An excess profit tax is intended to collect the high profits made by energy companies as a result of the Ukraine war. The idea sounds simple, but it is neither new nor easy to implement. FOCUS Online explains what’s behind the tax.
What is an Excess Tax? The name says it all: With an excess profit tax, the state is supposed to siphon off profits from corporations that are above a certain value. There is no fixed limit as to when a win is an “excess win”. In the USA, the term residual profit has been used as a benchmark since 1955. Put simply, the residual profit describes the profit that a company has to generate in order to cover its costs and pay off its investors. For listed companies, this is done through the dividend that is paid out each year. Any win in excess of this is technically considered an over win.
That’s right, excess profits are the goal of every company. That’s why General Electric introduced the term in 1955 to explain the profit at which its managers should receive bonuses – namely when they made excess profits. First of all, excess profits are not a bad thing. Excess profits from one year can, for example, be used as reserves to compensate for losses in bad years. Some companies also use them to aggressively expand their business. Amazon is a good example of this. The US shipping giant didn’t make any excess profits for years because all profits were immediately put into expansion.
Neither Germany nor the EU, where excess profit taxes are being discussed this year, want to skim off any excess profits. The politicians are specifically concerned with the additional profits that energy companies, i.e. electricity giants, energy suppliers and oil and gas companies, are generating this year because energy prices have risen so sharply. Excess profits from other sectors remain untouched. There is a moral argument behind this: Citizens and politicians say that these corporations would profit from the war in Ukraine, so to put it casually, they are war profiteers – the excess profits are therefore considered immoral in this case.
Analysts estimate that the 18 companies listed in the energy sub-index of the Eurostoxx 600 plus the two German energy suppliers RWE and E.ON will bring in almost 34 billion euros more net profit after taxes this year than in the previous year. The lion’s share of 25.3 billion euros is accounted for by the two giants Shell (Netherlands / Great Britain) and Total (France). Irrespective of outliers in both directions, the profit per company increases by an average of 64 percent.
No idea. So far there is no suggestion as to what exactly would be classified as excess profit in Germany and at what tax rate it would be subject. Possible income cannot be calculated in this way.
The idea of an excess profit tax did not first come up during the Ukraine war. The first levies of this type – known as the “windfall tax” or “excess profits tax” – were first introduced in 1863 in the US state of Georgia. During the American Civil War, it was given to companies in the Confederate state that profited from the war. In 1917, both the United States and Great Britain introduced such taxes nationwide to siphon off war profits from the First World War. Tax rates were up to 80 percent on all additional profits compared to the pre-war years. The USA reintroduced a corresponding tax during the Second World War, which applied in different rates from 1940 to 1945. An attempt to burden oil companies with an excess profit tax during the 1991 Gulf War failed.
Traditionally used in times of war, there were also excess profits taxes in times of peace. In 1981, Great Britain demanded a one-off levy on banks in this form, and in 1980 the USA siphoned off excess profits from oil companies after a sharp rise in prices. Australia introduced various excess profit taxes in 1997 and 1998, but the Supreme Court ruled that they were unconstitutional. Most recently, Mongolia imposed an excess profit tax on the profits of mining companies in the country from 2006 to 2009.
This year, for example, Italy introduced an excess profits tax – “called an extraordinary solidarity levy”. It applies to additional profits between October last year and April this year, with an allowance of five million euros. Italy compares the sales of oil companies at gas stations. If these increase by at least ten percent, the profit is considered excess profit, of which 25 percent must be paid.
Great Britain has also reintroduced an excess profits tax. What an “excess gain” is is not even calculated there. Oil companies have to pay a flat rate of 25 percent more on their profits by the end of the year. However, they get a discount when they develop new oil and gas deposits.
The arguments in favor of an excess profit tax are initially on a moral level. Proponents argue that energy companies currently have high revenues that are based on fortunate circumstances for them – precisely the high rise in prices for commodities such as oil and natural gas caused by the war. Conversely, many citizens would bear the costs of this war. Fortunately, in Germany we only talk about the financial consequences, in the Ukraine about life and limb. Accepting such profits is therefore immoral. “Energy companies earn a fortune because they shamelessly exploit the current situation,” says Bremen’s Prime Minister Andreas Bovenschulte.
Opponents of the levy mainly put forward two arguments. First, a tax system must be predictable for all participants. Corporations planned their business on the basis of the applicable tax laws. Surprising them afterwards with a new tax is therefore unfair and will only increase planning uncertainty in the long term. “It’s better to say in advance what taxes will be due and under what circumstances than to add an extra surprise to the tax system afterwards,” Stuart Adam, an economist at the Institute for Fiscal Studies in London, told DW.
The second counter-argument: justice. While energy companies are now supposed to pay for exploiting a global crisis situation, the tech industry, for example, which received a huge boost in profits from the corona pandemic, was spared. Mail order companies such as Amazon (188 percent profit in two years) or in Germany Zalando (136 percent) and HelloFresh (went into the black for the first time due to the pandemic) mercilessly exploited the fact that brick-and-mortar retail was repeatedly shut down by lockdowns.
Other sectors that are currently benefiting from the high oil and gas prices should also remain unaffected. This affects, for example, fertilizer manufacturers and also the suppliers of solar systems and wind turbines. Steel manufacturers are also expecting significantly higher profits this year due to the war.
The traffic light coalition is divided on the question of the new tax. Federal Minister of Finance Christian Lindern (FDP) is against it, Federal Minister of Economics Robert Habeck (Greens) for it, Federal Minister of Labor Hubertus Heil (SPD) is somewhere in the middle. However, all parties, including the CDU/CSU, have both pro and contra votes. It remains to be seen whether and in what form such a tax will be introduced in Germany. However, the federal states of Bremen, Berlin and Thuringia submitted an application to the Bundesrat last Friday. It is now to be discussed in specialist committees.
Follow the author on Facebook
Follow the author on Twitter