Why Tax Breaks are not the Answer

“Adhere to your purpose, and you will soon feel as well as you ever did. On the contrary, if you falter, and give up, you will lose the power of keeping any resolution, and will regret it all your life.”

  • Abraham Lincoln

 

When the Liberal Leadership contest began, I honestly thought that I would not write about it. I would not talk about policy or values. I would not talk about programme and positions. My thinking was simple: who was I to criticize a number of really intelligent people. They had the best advice and some of the most thoughtful people in the game.

Then, Justin Trudeau made a comment about the Gun Registry. That commentary compelled me to write a response. Again, I thought I would not do this again. However, today, I must add another critical blog.

Between 2006 and 2012, Prime Minister Harper was criticized by Liberals and the NDP for changing the nature of our tax system. Mr. Harper’s administration took away funding for urban transit and added a tax credit that was available to frequent users of the system. His administration also gave tax credits to parents who purchased exercise programmes for their children and provided tax credits for workers.

That criticism was harsh. We argued that there would be no way of measuring the success of the programme. We argued that the programmes could not be effective. The interesting thing is that History tells us that most of that criticism was true. Canadians have not suddenly given up their cars in favour of transit and our country still has a growing problem with childhood obesity. Therefore, I was shocked to see that CTV News, in an article called “Liberal leadership hopeful Marc Garneau calls for focused tax measures” called for the elimination of capital gains taxes for Canadian entrepreneurs and for “payroll tax breaks for small and mid-sized businesses that invest in employee training as well as firms that hire students in skilled jobs.”  Was this not the implementation of the same type of programme that we criticized the Conservatives for?

Before I go on though, let me be fair. There are a number of reasons why any Government might want to use Tax Credits in this context. For example, if there was a lot of savings in the economy and a government wanted to push those savings in a particular direction, then one might want to use tax credits. Or, if Governments wanted to incentivize companies to move existing jobs from one part of a country or region to another, then one might want to provide tax credits.  However, Canadian politicians are not trying to move jobs around or make extra capital work. In our context, we are looking for companies and entrepreneurs to take risk and start new ventures. We are looking for Canadians to create the next Microsoft, Google, Apple or Research in Motion. Mr. Garneau is quoted as saying so:

“Garneau also chided the business sector for failing to take risks and invest in research and development.

‘Far too often Canadian entrepreneurs must set up their companies in the U.S. to find funding,’ he said.

The solution, he said, is not ‘more government handouts’ but giving businesses more incentives to grow.”

The problem I have is that changing income tax law will not bring Canadian innovation to the fore. Let’s just perform a thought experiment to see why. Let’s say that I have an idea to develop a new type of LCD light bulb. I am in my forties. I might be married or I might have a child or both. I will likely have a huge amount of debt: either from my buying my education or buying my house. Therefore, I have little capital or cash flow to manage the development of such a project. Furthermore, if I have a tax credit, I can admittedly reduce the amount of my existing income; it will not provide me with the $100,000+ necessary to develop a new product. Such a tax credit will not give me the $100,000 that would be necessary to hire a new person, student or immigrant because such a tax credit will not give an entrepreneur money. Or put differently, tax credits are designed for entrepreneurs or small businesses, they are designed for large businesses that might be able to already afford the costs of hiring. Tim Horton’s, as an example, changed from being a US domiciled business to being Canadian Based, because of such tax differences. The same might happen with GM, Ford or Arcelor-Mittal due to tax credits; but they will develop local Mom-and-Pop shops. Or put differently, the policy solution must match the need. This is the lesson every Liberal should learn and Leadership Candidates are not immune from such a lesson.

If Mr. Garneau wanted to work on a problem, he could point to the same problem that Canadian Businesses have had for years. Since the 1970’s, Canada has had the same problem: a lack of venture capital. Banks in Canada do not want to take risk. Therefore, they largely do not take an active role in start-ups. They look for companies that are more mature. Luckily for them, Canada has enough firms to satisfy their appetite. The same is true for Canadian brokerages, insurance companies and trust companies. All of them can find profit on projects which are national and international and do no need to feed the Canadian Venture Industry pipeline.

This is not true in the United States. For, the US is awash in hedge fund, venture and angel capital. This is why Canadians have been going to the States for years. In the United States, Canadians can get money and capital to bring their ideas to life. Think of Zak Pashak. (Why Canadian Zak Pashak decided to make bikes in Detroit, by Erin Millar, Globe and Mail.com Published Wednesday, Sep. 19, 2012 04:47PM EDT).  He is a Calgarian that moved to Detroit to start a bicycle manufacturing business. His story is in the National Post. Or think about Silicon Valley. While, its success does rest on a remarkable concentration of knowledge and talent, it also has some of the strongest venture and angel capital institutions in the world. While, money cannot buy love, it can start corporate ventures.

Therefore, instead of falling for the Tax Credit Trap, Mr. Garneau could have proposed a workable solution. For example, the Canadian Government created Export Development Canada (EDC) and the Business Development Bank of Canada (BDC) to solve other problems. Since the Mulroney Government – in the 1980’s – both have been required to make a profit and solve business problems that the Canadian Financial Establishment choose to ignore., One could say that Mr. Garneau could propose the creation of a Crown Corporation, the Federal Government could make a grant or give it a loan, however, it would be required to assist Canadians in creating ventures.

However, this is not the only solution. The Federal Government could provide grants or loans to not-for-profits who work in the entrepreneurial space. Such an effort could promote a culture of best practices throughout the Country. Shared space or facilities could reduce the cost of creating industrial, commercial or retail ventures. Or Social Enterprises could develop the skills and services that businesses require. This could mean that services could be developed in Rural Alberta or the Hinterlands of Nova Scotia that could service other businesses.

Either way, based on real local efforts, a strong solution can be found. This strong effort does not include Tax Credits. Instead, it requires solving a real problem. In this case, solving that problem means creating capital pools for entrepreneurs. I have mentioned two ways of doing this, but there are many more out there. However, the way that tax credits are being proposed, it will not.

So here we are left with the same problem: a Liberal Leadership contender who does not look at objective solutions to solve quantifiable problems. My hope is that this type of thing is the beginning of the hard conversations, we need to have: Conversation about policy and about direction. It might lead to some missteps and changes. However if not, we – the Party Membership – might have to have hard conversations with our Leadership Contenders. I hope to not have to have a third blog post of this topic. I just hope our contenders give more thought to their proposals.

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