Friday, April 08, 2011

The NDP Tax Plan, Fostering of Innovation, & Undermining the Conservatives

Jack Layton & Chris Buckley {NDP candidate in Oshawa}, 30 March 2011
Last week in Oshawa, Jack Layton unveiled the NDP's tax plan that sought to increase small business incentives and paying for them through increases in corporate income taxes. I'm awaiting the full NDP platform. As I blogged about yesterday, the link between corporate taxes and investment in Canada isn't clear. There has been relatively high investment in Canada under a higher tax structure, so if there is a corporate tax effect, it's interactive and contextual. A taxwise "race to the bottom" is unfounded and while the OECD may be touting a shift from income taxes towards consumption taxes, I think it's important to look closely at their findings, which I intend on doing, since I get a sense that it's smaller, emerging and the Nordic economies that are driving these results.

Clusters of economic activity occur for many reasons far beyond taxes, but if you put free money on the table—you're going to get takers. My blog post on the NDP's ad on "Corporate Giveaways" addresses how putting public money on the table in the forms of grants is one way to entice business. The question is whether this turns into a giveaway arms race. In marketing, coupons and frequent deals {price reductions} often create a situation known as "double jeopardy", where it's expensive to run these campaigns that result in short-term sales boosts, but the manufacturers and retailers cannot unilaterally stop because they'll lose revenues to the competition. Putting public money on the table is likely to follow the same effects. Corporations will shop for the best deal. Public sports venue financing under the guise of economic development is often a bad move that leaves the taxpayers holding the bag. The public-private venture of the Skydome here in Toronto was a boondoggle that Bob Rae's Ontario NDP government had to clean up by divestiture.

Low corporate taxes cuts in this economic climate run the risk of firms taking the money and sitting on it. Moreover, with what I know about firm behaviour, in times of uncertainty, corporate tax breaks aren't going to mitigate risks and encourage investment—it's all about the cashflows.

Jack Layton's NDP is proposing to increase incentives for small and medium-sized businesses, with the idea of increasing jobs and incubating economic activity. This would be done through reducing the small business tax rate from 11 to 9% and providing an up to $4,500 per new hire tax incentive. The reaction seemed mixed, but I feel this policy can make serious inroads into Conservative territory and Conservatives should be worried. According to the latest EKOS poll [pdf], 20% of Conservatives view the NDP as a second choice::

The NDP policy has the ability to appeal strongly to new Canadians, who may face economic, social, and linguistic barriers in the workforce, and enhance the tipping point for entrepreneurship for everyone. I think this policy can get jumpstart innovation by creating incentives for people with good ideas to set up shop and increase competition. I'd like to see this particularly encouraged in industries that could benefit greatly by being located in Canada, a high standard of living area with relatively higher costs, but with an educated workforce and good social and economic infrastructure.

The policy has its detractors. Mike Moffat at UWO has concerns over efficiencies and offshoring and brings up points that should indeed be discussed. His summary is that:: 
“Changes in tax rates affect investment, productivity and wages of workers, but what evidence we do have suggests the impact on jobs is small… overall it would create some new jobs but at a cost of lower productivity, lower investment, lower wages, and reduced provincial tax revenue.”
As stated above and on this blog post, investment based on tax policy is murky to say the least and I'm uncomfortable with any rhetoric that makes a causal link.

Moffat believes that due to lower productivity of smaller and unincorporated businesses makes the NDP plan inefficient and costly, while the increases in corporate income taxes is likely to cause offshoring. He cites a StatCan report [pdf] that states that smaller and unincorporated businesses have lower productivity, but this is dependent on the sector::

So, categorically stating that encouraging unincorporated productivity is hard to justify on efficiency grounds is a bit too broad. Unincorporated businesses do lag in productivity with respect to their corporate counterparts in certain areas, but they excel in others, such as health and retail, and are fairly close in many others.

