Our economy might still be cratering, but left‐wing luminaries are still dreaming up new ways to raise taxes. The latest idea from French economist Gabriel Zucman, a poster‐boy of “progressive” economics, is for a “windfall tax” on businesses enjoying “abnormal” COVID-19 profits.
Such “excess profits” taxes in crises were used in the United States during WWI, WW2 and the Korean War, sometimes rising to 80 percent on profits above a level deemed acceptable. Now, the rationale for war‐like emergency taxation is gaining momentum here. YouGov polling suggests the British public supports such a tax — by 53 percent to 13 percent. A Conservative minister told the Financial Times he expects “a windfall tax on the supermarkets and online retailers.”
The theoretical argument for an excess profits tax is simple. A pandemic, it is thought, is a one‐off, extraordinary event. It indiscriminately destroys or shutters sound and vulnerable businesses. Governments offered widespread bailouts for struggling firms because the virus was no company’s fault. But the flip side of the hard luck of restaurants, cinemas, and concert venues has been the “good luck” of supermarkets, streaming services, and online delivery companies.
These firms are supposedly profiting handsomely from enforced lifestyle changes and lockdowns closing rivals. Just as governments supported firms suffering the gut punch of the pandemic, they should therefore tax the “excess profits” from those gaining from it. Provided policymakers credibly argue this is a one‐off, this should not affect future business decisions. It’s an efficient revenue source to help repair the public finances.
Unsurprisingly, all this is a case of theory over reality. First, it’s not clear which companies are making a mint today. “The call for windfall taxes confuses me, because it’s so hard to find any businesses making windfall profits,” Clifford Chance partner and tax expert Dan Neidle told me. “Even the large internet retailers and supermarkets have been suffering. So I’ve no idea why we’re discussing this!”
Though demand shifted to online firms and from dine‐in restaurants to supermarkets, these businesses were not prepared for ballooning sales on unchanged unit costs. Amazon is hiring additional workers, raising wages to encourage people into risky employment, expending warehouse facilities, and spending vast amounts on personal protective equipment and testing capacity. As a result, it is likely to make a Q2 loss.
Supermarkets are unlikely to enjoy a profits boon either. They face costs from enforcing social distancing and reduced capacity in stores, while a greater proportion of sales are coming through less profitable online orders. Back in April, Tesco CEO Dave Lewis explained that payroll, distribution and cleaning expenses had largely offset additional lockdown revenue. Disruptions have, of course, raised many wholesale prices too.
Faced with potential damage to companies’ reputation and warnings from the Competition and Markets Authority about “unfair” price rises in stores, Frontier Economics analysis shows UK shop prices have therefore remained remarkably stable, despite massive demand surges. This hardly screams firms reaping “unearned” rewards from short‐term monopoly power or good fortune.
No, if firms do find ways to enjoy large profits today, it’ll not be just because of an act of God, but due to adapting swiftly. It will be because they provided consumers with a safe purchasing environment and navigated well the thicket of supply‐chain problems, capacity constraints, and school closure‐induced disruption to their workforces.
Such innovation is valuable. High profit signals coming from it would be important to encourage capital to pore into firms delivering efficient ways to serve our wants and needs. Remember, the pandemic itself may well change tastes and demands semi‐permanently, in which case we want competitors to invest or enter markets with these novel business models.
Though advocates will claim such an additional tax would be “one‐off,” its very use signals that big changes in business practice from those of March 2020 are somehow abnormal or illegitimate. Given the pandemic or voluntary social distancing might roll on for years, why would companies then trust governments to refrain from expropriating their innovative gains again? The mere talk of an anticipated windfall tax now might be deterring supermarkets changing business models today.
Pandemics like this might have been low probability, but they were not unexpected. We want businesses to invest in “option ready supply” for future crises. Yet if there’s an expectation that “excess profit taxes” might come along again and punish companies for improving their resilience, don’t be surprised if they do less of it. Think how damaging that would be if applied to, say, PPE manufacturers!
Tony Blair’s government famously introduced a windfall tax in 1997 on privatised utilities. That was to serve the purpose of supposedly recouping losses from public asset firesales and too lax price regulation. But there is little argument today that supermarkets or online retailers are ripping off consumers or operating in uncompetitive markets (at least when they are defined properly).
Nor would a windfall tax do much to repair the public finances. Talk as if some firms struggling is the flip‐side of others’ massive profits is highly misleading. Most companies are dealing with rising costs and consumer spending is down massively. Companies who have miraculously managed to become highly profitable will already be paying more corporation tax. Excess profits taxes beyond that will make a tiny dent against the huge borrowing used to finance furloughed workers’ salaries and business rates holidays more broadly. If there’s a permanent hole in the public finances, broader tax rises will be needed.
Quite simply, there’s little evidence of “excess profits” among major companies and less still that anyone is making money right now out of good fortune alone. There is no case for a windfall tax.