Made to Last? Windfall Profit Taxation in Europe (and Beyond) - PowerPoint Presentation

1. Made to Last?Windfall Profit Taxation in Europe (and Beyond) University of Ferrara - 9 March 2023Inequality: regulating the extra-profit tax, a hypothetical remedy. Dr. Maria ViscoloPh.D. in Economic Sciences

2. IntroductionThe exponential increase in inequality has been constant over the years, due to the effects of the global economic crisis between 2007 and 2013, amplified by the Covid-19 pandemic, and exacerbated by the war in Ukraine; while it is well known that every state has a responsibility to remove the causes of distributive injustice and to prevent - if it is still possible - inequality from becoming a real threat to democracies, the distribution of tax levies, if it were to be done reasonably, is one of the appropriate tools for overcoming economic and social distortions also from a solidaristic, egalitarian and constitutionally guaranteed perspectiveAfter briefly attempting to reconstruct the causes of inequality, the aim of this paper is to show how inequality can be reduced through income redistribution and, consequently, how the redistribution of the extra profits generated by a certain category of companies in a certain period of time as a consequence of extraordinary events can be considered 'fair'.

3. IntroductionAn attempt will be made to prove how the taxation of extra profits and the consequent redistribution - if implemented on a broad scale with transparent, legitimate and timely legislative provisions - is able to reduce inequalities by reaping positive results. The legislative measures put in place at this early stage at the international level by Europe, and by individual countries, have not had the hoped-for effects, also due to the lack of consensus. It would be necessary to foresee a regulation and control of the global markets aimed at limiting the differential between income and wealth, between countries, and between social groups within each individual state; the provision of taxing a highly profitable sector, such as energy companies, with an extraordinary contribution does not imply a violation of rules, but in the event of a concrete harmonisation of the provision of the contribution, the results could be positive and concrete, guaranteeing the achievement of social justice objectives

4. Inequality and some determinants.(1)An optimal income distribution would not generate inequality but such a distribution assumption is abstract and does not occur in the real world (Sen 1976). This problem, both economic and social, for the economist-philosopher has its basis in the need to answer the question "equality of what?" since the notion of inequality based only on the distribution of resources and income is insufficient with respect to the various indicators of well-being.One is aware that the estimation of inequality poses complex problems and the vast scientific literature on the subject has shown how this measurement is affected by the effects of the solutions given to the measurement as well as the various factors that strongly influence its origin.

5. Inequality and some determinants. (2)The first on which the literature has focused attention are the descriptive indices applicable to income, wealth and any other quantitative characteristic, of which the Gini index is a typical example; the second are the ethical indices that identify inequality with the loss of social welfare and an example is the Atkinson index. The purpose of these indices is to measure the distribution of income, to see when it is unequal and then to make corrections; The increase in collective well-being generated by economic growth is not infrequently counterbalanced by an increase in inequality, especially in those at the bottom of the social scale. An automatic correction tool could trigger - once a threshold, considered a limit, has been reached - the activation of measures aimed at tempering the increase in income and wealth inequalities generated in a given period of time by the effect of extraordinary and unforeseeable events that have affected market forces (e.g. a pandemic; a large-scale war).

6. A mention in this reconstruction seems useful to the considerations of Nobel Prize winner Joseph E. Stiglitz with respect to the somewhat outdated belief that 'a rising tide lifts all boats, big and small', i.e. that economic growth brings greater wealth and a higher standard of living to all social classes, because the resources given to the rich would inevitably be 'filtered' to the rest of the population. Well, Stiglitz criticises this belief, which is also belied by the numbers, and in his small volume: Reversing the course. Inequality and Economic Growth he points out how in the end "the high tide has only lifted the big yachts, leaving many of the smaller boats to crash against the rocks" and then recommends a series of measures to increase equality and economic well-being.Inequality and some determinants. (3)

7. Taxation on extra-profits, lack of tax harmonisation, remedies to tackle inequality. (1)In the historical context in which we have found ourselves facing uninterrupted economic crises that have profoundly changed the situation, severely weakening social structures - most recently the war in Ukraine - the tax on extra profits introduced to compensate for the profits of energy companies that, thanks to the increase in gas prices, have earned more than expected was immediately welcomed because it was aimed at obtaining an immediate increase in revenue for citizens who, on the contrary, have incurred higher costs with the increase in energy prices.In a first version envisaged by the Aid decree, the tax amounted to 10% of the companies' turnover, in the version definitively approved with the bis Aid decree it rose to 25%; taxing a highly profitable sector for the Italian legislator did not entail any violation of primary rules, but rather, the difficulties were generated by the precise identification of the taxable persons, of the taxable base, of the extraordinary nature of the contribution and precisely with regard to this aspect, the Budget Law 2023 - subsequent to the Decrees - has punctually mentioned the temporary nature of the tax.

8. Taxation on extra-profits, lack of tax harmonisation, remedies to tackle inequality.(2)Well, while in Italy, and also in other European countries such as Spain, France, Hungary, and Germany, similar measures were hypothesised and in part envisaged, i.e., taxing the higher revenues of energy companies to reduce citizens' bills, which did not produce the hypothesised result despite responding to a need for redistribution linked to the crisis, the Council of the European Union with the regulation of 7 October 2022, published in the Official Journal of the European Union no. 2022/1854, adopted a series of exceptional measures and interventions aimed at coping with the increase in energy prices. This Regulation introduced a set of measures whose purpose was to provide a unified and well-coordinated Union-wide response to the sharp rise in electricity prices and its impact on households and industry.

9. Taxation on extra-profits, lack of tax harmonisation, remedies to tackle inequality.(3)The regulation provided for three types of complementary intervention to the solidarity contribution, however, the provisions contained in Article 14(1) and (2) ofhas left margins in the determinations to the Member States that are unsuitable to harmonise the application of the provisions and to achieve an effective homogeneous result on the European territory.

10. Taxation on extra-profits, lack of tax harmonisation, remedies to tackle inequality.(4)If there had been an alignment dictated by the European Union for this tax on extra-profits by determining the tax rates, the taxable base, and the methods of allocation, positive results could have been obtained even in the short term, both with reference to revenue and with reference to distribution to those in conditions of objective difficulty.

11. Future ResearchWhat is needed is a uniform and equal application of this tax on extra-profits in all European countries so as not to have a negative impact on the principle of fair competition, all the more so because of the nature of the network services inherent in the energy supply, a circumstance which, if not considered as a whole, could generate spillover effects.A European policy of sharing taxes on extra-profits must be directed towards a regulation both in the forecasting and in the punctual allocation of the revenue; the creation of a valid instrument to operate whenever there are unexpected profits (extraordinary nature), could respond to guarantees of speed and certainty in the adoption of measures aimed at the distribution of the revenue deriving from taxation.

12. Future ResearchThe creation of an automatic mechanism that intervenes every time there is a greater windfall profit and consequently a greater ability to pay on the part of energy companies can lead to a legitimate redistribution in favour of the poorest by considering it appropriate that part of the revenue from the tax measures borne by companies in the sector be allocated to the final customers, in poor conditions, who have borne the burden.Tackling inequality is not an easy matter, not least because of the many causes that generate its effects, but the proper functioning of every democracy and every economy is closely dependent on its reduction as an indispensable factor of social progress