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Will small businesses be better off? Hardly

Note the irony: The schizophrenic federal government helped encourage incorporation among high earners as a means of tax avoidance in the first place by bumping up top marginal personal tax rates from 29 to 33 per cent, piling atop provincial hikes that have added on another three points since 2013. But by reducing the small-business rate, the government has now pivoted against its own tax-the-rich approach, since the cut will mostly benefit high-income taxpayers.

The government has clearly learned the hard way the lesson that fairness is not the only objective for tax policy. Taxes can hurt the economy. They can discourage entrepreneurial effort, family succession, or investment in innovation. Complex provisions can also impose unwelcome compliance costs on taxpayers and burden the government with auditing demands. And now, the end result of the finance minister’s supposed fixes to the proposed tax changes for private corporations is to worsen an already complex and distortionary system.

This is especially true of the latest small-business tax cut (for businesses with less than $10 million in assets on their first $500,000 of profits). While the government justifies it as enabling small businesses to accumulate retained earnings to fund future expansion, it has the unfortunate effect of creating a tax wall for growing companies. Along with rising marginal personal tax rates on income and capital gains, the tax system penalizes success.