break­fast with Dave.

Frankly, what would get me ex­cited is if the gov­ern­ment just sat on its hands and did noth­ing. I am deeply dis­ap­pointed in what has al­ready been done with re­spect to taxes and the road back to run­away deficits.

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