Data

As the focus of this report is on the intensive margin measures, entrepreneurship is measured, not by participation indicators such as the share of the population by province who report to take part in entrepreneurial activity but by the entrepreneurial income and employment reported. This definition has the advantage of addressing the policymaker’s concern of sustainable entrepreneurship. Entrepreneurial income is defined as the “net earnings of proprietors from their own businesses in all industries except agriculture. It includes the net income of private

10

consultants, accountants, lawyers, doctors³ and other independent professionals”⁴. It only includes income from unincorporated ventures and it is derived from Canada Revenue Agency’s (CRA) personal income tax forms (T1). CRA does adjust this data using other sources in some cases if underreporting is found to be an issue. It would clearly be unrealistic to assume that CRA has a 100% detection rate of underreporting. The implication is discussed in the results section.

Employment estimates come from the Canadian Labour Force Survey. Unlike Bruce et al. (2014), data availability makes it impossible to consider employment measures for the whole period used for the income measures. None of the provinces have unincorporated self-employment farm employment⁵ numbers for the 1981-1986 period and many years have been partially or entirely supressed to meet confidentiality requirements imposed by the Statistics Act. Newfoundland and Labrador has no available data whatsoever and only Quebec, Ontario, Manitoba, Saskatchewan and Alberta have no suppressed data in the 1987-2009 period. Therefore, all estimates for employment and productivity are obtained with a much smaller sample size than those using income.

3 The inclusion of physicians is problematic since they are considered as self-employed workers paid by the provincial governments. It would be difficult to consider them as entrepreneurs and therefore an adjustment has been made.

Physician remuneration net of overhead costs has been subtracted from entrepreneurial income in order to obtain a more accurate number. Physician remuneration data for the whole period of analysis comes from the Canadian Institute for Health Information and an estimate of overhead costs (34%) for 1997-1998 comes from Buske (2001) and is assumed constant for the whole period. This method of adjustment tends to underestimate entrepreneurial income excluding MD income due to the fact that since 2002 (2007 in Quebec) doctors have been allowed to incorporate and work as employees of their own companies and thus fall under the wage income classification. However, estimation using the pre-incorporation period does not yield different results.

4 http://www.statcan.gc.ca/pub/13-017-x/2008001/themes/ch05/5213351-eng.htm

5 It is necessary to obtain entrepreneurial employment which is obtained by subtracting unincorporated farm

self-employment from total unincorporated self-self-employment.

11

All financial variables have been set in 2009 dollars using the corresponding provincial consumer price index. The mean non-farm net mixed income (entrepreneurial income) by province is presented per capita, as a share of total income and by the provincial share of the national⁶ entrepreneurial income in Table 2 for 1984 and 2009. Figure 1 presents the evolution of the average per capita value for each province for the whole period. All provinces saw advances in per capita entrepreneurial income with Quebec, Alberta, Saskatchewan and British Columbia showing the strongest gains. Entrepreneurial income as a share of total income only saw increases in Ontario, Quebec, Alberta and British Columbia. Finally, except in Alberta, the provincial entrepreneurial income as a share of the national entrepreneurial income generally fell sharply.

Table 2: Provincial Non-Farm Net Entrepreneurial Income, 2009 dollars, Canada, 10 provinces, 1984 – 2009

Per capita As a Share of Total Personal Income

Provincial Share of National Non-Farm Entrepreneurial Income

Province 1984 2009 1984 2009 1984 2009

Alberta 852.65 1151.06 0.0374 0.0382 0.0791 0.1021

British Columbia 1026.82 1410.47 0.0534 0.0534 0.1316 0.1395

Manitoba 1064.53 1025.41 0.0506 0.0462 0.0418 0.0299

New Brunswick 553.10 526.34 0.0374 0.0310 0.0172 0.0122

Newfoundland and Labrador 880.82 850.30 0.0641 0.0391 0.0200 0.0109

Nova Scotia 1074.50 750.35 0.0558 0.0366 0.0348 0.0185

Ontario 1104.56 1435.98 0.0474 0.0545 0.3976 0.4271

Prince Edward Island 1134.38 809.81 0.0668 0.0411 0.0053 0.0029

Quebec 893.05 1360.23 0.0473 0.0530 0.2364 0.2269

Saskatchewan 934.89 1195.93 0.0470 0.0464 0.0350 0.0284

6 Excluding the territories.

12

Figure 1: Evolution of Mean Per Capita Values of Non-Farm Entrepreneurial Income, 2009 dollars, thousands, Canada, 10 provinces, 1984 – 2009

Table 3 contains employment data for the 1987-2009 period for all provinces as well as for entrepreneurial productivity, which is obtained by dividing entrepreneurial income by entrepreneurial employment. As mentioned above, data availability limits the timespan and therefore certain provinces only show the most recent year available instead of 2009.

13

Table 3: Provincial Non-Farm Entrepreneurial Employment and Productivity, Canada, 10 provinces, 1989 – 2009

British Columbia 0.0880 0.1126 0.0900 0.1143 23237.51 33646.17

Manitoba 0.0750 0.0682 0.0816 0.0714 22924.90 43456.27

New Brunswick* 0.0756 0.0726 0.0773 0.0741 17306.96 27926.21

Newfoundland and Labrador n.a n.a n.a n.a n.a n.a

Nova Scotia** 0.0825 0.0754 0.0843 0.0765 26651.75 33976.63

Ontario 0.0644 0.0912 0.0660 0.0923 28864.43 43433.30

Prince Edward Island 0.0674 0.0627 0.0758 0.0663 36940.18 40915.65

Quebec 0.0665 0.0801 0.0683 0.0813 25470.04 44384.91

Saskatchewan 0.0725 0.0730 0.0904 0.0796 20891.57 45238.06

* Last year available is 2005

** Last year available is 2008

The main interest of this research project is the effect of tax policy on entrepreneurship.

