Windfall tax
A windfall tax is a higher tax rate on profits that ensue from a sudden windfall gain to a particular company or industry.
There have been windfall taxes in various countries across the world, including Australia, Italy, and Mongolia. During the 2021–2023 global energy crisis, policy specialists at the International Monetary Fund recommended that governments institute permanent windfall profits taxes targeted at economic rents in the energy sector, excluding renewable energy to prevent hindering its further development.
Discussion
Support
Thomas Baunsgaard and Nate Verson of the IMF recommend implementing permanent windfall profit taxes on fossil fuel extraction but not temporary taxes or taxes on renewable energy. The taxes should always target a clear measure of excess profits and not be tied to price levels or revenue. They also recommend ensuring that markets can add new capacity quickly if-needed to avoid a spike in prices. Another 2022 IMF paper argues these taxes are a tool for efficiently taxing economic rents, which are often a result of monopolistic power or unexpected events like pandemics, war, or natural disasters, and contribute to windfall profits. Such profits have raised public and policy concerns about price gouging, where firms are perceived to be profiting excessively from unforeseen circumstances.Eric Levitz argues that these taxes are worth pursuing as it would incentivize producers to invest in lowering prices during times of supply shocks by expanding production instead of giving out dividends to shareholders.
In 2022, Joseph Stiglitz argued for windfall profit taxes for oil and gas in Australia to disincentivize raising prices.
In 2022, an informal survey of 33 American and European economists at the IGM forum found majority support for taxing windfall profits.
In 2023, a group co-directed by Thomas Piketty suggested taxing windfalls from excess profits.
As of 2023, Isabella Weber has also been advocating for windfall profit taxes.
Criticism
A 2008 Wall Street Journal editorial argued that income taxes incentivize companies to make more profits which results in more tax revenue. A 2022 Reason article argued against windfall taxes.Australia
has a windfall profits tax on energy sources like coal.Polling by the Australia Institute as well as Oxfam showed more than two-thirds of Australians supported windfall profit taxes.
European Union
For fiscal years 2022 and 2023, The EU asked energy companies to return 33% of taxable surplus profits to governments to help fund energy affordability and address shortages.On solar power
Rapid drop of photovoltaic equipment in the period 2011 to 2013 has created windfall profits conditions due to lagging response of regulators by adjustment of feed-in tariffs. Regulators in Spain, Greece, Bulgaria and Romania have introduced retroactive incentive reductions. In the Czech Republic a windfall tax has been introduced on solar electricity and further clampdown of solar power companies was considered in 2014.Greece
In November 2022, Greece responded to soaring energy prices by imposing a 90% excess profits tax on energy companies. The Greek energy minister justified this decision by stating, "Our primary concern is to maintain affordable prices on consumer bills until the end of this major, pan-European energy crisis." The tax revenues were used to subsidize energy prices.Netherlands
In November 2022, the Dutch government introduced a temporary windfall tax as a strategic response to mitigate the impact of surging energy prices. This 33% tax targets companies operating within the oil, natural gas, coal, and petroleum refining industries. The tax applies to profits that exceed the average profit margins of these sectors by more than 20% during the reference period from 2018 to 2021, as specified by the ministry. This measure is intended to buffer the financial shock experienced by consumers and stabilize market fluctuations in the energy sector.Scandinavia
Finland announced its intention to tax windfall profits at large nuclear and hydro plants built before 1997 by 2010 or 2011. As non-CO2 emitting electricity generators, these plants have all seen their profits increase because of the European Union Emissions Trading System.As of 2009, in Sweden, hydroelectricity is subject to a property tax and nuclear power plants to a capacity-based tax. While neither are windfall taxes, they were raised in 2008 due to higher windfall profits. In 2009, Norway, where hydro-electric power plants supply 99% of the country's electricity, similarly imposed a ground rent tax on hydro-electric power plants to reduce their profits by 30%.