Excess profit tax: Here’s what you need to know about the idea

What is the excess tax? The name says it all: with a Excess profit tax State profits must be deducted from companies that exceed a certain value. There is no fixed limit when winning is ‘extra profit’. In the USA, the term residual profit has been used as a standard since 1955. Simply put, residual profit describes the profit that a company has to make in order to cover its costs and repay its investors. For listed companies, this is done through dividends that are paid each year. Any win more than this is technically considered an excess win.

Doesn’t every well-functioning company generate excess profits?

That’s right, excess profits are the goal of every company. That is why General Electric introduced the term in 1955 to explain the profit at which its managers must receive bonuses—that is, when they generate excess profits. First of all, excess profits are not a bad thing. Profits in excess of one year, for example, can be used as reserves to offset losses in bad years. Some companies also use it to aggressively expand their business. Amazon is a good example of this. The American shipping giant has not generated any excess profits for years because all profits were immediately put into expansion.

Excess Profit Tax: What Excess Profit Should Be Taxed Now?

Neither Germany nor the European Union, where excess dividend taxes are discussed this year, want to get rid of any excess earnings. Politicians are particularly interested in the additional profits that energy companies, such as electricity giants, energy suppliers and oil and gas companies, are making this year because energy prices have risen sharply. Excess profits from other sectors remain unchanged. There is a moral argument behind it: Citizens and politicians say that these companies will benefit from the war in Ukraine, in other words, they are profiting from the war – so the excess profits are considered unethical in this case.

How high is excess profits in the energy sector?

Analysts estimate that the 18 companies included in the Eurostoxx 600 energy sub-index plus German energy suppliers RWE and E.ON will generate nearly €34 billion in net profit after tax this year compared to the previous year. The lion’s share of 25.3 billion euros is represented by the two giants Shell (Netherlands / Great Britain) and Total (France). Regardless of the outliers in both directions, the gain for each group increases by an average of 64 percent.

How much can Germany withdraw excess profits tax from this?

No idea. There is still no suggestion as to what exactly will be classified as excess profit in Germany and what tax rate it will be subject to. Potential income cannot be calculated in this way.

Are there already excessive taxes on profits in other countries?

The idea of ​​an excess profit tax did not first appear during the Ukraine war. The first fees of this kind – known as the “sudden profits tax” or “excess profits tax” – were first introduced in 1863 in the US state of Georgia. During the American Civil War, it was awarded to corporations in the Confederate state that had profited from the war. In 1917, both the United States and Britain imposed such taxes nationwide to absorb war profits from World War I. Tax rates were as high as 80 percent on all additional profits compared to the pre-war years. The United States reintroduced a corresponding tax during World War II, which applied at various rates from 1940 to 1945. An attempt to charge oil companies with an excess profit tax failed during the 1991 Gulf War.

Traditionally used in times of war, as there were excessive taxes on profits in times of peace. In 1981, Great Britain demanded a one-time tax on banks in this form, and in 1980 the United States withdrew excess profits from oil companies after a sharp rise in prices. Australia imposed various taxes on excess profits in 1997 and 1998, but the Supreme Court ruled that it was unconstitutional. 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 a tax on excess profits – “called an exceptional solidarity tax”. It applies to additional profits between October last year and April this year, with an allowance of five million euros. Italy compares sales of oil companies at gas stations. If these increase by at least ten percent, the profit is considered excess profit, and 25 percent of it must be paid.

Great Britain also reintroduced the excess profits tax. What is “extra profit” is not calculated there. Oil companies are required to pay a flat rate of 25 percent on their profits by the end of the year. However, they get a discount when they develop new oil and gas deposits.

What is he talking about the excess profits tax in the current situation?

The arguments in favor of the excess profits tax are initially on an ethical level. Proponents argue that energy companies currently have high returns based on happy conditions for them – specifically the war’s soaring prices for commodities such as oil and natural gas. In turn, many citizens will bear the costs of this war. Fortunately, in Germany we talk only about the financial consequences, in Ukraine about life and parties. Therefore, accepting these profits is considered unethical. “Energy companies are making a fortune because they are shamelessly taking advantage of the current situation,” says Bremen Prime Minister Andreas Buffenshult.

What speaks against excess profits tax in the current situation?

Opponents of the tax made two main arguments. First, the tax system must be predictable for all participants. Companies plan their business on the basis of applicable tax laws. So surprising them afterwards with a new tax is unfair and will only increase the uncertainty of long-term planning. “It is better to say in advance what taxes are due and under what circumstances than to add an extra surprise to the tax system afterwards,” Stuart Adam, an economist at the Institute of Fiscal Studies in London, told DW.

The second counterargument: justice. While energy companies are now supposed to pay to exploit the state of the global crisis, the tech industry, for example, which received a massive boost in profits from the Corona pandemic, has survived. Mail-order companies such as Amazon (+188% profit in two years) or Germany’s Zalando (+136%) and HelloFresh (going black for the first time due to the pandemic) have ruthlessly exploited the fact that brick-and-mortar retail was frequently closed through… closures.

Other sectors that are currently benefiting from higher oil and gas prices should also remain unaffected. This affects, for example, fertilizer manufacturers as well as suppliers of solar energy systems and wind turbines. Steel manufacturers are also expecting significantly higher profits this year due to the war.

How likely is excess profit tax in Germany?

The Traffic Light Coalition is divided on the issue of the new tax. Federal Finance Minister Christian Lindern (FDP) is against, Federal Minister for Economics Robert Habeck (Greens), and Federal Labor Minister Hubertus Hill (SPD) are somewhere in the middle. However, all parties, including CDU/CSU, have both votes in favor and against. It remains to be seen whether and in what form such a tax will be imposed in Germany. However, the federal states of Bremen, Berlin and Thuringia submitted an application to the Bundesrat last Friday. It is now being discussed in specialized committees.

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