The Wynne Ontario government responded to the laughter caused by their proposed small business tax cut from 4.5% to 3.5% with the minimum wage hike from $11.60 to $15.
“There was never a commitment to offset the increases in minimum wage,” Wynne said. “I was very clear that that was not something that we were going to be able to do, but we want our small businesses to be strong. We want them to be able to thrive. So that’s why we’ve put a number of supports in place.”
The province will cut the corporate tax rate for small businesses from 4.5 per cent to 3.5 per cent effective Jan. 1, 2018, the same day it increases its minimum wage from $11.60 to $14. The government’s plan will eventually see minimum wage jump to $15 an hour by Jan. 1, 2019.
The province will also designate that one-third of its procurement spending on goods and services will come from small and medium-sized businesses by 2020. And it will spend $124 million over three years to help companies with fewer than 100 employees who hire youths aged 15 to 29. The government will pay incentives of $1,000 for each worker hired and another $1,000 for each worker retained for at least six months by a small business.
This mound of government intervention is supposed to help the economy?
As already detailed out in my previous article, a small business needs to hire a worker that brings in $2,000 of productivity daily to break even with the new 2018 government plan. If an employee adds $2,000 in daily revenue to a company, the gains from the tax cut would offset the losses from the wage increase.
Let’s now add the ludicrous and arbitrary $1,000 “awards” for hiring young workers and retaining them for six months.
Clearly the best play for small businesses is to hire young workers and then immediately let them go. Create a hostile enough work environment to encourage them to quit, and reap a series of $1,000 awards just for the act of hiring them.
But even keeping them for six months and then letting them go proves to be unprofitable despite the added $2,000 bonus.
Let’s assume that a minimum wage employee is worth about $500 of daily revenue. On average, the loss as a result of the new tax and wage structure would be about $30 per day. This means that at about 60 days the $1,000 award would be used up. After six months and a second $1,000 award, it would still result in approximately a net $1,000 loss for the small business.
With the $1,000 awards, an employee would have to produce the equivalent of $1,000 in daily revenue to be worth hiring under the new tax and wage structure, and that’s also assuming this low-experienced young worker is competent right out of the gate and doesn’t expect any wage increase or bonus for good performance.
This plan doesn’t help anyone, not even the government (other than buying votes from the easily fooled):
- Businesses have to absorb higher costs, which means they have to make cuts in employment, higher wages and bonuses to performing employees
- The increased $124 million in spending for the “supports” and the tax cut means higher deficits — tax cuts need to coincide with spending cuts, otherwise the government is drawing from debt to pay its spending sprees
- Tax revenue will be lower as more businesses fold and unemployment will rise as a result of the wage hike
- The newly unemployed will rely more on government programs, thus demanding more government spending, which will inevitably lead to more tax hikes in the future or more inflation via debt
- The employees that survive will no longer be incentivized to work harder as voluntary wage increases will be minimized by businesses
- Employees already in positions of higher responsibility will demand a proportionately higher wage as well, otherwise they will be discouraged to work any harder than an absolute minimum wage employee
This list could go on, but:
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