In the first commentary in this three-part series, I discussed the supply side of the capital market in Canada, and the personal taxation of dividends and capital gains. Here, I turn my attention to the demand side, and the corporate income tax. Specifically, I argue that replacing the current CIT with a tax on “economic rents” earned by businesses can make our tax system more efficient and equitable.
Canada Should Repeal the Small Business Deduction
Canadian government support for small and medium-sized businesses includes tax preferences, one of which is the small business deduction. This article argues that there is little evidence supporting the efficacy of the small business deduction, that equivalent benefits are generally not available in other countries, and that the small business rate should therefore be repealed. As a result of the repeal, we could reduce the general corporate tax rate and eliminate some of the distortions and complexities in our dividend gross-up and credit rules.