The Costs of Business: Tax Regulation and the Value of the One-for-One Rule

Regulation could be hurting businesses, and the One-for-One Rule is a good step towards solving this harm. But is it enough?

Statistics Canada reports a decline in the rate of business creation over the past 30 years, writing that it “is apparent” and the “magnitude of the decline was similar across industries, suggesting the decline was secular rather than the result of a compositional shift with growth favouring industries with lower entry and entry rates.”[i] US researchers report similar findings.[ii]

Several things could be causing this decline, including an increase in the complexity of goods and services; the start-up costs of doing business, such as business registration fees, insurance, the costs of learning and educating oneself sufficient to resolve the complexity, among others; disincentives to work and take risk; and probably many more. Barriers to entry are numerous. The focus of this article is regulation and its effect on business creation.

The Canadian Federation of Independent Business estimates the annual cost of regulatory compliance at more than $37.1 billion in 2014, increasing from $33.8 billion in 2005, $33.3 billion in 2008 and $31.7 billion in 2012.[iii] For small businesses, this cost amounts to approximately $6,000 per employee.[iv] Statistics Canada estimates that the average annual earnings of a Canadian employee are approximately $50,000, which means that the regulatory cost per employee amounts to more than 10% of the average employee salary.[v] For a business, especially a small one, this is a significant cost burden.

While there is no doubt certain regulations benefit Canadians, and that others hurt them, it is unclear whether the benefit of any particular regulation exceeds the cost of the regulation. Some regulations include labour regulations such as those concerning hours of work and collective bargaining, environmental protection, occupational licensing, transportation, and many more. The most common regulation arises from tax compliance, such as the recording, reporting, and remission of GST/HST, payroll taxes, income taxes, property taxes, and the like.[vi] Taxes pay for the social safety net and public protection, among other things, but most federal government spending consists of transfer payments rather than the production of a good or service. This point begs the question of how much of the social safety net is benefiting Canadians? Is the Canadian employment insurance scheme as valuable and important to our society as Health Canada? Is the rule that employees ought to be paid over-time wages a net benefit for the country? Is the rule that an employer must pay 1.4 times the amount paid by its employee towards the employee’s Employment Insurance a net benefit for the country? The question of whether a regulation is beneficial on balance is a difficult one.

Yet, the possibility that regulation is impeding business creation and competition, and that we can eliminate any particular regulation by an act of legislature, means that we should pay closer attention as the problem is significant and the remedy could be relatively inexpensive.

This possibility makes the Trudeau Government’s commitment to the one-for-one rule a laudable policy decision. The Harper Government first implemented the rule when it introduced the October 2012 Red Tape Reduction Action Plan. The Red Tape Reduction Act received Royal Asset in 2015. The Government’s commitment can reduce the regulatory burden by forcing policy-makers to choose only the most effective regulations. Yet, a major criticism remains.

Given how common tax regulations are, it is important to note the tax or tax administration exemption from the one-for-one rule. Tax rules are among the most costly and ineffective of all regulations. Consider, for example, Canada’s implementation of the Common Reporting Standard with the enactment of sections 270-280 of the Income Tax Act, which is a regulation that will impose millions, if not billions, of dollars of costs onto Canadian businesses. This regulation can be defeated with the stroke of a pen. Though penalties exist, malicious actors can indicate Canadian residency on their self-certification forms, and thus easily defeat the objectives of the Standard. Moreover, the information that the Standard passes along to the CRA and other tax agencies is information the agencies likely already have or can obtain with relative ease, so the value of this information is debatable. The Common Reporting Standard is an example of a costly regulation with rather unknown benefits.

The tax system is perhaps the most complex and expensive of all regulatory regimes and it is exempt from the one-for-one rule; this exemption suggests the one-for-one rule’s ultimate social value is debatable. While the government’s revenue collection and tax policy objectives are vitally important, and a one-for-one rule could interfere with these objectives, the Government might benefit from a two-for-one approach in tax (two enactments, one repeal). It is difficult to say. Tax remains a significant regulatory burden to individuals and businesses alike. Perhaps it is time for the Government of Canada and the Provinces to reform the tax system, or at least institute a rule or principle that would alleviate the regulatory burden associated with the tax system.

In a capitalist society, competition among businesses is crucial because it fosters innovation, wealth creation, and the sharing of wealth. Businesses are the actors that organize the market by organizing the factors of production. Businesses supply the goods and services consumed in the economy, and businesses demand the labour, land, and capital that are necessary to produce that supply. For the most part, Canadian governments do not provide goods and services. One must not confuse funding of production with actual production. Businesses are crucial to our economy and the declining rate of business creation is concerning.

This decline has occurred alongside stagnant real economic growth, a ‘secular’ bear market in the major stock market indexes, and a revival of political and social instability that is reminiscent of a time before the so-called ‘end of history’. While it is crucial not to confuse correlation with causation, if one accepts that businesses foster economic prosperity as the drivers of efficient economic activity, it is possible the decline in business creation has at least partially caused this situation. A decline in business creation could cause a decrease in an economy’s internal competitiveness, job creation, and the quality of jobs. It could also cause a concentration of wealth as less people or entities own a nation’s capital.[vii]

There is no easy answer to the question of whether the benefits of a particular regulation exceed the costs; however, in light of the concern that this regulation is negatively affecting business creation and dynamism, it is certainly a question worth asking, especially if we appreciate the importance of a thriving business sector to a thriving economy, and prosperity for all Canadians.

[i] Ryan Macdonald, Economic Analysis Division, “Business Entry and Exit Rates in Canada: A 30-year Perspective” Online: http://www.statcan.gc.ca/pub/11-626-x/11-626-x2014038-eng.htm

[ii] https://www.washingtonpost.com/news/on-small-business/wp/2015/02/12/the-decline-of-american-entrepreneurship-in-five-charts/?utm_term=.81fd64b391bc

[iii] Canadian Federation of Independent Business, Canada’s Red Tape Report 2015.

[iv] http://business.financialpost.com/fp-comment/too-much-regulation-is-stifling-canadas-innovation-economy

[v] http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/labr69a-eng.htm

[vi] Canadian Federation of Independent Business, Canada’s Red Tape Report 2015.

[vii] https://www.forbes.com/sites/bruceupbin/2011/10/22/the-147-companies-that-control-everything/#5f3fff4f5105

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