What is a windfall tax, and why do governments sometimes tax banks and energy firms?

A windfall tax is a higher tax rate on profits that come from a sudden stroke of luck to a company or an industry, such as a jump in energy prices that the firms did nothing to cause. Governments sometimes use it when profits look unusually large, to raise money or fund relief for households.

Supporters have a theory behind it. A 2022 paper from the International Monetary Fund argued that these taxes are an efficient way of taxing economic rents, profits that often come from monopoly power or from unexpected events such as pandemics, war or natural disasters. Such profits have raised concerns about price gouging, where firms are seen as profiting excessively from circumstances nobody foresaw. In 2022, an informal survey of 33 American and European economists found majority support for taxing windfall profits. Others disagree: a 2008 Wall Street Journal editorial argued that income taxes encourage companies to make more profits, and so more tax.

The idea is old in Britain. A one-off windfall tax fell on certain bank deposits in the 1981 budget. In 1997 the Blair government taxed privatised utilities, raising an estimated 5 billion pounds, used to fund a welfare-to-work programme and school investment. In May 2022 the UK taxed oil and gas extraction to help pay for cost-of-living relief, and for fiscal years 2022 and 2023 the EU asked energy companies to return 33 percent of taxable surplus profits.

Bank taxes are a separate cousin. The bank levy discussed after the 2008 crisis was meant to make banks pay towards the cost of bailouts, and the IMF favoured a charge on bank balance sheets. Whether such taxes are fair or wise is debated, and this lesson does not take a side.