NDP Leader Jagmeet Singh says Canada needs an excess profits tax to help reduce inflation. His argument seems to be that if you let grocery chains and others know they won’t profit from raising prices unfairly, they won’t raise prices unfairly. I don’t know. It doesn’t sound like typical corporate-robber-baron behaviour to me. Why won’t they start raising prices on the grounds their taxes are higher?

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William Watson: An excess profits tax? OK, Mr. Singh, but how about an excess wages tax, too? Back to video

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And why did they only start price-gouging in 2021, which is when inflation broke out? If they’ve had robber-baron power all along, why did they wait until then to exercise it? You don’t suppose crazy-high COVID deficits and interest rates held too low too long have more to do with inflation than “cost-push factors” like companies and unions getting into food fights over compensation. (“Cost-push factors”: I can’t believe we’re back to the terminology of the 1970s.)

Actually, I might not mind an excess profits tax if we also had an excess wages tax. It’s not a price-price spiral, after all, it’s a wage-price spiral.

If you think about it, just about everybody makes excess wages. Very few of us earn the bare minimum we need to keep us on the job, working as hard as we do. We all make a little more than we need. A surplus. Some gravy. (Note to editor: Except me, boss. My fingers are typed to the bone.)

That surplus, that part of our wage that is more than we actually need to get us to do the job, is an ideal target for taxation. Economists’ conception of the perfect tax is one that doesn’t change people’s behaviour. If the Canada Revenue Agency could lop off that sliver of income that is more than we need to do the job — which for some people, star athletes, for instance, is probably a lot more than a sliver — people would grumble but since it literally wasn’t needed to get them to do the job, they’d keep doing the job.

Same thing for profits. If the CRA could figure out which part of profits people didn’t need in order to get them to undertake the investment or entrepreneurship or risk-taking that was generating those profits, that would be a perfect tax, too: Take away that surplus sliver of profits, however thick it is, and there won’t be any change in investment, risk-taking, entrepreneurship or all the other things that make production possible.

There are at least two problems with all this, of course.

One: is it fair? Sure, you and your employer may have agreed on compensation that is more than you need to get you to supply your services. But your employer is OK with it. You’re obviously OK with it. You shook hands on it. So what exactly is the problem?

Same for “excess” profits. Unlike wages, profits are a residual. You go into business. You purchase all your inputs. You produce your good or service. You see what it fetches in the marketplace. And what’s left over — if anything’s left over! — is your profit. Sometimes it will be disappointingly low — so low in fact that you start thinking maybe this business really isn’t for you, after all. And sometimes, if you’re lucky, it will be higher than you’d hoped for and higher than what’s necessary to convince you this is the business you should be in.

If, in the good years, the government comes in and taxes your profits back down to the level that’s just necessary to keep you going, you do (by definition) keep going. So such a tax doesn’t actually change your behaviour, which makes it, in economists’ terms, a very efficient tax. (OK, maybe you change your behaviour a little bit by joining whatever opposition party says it will do away with the tax.)

But is it fair? Your profits (like the agreed wages in the previous example) may be “excess” in the sense defined. But they’re honestly come by. What’s the problem — except maybe other people’s envy of your success?

Apart from unfairness, the second big problem with an excess profits tax is: who’s to say what’s excess? In the case of wages, we all have our own view of what’s necessary to keep us doing what we’re doing — and of course no incentive at all to share that information with our employers or the CRA.

Same thing for businesses. Who is smart enough to know, all across the economy, what rate of profit is necessary to keep people invested in what they’re doing? Yes, some businesses in some industries will have years in which their rates of return are well above average. Who’s to say they didn’t get into the business knowing profits would be variable but believing the good years would offset the bad? The government imposing extra taxes in the good years destroys that business model. Unless it also provides tax relief in the bad years. Is that part of the NDP plan? I’m guessing not.

You can see the Invest in Canada billboards now: Come invest in Canada and hope for average profit rates plus half a standard deviation and not a loonie more!

If businesses or unions are “gouging,” competitors will punish them. Not blocking competitors — including not gatekeeping them — is certainly a job for government. They should give it a try.