Accordingly, three tax related variables are included. They are: the provincial top marginal personal income tax (PIT) rate; the provincial top marginal corporate income tax (CIT) rate and the real⁷ rate of provincial sales taxes.

The PIT rate can have an ambiguous effect on entrepreneurial effort. The substitution effect would translate higher real income due to lower taxes into a higher level of effort. At the same time, assuming leisure is a normal good, the higher income would also translate into more leisure

7 Taking account of the tax-on-tax system used by Prince Edward Island and Quebec. For some years in the sample,

these two provinces impose their sales tax on top of the national Goods and Services Tax (GST), making the real rate higher than the statutory rate. Both provinces eliminated this practice shortly after the end of the period of analysis used in this research.

14

consumption and therefore into a lower level effort. The net result depends on the size of the two effects relative to each other. The high cost of detecting tax evasion by the self-employed makes it easier to hide income from the tax authorities, this can create additional effects to changes in the PIT rate. First, a higher PIT rate can push the self-employed to compensate by either starting to underreport income or underreporting by an even higher margin than it was already the case.

Second, it can also create incentives to switch from wage labour to self-employment in order to be able to better bear the higher tax burden by failing to report their full income. The evolution of the PIT rate is shown in Figure 2 below.

Figure 2: Evolution of Personal Income Tax Rates, Canada, 10 provinces, 1984 –

2009

15

The net impact of the CIT rate on entrepreneurial income again depends on whether the income or the substitution effects dominates. However, the CIT-PIT mix chosen by policymakers can also influence the legal structure of the business venture. Profit maximization can lead businesses to organize in such a way that they minimize taxes and thus if the PIT rate is higher than the CIT rate, businesses expecting losses can operate under an unincorporated arrangement in order to be able to deduct business losses against other income while those expecting profits can opt for incorporation in order to face the lower tax rate. If CIT rates are higher than PIT, businesses that would have otherwise incorporated may choose to remain unincorporated in order to reduce the tax burden. The evolution of the CIT rate is shown in Figure 3 below.

Figure 3: Evolution of Corporate Income Tax Rates, Canada, 10 provinces, 1984 –

2009

16

Sales tax rates are included as theory and evidence point to locational distortions created by differences in taxation. Sales tax differentials and competitive markets can push businesses to establish themselves in lower tax jurisdictions to reap the benefit of the additional business volume due to lower prices made possible by lower costs (Davis, 2011)⁸. Businesses’ bottom line also depends on the ability to pass tax rates through to consumers in the form of higher prices. In a competitive environment the incidence of the tax is likely to be greater on the producer than on the consumer and the inverse is true in a non-competitive setting. A study by Boisvert and Thirsk (1994) finds evidence of federal sales taxes having higher incidence on Canadian producers in Canada-United States border cities⁹ than in non-border cities¹⁰ due to competition arising from international cross-border shopping. Figure 4 below shows the evolution of the provincial sales tax rates for the 1984 – 2009 period.

8 Spatial equilibrium theory would suggest that at least a share of this benefit would be capitalized in property values

and therefore ultimately be borne as a cost in the form of higher property taxes. While a vast literature has previously addressed the capitalization of local property taxes on residential land and housing values, little has been done in the area of sales taxes. On this matter, Man and Bell (1996) find that sales taxes are capitalized into the value of owner-occupied housing but to a lesser extent than local property taxes. There are, to the best of the author’s knowledge, no studies on the capitalization of sales taxes on commercial property values.

9 Saint John, Montreal, Ottawa, Toronto, Thunder Bay, Winnipeg, Regina, Vancouver

10 St. John’s, Charlottetown, Halifax, Quebec City, Saskatoon, Saskatoon, Edmonton, Calgary

17

Figure 4: Evolution of Sales Tax Rates, Canada, 10 provinces, 1984 – 2009

Several non-tax variables are used in the model. The female percentage of the total population is included in order to account for differences between male and female participation to self-employment as women tend to be less active in self-self-employment¹¹ than men. The percentage of the population over 64 years old is included for various reasons. There is evidence that participation in self-employment activities increases with age and its incidence is the highest above

11In June 1981, women made up 28.2% of all the self-employed in Canada, the same percentage climbs to 36.1% in June 2014. Data from Statistics Canada 2014, Labour Force Survey estimates, employment by class of worker and sex, seasonally adjusted and unadjusted. Calculations by the author.

18

55 years old (Kamhi and Leung, 2005). People in the mentioned age group may take advantage of the social network and accumulated financial capital they have built over the years to become self-employed. Population density is included to account as a proxy for competitiveness.

The property crime rate is included as it can reduce the expected profit of entrepreneurs, either by actual material losses due to crime or by translating into higher property insurance rates. Due to data availability, for the 1984-2000 period, actual property crime offences data is used while for the more recent 2001-2009 period, property crime incident data is used. The first is a subset of the latter¹². They are combined in order to obtain data for the whole period, a dummy variable is used to indicate the shift in the measurement method¹³. Figure 2 and Figure 3 respectively show the evolution of actual offences and reported incidents.

Per capita public expenditures are included as a proxy for the level of public services offered.

Public expenditures, in some occasions, can be interpreted as a subsidy to business when used for services that reduce operation costs and facilitate business (e.g., security, transportation and schooling) but may also represent a burden on business if taxes are used for purposes unrelated to the business or if the relevant public services are provided in an excessively ineffective fashion (i.e., if the cost borne in taxes by the business is higher than the benefits received).

12Actual offences are made up of reported crime incidents that are not dismissed as unfounded.

13 It is equal to 0 for the 1984-2000 period and 1 for the 2001-2009 period.

19