Windfall profits are profits that do not stem from direct and planned actions of a firm but from unanticipated external changes in the market conditions, changes that could not have been foreseen at the time when the initial investment decision had been taken.

A windfall profits tax (excess profit tax) is an one-time surtax levied on a company or industry when economic conditions result in the above mentioned large and unexpected profits. 

The discussion around the effectiveness and distributional consequences of excess profit taxes or windfall taxes in the light of the 2022 energy global crisis has been opened again. There are political, legal and economic dimensions of this issue that can be raised and that have to be exhaustly discussed before we come up with a conclusion.

One reason governments propose a windfall profits tax is to generate additional revenue. In some cases, a windfall profit tax is levied to encourage companies to reduce prices for the benefit of the consumer (but may actually cause companies to reduce investment). It is a fair way to redistribute wealth and prevent excessive profits from being made by a few individuals or companies.

Historically, such taxes have targeted oil and energy companies when costs have risen, especially from war or other crises. These taxes are designed to temporarily regulate the market they target during periods of unusual volatility.

On the other hand, by windfall profit tax , States could be accused of imposing a double taxation since the respective tax base of both windfall taxes is already part of the tax base of the corporate income tax. In view of global capital mobility, that would be proves risky and to result in allocation of these investments.

Concluding, there are several reasons why a windfall tax is seen as a fair way to redistribute wealth. First, it is based on the idea that those who have made extraordinary profits should contribute more to society than those who have not. Second, it ensures that the benefits of sudden profits are shared more equally, rather than being captured by a select few (shareholders/investors). Third, it can be seen as a way of making up for any economic or social costs that may have been caused by the sudden profits. However, in order to address with the opposite “voices” it is proposed windfall taxes to be structured in a way that provides incentives for companies to continue investing in innovation and growth. 

By Theo Makris