chevron-down Created with Sketch Beta.
April 09, 2024 The Tax Lawyer

Rethinking Taxing Excess Profits

Vol. 77, No. 2 - Winter 2024

Reuven Avi-Yonah and Tamir Shanan


This article discusses the application of excess profit taxes (EPTs, also referred to as windfall taxes) that have gained renewed interest and popularity over the past several years. The revival of these windfall taxes gained renewed interest following the COVID-19 outbreak, which led to a sharp price increase in corporate revenues of medical equipment and within pharmaceutical industries. However, the revival of such taxes was also used following the recent rise in energy prices mainly in Europe, leading to a sharp increase in corporate revenues of energy corporations and the recent surge in borrowing interest rates that was not accompanied by a corresponding increase in lenders’ interest rates which, in turn, led to a sharp increase in the corporate revenues of the banking sector.

Not only are these taxes viewed as a means to finance governmental needs, but they also assist the federal government in supervising large scale and sophisticated cross-border taxpayers that possess significant economic and political powers. The main criticism is that the corporations that become exceptionally profitable do not hesitate to exploit their monopolistic powers and inflate their prices.

This article therefore questions the extent to which EPTs can be used to combat the “curse of bigness” (in paraphrase to Louis Brandeis’ greatest critique on the “curse of bigness,” which he viewed as a menace to liberty and democracy)1 and restore one of the principal justifications in the legislation of the corporate tax code as a “supervisory control of corporations which may prevent a further abuse of their power[s]."

The introduction of windfall taxes dates back more than a century ago to the early phase of World War I (WWI)—a period in which corporate income tax was in its infancy—by more than dozens of countries that adopted some kind of above standard/normal returns, primarily in Europe but also by North American countries. The first imposition of EPTs on food exporters was by Denmark in 1915, which imposed taxes on Danish food exporters that received an exceptional trade permit to trade with Germany during the first World War. More countries followed suit and imposed similar taxes. The notion was that such taxes minimize the enrichment that had been attributed to taxpayers who traded on the “world’s misery” and, as such, were viewed as important means to increase governments’ tax revenues when governments desperately needed to increase their revenues to support national efforts.

However, as soon as the period of war/crisis ended, many of the countries that imposed EPTs repealed them because they were highly controversial and sharply criticized by business and commercial sectors. These taxes were not revived or re-imposed unless crisis conditions existed, and for this reason, many of the windfall taxes that were imposed by different countries, following the period of the two world wars, were imposed on a temporary basis.

This article also argues that exceptional corporate profitability primarily results from a monopoly or quasi-monopoly status, a political crisis, or natural disasters that are a significant extent “undeserved” (i.e., the result of luck or political power) and cannot be attributed to corporate behavior. However, the imposition of EPTs does not lead to behavioral changes, especially when the goods or services that the corporations provide are viewed as essential (that is, they meet the population’s basic needs). Therefore, the EPTs’ corporate incidence is shifted to the end customers, potentially increasing regressivity. This article also argues that EPTs may unintentionally discourage corporations from innovative, entrepreneurial decision-making, especially in respect of activities that are inherently risky, and thus may disincentivize investments in research and development.

This article therefore examines the recently enacted (or proposed to be enacted) EPTs by dozens of countries (both developed and developing) and proposes certain necessary adjustments to an archaic design, which might have worked well a century ago but no longer does, and will decrease unintended spillover effects to alleviate concerns about EPTs base erosion and tax competition.

Read the full article or download the complete issue.

The material in all ABA publications is copyrighted and may be reprinted by permission only. Request reprint permission here.