Cost Estimate of an Excess Profits Tax
This report estimates the federal corporate income tax revenues that would be generated if an additional 15 percent tax rate was applied to excessive profits earned by big firms in 2020.
Executive Summary
This report is based on a request by Member of Parliament Peter Julian (New Westminster-Burnaby) to estimate the cost of introducing an “excess profit tax on big corporations that have been profiteering from the pandemic.”[^1]
Specifically, this report estimates the federal corporate income tax revenues that would be generated if an additional 15 percent tax rate was applied to profits that met the following criteria:
-
Generated in the 2020 calendar year;
-
Generated by Canadian firms that earned more than $10 million in revenues in at least one year during 2016-2020; and,
-
That exceeded a firm’s 2020 expected profits, which is calculated for each firm according to their 2014-2019 average profit margin multiplied by their 2020 total revenues.
The proposed tax is incremental to the current 15 per cent statutory corporate income tax rate.
We estimate that an excess profits tax would generate $7.9 billion in federal corporate tax revenues for the 2020 year.
This is a static cost estimate. We do not attempt to quantify the effects of taxpayer behavioural response and we implicitly assume that complementary measures are put in place to prevent eligible firms reducing their tax burden in 2020, for example by applying losses or shifting depreciation and amortization otherwise recorded in other tax years.
It is also worth noting that our estimate should not be interpreted as evidence of undue price increases in response to the pandemic. Several factors can lead to an increase in profits, such as productivity improvements, economies of scale, or reduction in the cost of inputs.
Introduction
This report is based on a request by Peter Julian (New Westminster-Burnaby) to estimate the cost of introducing an “excess profit tax on big corporations that have been profiteering from the pandemic”.[^2]
Currently, the statutory federal corporate income tax rate is 15 per cent, with some firms qualifying for the small business tax deduction, reducing their federal rate to 9 per cent.[^3] These tax rates apply to all corporate taxable income, referred to hereafter as profits.
The proposal would impose an additional 15 per cent tax to “excess profits” earned by large corporations in 2020, such that “excess profits” are subject to a 30 per cent federal corporate income tax rate.[^4]
The requestor indicated to PBO the intent to align the proposed federal tax concept with a similar wartime measure. During World War II, Canada imposed a 100 per cent tax on all profits deemed excessive.[^5][^6] Excess profits were defined as profits that had exceeded ‘normal profits, which were calculated as the average yearly profits from 1936-1939.[^7]
Parameters
The proposed excess profit tax has several parameters and definitions, as provided by the requestor:
-
The first key parameter is in defining excess profits. For the purposes of the request, excess profits are calculated as the profits earned in 2020 that are greater than what would have been expected in 2020, had the profit margin on revenues in 2020 been equal to the average profit margin from 2014-2019.[^8]
-
The next key parameter is the definition of big corporations, which PBO assumes are firms that have earned at least $10 million in total (gross) revenues in at least one year during the 2016-2020 period.
-
Another key parameter is timing, where the excess profits tax is applicable to all excess profits earned in the 2020 tax year. For this report, we used calendar year, due to data limitations on firms’ unique tax year.[^9]
-
The last key parameter is the tax rate that will be applied to excess profits from big firms, which is 15 per cent. The proposed tax is incremental to the current 15 per cent statutory corporate income tax rate.
Data and Methodology
To estimate the revenues from an excess profit tax in 2020, PBO estimated, on a company-level basis, profits earned in 2020 and in prior years.
Capital IQ was used to obtain financial and industry classification information on individual corporations. This data source compiles and standardizes information on publicly-traded corporations around the world, and is constantly updated.[^10] PBO selected corporations if they met the following criteria:
-
Had earned more than 10 million in total revenue in at least one year between 2016 and 2020;
-
Had reported income specifically in 2020; and,
-
Was based in Canada.[^11]
A firm was considered to be earning excess profits if it had achieved a profit margin in 2020 that exceeded the profit margin it had historically earned, on average, from 2014-2019.[^12] Based on 2020 revenues, any profits in excess of what would have been obtained using the historic profit margin are subject to the tax.
Data from Capital IQ omits private corporations and may not reflect the complete universe of taxable corporations, so PBO scaled these results to represent the Canadian corporate sector as a whole on an industry-basis consistent with their relevant North American Industry Classification System (NAICS) code for the purpose of aggregation.[^13][^14]
Information from Statistics Canada was used to determine industry level profits for the period of 2014-2019.[^15] Information for 2020 was not available, so PBO forecasted the profits for 2020 using industry-level GDP growth projections from Pre-Budget Outlook 2021.[^16][^17]
Excess profits were then aggregated by sector. PBO calculated the share of excessive profits for each industry and multiplied it by the share of forecasted profits for Canadian firms by sector.[^18] This was then scaled down by the share of economic activity that was conducted by large firms.[^19]
In nine sectors, there were fewer than 10 observations from Capital IQ with profits in 2020. For these sectors, PBO assumed the national average percent of profits estimated to be excessive would apply to the forecasted profits among big Canadian firms, as calculated from data from Statistics Canada. Collectively, these sectors represented 30.9 per cent of forecasted 2020 profits.[^20]
To estimate the federal revenues the excess profits tax would generate in 2020, PBO multiplied the total estimated excess profits by the proposed tax rate of 15 per cent.
Our estimate is a static cost estimate. We do not attempt to quantify the effects of taxpayer behavioural response and we implicitly assume that complementary measures are put in place to prevent eligible firms reducing their tax burden in 2020, for example by applying losses or shifting depreciation and amortization otherwise recorded in other tax years.[^21]
Results
We estimate that a tax on excess profits earned by large firms would generate approximately $7.9 billion dollars in 2020. “Excess profits” in a given sector should not be interpreted as evidence of price increases by corporations in response to the pandemic. Several factors can lead to increases in profits, such as economies of scale, improved productivity, or lower costs.