The calls for tax hikes is ramping up. Last December the Wealth Tax Commission recommended a ‘one-off’ 5 per cent levy on the assets of Britain’s wealthy to pay for the growing costs of Covid-19. In January Oxfam followed suit, using its yearly inequality report to call for big taxes on wealth and high incomes. Now, it’s the International Monetary Fund’s turn, recommending not only a temporary income tax hike for high earners, but also a windfall tax — that is, a tax on ‘excess profits’ — on businesses that faired well and profited during the pandemic.
The concept of wealth taxes on individuals is bad enough. Over the past few decades, the majority of European countries that implemented them have gone on to repeal them, as they found them an inefficient and ineffective way of raising revenue. For little gain, they come with a significant burden, including the erosion of a country’s own tax base and pressure to justify double-taxation.
Windfall taxes on businesses aren’t any better. Instead of targeting people’s personal incomes and assets, it targets people through companies. The concept of ‘excess profits’ is odd to begin with. Yes, shareholders benefit from a company’s success — but so do the many employers and countless consumers that also depend on the business. It’s been estimated that up to half of the ‘corporate tax burden’ falls on employees: coming out of their wages and being diverted to the state instead. The IMF’s proposed threshold for when the windfall tax kicks in — when profits are in ‘excess of the minimum return required by investors’ — is perhaps the worst cut-off point from the perspective of workers.
Similar to arguments against wealth taxes on individuals, there is an incentives point to be made here too — what message do we send to companies who helped us through lockdowns that the response to their success is a bigger financial burden? If the businesses that adapted to extremely difficult circumstances know that in future this leads to a profits raid, they will inevitably lose some incentive to perform so well again.