Economic trendspotters at the United Nations are seeing an increasing number of windfall profit taxes aimed at abnormal levels of profitability amid high inflation.
“Windfall profit taxes were prominent among measures introduced in developed countries,” economists with the UN Conference on Trade and Development wrote in their 2023 World Investment Report released Wednesday.
“Several developed countries introduced taxes aimed at ensuring a fair distribution of profits in industries that have experienced significant gains because of the pandemic and financing recovery programs or subsidies for energy consumers,” they said.
Countries including the United Kingdom, Italy, Portugal, Romania and Croatia have enacted various kinds of windfall taxes. Many are geared specifically at the energy sector, which saw a price spike in the wake of the war between Russia and Ukraine, contributing significantly to inflation.
The UK’s energy profit levy, enacted last year, taxed oil and gas company profits at a rate of 25 percent and was later bumped up to 35 percent. There was also a 45-percent tax put on abnormal profits of companies that produce electricity.
Portugal’s temporary solidarity tax for the energy and food distribution businesses levied a 33-percent tax on profits in 2022 and 2023 if they exceeded taxable profits averaged over the previous years by more than 120 percent.
U.S. lawmakers have made similar proposals but they have so far failed to make it into law.
One such proposal from Democrats would tax each barrel of oil produced or imported by certain large oil companies at 50 percent of the difference between the current price of a barrel and the average price of barrel between 2015 and 2019. The tax would apply to companies that produce or import at least 300,000 barrels of oil per day or did so in 2019.
“Instead of an economy creating windfall profits, we need one creating wind power energy. This bill will protect consumers from profiteering,” Sen. Ed Markey (D-Mass.) said along with the release of the legislation.
Gasoline prices have fallen significantly to around $3.50 a gallon from nearly $5 a gallon last year, as broader energy prices have relaxed. West Texas Intermediate crude oil has dipped to around $70 a barrel from more than $100 last July.
The UN report notes the “continued high profit levels” of the world’s largest 3,849 private companies. Global profits generally stayed in the range of $2 trillion in the decade before the pandemic before exploding above $3.5 trillion in 2021 during the economic recovery and climbing even higher in 2022.
The rate of profit in the U.S. economy has been rising for decades, spiking from 1 percent to 8 percent over the last 40 years, according to research published in the Quarterly Journal of Economics. Profit shares have also been rising in the wake of the pandemic at the same time that labor shares have been decreasing.
The extent to which profits have been responsible for the current wave of inflation has been a subject of intense debate among American economists — much of it ideological as opposed to empirical — but UN economists have been observing this relationship since last year.
“Where data is available, as in the European Union, the United Kingdom and the United States, there is clear evidence of a significant contribution of higher profit margins to inflation coming out of the pandemic,” UN economists wrote last year.
UN economists last year excoriated global policymakers for the “policy myopia” related to the role of profits in global inflation.
“As the focus of policymakers turned to the threat of a wage-price spiral and accompanying expectational consequences (a worry, which would turn out to be mostly unfounded), the danger from speculative pressures on commodity prices as well as retail and producers’ price-setting practices was ignored or missed altogether,” they said.
“As a result of this policy myopia, prices in some key sectors with a direct bearing on the cost of living, such as natural gas, food and the rental housing sector, continued to rise alongside a sharp increase in profit margins,” they wrote.
Wednesday’s report also noted that foreign direct investment declined last year by 12 percent after taking a “nosedive” in 2020 and recovering in 2021.
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