This article originally appeared in Jacobin
The cost-of-living crisis shows no sign of abating. A new report from Canadians for Tax Fairness may explain why. The report finds that 2023 pretax corporate profits in Canada were up 54 percent over 2019, the year before COVID-19 hit the planet. Profit margins — the percentage rate of revenue a company earns after costs — were also up. As companies made more, they contributed to inflation and the cost-of-living crisis. As if that wasn’t enough, rather than investing those profits back into the economy, companies chose to pay themselves off. Researcher Silas Xuereb explains how this works.
DAVID MOSCROP:
What happened to corporate profits and to corporate profit margins during and immediately after the pandemic?
SILAS XUEREB:
Initially, in 2020, there was a small dip, but towards the end of 2020 and through 2021, corporate profits nearly doubled compared to their average from 2010 to 2019. In total, pretax corporate profits were $685 billion in 2022. From 2010–2019, they averaged $314 billion.
On the margins side, we have a similar story. In the prepandemic decade, pretax profit margins averaged around 8 percent. And then in 2021 and 2022, they were well over 12 percent. So there was a significant spike in pretax profit margins during the pandemic.
DAVID MOSCROP:
Profits and profit margins vary across industries. Which sectors led in growth and which sectors trailed?
SILAS XUEREB:
There was variation across industries. The oil and gas industry and the finance industry were two that saw some of the biggest increases in profits. But we see pretty broad increases in profits and profit margins across the board. The majority of nonfinancial industries saw increases in their profit margins during the pandemic compared to the decade before the pandemic.
DAVID MOSCROP:
What drove the increases?
SILAS XUEREB:
It’s not a simple answer. I think that’s why there’s so many different competing explanations out there. Supply chain disruptions and the Russian invasion of Ukraine certainly played a role. But here is where I think the insights from Professor Isabella Weber and Evan Wasner are so helpful — they provide a theoretical story for how, after you have these initial price shocks that are increasing costs in certain sectors, this can lead to price increases throughout supply chains and even increases in margins. Not just increases in prices that keep the margin the same, but because of longer-term trends of market concentration, a lot of these firms in these downstream sectors had a significant degree of market power.
Firms had the ability to not just match the input cost increase, but tack on a few extra percentage points and so increase their margins during the pandemic. It’s not a simple story; it’s a combination of supply chain pressures and firms exploiting the situation to increase prices. They took the opportunity provided by rising prices and consumer expectations, believing consumers might not notice the difference between a 5 percent increase and a 7 percent increase.
Stock Buybacks and Dividends
DAVID MOSCROP:
Recognizing that this will vary by industry and even by business, to what extent can we say that the sneaking in of a few extra percentage points to margins affected inflation? Is it fair to say at least it had an appreciable effect on inflation?
SILAS XUEREB:
I definitely think that’s fair to say. I only touch on this briefly in this report, but that’s partially because a few other papers I think have already demonstrated this. Economist David McDonald’s piece showed that 41 percent of inflation between the third quarter of 2020 and the third quarter of 2022 in Canada could be attributed directly to higher profits. This rate is much higher than is typical and even much higher than the proportion that can be attributed to profits in previous recessionary periods. The initial shocks of the pandemic, the associated lockdowns, and, later, the Russian invasion of Ukraine kicked off this process, but I think that you can say that the increase in profits increased inflation further than it would have been otherwise.
DAVID MOSCROP:
What did companies do with these profits? Because it looks like they didn’t reinvest them into research and development or give them back to the workers who produced those profits in the first place.
SILAS XUEREB:
What we saw during the pandemic is that stock buybacks increased quite significantly. We had a record $128.7 billion in stock buybacks in 2022 in Canada. And this meant that we had a reduction in the total value of shares available because far fewer new shares were issued than shares that were repurchased in that year. As we know, share repurchases inflate share prices, and so directly benefit shareholders.
We also saw huge amounts of dividends paid out. When we add the dividends paid in 2023 to the stock buybacks, these account for over two-thirds of nonfinancial firms’ net profits in that year. Unfortunately, we did not see any change in investment or corporate capital spending. Corporate capital investment has been relatively stagnant over the past decade, and this did not change at all despite these record profits during the pandemic.
DAVID MOSCROP:
You also note that the rise in profits worsened inequality. How does that work?
SILAS XUEREB:
There are a few channels through which that could happen, such as through dividends. If corporations use higher profits to pay out higher dividends, this tends to benefit top income earners disproportionately since they are much more likely to own shares than the average worker. As dividends increase, incomes at the top rise significantly, while incomes at the bottom remain largely unaffected. This is what we saw.
We see this in the data in 2021 — the income share of the top 1 percent increased. Although we don’t yet have data for 2022, it’s likely we’ll see another increase when it becomes available in the fall, given that 2022 was another record year for profits. We’ve already seen the poverty numbers from 2022, which show an increase in poverty.
When corporate profits increase, basically it’s the wealthiest who are getting to decide what to do with that money. Typically, that money ends up going towards top earners rather than increasing wages for average workers.
Pushing Back
DAVID MOSCROP:
What could we do to bring down profit margins, to bring down inflation, and to level inequality?
SILAS XUEREB:
There are a lot of different things that we could do. One, and this is already happening to some extent, is strengthening the labor movement. I think firms were able to get away with all this was partially because they were able to exploit weaknesses in labor that didn’t exist in the past.
Various policy mechanisms could be introduced, such as a windfall profits tax, similar to the one imposed on the banking sector. A Canada Recovery Dividendcould be applied more broadly across all sectors, or targeted specifically on sectors like oil and gas. This would not only raise revenue that would allow us to democratically decide how to distribute that money — whether we want to spend it on affordable housing, investing in renewable energy, or a just transition — but also discourage firms from seeking excessive profits if they know that governments are willing and able to tax those extra earnings.
We can also permanently increase the corporate income tax rate. It’s been progressively decreased over several decades with the promise that it would promote investment. But, as we know, it has not promoted investment.
We can also do more to prevent mergers. We’ve made some progress here as well. The Competition Act was strengthened last year, but we need to ensure that it’s actually used in the future so that we don’t see continued increasing concentration in these industries.
Finally, international coordination on taxation is crucial. There’s a growing movement for a UN framework on taxation that could help prevent this international race to the bottom on corporate taxation.
DAVID MOSCROP:
Is this a critical moment to make this happen? Consumers still are feeling the pain of inflation. They’re still angry about it; they’re still frustrated with oligopoly and monopoly in Canada. But labor is having a bit of moment, too. How important is it to seize this moment? Is the window going to narrow, or do you think that there’s going to be a long-term opportunity to do something about this?
SILAS XUEREB:
I think anytime these issues are prominent, we should seize the opportunity rather than wait for some future time. Because we do have this rising labor movement right now and we do have this focus on grocery profits. And because of the urgency of some of the crises that we’re facing, especially around the climate and around housing, there are big investments that are needed right now.
If corporations aren’t going to do that on their own, we need to do it through the public sector. We need some of this revenue to be invested in renewable energy and in building new, affordable nonmarket housing. This is an important moment and we should not let it pass us by.
CONTRIBUTORS
Silas Xuereb is a researcher with Canadians for Tax Fairness. His research focuses on social and economic inequalities, and he holds masters degrees in economics from the University of British Columbia and the Paris School of Economics.
David Moscrop is a writer and political commentator. He hosts the podcast Open to Debate and is the author of Too Dumb For Democracy? Why We Make Bad Political Decisions and How We Can Make Better Ones.
