In the face of the minimum wage hike, Ontario’s corporate tax rate cut is laughable

Finance Minister Charles Sousa unveiled the plan in the province’s fall economic statement Tuesday afternoon. The corporate tax rate for small businesses will fall from 4.5 per cent to 3.5 per cent effective Jan. 1, 2018, the same day the province will increase its minimum wage from $11.60 to $14.

The Canadian Press, November 14, 2017

The Keynesian theory that the government can intervene and “stimulate” the economy will be proven disastrous again. We don’t even need to wait for the future to see the negative results, we can see it now based on their faulty math.

Let’s look at a series of charts depicting the pre-2018 to post-2018 scenarios for businesses of increasing size and revenue.

The blue lines represent the net cost of tax and wages. The solid line is prior to the 2018 changes (4.5 tax rate and $11.60/hr wages), and the dotted line is 2018 and after (3.5 tax rate and $14/hr wages).

There is a clear incentive for having fewer employees post-2018.

To make up for the increased cost in wages, a company hiring just one minimum wage employee at $14/hour for eight hours a day must make at least $2,000 in revenue to show a benefit from the combined tax cut and wage increase. $2,000 is considered the break-even point to be unaffected by the 2018 wage and corporate tax policies.

As any small business owner knows, $2,000 in daily revenue is quite the feat for a staff size of one, and this is just isolating it to tax and wages, ignoring almost all other expenses. This also ignores the reduced absolute benefit of the tax cut after it is applied to net income after deductions.  If the business makes any less than $2,000 daily under the most ideal circumstances, this business will be encouraged to cut labor to move the break-even point closer to where their revenue streams are actually at (i.e. where the dotted blue line intersects the solid blue line in the above charts).

As staff size grows, the break-even point moves further away linearly at $2,000/employee.

Thus, the government policies are making the assumption that every employee is contributing at least $2,000 daily in productivity. For small businesses that don’t have economies of scale such as retail stores and restaurants, this is realistically an impossible expectation. These businesses will have to resort to higher prices or labor cuts. Businesses that scale don’t necessarily hire more people (and they will not be incentivized to do so), as the amount of new labor required to take over the customer base of the failing small businesses is relatively inconsequential.

It is obvious then that this plan ultimately hurts both employers and employees, benefits big corporations by eliminating more competition, while simultaneously giving the government that veneer of morality by supposedly “fighting for the middle class”.

Modern Keynesian economists and self-proclaimed progressives will continue to argue that raising minimum wages will inject more money into the economy and thus help small businesses thrive due to increased spending, such as this article and this article (they purport to be “behind the numbers” but literally do no math in their analyses).

If there are much fewer people earning slightly higher wages, businesses will not show an increase in revenue.  Most small businesses specialize in a narrow market segment and will thus have a shrinking pool of customers still spending the same amount to meet their needs.

Their argument that small businesses perform better with higher wages falls flat if you measure a business’ labour investments relative to the labour investments of other businesses. If a business tends to hire higher skilled workers by offering a relatively higher wage (e.g. 120% of minimum), it can be demonstrated that they perform better than businesses that hire lower-skilled minimum wage workers due to the increased incentive to produce more for that higher wage.

Once you raise the minimum wage threshold however, the only way to maintain that relatively higher level of skill is to maintain that same relatively higher wage, otherwise the incentive to produce more disappears.

The minimum wage increase does nothing in relative terms, but increases everything in absolute terms.  It is pure, immediate inflation.  Businesses are not going to get a sudden increase of revenue, because if it plans to maintain its current level of productivity and sales, it must raise enough additional cash to pay its employees the same relative increase. Employees paid $14/hr prior to 2018 will want to be paid $16.90/hr after to 2018 for the same work.

A simple thought experiment to demonstrate the absurdity of mandated minimum wage is to hypothetically set the minimum wage to $100/hr or something ludicrously high. Why is it $15 anyway? Why not $100? If an increased minimum wage supposedly stimulates the economy because people have more spending cash, then in the Keynesian view, forcing businesses to devote all their earnings to paying their employees ought to make those businesses flourish.

Of course, in reality it will just devalue any savings businesses and citizens have, funneling it all to big government in the form of higher absolute taxes (income and corporate).  Consumption may rise temporarily but then falls dramatically after consumers realize their relative purchasing power has either remained the same or has gotten worse.

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As 2018 quickly approaches, Ontario small businesses are left with fewer options to survive. Automation, while easily financed by big corporations with large budgets, may be out of reach for small businesses looking to trim costs. If this impacts your business, consider contacting me and I may be able to help develop automation tools for you.

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