The Uneasy Case for Windfall and Excess Profits Taxation – Part II

In the first part of this article (World Tax Journal 18, no. 1), the conceptual base of windfall taxation has been laid down. Taxes on supernormal profits have been widely used in the past and are gaining support among today’s legislators, the aim being to confiscate profits which supposedly do not reflect a firm’s capability, effort and innovative capacity. To date, windfalls or excess profits have been pursued using a variety of methods, and in the first part of the paper the “base approach”, grounded on a time element, has been challenged for its shortcomings.In the second part of this article, the invested capital method, in which a special tax is applied to profits that exceed a profitability threshold considered “normal”, is put under examination. The analysis is extended to the use of gross-receipts taxes as a way of targeting excess profits, and to the territorial scope of taxes on surplus income as well as their compatibility with EU law. The paper also focuses on the similarities between excess profits taxation and progressive income taxes on corporations, highlighting the critical issues involved. Finally, a major defect of taxes on excess business profits is underscored: to the extent that they target only selected tax periods, they fail to consider possible underperformance of previous or future periods, thus resulting in asymmetrical treatment of economic results in contrast with the taxpayer’s comprehensive ability to pay.