The Rise of Corporate Profits in the Time of Covid

SUMMARY

In recent months, Canadians have seen significant price increases in everyday goods. New analysis shows that along with prices increasing, so too have corporate profit margins, which is not a coincidence. In 2021, when Canada was in the middle of the covid pandemic, large corporations in all major sectors of the economy saw their profit margins substantially exceed 20 year averages, with many hitting record levels. The Finance, Insurance & Real Estate Sector (FIRE), which already had the highest sectoral profit margin over the last two decades, also had the biggest increase in 2021—reaching a profit margin of 22%.

As the federal government considers its 2022 budget, it is critically important that both rising profit margins and all-time lows in corporate taxation be addressed. Our previous research shows that in 2021, corporations enjoyed their lowest ever effective income tax rate of 16.6%, which contributed to the sharp rise in corporate profit.

However, the key contributor to the jump in corporate profits is increasing prices. This report indicates that in 2021 corporations brought in unprecedented levels of profit largely by increasing what they charge for their goods and services. This allowed corporations to almost double profit margins in 2021 to 16%, compared to the 9% average for 2002 to 2019.

When corporations choose to raise their prices in order to boost their profit margins, they drive up inflation. While much emphasis is put on inflation being caused by government spending, the corporate pursuit of higher profits through price increases is a much simpler explanation, though more poorly understood and less discussed.

This misunderstanding plays into the hands of individuals, organizations and lobby groups pushing an austerity agenda. Such an agenda would have a range of negative repercussions on the Canadian economy, while benefiting only the very rich.

The more Canadians understand what causes prices to rise, the better we can respond in a manner that helps the overall economy, as opposed to enriching only a fortunate few.

Beyond driving inflation and reducing the affordability of goods and services, higher corporate profit margins also contribute to rising inequality. The overwhelming majority of corporate owners are part of the 1% and they receive the majority of capital income.

Fortunately, a number of reasonable, immediately applicable solutions exist, including bringing corporate income tax rates closer to where they used to be, applying an excess profits tax on top pandemic profits, closing the most egregious tax loopholes, and improving corporate financial transparency.