As large parts of economies have shut down to help stop the spread of Covid-19, people and businesses are hurting. But a subset of businesses will see a spike in profits, including in Big Tech, e-commerce and logistics, and cleaning supplies, as well as vendors of scarce goods who engage in price gouging. No one should make windfall profits from a crisis causing so much suffering, particularly when many businesses are relying on public funds to stay afloat.

Leading economists in the United States are now calling for an excess profits tax of the type previously imposed during World War I and II in countries including Canada, the US and Britain. A wartime-style excess profits tax would help prevent profiteering amid Covid-19, discourage abuse of government support programs for business, clamp down on price gouging, and raise public revenues from large, profitable corporations that are booming during the crisis. As US President Wilson declared in 1918, “[t]he profiteering that cannot be got at the restraints of conscience and love of country can be got at by taxation.”

States around the world should move quickly to implement an excess profit tax now, particularly those making massive outlays of public funds to support businesses. As Berkeley economists Emmanuel Saez and Gabriel Zucman point out, without countervailing action the coronavirus crisis will only deepen pre-existing problems of extreme inequality and rising corporate power.

To understand how an excess profits tax works, it’s first important to bear in mind how the ordinary corporate income tax works. Corporate income tax is 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. 

Under an excess profits tax, companies making extraordinary profits during a war or crisis pay a steep corporate income tax rate—in some cases historically up to 100%—on profits above a set “normal” rate of return. This normal rate of return has been calculated in different ways across jurisdictions and time, but a typical approach might exempt profits using an average over recent years. 

A key purpose of an excess profits tax, as Franklin D. Roosevelt put it in 1940, is to ensure that “a few do not gain from the sacrifices of the many.” It also has the benefit of discouraging destructive price-gouging by limiting the opportunity to profit from this behaviour, and it could similarly help prevent abuse of government programs intended to support struggling businesses.

In the context of Canada and the UK’s massive wage subsidy programs for business, an additional but complementary policy would be a steep tax on any corporate profits booked by businesses receiving the subsidy. Wage subsidies are critical to help protect workers’ incomes and employment, but businesses should not be profiting from these public funds. As currently set out, large and profitable corporations facing temporary revenue declines may be able to do just that if careful conditions aren’t put in place.

In labour-intensive businesses, where payrolls are a very large portion of expenses, a wage subsidy of 75% or more of payroll costs could end up more than offsetting a drop in revenue of 15% or 30%, leaving the difference to be booked as profit. Another scenario could involve big banks becoming eligible for the subsidy because their revenues temporarily decline when they defer some mortgage payments, as they are currently doing in Canada (even though they’ll still receive these payments after a delay).

A steep tax on all corporate profits (not just above-normal profits) booked by companies receiving wage subsidies would help ensure the integrity and fairness of these programs. Other important amendments and conditions should be included to strengthen them, including strict limits on executive pay and bonuses, stock buybacks and dividend payouts. Such conditions are needed to ensure that profits aren’t simply shifted into executive pay to avoid corporate tax, and the tax itself could help encourage businesses to use excess funds to top up their workers’ pay beyond the amount covered by their government’s wage subsidy programme.

The Covid-19 crisis has highlighted how deeply dependent we are on each other. It was always clear that no corporation or individual accrues profits or wealth on their own, but only with the help of workers and the critical public investments that make our societies and economies tick. All of us who create this wealth should share in it, and corporate profits during a crisis are one good place to start by ensuring that “a few do not gain from the sacrifices of the many.”