The European Union’s idea of ​​taxing the “excessive” profits of energy companies is not all that new. Great Britain, Italy, Romania and Spain have already proposed or introduced similar measures. In this way, the rising electricity and heating costs, which are bringing European households to the abyss, are to be compensated.

The arguments for such a one-off tax are superficially convincing. Oil, gas and energy companies are among the biggest beneficiaries of the war in Ukraine, which has brought them windfall profits. It wasn’t achieved because of a smart investment decision, increased efficiency or innovation, it was just pure luck. So it is obvious that this windfall will be redistributed among needy citizens.

However, this overlooks the fact that the energy companies concerned are already paying their share of the government taxes and thus paying into the state coffers. Ideally, higher profits mean higher corporate taxes and thus higher revenues for the state.

Retrospectively introducing arbitrary corporate taxation is unfair. After all, they made their investment decisions based on the existing tax system. In addition, the tax burden in countries such as Germany and France is already very high in a global comparison.

Excess profit taxes would no doubt be a boon to government coffers already drained by stimulus packages to help families and businesses weather the unique energy crisis. But these taxes are downright indecent for governments that pride themselves on their just and fair tax systems. In addition, such a measure would increase companies’ uncertainty about future taxes and is likely to have an impact on their investment decisions.

Excess taxes are simply political opportunism in the current context. They appear to be a quick fix to growing public discontent anticipating a harsh winter while energy companies make tons of money.

Polls show that a large majority of people want their governments to grab the profits of the energy companies and then redistribute them. And when those oil and gas companies are already being pilloried for using fossil fuels, it’s all the easier to introduce an arbitrary, unpredictable tax.

But it’s hard to understand why governments have looked the other way when companies like Apple and Amazon or even BioNTech/Pfizer and other healthcare companies have benefited from the COVID-19 pandemic. Much like today’s energy companies, these companies were fortunate during a crisis when the state had to bear heavy costs to support the vulnerable.

Proponents of an excess profits tax argue that a Russian invasion of Ukraine, or even a pandemic, could not have been foreseen far in advance. Still, the EU and others should not give in to demands to cash in on profits from legally run companies, not least retrospectively.

On the other hand, they need to ensure that they set up a reliable system to handle unexpected gains when the next unforeseen crisis hits. For all we know, given the rapidly changing climate and growing geopolitical unrest, that could be lurking around the corner.

If the excess profit tax now being considered is really about a fair distribution of profits in extraordinary times, then the EU must ensure that it is not a one-off tax.

Author: Ashutosh Pandey

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Originally from Deutsche Welle