Current system encourages firms to form smaller, less efficient units
Despite the common belief small business tax concessions encourage job creation and economic growth, this cannot be substantiated, according to a study by Duanjie Chen and Jack Mintz from the University of Calgary.
"The incentives undermine the neutrality of the overall tax system and the goals of simplification, economic efficiency and fairness," wrote the authors. "Ironically, the current system encourages companies to break up into smaller, less efficient units."
The authors also refer to a "wall of taxation," saying smaller companies are penalized as they try to grow.
The study assesses the impact of taxes on small business growth by estimating the amount of tax paid on the rate of return to capital as the company gets larger. As a business grows, effective tax rates on capital investments virtually double when the company goes from $1 million to $30 million in asset size, found the study.
The authors provide a set of recommendations for government:
•Encourage investment in depreciable assets.
•Create a capital gains incentive for small businesses going public.
•Reduce the lock-in effect of capital gains taxes.
This also means replacing the current small business tax deduction and lifetime capital gains exemption which hinder growth, according to the study.
