Excess profit tax controversy: "Excess profits signal that market is attractive"

While consumers groan under record prices, mineral oil companies are making billions in profits.

Excess profit tax controversy: "Excess profits signal that market is attractive"

While consumers groan under record prices, mineral oil companies are making billions in profits. Nevertheless, economist Dominika Langenmayr does not consider a tax on excessively high profits to be a good idea. In an interview, she reveals the catches of an excess profit tax.

Ms. Langenmayr, you are currently working on the so-called excess profit tax. What bothers you about it?

Dominika Langenmayr: The fundamental problem is conceptual. There are companies that make big profits for reasons we don't like. And then, in retrospect, we decide to tax these profits particularly heavily. But it shouldn't be a political decision as to which companies make bad or good profits and that individual sectors are suddenly taxed more heavily, regardless of whether it's the mineral oil industry, the weapons industry or the chemical industry.

What snags do you see in the implementation?

A big problem is defining excess profits. And you have to if you want to levy an excess profit tax. One suggestion is to compare the profit now to previous years. This is particularly difficult at the moment because the last two years have not been normal years due to the pandemic. But it also applies in general: Depending on which reference period you take, you get completely different excess profits. And that shows again that it is more or less arbitrary what is ultimately an excess gain.

So it would be too much state in a market economy?

Surely excess profits have a function in the market economy, they do not arise by chance, but because demand suddenly increases or supply decreases. They send a signal that this market is attractive and that others should enter the market. This is difficult in the case of oil refineries, although investment would certainly be required there too. The mask manufacturers, for example, made very high profits in spring 2020. Those were also excess profits that could have been taxed. Because other participants entered the market and also produced masks, the excess profits fell. And a few months later we could buy cheap masks in every supermarket. The existence of excess profits was important for the functioning of the market economy

Nevertheless, a redistribution is needed to cushion the hardships. And with the giants Lidl and Aldi, this argument only works to a limited extent. The two have divided the discount market between themselves and made huge gains relative to others during the pandemic.

We tax them too. In Germany, profits are taxed on average by up to 30 percent. The larger the profits, the higher the tax on them. I don't think that there is too little competition in the case of Lidl and Aldi, but in principle the cartel office is responsible if there is too little competition. We can see from Robert Habeck's proposals that it should become easier to take antitrust action against these cases.

Would an excess profit tax help against the high fuel prices?

No, it doesn't do anything against the high prices. The incentive to make a profit remains, nobody is talking about a 100 percent tax. The idea behind the excess profit tax is that it could be used to finance other measures. The high prices hit many people hard, especially those on low incomes. The excess profit tax seems like an elegant way to fund more redistribution while only hitting the bad oil companies. I think that's why it's so popular. She would help hide us from the hard truth; namely that we have all become poorer as a result of the war in Ukraine and its consequences for oil, gas and food prices. We have to bear these costs. It is a political question how to distribute them. We should be honest enough to say that everyone gets these costs, for example in the form of higher taxes; and just don't pretend that you can finance it with a new tax for some oil companies, which at best are also located far away abroad. It is not that easy.

A higher top tax rate could flush more money into the coffers to support low-income people.

Yes, the classic instrument for redistribution would be income tax. You could raise the top tax rate or capital income taxes. These are tough decisions that politicians have to make. To support people quickly, direct transfers are always best, which people can then spend as they see fit. In any case, that makes more sense than trying to lower fuel prices at the gas stations now.

If rich people are to be burdened more, shouldn't this also apply to companies?

At company level, Germany has very high taxes in an international comparison. But there would be the possibility, for example, that the capital income of the shareholders would be taxed more, since the taxation is not that high - especially compared to the earned income of the wealthy. You could definitely think about reforms.

Great Britain and Italy have opted for a higher profit tax. Are they wrong?

In the UK the situation is different. The country produces its own oil and gas. The raw materials are in the ground and when you get them out, they are suddenly worth more because the market price has risen. The profit margin is actually increasing here, while the refineries in Germany have to buy the oil at higher prices. Strictly speaking, Italy does not levy a profit tax, but a tax on sales, a kind of excess sales tax. This is a pragmatic solution to the fact that, like in Germany, there is no oil and gas worth mentioning. However, this taxation harbors the risk that prices at Italian gas stations will tend to rise even further. Because part of the sales tax is passed on to the consumer by the company. In Germany, such a sales tax would probably be legally impossible anyway.

One of your arguments against the excess profit tax is that the state would also have to step in if things were going badly for companies. Couldn't this be countered by simply limiting the increase in corporate taxes over time?

But then again it brings little revenue. A principle of the market economy is that entrepreneurs bear the risk. If they make a big profit, great. If they make a loss, they're out of luck. If you take out the upside, you ruin the deal. Nobody would be willing to take the risk anymore. And then, as a logical consequence, you would also have to compensate more for the losses. The state would intervene more and more in the economy and take on more and more of the entrepreneurial risk. The excess profit tax would be a first step towards much greater government intervention in the economy. However, we have seen historically that the state is not the better entrepreneur.

And do you also see this danger if taxes are only increased temporarily?

If taxes on large profits were temporarily increased, it is never credible that it would only happen this once. In the next crisis, a similar idea will come up and what exactly is defined as a crisis will also vary. During the pandemic, mask manufacturers and online retailers were the focus, and vaccine manufacturers like Biontech were also asked to increase taxes. However, we want many companies to invest in products and incur high costs in the hope that they will then also make huge profits. If we tax Biontech away from profits, which company is putting millions into vaccine development? If it doesn't work, the companies are stuck with the costs; and if it works, they would be taxed. In that case, there would be no reason at all to invest in development.

Laura Eßlinger spoke to Dominika Langenmayr

This interview first appeared on Capital.de

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