Whatever its concrete form, the sheer notion of taxing windfall and excess profits is cynical populism and therefore bad policy. Proponents propose them as seemingly simple solutions to big, complex problems, thereby tapping the voters’ emotions rather than their intellect.
Here’s their populist story: There’s an energy shock caused by a distant, evil dictator who is stopping the flow of gas to Europe and sending prices skyrocketing. Greedy and selfish corporations in the West are profiting from this emergency by making big bucks while ordinary people suffer. Confiscate those unfair winnings.
Like all effective demagogues, the storyline isn’t entirely wrong, it’s just grotesquely oversimplified. Yes, British companies exploring the North Sea for oil and gas are creating unexpected bundles as the prices of their output soar. So are German cheap power suppliers. This is because the price in that market is set by the supplier with the highest marginal cost. Suppliers that currently use natural gas for power generation. At the same time, it is clear that many households are struggling with rising utility bills.
But a proper economic interpretation is more complicated and turns off most of the intended audience. It starts by reminding you that all companies with windfall profits today already pay corporate, income and other taxes.
If they are able to profit from abnormal market conditions, it is because they have invested in equipment, technology and know-how in the past to prepare themselves. But they took that risk in the hope of a reward — and based on the assumption that the government would not arbitrarily seize that reward.
Attempts to assign moral grades to such investments lead nowhere. Oil and gas companies were already hated before the crisis for keeping us hooked on evil fossil fuels. Was it admirable or deplorable?
In contrast, German solar and wind energy producers, while wearing environmental halos, have now made a lucky bet. Under market rules, it can bear the difference between the costs incurred by its gas rivals. The same Greens that once bombarded them with subsidies suddenly want to curb their profits.
Recall for a moment some other recent instances of populist demands for windfall taxes. In the early days of the COVID-19 pandemic, there was a shortage of face masks. Firms that ramped up production quickly got their money. “Speculator” or Savior?
What about Covid vaccine makers? Some have literally spent decades working on mRNA science without pay. They didn’t do it for the money — the ascetic founders of BioNTech SE struggled for years just to find outside funding for their lab. I dreamed instead of curing other ailments. And then one day a new pathogen appeared and was ready. “Plunderer” or Hero?
Of course, there are certain cases where the benefits are objectively excessive, immoral, or even illegal. These include, for example, so-called economic rents accruing to cartel members. But the purpose of antitrust law is to ensure that the rules are prewritten and enforced in a fair manner.
Otherwise, it is legitimate to take risks in hopes of reward. It’s called an investment. But if they threaten to arbitrarily confiscate the reward after the fact, the investment will dry up. Perhaps it could always do so by holding an impromptu referendum to decide whether the benefits given are fair or unfair and how they should be taxed.
Psychologically and politically, the repeated attempts by some politicians to declare profits worthy or worthless, good or bad have two origins. One is ideology, or socialism. This worldview is based on envy and a desire for power to judge market outcomes. Another is populist. It is the unprincipled willingness to give the mob, the voice of the masses, whatever they ask. Responsible leaders do not succumb to such stagnation.
More from this writer and others on Bloomberg’s opinion:
• Should your buses, trams and trains be free?: Andreas Cruz
Where Did the Oligarch’s Superyacht Go?: Lionel Laurent
Pensions are not the answer to retirement anxiety: Alison Schrager
This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.
Andreas Kluth is a Bloomberg Opinion columnist covering European politics. Former editor-in-chief of Handelsblatt Global and writer for The Economist, he is the author of “Hannibal and Me.”
More articles like this can be found at bloomberg.com/opinion.
