A Toxic Mix: Minimum wage and business tax cuts

Yesterday, Ontario’s NDP announced an election plank: increase the minimum wage, and at the same time, cut taxes for small business.

The gist of their proposal:

a) a 33% tax cut for small businesses and

b) a 56 cent minimum wage increase over and above what the current government has already committed

I have no squabble with the minimum wage increase. Sure, I wish it were higher, as we proposed to the Minimum Wage Advisory Panel back in November. The problem comes when a wage increase is coupled with a tax cut. This sets an extremely dangerous precedent. It buys into the rhetoric that minimum wage increases are bad for business and governments need to mitigate the damage.

There is no clear-cut evidence that minimum wage increases hurt small business. Meanwhile there is growing evidence that higher wages are actually a net benefit to business and to the economy. They promote increased innovation, productivity and efficiency in the use of other resources.  Higher wages foster loyalty among employees and employers, reduce staff turnover and lower training costs.

Meanwhile, cutting taxes means less revenue to invest in transit, in infrastructure and in high quality public services. Less money for social housing. Less revenue for social investments that will be on offer during the next election.

A number of my colleagues at the CCPA recently contributed to the book  “Tax is Not a Four Letter Word.” They did this because they share a sense of urgency, a desire to change how we in Canada think and talk about taxes, and how legislators approach revenue raising tools. Their message? Taxes are about what is possible, about what we want to do together. When we cut taxes we stifle the public imagination about what we can build, create and solve together.

Not to mention, we’ve already cut small business taxes. All businesses, small ones included, were the recipients of federal in 2010, 2011 and 2012 and provincial tax cuts in 2010 and 2011.  At the time, policy makers predicted lower taxes would increase business investment – and lead to more jobs and higher wages.  In reality this hasn’t come to pass.  Instead, a significant number of businesses made the decision to either pay those savings out as dividends or keep it as cash on hand.

To be clear: we are in support of a higher minimum wage.  A higher minimum wage will be good for workers, business and the economy. This announcement is misguided despite the increase, for two simple reasons. For one, it buys into the myth that “minimum wage increases hurt small business.” And it further contributes to the erosion of our revenue base ­– a revenue base we need in order to offer the public services that we all rely on, many of which are desperately in need of re-investment.

Kaylie Tiessen is an economist with the Canadian Centre for Policy Alternatives’ Ontario Office (CCPA Ontario). Follow her on Twitter @kaylietiessen

6 comments

  1. Great research and a worthy idea. Problem is when the voting public hears minimum wage increase the first thing they think is up goes the price of my coffee in the morning or sandwhich at lunch or grocery bill on the weekend. Taxes are not a four letter word to the progressive mind but unfortunately that is not who is voting in these governments in Canada. Another approach is needed.

  2. Reducing corporate taxes in Ontario for small business is insane. Corporate tax rates are already far lower than any where else in the world. All incorporated professionals benefit from these extremely low corporate tax rates, that is, lawyers, accountants, doctors, dentists and their children – who own shares indirectly through trusts.

  3. This is a very misleading and prejudicial article; to begin with, how can you make a valid comparison if one statistic is a percentage and the other is a cents value? By my calculation, the tax cut is 11% and the wage increase is 7.3%; obviously the author needs to provide us with some clarification.

    The argument that this sets a precedent is fallacious; you can hardly call it a trend – to me it seems like a sound approach to provide some leverage for small businesses while asking them at the same time to pay their employees a bit more .. Nope, can’t agree with this one and wonder what purpose CCPA hoped it would serve ..

  4. I live in a condominium complex, so I can appreciate the value of taxes.

    For example, I am not personally responsible for my foundation or roof, or for clearing snow out of our parking lot, or for my water service (although maybe I should be for the last). As an owner, I pay for these things through my condo fees along with all the other owners. Just like insurance, the risks/costs are pooled so instead of each of us facing unaffordable costs, as an aggregate we can pay for all of these things.

    Taxes are practically just condo fees writ large. They let us, as society-wide aggregates, purchase and maintain assets and services that the vast majority of us could not afford on an individual basis, including value-add/positive-sum services like mass immunization, public education and health, and the like.

    (Of course, progressive taxes also serve other useful social goals, such as reducing competitive consumption, which is a collective action problem, and reducing inequality, which corrodes the social compact when allowed to get out of hand.)

    TL,DR: Taxes are an enormously useful tool that allows us to pay for lots of really useful but really expensive things in such a manner as to be affordable at the individual level.

  5. Both the federal and Ontario NDP have long promoted reducing taxes for small business. Likewise, both have supported increasing corporate taxes. It’s not a new policy plank. That this long standing policy was mentioned in the same document as raising the minimum wage isn’t indicative of a new precedent. They’ve had both these policies in existence for some time.

  6. I wouldn’t be so quick to overlook the point Kaylie makes here: that minimum wage increases and business tax cuts should not go hand-in-hand. That is the new development here. And it’s worth noting if only because it’s inadvisable policy for the reasons Kaylie aptly mentions.

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