From the editor: Let’s tax the poor

Written by Ian Portsmouth
Are we an entrepreneurial nation? Our glass is half-empty, according to an international study of business activity. Led by research teams at Babson College in Massachusetts and the London School of Business, the fifth annual Global Entrepreneurship Monitor places Canada in the middle of the pack when it comes to starting and growing companies.

It applies two metrics: total entrepreneurial activity (TEA), the percentage of people involved in startups and young firms; and firm entrepreneurship activity (FEA), which is roughly the weighted proportion of businesses that are creating innovative products and expecting growth.

According to the GEM, 8.5% of Canadian adults are engaged in building young businesses, while 14.7% of Canuck companies are entrepreneurial and employ 13.4% of adults. These numbers place us 12th out of 40 countries surveyed in both TEA (8.5%) and FEA (an indexed score of 2.3). How fared our brothers and sisters to the south? They ranked 7th in TEA (11.3%) and 10th in FEA (2.4).

But never mind the Americans. You’d expect high TEAs in emerging economies such as Uganda (1st, 29%) and Venezuela (2nd, 27%). But Canada gets spanked in FEA as well, by such business behemoths as first-placed Chile (6.1), New Zealand (4th, 2.8) and even Slovenia (7th, 2.7). Along with our traditional rivals, these countries will battle Canada on the world stage in years to come.

How can we improve our prospects? The GEM advises governments to reduce state involvement in economic activity and to promote entrepreneurship at the cultural level, among other things. I’d like to make another recommendation: raise taxes on the poor.

Not on low-income individuals — whose lot often results from accidents of birth — but on low-profit companies. After all, every business owner chooses to be in business and is, generally, successful to the degree they create value for customers. When judging how to tax them, compassion shouldn’t come into play. Still, less profitable businesses are allowed to retain a greater portion of their net income than are more prolific earners. In many instances, this amounts to a subsidy for lack of ingenuity, poor selection of markets, bad business models and general inefficiency.

Consider what happens when our graduated tax system is turned on its head, and tax rates decrease as net income rises. A declining tax would provide an additional incentive for firms to be more productive, hire the best people, invest in technology and focus on value-added products filled with intellectual property.

Opponents will argue such a system would encourage companies to make that extra buck by behaving badly: duping customers, underpaying employees and shirking environmental responsibilities. They might also scrimp on investments such as new technology, which, like any expense, count against the bottom line. However, firms that take such short-term gains suffer long-term pain. Another cause for concern: higher taxes for lower-income businesses might also discourage startups and investment in high-risk innovations. One possible solution is reducing business taxes across the board. Another echoes a recommendation of the GEM: make informal investing in entrepreneurial companies easier and more rewarding.

As for companies in the red? Leave things as they are, because no one wants to lose money. We don’t want to lose any battles, either.

Submit your letters to the editor here.

Originally appeared on