Canada's Small Business Job Credit Flaws

The proposed “Small Business Job Credit” has major structural flaws that, in many cases, give firms an incentive to fire workers and cut salaries. Like my colleague Stephen Gordon, I am no fan of this proposal.
  
This “EI cliff” kicks in fairly early, as a small business with as few as 12 employees can have EI contribution costs above $15,000 per year. Those firms then face a decision: Are they close enough to the edge of the cliff that they should cut staff or wages in order to obtain the tax credit. (Full disclosure: I own such a company that is on the “wrong” side of the cliff). The way this proposed system is designed is that the maximum benefit a company can receive from firing a worker and going under the $15,000 threshold far exceeds the maximum benefit a small business can receive from hiring an additional worker:

• The maximum benefit a firm can receive from firing a worker is $2234.04.
• The maximum benefit a firm can receive from hiring a worker is  $190.52.

Although this is sold as a job credit, there is no requirement that companies hire new workers. A firm can have fewer workers and a lower payroll than they had the year before and still receive a tax credit.

A larger problem with this proposal is the discontinuity that occurs when a firm reaches $15,000 in EI payments to the government. Once a firm crosses that threshold, it goes from collecting a tax credit of $2234.04 to collecting nothing.
 Mike Moffat Articles On Canadian Business
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