Why are we not discussing a windfall tax?

Inflation is running at almost 7% and fuelling a cost-of-living crisis in New Zealand. Yet at the same time many companies are making record profits. So why are we not discussing a windfall tax? In other countries the debate runs hot.

What is a windfall tax?

A windfall tax is a one-off tax placed on companies that make excess profits from something they were not responsible for. An example would be the energy companies currently benefiting from high oil and gas prices caused by the Ukraine war and pandemic bounce-back. The profits of both Shell and BP are attracting scrutiny in the UK, although it could be argued there are already supplementary taxes on North Sea energy companies. They pay an extra tax of 10%.

Have other countries introduced a windfall tax?

Italy introduced a windfall tax of 10% on energy profits in January, but has since increased it to 25%. Spain decided on a windfall tax on electricity companies using nuclear or renewables, on the basis they profited from higher electric prices, forced up by suppliers who rely on gas to produce their electricity. That’s quite an odd policy to punish those without emissions, but it was a windfall. Malaysia have also introduced a one-off tax on any high-income company.

How could it help the cost-of-living crisis?

Windfall taxes are a method of rebalancing the fairness of extraordinary circumstances. They can also be used to reduce inequality and fund social policies that help those now experiencing hardship.

Who is making excess profits in New Zealand?

It could be argued that a number of different sectors have benefited from the pandemic or the Ukraine war in an extraordinary way.

Banks: Across the banking industry there was an eye watering increase in profits to over $6 billion in 2021. The negative impact of Covid-19 was over-estimated and provisions for losses were reversed, creating a bumper profit season.

It can be argued that the New Zealand Government’s massive wage support and loose monetary policy had the unintended, but inevitable consequence, of supporting the housing market and cheap lending. The banks scooped up the loot without complaint and who can blame them. There are always winners and losers.

Primary producers: Our milk industry, meat, horticulture and forestry industries are flying in the tailwind of a commodity crisis and supply chain squeeze offshore. Our zero Covid policy allowed these industries to keep up production, unencumbered. Unfortunately, that same policy decimated other industries such as tourism, hospitality and international education.

It also caused a skill shortage that has hampered the recovery across all industries.

There’s a fairly sturdy argument that both our banks and primary producers have had windfalls handed to them by events they didn’t work to create. Simultaneously, many other businesses paid the price and had to be supported by the taxpayer. A windfall tax would ensure these companies contribute more.

Many other sectors have made excess profits, from those involved in respiratory equipment, personal protective equipment, online entertainment and delivery and freight services.

Didn’t something like this happen in World War 1?

Indeed it did. A tax called “Excess Profits Duty” was introduced in the UK on everything from flour to ammunition. After allowing for a 6% return on capital, any profits above the pre-war average for each company were taxed at 50%. This tax stayed in place for six years.

In New Zealand, we copied the UK duty, but it only lasted for a year.

Are there more recent examples?

Indeed there are. The UK in particular has quite a history of one-off windfall taxes:

2010: Bankers bonuses were taxed at 50%, payable by the banks themselves. It raised seven times more than expected at £3.4b (NZ$6.5b).

• 1997: Utility companies were deemed to have been privatised too cheaply. They were revalued based on the higher profits made post-sale and taxed £5.2b (NZ$10b), the amount the government calculated it missed out on by selling too low.

• 1981: Margaret Thatcher taxed the banks £400m (NZ$770m), as profits were abnormally high. Then she added an additional 20% tax on North Sea oil and gas companies given prices were skyrocketing.

Why could it be a bad idea?

An unstable or onerous tax environment could discourage investment, new entrants and production. The UK saw evidence of this when North Sea oil taxes were high. Right now, British politicians are in a tussle with energy companies. Windfall taxes have been dismissed as these businesses are some of the biggest investors in zero emission green technology. The negotiation will now be to ensure abnormal profits end up invested and not in share buy-backs and dividends.

There’s also the argument that all companies are owned by individual investors – many of those are pension funds like KiwiSaver. While that means we end up benefiting, it doesn’t result in social fairness.

Janine Starks is the author of www.moneytips.nz and can be contacted at moneytips.nz@gmail.com. Opinions are a personal view and general in nature. They are not a recommendation for any individual to buy or sell a financial product. Readers should always seek specific independent financial advice appropriate to their own circumstances.