By Jack Mintz, November 1, 2022
Windfall taxes are all the rage this year. With a winter of distress soon coming to Europe, 14 EU countries have implemented these-one-time taxes on their favourite whipping targets — fossil fuel producers, utilities and banks — to help pay for consumer energy subsidies. As Chancellor of the Exchequer last June, new U.K. Prime Minister Rishi Sunak implemented a windfall tax on oil and gas companies. Liz Truss, his predecessor as PM, was going to scrap it because it would discourage investment. But you can bet your last British pound that won’t happen now.
So why tax windfall profits? The usual argument is that windfall gains are due to luck, not effort, so taxing them away won’t discourage economic activity: easy come, easy go. But is that really the case? When the economy is going through a major disruption — such as energy and food shortages — unexpected profits may encourage companies to invest until the shortages that caused the windfall profits in the first place have been eliminated. In other words, transitory windfall gains may be necessary for capitalism to work best.