Funding fair growth: the case for excess profit taxes

6 July 2023

By Tanya Singh

16 minute read

This essay forms part of CPP’s new programme of work on funding fair growth. Our starting premise is that to stop the UK’s continual economic stagnation and political turmoil, a new approach to delivering economic growth is needed, based on public service investment and reform, interventionist industrial strategy and more devolved powers for local government.

Festering health, stagnating wages and productivity levels combined with pervasive regional inequalities have created a strong sense that the UK is crumbling. Reversing these trends will require serious public investment. The UK has trailed other parts of the developed world in fiscal spending and clearly needs to assume a more proactive role. [1][2] But sustainably increasing spending on public services requires an increase in government revenue.The key challenge then is how can an incoming government use fiscal policy to raise public investment while maintaining fiscal sustainability? In this context, this essay explores Excess Profits Taxes (EPTs) as a way of funding fair growth and develops some feasible options for reform.

The Russian invasion of Ukraine in February 2022 and the accompanying war has had an adverse effect on the world economy, as well as the UK economy. Due to a surge in oil and gas prices, several energy companies have experienced an increase in revenues and stock prices. This has led to several calls for a more proactive usage of excess profits taxes , also known as windfall taxes, on businesses' unusually big profits. Given that they have benefited heavily from the rise in prices, the focus at the moment is on firms in the energy sector. The same is true for defence industry firms, whose business climate and demand prospects have improved as a result of a reassessment of the global security environment. During the Covid-19 crisis, many demanded that firms that profited from developing a vaccine pay up, or that supermarkets or online retailing giants such as Amazon be subjected to an EPT as crisis profiteers. Every time there is a crisis, the same arguments - with slight variations - crop up, owing to a simmering sense of unfairness at the sight of corporations making large sums of money while the majority of people struggle to make ends meet. Under these circumstances, EPTs may not only serve as a revenue-raising mechanism, but could also serve as a politically popular tool to quell the rising sense of injustice and signify the state’s commitment towards fair growth.

Drawing on these undercurrents, the UK government announced the Energy Profits Levy (EPV) on 26th May 2022. The EPV is an excess profits tax that is charged at 25 percent and applies to profits generated by oil and gas companies on or after 26 May 2022. Given that the oil and gas sector in the UK is currently subjected to a 40 percent headline tax rate on ‘ring fence profits’, the Levy increased the headline rate of corporation tax on profits from 40 percent to 65 percent. The measure is designed to be temporary with gradual phasing out as prices return to historically ‘normal’ levels. The legislation included a sunset clause, eventually removing the Levy after March 2028. In line with initial projections, the Levy successfully raised £5 billion in the first year, which the government used to partially fund a slew of measures aimed at helping households deal with the cost-of-living crisis. [3] However, there are some looming questions: Could excess profits taxes like EPV possibly affect investment in the future by damaging investor confidence? Are they able to generate enough resources that can justify the risk associated? What exactly is the best way to capitalize excess profits through taxation? This essay will explore these questions, drawing on international historical and contemporary evidence.

The whats, the whys and the why nots of excess profit taxes

EPTs are one-time levies or taxes placed on businesses that the government believes have made excessive profits. These earnings were unexpected, sizable, and not a result of new initiatives launched by the companies; rather, they were the result of erratic developments in the markets in which these companies operate, or the consequence of factors beyond the control of markets themselves such as war. The crucial aspect is that the tax is applied to reflect profit gains that came as a windfall and were caused by external changes in market conditions rather than the active strategies of the companies. [4]

Windfall taxes present a convenient way for authorities to raise a large amount of revenue quickly. And at a time when people are suffering due to the same circumstances from which some companies are profiting, levying such taxes is often considered ‘fair’. Importantly, EPTs do not incentivize companies to change behavior in order to escape or reduce their tax liability. This is owing to their one-off and retrospective nature. Since these are one-time taxes that are based on past behavior and are levied in response to an unforeseen external event, companies cannot change their behavior in response to such taxation. As a result, they are considered economically efficient, in sharp contrast to taxes such as those applied on personal income. [5] Lastly, these taxes yield a predictable tax yield, which is particularly helpful if the revenue collected is aimed at dealing with a short-term challenge, such as providing relief in times of a cost-of-living crisis. [6]

The main contention with EPTs is that they might discourage investment. This can happen through two mechanisms. First, these taxes reduce the volume of profits that firms are left with for business investment purposes. Second, windfall taxes may lead to uncertainty and a lack of trust in the tax system. Companies may rightly become suspicious that the tax will be repeated in future, and this could discourage them from capital spending. Such a precarious investment environment can have a prejudicial effect on growth as firms that have an international presence may look to shift their businesses elsewhere. [7] Another major cause of resistance to the idea of EPT is due to the definitional issue associated with the concept of “normality”. An EPT is a tax levied on profits that are considered in excess of what is considered “normal”. However, what exactly is meant by “normal” could vary depending on the context and, in the end, becomes essentially an arbitrary exercise. [8]

