Windfall taxes are pure economic populism



The German government has just been the latest to curry favor with angry voters by promising a windfall tax on energy companies. One way or another, these levies aim to capture “surplus” profits and redistribute them to needy consumers suffering from soaring electricity and heating costs.

Several countries, from the UK to Italy and Greece, have already done something similar. Others, including the European Union, are aligning their own proposals.

Whatever the specific form, the mere notion of windfall or excess profit levies is cynical populism, and therefore bad policy. Proponents offer them as a deceptively simple solution to important but complex issues, thus playing on the emotions rather than the intellect of voters.

Here is their populist tale: There is an energy shock, caused by an aloof and evil dictator who is cutting off the flow of gas to Europe and driving up prices. The greedy and selfish corporations of the West are taking advantage of this emergency by making heaps of money even as ordinary people are suffering. It is unfair. Confiscate these unearned gains.

Like any effective demagogy, the scenario is not totally wrong, just grotesquely oversimplified. Yes, British companies exploring for oil and gas in the North Sea are making unexpected bundles as prices for their production soar. The same is true for German suppliers of cheap electricity, as prices in this market are set by the suppliers with the highest marginal cost – currently, those who use natural gas to generate electricity. At the same time, many households are obviously suffering from higher utility bills.

Good economic exegesis, however, is more complex and would put off most of the intended audience. It starts with a reminder that all of these companies now picking up deals are already paying taxes — corporate, income and otherwise.

If they can take advantage of the unusual market situation, it is because they have invested in equipment, technology and know-how in the past to be ready. When they made these decisions, they knew that “lucky” scenarios might never come to fruition. But they took this risk in the hope of a reward – and on the assumption that governments would not seize that reward arbitrarily.

Trying to assign moral grades to such investments leads nowhere. Oil and gas companies were already hated before the crisis for keeping us hooked on diabolical fossil fuels. They stayed anyway. Was it commendable or deplorable?

German solar and wind power producers, on the other hand, have placed their now lucky bets while donning environmental halos. Now their electricity is suddenly the type with the lowest marginal cost, and under current market rules they can pick up the difference between their cost and that incurred by gas rivals. The same Greens who showered them with subsidies suddenly want to cap their gains.

Recall, for a moment, a few other recent cases in which populists demanded windfall taxes. At the start of the coronavirus pandemic, there was a shortage of face masks. Companies that quickly increased production quickly made money. “Speculators” or saviors?

What about Covid vaccine makers? Some have literally spent decades unpaid researching the science around mRNA. They didn’t do it for the money – the ascetic founders of BioNTech SE struggled for years just to find outside funding for their labs. They dreamed instead of curing cancer and other diseases. Then one day a new pathogen appeared and they were ready. Profiteers or heroes?

There are of course specific cases where profits are objectively excessive, immoral or even illegal. These include the so-called economic rents accruing to cartel members, for example. But that’s what antitrust law is for, with rules established in advance and enforced impartially.

The rest of the time, taking risks in the hope of rewards is legitimate: it’s called investing. But investment will dry up if we threaten to arbitrarily confiscate rewards ex post – whenever we feel like it, perhaps by holding impromptu plebiscites to determine whether a given profit is fair or unfair, and how we should invest it. impose.

Psychologically and politically, the recurring attempts by some politicians to declare comebacks deserved or undeserved, good or bad, have two origins. One is ideological, that is to say socialist. This view of the world is based on the desire and the thirst for the power to judge the results of the market. The other is populist. It is the unscrupulous desire to give the crowds – the vox populi – everything they want. Responsible leaders will not stoop to such lows.

More from this writer and others on Bloomberg Opinion:

• Should your buses, trams and trains be free? : Andreas Kluth

Where have all the superyachts of the oligarchs gone? : Lionel Laurent

Pensions are not the answer to your retirement anxiety: Allison Schrager

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andreas Kluth is a Bloomberg Opinion columnist covering European politics. A former editor of Handelsblatt Global and a writer for The Economist, he is the author of “Hannibal and Me”.

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