WINDFALL Profit Tax doesn’t work–Bajomo

Windfall Profit Tax – My Two Cents!Last week, we explained that Windfall Profit Tax is a surcharge levied by governments on businesses in sectors that experience substantial financial gains, that exceed normal returns, not solely due to the their efforts but helped by external factors thus justifying profit redistribution for public good.Arguments for✅● WPT can Bolster government finances and boost funding for social interventions in key areas – Health🏥, Education📚and Infrastructure🏗️Arguments Against❌● Discourages Investment, R&D🧪and Innovation: WPT Imposition can limit R&D spend on innovation. Banks could do with more funds to ring-fence their operations from negative AI impacts. WPT added to existing tax burdens may hinder this drive.● Creates Economic Uncertainty📈📉 which is antithesis to current investment mobilization and recapitalization. Operational predictability is essential for businesses to thrive. Banks may struggle to hold FDI if investors are unsure if future profits will be subject to sudden additional taxation should their ingenuity succeed.● Significant concerns around probity and utilization. Question is, where have all health facilities set up during COVID gone to? Who is accountable? Rather than WPT compulsion, a CACOVID collaborative approach may be a better option.● WPT Burden will ultimately be passed on to consumers. Cost of financial services would likely reflect any arbitrary taxes overtime to maintain profit margins.💰● WPT reduces companies’ initiatives to seek-out profits. WPT penalizes initiatives. Holding FX position requires risk-taking. Shall we then punish risk takers?🤔Precedents:● 1980 Crude Oil Windfall Profit Tax Act, USA enacted in response to sharp oil price increases during the 1970s. Implementation was expensive and revenue was consistently below expectations, hence was repealed in 1988.● European Union – imposed a Temporary Windfall Tax on oil and gas companies in September 2022 to help households and businesses cope with high energy prices. This tax applies to profits exceeding 20% of the average yearly tax profits from 2018, in addition to regular taxes.● Big Oil Windfall Profits Tax Act 2023 – introduced by President Biden, proposed a windfall profits tax on large oil companies in 2023 to address record profits amid the Ukraine war. This tax would be 50% of the difference between current and pre-pandemic oil prices. Smaller companies, which account for 70% of domestic production, are exempted.Are they effective? Usually Underperforms● Congressional Research Service (CRS,2006) USA report showed that the WPT generated less than expected revenues. Gross revenue was $80bn versus $393bn projected for 1980-88, due to deductibility of the WPT against the income tax. Aggregate net WPT revenues was $38bn versus $175bn projected.● The 2022 Windfall Tax in Italy has only generated one-fifth of government’ projected income as at September (Bloomberg reports