The Covid-19 crisis and its aftermath have allowed companies to make excess profits. Our study shows that a tax on these excess profits could compensate those who have suffered most from the crisis.
Recent geopolitical events have demonstrated that a crisis for some may represent an opportunity for others. With some companies reporting exceptional results while others suffered from the pandemic then from the inflationary context, there have been calls to redistribute the profits of the “winners” to the “losers”.
In September 2022, the European Commission thus implemented a solidarity contribution from fossil fuel companies, which more or less corresponds to an excess profits tax. The EU (European Union) Tax Observatory has also proposed taxing the rise in the stock market capitalization of energy companies.
Macron talks about it
On Wednesday 22 March, during his television interview on TF1 and France 2’s one o’clock news, the President of the French Republic Emmanuel Macron suggested a mechanism aimed at employees:
“We have large companies whose income is so extraordinary that they are able to use this money to buy back their own shares; I am going to ask the government to work on an exceptional contribution so that their employees can benefit from this.”Emmanuel Macron
According to clarifications later provided by Bruno Le Maire, the French Minister of the Economy, this would involve strengthening incentive schemes, and not consolidating the taxation of excess profits tax by extending it to firms other than those in the energy sector. Moreover, the government has often been reticent with regard to this proposal, concerned that large groups may go abroad to enjoy more advantageous taxation.
Nonetheless, our research suggests that the idea should not be abandoned.
Our article published in the Journal of Public Economic Theory studies the gains and losses incurred during the COVID-19 pandemic. The health episode and the measures taken to slow its spread had a major impact on economic activity.
World output fell by 3.3% in 2020, with a decline of over 8% for countries such as France, the United Kingdom, Spain, India and South Africa. Many governments quickly reacted to support companies with initiatives including deferred tax payment, tax exemptions, salary subsidies paid to employees as well as non-repayable subsidies.
All the same, some companies took advantage of the situation and reaped larger profits than they would under ordinary circumstances. They were able to benefit from the change in consumption patterns caused by the pandemic: for example, the increased demand for health products. Other companies, operating “digitally”, made the most of the temporary “physical” closure of their competitors.
Using the S&P Compustat North America data, which includes around 11,000 companies over the 2017-2020 period, we were able to highlight the period’s heterogeneous economic effects from one sector to another.
Some, such as air transport, clearly and broadly lost out. However, there are still heterogeneities within the same sector. The most successful companies in the sectors of chemical products, merchandise or food stores, or corporate services, improved their profit margins during the pandemic – and sometimes considerably. Others reported losses over the same period. This suggests that the former were able to make the most of the situation to augment their market power and increase prices.
Thanks to a theoretical model of imperfect competition in a partial equilibrium setting, we have demonstrated that the excess profits made by certain companies during this period could have been taxed so as to compensate, at least partially, the losses incurred by the majority.
A necessary step
For example, let’s consider two types of company: online (or active) companies and offline companies. During the lockdown, only the online companies could sell. When there is a small number of companies, they can exercise more power over the market, increase prices and obtain higher profits. It thus becomes possible to compensate the losses with the gains generated by the lockdown.
Even when the online companies are in such proportion that their market power remains fairly moderate (and thereby even their “excess profit”), we can still conceive of compensating the losses of those not operating with the gains of the former. This is made possible if consumer demand increases significantly with the shock.
The pandemic was followed by the shock of the invasion of Ukraine, which shook up the still-convalescing global economy. In particular, it led to a spike in oil and gas prices, penalising consumers while being beneficial for the energy sector (for example, Shell and Total tripled their profits in 2022 compared to the pre-war period).
This is why the European Commission introduced its excess profits tax, known as the ‘solidarity contribution’. It corresponds to an additional levy of 33% for companies in the oil, gas, coal and refinery sectors in the EU whose 2022 profits were in excess of 20% of the average profits generated over the previous three fiscal years.
Until now, when it has been implemented, an excess profits tax has been deemed a temporary measure and concerned only companies in the energy and banking sector (in Spain, for example). These companies are not, however, the only ones generating excess profits, which causes a problem of unequal taxpayer treatment.
Crises are less and less exceptional
In particular, the difficulty lies in tracing the origin of the excess profits. This could be ignored in order to tax any excess profit similar to an economic rent, namely that is not connected to investment, innovation or the risk taken by the company but due to unexpected external events. Moreover, this is what happened during the First and Second World Wars, with an excess profits tax being adopted by around ten countries and across all economic sectors.
The mechanism was based on a comparison between “normal” profits before an external shock and those made during this shock; the difference between the two corresponds to excess profits. Another possibility is to consider all profits above a certain rate of return on capital as excess profits.
Climate change, with its increased risk of conflict, infectious zoonotic diseases, drought and other natural catastrophes, will lead to significant opportunities for some and to losses for others. The adoption of a permanent excess profits tax in all economic sectors could be a necessary step to move towards inclusive growth and ecological transition. Moreover, this is what researchers at the International Monetary Fund (IMF) are suggesting. To address the problems of profit shifting to low-taxation countries, this tax could be calculated from the consolidated accounts of multinationals using sales by destination.