Windfall or excess profits taxes on large corporations

What problem are we trying to fix?

Increasingly large corporations are making extremely high profits. Often they make windfall or excessive profit by taking advantage of times of public emergency by raising prices on essential goods (e.g. facemasks during the COVID pandemic) or exploiting a lack of competition (e.g. supermarkets, banks and electricity companies). 

The drive to make ever increasing profits by these corporations contributes to unaffordable rises in the cost of living and makes it even harder for ordinary people and small businesses to survive through a crisis.

How does a windfall or excess profits tax work?

An excess profits tax applies an additional tax or higher tax rate when a company’s profits go above a level considered normal. The tax applies to the portion of the profits above the normal level, the portion of profits below that level are charged at the normal rate. Excess profits taxes are often imposed on sectors where there is a lack of competition, like the supermarkets, banking and energy sectors. 

A windfall tax is a version of an excess profits tax. The tax is a one-off levy on large corporations that are taking advantage of unusual circumstances to generate higher than normal profits. The tax redistributes some of the unusually high profits of large corporations to help respond to the emergency, support people and small businesses to recover.

Why would this be better?

An excess profits tax can be a way to discourage excess profit making. The tax only applies on the profit over the normal rate of return - the excess profits - so it shouldn’t impact the profitability of businesses or motivations to invest.  

While we would need to define what “excess” profits are, this has been done before and studied by economists, so there are models we can learn from.

It can increase the progressivity of the tax system and reduce inequality. Any excess profits reclaimed can be used to pay for free public services that can reduce the cost of living for whānau, like school lunches and free public transport.

As a one-off and retrospective tax it is simple to implement once the excess profit threshold is determined, can’t be passed on to consumers and sends a message to corporations about the community’s expectations.  Although, as a one-off measure a  “windfall profits tax” will not resolve our underlying need for more revenue, any revenue generated can be specifically directed to supporting people affected by the crisis and harmful corporate behaviour.