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EU must shun populist impulse on windfall tax

Ashutosh Pandey
Ashutosh Pandey
September 15, 2022

The EU plans to grab a pie of the Ukraine war-fueled supernormal profits of the energy firms. The move might mollify the public reeling from record inflation, but it's an unfair and bad policy, says DW's Ashutosh Pandey.

Supporters of the Big Oil Windfall Profits Tax Act hold posters during a bicameral press conference at the US Capitol in Washington, DC
There are growing calls to tax the excess profits of energy companies amid soaring electricity and heating costsImage: Bonnie Cash/UPI/newscom/picture alliance

As soaring electricity and heating costs force European households to the brink, the EU is toying with a not-so-novel idea to pander to their anger and frustration — tax the "excessive" profits that energy firms have been making during the energy crisis. The bloc is following the footsteps of the United Kingdom, Italy, Romania and Spain, which have introduced or proposed similar measures.

The case for such a one-off tax is compelling. Oil & gas and power companies have been among the biggest beneficiaries of the war in Ukraine which has brought them a profit windfall. They have fortuitously struck gold not because of any clever investment decision they've taken or an increase in efficiency or innovation, but simply because of brute luck. So, it only makes sense that that pot of gold worth billions of euros is redistributed among hard-pressed citizens.

That argument, however, overlooks the fact that the energy companies in question have already been paying their share of taxes, taxes predetermined by the state, and thus contributing to government coffers. Higher profits ideally mean higher revenues for the state.

Adding an arbitrary tax, that too retrospectively, to the companies' tax burden — which in countries like Germany and France is already very high in global comparison — is akin to shifting the goalposts and is unfair to firms that have made investment decisions based on the existing tax system.

Undoubtedly, windfall taxes would be a boon for state coffers already drained with relief packages to help families and companies deal with the once-in-a-lifetime energy crisis. But these taxes are unbecoming of governments that take the utmost pride in justice and fairness embedded in their tax systems. Such a measure would fuel uncertainty among businesses about future taxes and likely hit investments.

DW editor Ashutosh Pandey
DW editor Ashutosh PandeyImage: DW

Political opportunism

Windfall taxes in the current context reek of political opportunism. They seem to be a quick fix to the growing discontent among the public staring into a winter of hardships even as energy firms make tons of money. Surveys show that a vast majority of people support their governments gunning for the energy firms' riches and redistributing them.

And when the targets in question are oil and gas firms, already vilified for their role in perpetuating fossil fuels, the task of implementing a random, unpredictable tax only becomes much simpler.

Otherwise, it's difficult to understand why governments looked the other way when firms like Apple and Amazon or even Pfizer and Germany's own BioNTech and other health care companies benefited from the COVID-19 pandemic. Much like the energy companies today, those firms lucked out during a crisis when the state had to bear large costs to support the vulnerable.

Need for a predictable tax system

There is an argument to be made in defense of those backing a windfall tax that one couldn't have foreseen Russia's invasion of Ukraine or even a pandemic to introduce a windfall tax or something similar well in advance.

But then hard luck. The EU and others should give up their urge to snap up profits of legally running firms, not least retrospectively, and ensure they set up a more predictable system to deal with windfall profits when the next unforeseen crisis strikes. And all we know with the rapidly changing climate and growing geopolitical strife, that could be just around the corner.

If the windfall tax that's being contemplated now is really about fair distribution of profits during extraordinary times, then the EU must ensure it's not a one-off.

Windfall tax in Italy hotly debated

Edited by: Hardy Graupner

Ashutosh Pandey
Ashutosh Pandey Business editor with a focus on international trade, financial markets and the energy sector.@ashutoshpande85