In a blog post Thursday, Alex Hemingway said an excess-profits tax modeled on levies imposed in Canada and other countries during both world wars would also curtail price-gouging and raise needed public revenue from big corporations that are booming during the pandemic.
Hemingway, writing for the Canadian Centre for Policy Alternatives, a left-leaning think tank where he is an economist and public finance policy analyst, cited recent calls by economists Gabriel Zucman and Emmanuel Saez of the University of California, Berkeley, for a wealth tax in the U.S.
Referring to a book by Zucman and Saez, the Canadian blogger warned that without action toward a tax, the current crisis "may ultimately reinforce and deepen preexisting problems in the economy, including inequality and rising corporate power."
To understand how an excess-profits tax would work, Hemingway said, it's necessary to consider how standard corporate income taxes function. The latter are 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," he said.
Under an excess-profits tax, companies making extraordinary profits during a war or crisis pay a much steeper corporate income tax rate than Canada's federal level of 15% — up to 100% in some historical cases. The tax would kick in only if a company's profit rose above a set "normal" rate of return, Hemingway said, adding that this normal rate has been calculated in different ways across jurisdictions and time.
A typical approach might exclude profits based on an average over recent years, he said. For example, Canada's World War II-era Excess Profits Act exempted "normal" profits taken as an average between 1936 and 1939 and initially applied a tax rate of 75% to the rest — later raised to 100%, though with a 20% postwar tax credit.
"Notably, Canada also raised the minimum corporate tax rate that would apply even to 'normal' profits from 18% to 40%" under the wartime tax, Hemingway said.
He also noted Zucman's assertion on Twitter last week that taxing excess profits is economically efficient because it focuses on windfall gains while discouraging destructive price-gouging by limiting the opportunity to profit from such behavior. An excess-profits tax "could similarly help prevent abuse of government programs intended to support struggling businesses," Hemingway said.
In the context of Canada's wage-subsidy program for businesses, the economist said, a complementary policy would be a steep tax on any corporate profits booked by companies receiving the subsidy.
Businesses shouldn't be able to profit from a taxpayer-funded federal program meant to help protect workers' incomes and employment, Hemingway said, warning that large, profitable corporations facing temporary revenue declines may be able to do just that, if careful conditions aren't put in place.
In late March, just as the pandemic's spread began to accelerate in Canada, the government announced that it would subsidize up to 75% of wages for small and medium-size businesses hurt by the outbreak. The bailout also includes giving those businesses access to one-year interest-free loans and deferring their sales tax payments until June. In total, Canada has introduced a CA$82 billion ($59 billion) stimulus package — CA$27 billion for businesses and individuals through wage subsidies and the topping up of benefits, and CA$55 billion in tax deferrals to keep liquidity in the economy.
"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," Hemingway said.
He suggested the program be amended to include strict limits on executive pay and bonuses, stock buybacks and dividend payouts, while the excess-profits tax itself could help encourage companies to use excess funds to top up their workers' pay beyond the 75% covered by the subsidy.
Hemingway wasn't immediately available to comment.
--Editing by Neil Cohen.
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