Historical and contemporary global evidence: a policy predicament

Historically, EPTs have primarily been imposed during times of war or in the immediate aftermath. During World Wars I and II, such taxes were enacted in France, the UK, and the US to generate resources to support the war effort. For the purpose of calculating excess profit, a hypothetical normal profit was defined by the authorities. Either a normal rate of return on capital employed was fixed, or the average profits of several "pre-war" years at the level of the company were calculated. Though these taxes were immensely high (for instance, the tax rate was as high as 95% post-1943 in the US), these taxes met the key tests and proved to be consequential in supporting the war effort. This success led to a great deal of popularity for EPTs, as countries such as Australia, Canada, New Zealand, South Africa and Italy followed suit. [9]

Occasionally, selective taxes on profits were introduced even in peacetime, especially in the aftermath of large price shocks. For instance, the Jimmy Carter government introduced an EPT in the 1980s, in response to profiteering by oil companies in the backdrop of the first oil crisis and deregulation of the oil market. The tax was unique in that it taxed the difference between the market price of oil and a fixed base price, and the effective tax rate ranged between 15-70% depending on factors such as production volume and type of oil. The new tax was projected to raise nearly $393 billion worth of revenue over the following decade. However, not only did the tax fall seriously short of expectations in terms of revenue raised ($80 billion), but it is also widely credited with having increased US's dependence on foreign oil as domestic production reduced significantly in the short-to-medium run. [10]

The UK has also tried its hands at peacetime EPT on a few occasions. In the 1980s, at a time of high unemployment and inflation, when the banks were making huge profits from high interest rates, Margaret Thatcher levied a one-off tax on the banks charged at 2.5% of their non-interest-bearing current account deposits, netting £400m (equivalent to around £3bn in today’s terms). In the same year, with oil prices reaching record-breaking highs, Thatcher also squeezed North Sea oil and gas firms for cash by imposing a supplementary petroleum duty of 20% of gross revenue on each oil field with the first 20,000 barrels duty free - a move that helped raise £2.4 billion in today’s terms. Though many argued that the extra taxes would negatively affect investment, the industry flourished nevertheless. [11] In 1997, then-chancellor Gordon Brown raised £5.2 billion (£13 billion in today’s terms) by imposing a windfall tax on privatized utility businesses that, in his opinion, had been sold off much too cheaply. The tax was based on the difference between what the government earned from privatization and what it would have received if the significant profits that the privatized utilities actually made after privatization had been taken into account. [12]

With the exception of the US EPT of the 1980s, major historical examples of windfall taxes have helped to raise considerable amounts of resources without significantly affecting investment or investor confidence, and serve as good examples of how opportunism and creativity can lead to more equitable policies. It is important to recognize the common features of successful EPTs: they were all one-off in nature, applied to clearly identified windfalls, and did so retrospectively.

Contemporary evidence on EPTs is not very encouraging, however. In the wake of soaring energy prices and supply chain disruptions ever since 2021, several countries such as Greece, Hungary, Italy, Romania and Spain implemented windfall taxes. Current EPTs differ considerably in terms of tax rates as well as structures, with many of them going beyond merely taxing windfall profits. In most of these countries, the tax base is not designed to exclusively capture the excess profits generated by the increase in energy and oil prices. For instance, in Romania and Spain, the EPT closely resembles an excise tax whereas Italy’s Incremental Value Added EPT could very easily be influenced by several factors that are not linked to price changes. In other cases, the tax base is calculated based on the difference between current profits and profits generated over a baseline period. However, these incremental profits may not necessarily be ‘abnormal’ and an EPT could very much lead to double taxation of profits. Though the true effects of these taxes are yet to unravel, there already have been signs of tension. Italy’s EPT has hardly managed to collect €2 billion out of the €11 billion expected revenue, while corporates in many of these countries have challenged the constitutionality of such tax measures.[13][14] These issues could possibly be attributed to the flawed design of such taxes - most of the recently introduced EPTs are not retrospective and are much more complicated in terms of identifying ‘excess profits’ than their historical counterparts.

Towards the perfect EPT

Though historical evidence does offer some encouraging insights on EPTs and how they should be designed to maximize chances of success, replicating examples from history may not be as easy today owing to the dynamic nature of the global economy. The 21st century firm relies on a complex mix of global supply chain factors, heavy digitalization and increased emphasis on hard-to-price intangible assets to generate economic rent. All in all, economic activity of modern firms is usually generated and located in several countries. Consequently, and drawing from the argument for corporate tax coordination, there have been calls for a globally agreed EPT design. However, though an internationally coordinated EPT on consolidated accounts of firms could considerably alleviate concerns about tax competition and base erosion, there are concerns about international coordination and implementation owing to institutional and administrative differences among economies, rendering the idea impractical and unrealistic.[15][16]

