Tax and the City: Universities as startup incubators deserve a second look

Concordia President Alan Shepard’s proposals in the Financial Post (Nov. 13), on how to keep bright young minds in cities, warrants a serious second look. He proposes to build links between the business community and institutions of learning by furnishing special tax treatment and cheap infrastructure — “startup zones and incubators” in his words. His proposal violates several basic principles of economics, in addition to common sense.

The water-cooler discussions between academics and start-up entrepreneurs, in Dr. Shepard’s world, would be financed by taxpayers. He goes so far as to suggest that “to attract the brightest minds, employees be given an income-tax holiday for the first five years, and reduced taxes for the next five.”

The first problem with such a proposal is that it is elitist. Why should a university-educated student be the beneficiary of such a treatment while a graduate from the plumbing or micro-circuitry program in one of Montreal’s many professional schools be treated differently? Such a pro-elite policy hardly corresponds to a standard sense of social justice. Would, or should, an informed electorate support such special treatment?

Second, he proposes that businesses that “set up shop or expand on or around campuses and support a school’s academic mission pay no corporate … tax for 10 years.”

The evasion of corporate taxes for the most highly educated seems to me to be a perversity. In proposing a corporate tax holiday, President Shepard seems equally oblivious to the everyday workings of corporate accountants. Special zones inevitably become the target of larger and mature corporations looking for tax havens. They can set up a corporation whose aims satisfy the rules of the special zones, back-slide some of their operations to these zones and thereby use them as a means of reducing their corporate taxes.

The net effect is simply to provide a tax reduction to existing corporations. There is nothing wrong with lowering taxes of course, as long as it is done fairly and without distorting economic activity. In any case, this is unnecessary since the corporate tax rate for small businesses is already lower than for large businesses.

Third, he proposes that properties used for his special startup zones be given a 10-year tax holiday. The impact of such a tax holiday is understood by every university graduate in economics or business: since the properties surrounding urban universities would immediately become more desirable on account of favorable tax treatment, their prices would immediately jump. The primary consequence of his tax proposal would therefore be to confer a capital gain on initial local property holders.

Fourth, his proposal suffers from what I term the “paternalist’s delusion.” In attributing more than 70 startups to the Ryerson University Digital Media Zone, he makes the standard, and incorrect, assumption that none of these startups would have come into being without the zone. This is untrue. For all we know, most of such startups may have simply chosen a different location pursuant to the incentive.

Programs based on geographic criteria all suffer from that basic problem. That was also the case with the Quebec government’s plan to create a “Cité multimédia” and a “Cité du commerce électronique” a decade ago by subsidizing companies that set up shop in some specific neighbourhoods of Old Montreal. Many companies moved to benefit from the program, without creating any new jobs. It was simply a waste of taxpayers’ money.

My final objection to this proposal is that universities do not know better than the entrepreneurial sector which businesses, or which types of business, are more likely to succeed. Pet obsessions with the digital age have blinded us to the wider variety of developmental possibilities in the world. In a market economy, we should not permit the Ivory Tower to stamp its misperceived ascendancy onto public policy. We should treat all entrepreneurs equally.

Ian Irvine is a professor of economics at Concordia University and an associate researcher for the Montreal Economic Institute. The views reflected in this column are his own.