July 3 2024
A new report from Canadians for Tax Fairness shows that corporate profits are up more than 50% since the start of the pandemic, but most Canadians aren’t seeing any benefit. In fact, one of the reasons for the higher profits is the price-setting power of companies in the grocery or oil and gas sector.
Pre-tax profits remained high since the pandemic
In 2023, corporations raked in $644 billion in pre-tax profits, 54% higher than 2019, the last pre-pandemic year, and over double the average profit levels of the pre-pandemic decade. If an increase in profits was entirely explained by inflation, profit margins, that is, the total profits of firms divided by their total revenue, would stay the same. However, pre-tax profit margins increased significantly during the pandemic. In 2021 and 2022, the average pre-tax profit margin was over 12%, and it remained at 10.7% in 2023. Between 2010 and 2019, pre-tax profit margins averaged only 8.1%.
Increased profits not being reinvested to boost growth
It is commonly believed that higher corporate profits lead to higher corporate investment. Yet, despite their profits doubling after the pandemic, non-financial corporations did not increase their investment in the Canadian economy. Average non-financial corporate investment was $205.9 billion per year from 2010-2019 and $205.1 billion from 2021 to 2023. Instead, firms have used higher profits to repurchase their own shares and pay dividends, processes that inflate returns for shareholders without contributing to higher wages or productive investment that could boost future growth. In 2023, dividends and share repurchases were 68.2% of non-financial corporations’ net profits.
Profit margins rose significantly in grocery and oil and gas sectors
Profit margins remained above their pre-pandemic average in 18 of the 21 largest non-financial industries in 2023. Oil and gas extraction experienced the largest increase in profit margins, after averaging a -5.4% profit margin before the pandemic, the sector had a 17.6% profit margin in 2023. Grocery stores are typically a low margin industry, yet their profit margin doubled from 2.0% pre-pandemic to 4.1% in 2023.
High corporate profits = high inflation
Conventional economic theory, which asserts that profits reflect the marginal productivity of capital, cannot explain this economy-wide increase in profit margins. Instead, increasing profit margins reflect an increase in firms’ price-setting power due to reduced competition and policies less favourable to labour organizations.
Increased corporate profit margins contributed to the elevated levels of inflation experienced since 2021 and led to increasing income inequality in 2021.
Tax fairness would discourage excess profits and provide funding for services like health care
New policies are needed to bring profit margins back down, curb the power of the largest corporations, and ensure a fairer distribution of Canada’s resources. An increased corporate income tax rate, a minimum tax on book profits, and prevention of further corporate consolidation would contribute to these ends and raise revenue to fund much-needed public investment.