Excess profits tax needed to prevent profiteering amid COVID-19
People and businesses all over the country and the world are hurting as large parts of the economy have shut down to help stop the spread of COVID-19. But a subset of businesses will see a spike in profits, including in big tech, e-commerce and logistics, and cleaning products, as well as vendors of scarce goods who engage in price gouging. No one should make windfall profits from a crisis causing so much suffering, particularly when billions in public dollars are flowing to keep businesses afloat.
Two leading economists in the United States are now calling for an excess profits tax of the type previously imposed during World War I and II in countries including Canada, the US and Britain. A wartime-style excess profits tax would help prevent profiteering amid COVID-19, discourage abuse of government support programs for business, tamp down on price gouging, and raise public revenues from large, profitable corporations that are booming during the crisis. As US President Wilson declared in 1918, “The profiteering that cannot be got at the restraints of conscience and love of country can be got at by taxation.”
No one should make windfall profits from a crisis causing so much suffering, particularly when billions in public dollars are flowing to keep businesses afloat.
Canada should move to implement an excess profit tax now. As the US economists warn in their recent call, without action of this kind the crisis may ultimately reinforce and deepen pre-existing problems in the economy, including inequality and rising corporate power.
To understand how an excess profits tax works, it’s first important to bear in mind how the ordinary corporate income tax works. Corporate income tax is applied only to a company’s profits (net of expenses), not its total revenues. In other words, businesses that are losing money or merely breaking even pay no corporate income tax even in ordinary times, and companies in this situation—and there will be a huge number during the present crisis—certainly wouldn’t pay an excess profits tax. For reference, the federal corporate tax rate in Canada today is 15 per cent of profits, and the provincial rate in BC is 12 per cent.
A key purpose of an excess profits tax, as Franklin D. Roosevelt put it in 1940, is to ensure that “a few do not gain from the sacrifices of the many.”
Under an excess profits tax, companies making extraordinary profits during a war or crisis pay a steep corporate income tax rate—in some cases historically up to 100 per cent—on profits above a set “normal” rate of return. This normal rate of return has been calculated in different ways across jurisdictions and time, but a typical approach might exempt profits using an average over recent years. For example, Canada’s WWII-era excess profits tax exempted “normal” profits taken as an average between 1936 and 1939 and initially applied a tax rate of 75 per cent to the rest (later raised to 100 per cent, though with a 20 per cent post-war tax credit).
(Notably, Canada also raised the minimum corporate tax rate that would apply even to “normal” profits from 18 per cent to 40 per cent as part of the Excess Profits Act of that era.)
A key purpose of an excess profits tax, as Franklin D. Roosevelt put it in 1940, is to ensure that “a few do not gain from the sacrifices of the many.” But as Berkeley economist Gabriel Zucman notes, this policy is also an economically efficient policy since it focuses taxation on windfall gains. As noted, it also has the benefit of discouraging destructive price-gouging by limiting the opportunity to profit from this behaviour, and it could similarly help prevent abuse of government programs intended to support struggling businesses.
In the context of Canada’s massive wage subsidy program for business, an additional but complementary policy would be a steep tax on any corporate profits booked by businesses receiving the subsidy. The federal wage subsidy is an important program to help protect workers’ incomes and employment, but businesses should not be profiting from these public funds. As currently set out, large and profitable corporations facing temporary revenue declines may be able to do just that, if careful conditions aren’t put in place.
A steep tax on all corporate profits (not just above-normal profits) booked by companies receiving the federal wage subsidy could help ensure the integrity and fairness of this program.
How might this happen? In labour-intensive businesses, where payrolls are a very large portion of expenses, a public subsidy of 75 per cent or more of payroll costs could end up more than offsetting a drop in revenue of 15 per cent or 30 per cent (the wage subsidy program’s proposed eligibility thresholds for March and April, respectively), leaving the difference to be booked as profit. As Toby Sanger points out, another scenario could involve Canada’s big banks becoming eligible for the subsidy because their revenues temporarily decline when they defer some mortgage payments (even though they’ll still receive these payments after a delay).
A steep tax on all corporate profits (not just above-normal profits) booked by companies receiving the federal wage subsidy could help ensure the integrity and fairness of this program. In a previous article, I discuss other important amendments and conditions needed to strengthen the program, including strict limits on executive pay and bonuses, stock buybacks and dividend payouts. Such conditions would help ensure that profits aren’t simply shifted into executive pay to avoid corporate tax, and the tax itself could help encourage businesses to use excess funds to top up their workers’ pay beyond the 75 per cent covered by the subsidy.
The COVID-19 crisis has highlighted how deeply dependent we are on each other. It was always clear that no corporation or individual accrues profits or wealth on their own, but only with the help of workers and the critical public investments that make our society and economy tick. All of us who create this wealth should share in it, and corporate profits during a crisis are a good place to start by ensuring that “a few do not gain from the sacrifices of the many.”