Andrew Coyne: Most small businesses go nowhere, why tilt the tax system in their favour?

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 self-evident 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.