This is also historical data and new smaller businesses may use a new "production function" that is more efficient or customized to a specific markets. The government using tax policy to incubate small businesses can spur innovation by making it attractive for skilled workers with ideas to strike out on their own—breaking what is called "entrepreneurship lock" where employees with entrepreneurial ideas are tied to being employed by others. Focusing too much on historical data turns a blind eye to possibilities. Policy should be looking at deconstructing the details of the data, not make sweeping generalizations, in order to develop incentives that foster social and economic goals, as well as provide guidance and assistance to foster innovation and job development. While wages and provincial tax revenues may go down, this needs to be weighed in light of the lower costs from reducing unemployment and the serious problem of those unemployed for long periods being shunned from the labour market.

There are also other factors that may be beneficial to society. For example, despite unincorporated agriculture lagging in productivity when compared to corporate ag, moving towards sustainable farming in suburban and exurban areas may have quality of life benefits by limiting sprawl, as well as increasing the availability of locally-produced foods that uses fewer chemical inputs and may have a lowe life cycle carbon footprint. Incentives for unincorporated businesses can also increase market competition and along with enforced antitrust can improve efficiencies in Canada and lower prices for consumers. The devil is always in the details, but incentives can unleash creativity and Schumpeterian "creative destruction" of established modes of doing things. NDP policies of fostering a social safety net and funding of infrastructures like health and education help provide grist for an innovative mill and cushion the blow of the destruction part of creative destruction. The alternative is a corporate state with government and employees dependent on large multinationals, beholden to shareholders who want quarterly increases in value, and ceding them power.

Self-Employed in Canada with the numbers with paid help remaining stagnant, StatCan report

The StatCan report also notes that what drives down unincorporated productivity has to do with the hiring of workers::
"The decline in the relative productivity of the unincorporated sector in the 1990s was associated with the increase in the number of those self-employed who hired no workers; likewise, the increase in productivity of the unincorporated group post-2000 was associated with declines in the unincorporated self-employed with no paid workers."
The NDP proposal addresses this by creating incentives for new hires.

As for the offshoring of jobs or a migration of operations to the US or México, like I said above, I don't think it's wise to enter into an arms race of giveaways. I must say that as an entrepreneur myself, taxes aren't the issue. It's not even regulation. I'm in favour of streamlining the bureaucracy that facilitates getting things up and running and making it easy to be in compliance with regulation.

Eileen Fischer of York has concerns about the unintended effects of the NDP policy::
  • “If you do something that creates disincentives for large corporations to do business in Canada, such as increasing the tax rate, you can indirectly harm SMEs (small and medium enterprises).”
  • “While lower taxes for small businesses are appealing in that it may mean those companies can invest more in (for example) new product development or the pursuit of new markets, the fact is that many small businesses won’t spend their tax savings that way.”
I think these are valid concerns. I think the raising of corporate taxes proposed by both the Liberals and the NDP aren't that drastic and return the rates to those levied earlier in the decade and historically low for Canada. I think if corporate tax rates are to be maintained at current or lower levels, there needs to be a discussion of raising the GST, which is a political third rail. The problem of unincorporated tax savings not going towards new product or new market development can be remedied through policy. Creating investment incentives is in the Liberal Party's playbook::

  • "A new Innovation and Productivity Tax Credit (IPTC) that will grant Canadian investors a 15 percent tax credit for investments in small, early-stage start-ups that don’t yet have the track record to seek financing from more traditional sources such as banks and the stock market."
  • "An extension of the popular “Flow-Through Shares” tax model to start-ups in the three Canadian Champion Sectors. This tax incentive would allow venture companies with little or no revenue to pass on tax deductions to investors, creating a significant incentive to invest in Canadian entrepreneurs from promising sectors where Canada can become a world leader."

Policy can also encourage investment in machinery and equipment, as well as in labour, as the NDP policy intends on doing.

The NDP and Liberal economic platforms can create a real sticky wicket for Harper and the Conservatives, setting up an interesting scenario in the context of a debate. If the opposition parties undermine or outplay the Conservative traditional positions of strength and their supposed ace up their sleeve, the economy, public opinion may swing and fears over a "reckless" coalition may finally be put to bed. I think the Conservatives' worst fears are the Liberals and NDP to appear to be credible managers of the economy and that as a duo, they present a viable and fresh alternative.

Twitterversion:: [blog] Analysis of #NDP small biz tax incentives; bigger issue: undermining of trad #CPC bailiwick by #NDP&#LPC #canpoli @Prof_K

No comments: