Faculty & Research -Adopting an excess-profit tax

Adopting an excess-profit tax

The research by Céline Azémar (Rennes School of Business), Rodolphe Desbordes (Skema), Paolo Melindi-Ghidi (EconomiX‐CNRS, University of Paris Nanterre and AMSE, University of Aix‐Marseille) et Jean-Philippe Nicolaï (CNRS, INRAE, Grenoble INP, GAEL University of Grenoble Alpes) challenged the French and German government decision of not adopting an excess profits tax during the Russian-Ukrainian conflict.

By comparing business gains and losses generated by the COVID-19 pandemic, they provide evidence that the extraordinary profits made by a few companies could have been used to offset, at least partially, the losses suffered by the greatest number. A proposal is made to adopt an excess profits tax on all sectors of the economy, not limited solely to energy companies, and to consider a permanent change in tax policy to tackle the inequalities which will be generated by climate change.

Underpinning research

The COVID-19 pandemic, and the measures undertaken to slow down its spread, had a major impact on economic activity. World output decreased by 3.3% in 2020, with countries such as France, the UK, Spain, India, and South Africa experiencing a decline in economic output greater than 8% (IMF, 2021). The concomitant impact on companies is substantial. For instance, in France in 2020, 73% of companies incurred a decrease in their sales higher than 10%, 35% incurred a decrease larger than 50%, and a third had to close for an average of 2 months (Insee, 2020). Many governments have reacted swiftly to the COVID-19 pandemic with initiatives encompassing tax filing extension and tax payment deferral, tax waivers, wage subsidies paid to employers, nonrepayable grants, and government bailouts. Those measures have considerably increased the accumulation of public debt. A valuable option to fund these exceptional government policies could come from exceptional tax policies.

If many firms have been negatively affected by the pandemic, others have benefited from this health crisis and have earned excess profits. Some firms have benefited from a change in consumption caused by the pandemic per se, for example, the increased demand for personal product hygiene has raised the annual growth rate of the hand sanitizer market from 5% to 46% (Insights, 2020). This market size boost has also been observed for protective equipment, face masks, swab makers for COVID 19 testing, and obviously COVID-19 vaccines. Other firms, operating “digitally,” have benefited from the temporary “physical” closure of their competitors. For instance, when nonessential stores were closed, Amazon could supply books, clothes, or toys.

The pandemic can be seen as an external shock, creating market distortions. From this perspective, the aim of this paper is to investigate whether it may be valid to use a tax on the excess profits of the winners to compensate the losers. A theoretical model is presented focusing on the heterogeneous effects of the pandemic on firms in the same sector and emphasizing the presence of imperfect competition in a partial equilibrium setting. We compare business gains and losses generated by both the pandemic in general and the lockdown in particular and show that the extraordinary profits made by a few companies could have been used to offset, at least partially, the losses suffered by the greatest number.

Therefore, the results of this analysis support the implementation of an exceptional tax on excess profits, as advocated by Avi-Yonah (2020), in line with the one used during the World Wars I and II by 13 countries (including the United States, the UK, France, and Canada). With this measure, profits corresponding to the normal pre-pandemic level would be taxed at the regular corporate tax rate whereas the profits above the normal pre-pandemic level would be taxed at a much higher tax rate. This tax would be retroactive for the years 2020 and 2021 and would stop at the end of the pandemic.

References to the research

Céline Azémar, Rodolphe Desbordes, Paolo Melindi-Ghidi, Jean-Philippe Nicolaï (2022). Winners and Losers of the COVID-19 Pandemic : An Excess Profits Tax Proposal. Journal of Public Economic Theory, 24, 1016– 1038. https://doi.org/10.1111/jpet.12589.

Details of the impact

The Russian-Ukrainian war is having a major impact on the global economy, already weakened by the COVID-19 pandemic. In particular, it has led to high oil and gas prices, penalising consumers while greatly benefiting the energy sector. This increase in costs is prompting governments to adopt an excess profits tax such as in the UK, Spain, and Italy but it remains highly controversial in France and Germany. Its opponents accuse it among others of contravening two major tax principles: equity and efficiency.

Our paper Azémar et al. (2022) contributed to this debate both in France and Germany as a background to advocate that the adoption of an excess profits tax can reconcile tax fairness and social fairness. We first suggest adopting a general excess profits tax on all sectors of the economy, not limited solely to energy companies. This would address the issue of unequal treatment of taxpayers since other firms are currently benefiting from excess profits. Second, to address the concern of increase in tax uncertainty for companies, thus discouraging investment and limiting future growth, our proposition is to consider a more structural change with a permanent excess profits tax, instead of an exceptional one. Indeed, climate change will benefit a few winners and create many losers, with increased risk of conflict, zoonotic infectious diseases, drought, and other natural disasters. In this context, it is becoming imperative to reform tax systems. While the priority remains to ensure that multinational firms pay their fair share in taxes, a necessary step to move towards inclusive growth is the development of a transparent framework that makes it possible to adopt an excess profits tax.

Household and companies would benefit from an excess profits tax which can play a major role in achieving more social equity by reducing inequalities that are detrimental to national cohesion as well as to economic growth. This can be seen as a necessity at a time when a pandemic or a war with rising prices are causing strong feelings of injustice.

Evidence of the impact: The participation to this debate started in France with a Tribune published in the Journal Le Monde [Evidence 1] on the 31/08/2022. With about 2.44 million readers, this journal of reference is the most widely read paid journal in France. Céline Azémar was then invited to contribute to this debate on Radio France International [Evidence 2] which is a French public radio station with international broadcasting in French and in 14 foreign languages listened each week by 41.3 million people. She was also interviewed by a journalist from the fact-checking branch of Agence France [Evidence 3]. In Germany, the contribution to the debate was via the publication of Tribunes in Business Echo 21/09/2022 [Evidence 4] and Experten 22/09/2022 [Evidence 5]. Those Tribunes leaded to the publication of an article by Wissen (a knowledge portal part of the Konradin Media group) on the 29/09/2022 [Evidence 6], quoting our research and proposals.

Sources to corroborate the impact

France :
Evidence 1 : Le Monde 31 August 2022
Evidence 2: Interview at Radio France International
Evidence 3 : Interview Actu Orange

Evidence 4: Business Echo 21 September 2022 :
Steuer auf Gewinnüberschüsse (business-echo.de)
Evidence 5: Experten 22 September 2022 :
Evidence 6: Wissen 29 September 2022 :

Period when the impact occurred: 2022
Research Centre: FMCO
Dr Céline Azémar, Professor of Economics, Rennes School of Business