Another way around the issue would be to tax ‘excess valuations’ such as a rise in the stock market capitalization of companies rather than excess profits per se. Since stock market capitalization is easily defined, observable and hard to manipulate, such a tax instrument may prove to be more administratively feasible, a potentially key factor behind the success of EPTs in the past. And since market capitalization involves all sources of rents, whether from downstream or upstream activities, they are more comprehensive than traditional EPTs. However, like any tax instrument, there are issues with this kind of taxation. Most importantly, this tax fails to capture the possibility that some companies might have huge excess profits but no or little rise in stock market capitalization, or vice versa. [17]

Plucking the goose - and keeping it healthy

After almost thirteen years of austerity that has resulted in grave damage to UK’s public sector capacities, a strong recovery towards fair growth will require significant injections of cash. Under these circumstances, a case can certainly be made for taxing excess profits to meet extraordinary financing needs and supporting social cohesion. Some EPTs have indeed been successfully implemented in the past and helped raise considerable resources without giving rise to unnecessary distortions. However, this success has been difficult to replicate in modern times due to the relatively more dynamic nature of economies than in the past. Though there have been attempts recently to design EPTs in a way that takes care of some of these modern challenges, more research is clearly needed to be able to arrive at confident conclusions.

Nevertheless, there are some general principles that can inform the design of EPTs to increase their chances of success. Firstly, it is important to clearly define what constitutes as ‘excess profit’ as opposed to ‘normal profit’. Though delineating what may be considered as ‘excessive’ remains a highly contextual exercise, rooted in sectoral and economic realities, the lesson from history is that the process of differentiating ‘excess’ profits from ‘normal’ should be made as uncomplicated a task as possible so as to ensure administrative and political feasibility.

Secondly, it is important that EPTs are designed to be one-off as well as retrospective in nature. Though it might sound counter-intuitive and prejudicial to growth (under normal circumstances, use of retrospection is very damaging to the reputation and image of tax systems), in the case of EPTs, retrospectivity is important to prevent avoidance or distortions. Another advantage of retrospective taxation is that governments can be fairly certain about what the tax base looks like at the point the tax is drawn up, and more realistically gauge its revenue-generating potential. Along with retrospectivity, it is also important to ensure that these taxes are one-off in nature, as repeated taxation can damage business confidence, potentially distorting economic activity in the long-run.

Today, EPTs have emerged as a convincing tool to raise much-needed revenues while avoiding a general increase in corporate tax rates. Also, emerging evidence has highlighted the role that increased profiteering has played in driving inflation in the context of the UK’s current cost-of-living crisis.[18] As firms facing limited competition are taking advantage of higher inflation to raise their markup over input costs, household budgets are further being stretched by rising prices and interest rates. Under such circumstances, EPTs would not only help with ushering a more equitable perception of how fairly the nation’s income is being split between workers’ income and corporate profits, but also act as a convincing disinflationary strategy. [19]



[2] ;

[3] Energy Profits Levy Factsheet - 26 May 2022. (2022, June 14). GOV.UK.

[4] Lakeland, N. (2022). Is a Windfall Tax a Good Idea? NIESR.

[5] Tetlow, G. (2022, May 17). Windfall taxes. Institute for Government. https://www.instituteforgovern...

[6] Naisbitt, B., Patel, U. & Millar, S. (2022). Should the UK impose a windfall tax on energy companies’ profits? Available at: https://www.economicsobservato....

[7] ibid.

[8] Blough, R. (1948). Measurement Problems of the Excess Profits Tax. National Tax Journal, 1(4), 353-365.

[9] The Advisory Board to the Federal Ministry of Finance. (2022). Excess Profits Taxes. In

[10] Lazzari, S. (2006). The crude oil windfall profit tax of the 1980s: Implications for current energy policy. Congressional Research Service.

[11] Inman, P. (2022, May 26). A brief history of windfall taxes: Who used them and why. The Guardian.

[12] Rutterford, J. (2022, September 13). Taxing financial winners from coronavirus to pay for the crisis – lessons from WW1. The Conversation.

[13] Enache, C. (2022, October 24). What European countries are doing about windfall profit taxes. Tax Foundation.

[14] Nicolay, K., Steinbrenner, D., Wölfing, N., & Julia, S. P. I. X. (2023). The effectiveness and distributional consequences of excess profit taxes or windfall taxes in light of the Commission’s recommendation to Member States.

[15] Hebous, S., Prihardini, D., & Vernon, N. (2022). Excess Profit Taxes: Historical Perspective and Contemporary Relevance. IMF.

[16] Hebous, S. (2023). Has the Time Come for Excess Profit Taxes? (No. 49). ifo Institute-Leibniz Institute for Economic Research at the University of Munich.

[17] François, M., Oliveira, C., Planterose, B., & Zucman, G. (2022). A Modern Excess Profit Tax (Vol. 5). EU Tax Observatory Working Paper.

[18] Hansen, N. J., Toscani, F., & Zhou, J. (2023). Euro Area Inflation after the Pandemic and Energy Shock: Import Prices, Profits and Wages. IMF.

[19] Bivens, J. (2022). Corporate profits have contributed disproportionately to inflation. How should policymakers respond. Economic Policy Institute.