Who Wins When Corporations Profit?
Who were the major beneficiaries of recent monetary policies? Data reveals that high inflation coincided with soaring corporate profit margins, while rising interest rates exacerbated the inequality gap, favoring the wealthy and burdening low-income earners. Amidst widespread strikes by public and private unions, a deepening housing affordability crisis, and surging food bank demand, it becomes increasingly evident that monetary policies have bolstered corporate interests at the expense of middle and low-class earners.
Middle and low-class individuals are increasingly unable to generate passive or investment income as stagnant wage growth fails to keep pace with the rising cost of necessities. This erosion of purchasing power has not only undermined their ability to save or invest but also left many struggling to meet basic financial obligations.
The Role of the Bank of Canada in Stabilizing the Economy
The Bank of Canada (BOC) has focused on stabilizing the economy by controlling the “money tap,” i.e., regulating the money supply to combat inflation. While this strategy helps reduce inflationary pressures, it also brings significant consequences, particularly for low-income individuals and the middle class.
Inflation and Rising Interest Rates:
- Higher interest rates are a primary tool for controlling inflation, but their impact is disproportionately felt by tenants, variable-rate mortgage holders, and first-time homebuyers. The middle class, already strained by stagnant wage growth, faces heightened pressure as borrowing costs rise.
- High interest rates have a dual effect: they hurt borrowers (e.g., tenants, first-time homebuyers, and individuals with variable-rate mortgages) while benefiting wealthier individuals who hold significant assets in interest-sensitive investments (e.g., bonds, fixed-income securities, and savings accounts with higher yields). Returns on these investments increase, further enriching individuals in higher income brackets.
- According to the Centre for Future Work, the surge in inflation during 2022 and 2023 was accompanied by record-high corporate profit margins, further exacerbating economic inequality.
Corporate Profits and Inequality
Profits During Inflationary Periods:
- In 2022 and 2023, financial corporations saw profits rise by over 50%, and non-financial corporations reported more than a 55% surge compared to pre-pandemic levels in 2019. This indicates robust corporate performance even as inflation burdened individuals with soaring food and shelter costs. (Source)
- The significant increase in corporate profit margins during this inflationary period, compared to net income prior to the pandemic, suggests that a substantial portion of inflation can be attributed to pricing policies and profit margin expansion. This shift indicates that external cost pressures, such as supply chain issues, played a less dominant role than often assumed.
- Importantly, many corporations amplified inflation through aggressive pricing policies, raising prices beyond what was necessary to cover rising input costs. This profit-driven inflation worsened the financial burden on consumers, particularly in essential sectors like food, energy, and housing. With limited competition, large corporations used their market power to widen profit margins, fueling inflationary pressures further.
- Rising inflation disproportionately impacted lower-income groups, as they struggled to meet basic needs amidst escalating prices, while corporations thrived financially.
Profit Redistribution vs. Productive Investment:
- Instead of reinvesting profits into productive ventures or wage increases, many corporations have channeled profits toward share buybacks and dividend payments. This strategy inflates shareholder returns but does little to address long-term economic growth, wage stagnation, or affordability crises.
Wage Growth vs. Price Surge:
- Wage increases over recent years have not kept pace with the rising costs of goods and services, further widening the income disparity. The inability of wage growth to offset inflation has left middle and low-income individuals in an increasingly precarious financial position. For example, an analysis of individual income growth versus housing price growth in Ontario highlights the stark affordability gap, where housing prices have surged far beyond what income levels can sustain. (See detailed analysis: Breaking Down the Affordability Gap in GTA with Individual Income Data).
The Wealth Gap and Middle-Class Struggles
- Middle-Class Struggles: Saving rates among middle-income earners have declined, and their ability to invest in long-term assets (e.g., real estate or equities) has weakened. Rising housing costs, combined with stagnant wages, have eroded the purchasing power of the middle class, leaving them unable to build wealth or keep up with inflation.
- Higher-Income Groups: In contrast, higher-income groups have significantly expanded their financial portfolios, leveraging corporate profits and capital market returns. This has widened the wealth gap, as the wealthy gain the benefits of rising asset values and corporate tax policies.
- Corporate Behavior and Wealth Redistribution: According to a report by Canadians for Tax Fairness, Canadian corporations have prioritized profit redistribution (e.g., dividends, buybacks) over reinvestment in productive activities. This approach has stifled wage growth and failed to contribute meaningfully to future economic expansion. (See also What do Canadian corporations do with their profits?).
Government Incentives and Fiscal Policy
The debate over whether the government should increase corporate tax rates or reform the tax system to incentivize corporate investment has reached a critical point. Opinions diverge on the most effective path forward.
- According to a report by the C.D. Howe Institute, increasing the inclusion rate and marginal tax on corporations will disincentivize investment and productivity. Instead, introducing value-added taxes (VATs) could significantly improve investment growth and enhance productivity.
- On the other hand, a report by Canadians for Tax Fairness challenges this notion. It suggests there is no evidence that increasing the capital gains inclusion rate (a measure targeting the share of capital gains subject to taxation) would reduce worker productivity. Instead, they point out a misalignment: while corporate profits and capital gains have soared, the marginal tax rate on corporations has not proportionally adjusted to reflect this growth.
Corporate Power and Social Welfare
Governments face a critical challenge in balancing corporate interests with consumer and social welfare. Tax policies, for instance, have become a key battleground. For example, political slogans like Pierre Poilievre’s “Axe the Tax” campaign against carbon taxes highlight a broader dynamic between corporate interests and political ideologies. While carbon tax policies are designed to address climate change and promote long-term societal benefits, such opposition reflects the complex interplay of corporate lobbying, political alignment, and decision-making regarding reinvestment and wealth distribution.
This dynamic raises crucial questions: Does the corporate perspective on government and the political environment affect their willingness to reinvest and strengthen the economy? Are these corporations leveraging their power to pressure certain agendas into the political space?
This debate underscores the influence of corporate power on public policy and raises critical questions about how corporate political engagement impacts national wealth and GDP per capita.
Government vs. Corporate Influence: Empowering Consumers in the Fight for Economic Balance
The adage, “Those with the gold make the rules,” appropriately captures the significant influence corporations wield in shaping political agendas and government policies. Through financial power and concentrated lobbying efforts, corporations have strong sway over tax policies, regulatory frameworks, and public narratives. They often lobby against higher taxes or regulations that could diminish profits, influence trade protections and environmental standards, and use strategic media campaigns to frame public opinion in their favor.
However, consumers, when united, have the potential to act as a collective force to counterbalance this influence. Grassroots movements and consumer advocacy groups have successfully demanded fair pricing and corporate accountability. For example, Canadians for Tax Fairness advocate for a fair tax system, while Food Secure Canada tackles food affordability issues. In the U.S., the Fight for $15 movement has pushed for a $15 minimum wage and better union rights.
By leveraging public awareness campaigns, these groups can educate individuals on corporate practices like tax avoidance or resistance to environmental regulations, fostering greater transparency and equity. Governments, meanwhile, play a pivotal role in mediating this balance. Transparency in campaign financing and lobbying activities can mitigate the undue pressure corporations place on policy decisions. Equitable tax policies, such as levies on excess profits or tax incentives, can prioritize societal welfare over corporate gains. Furthermore, governments can strengthen consumer empowerment by supporting consumer rights organizations and enforcing regulations designed to protect workers and consumers’ interests.
