EU excess profit tax could generate over €100 billion per year, study finds

A permanent tax on European companies’ excess profits could generate more than €100 billion per year, or over half of the EU’s annual budget, according to a new report commissioned by the European Parliament’s Left Group.

Drawing on a technical definition of “excess profits” proposed by the OECD, the study published on Thursday (16 May) estimates that businesses made roughly €2 trillion in excess profits globally in 2022, of which €310 billion originated in the EU.

Taxed at a progressive rate of 20-40%, these earnings would yield €107 billion in public funds, which could be used to finance key green and digital investments and tackle inequality, the report notes. The EU’s current annual budget amounts to €160-180 billion.

Excess – or windfall – profits taxation targets revenues a company or a sector has collected thanks to external factors, such as extreme and random events (crises, natural disasters, geopolitical conflicts) or government policy (such as favouring demand for munition during conflicts).

Corporate earnings have skyrocketed since 2020, with the pandemic seeing major pharmaceutical, tech and health-tech companies post bumper earnings as governments spent heavily on vaccine procurement and work shifted largely online.

Energy companies and arms manufacturers have similarly reaped the benefits of the spike in oil prices and surge in global defence spending following Russia’s full-scale invasion of Ukraine in February 2022, while central banks’ efforts to tame high inflation by hiking interest rates have also caused the financial sector’s earnings to soar.

“A general and permanent tax targeting persistent excessive profits [can] address the crisis of inequality and democracy caused by big corporations that have become too big to regulate and to control democratically,” the report states.

“This inequality and concentration of power [also] endangers the functioning of free markets because, with their excessive profits, the biggest companies can outspend any competitor and grow even bigger,” it adds.

‘Necessary but most likely not enough’

Christoph Trautvetter, author of the study and researcher at advocacy group Tax Justice Network Germany, told Euractiv that “it is quite reasonable to assume” that businesses’ excessive earnings will continue over the coming years as they now accrue “largely independent of crises”.

He also stressed that the proposed tax will by itself probably be insufficient to address the problem of excessive corporate earnings.

“Once the tax is in place, it might decrease both the distribution to shareholders and further growth of those companies, so it might slow the growth of excessive profits but would most likely not be enough in itself to end them,” he said.

Left Group co-chair Martin Schirdewan emphasised that the report precedes expected budget cuts across the bloc next year, as member states rein in spending after heavy outlays during the COVID-19 pandemic and energy crisis.

“We don’t need cuts in Europe, neither in climate protection nor in pensions. What we need is tax justice,” the German MEP told Euractiv.

“With a windfall profits tax on the undeserved monopoly gains of powerful corporations like Microsoft, Pfizer, or Goldman Sachs, we could easily plug the budget holes,” he added. “It’s just a matter of political will”.

The report was also warmly received by labour unions. “This report is further proof that excess corporate profits have been fuelling inflation and creating further inequality when they should be taxed fairly and reinvested in the public interest,” Esther Lynch, the General Secretary of the European Trade Union Confederation, told Euractiv.

Businesses’ reaction, by contrast, was considerably more lukewarm. “As a general rule, any changes to the corporate tax system in EU Member States should reflect the importance of the EU maintaining its competitiveness and an attractive investment environment in a global context,” lobby group BusinessEurope told Euractiv in a statement.

A disputed definition

The Left Group’s study is the latest in a raft of recent analyses calculating the potential intake from levying taxes on exorbitant corporate earnings, with the estimated government revenue varying depending on the proposed tax rate as well as the precise definition of excess profits.

A 2022 study by the EU Tax Observatory calculated that a 33% tax on the rise in energy companies’ stock market capitalisation — used as a proxy to determine excess profits — between January and September 2022 would generate €65 billion.

Another analysis commissioned by the European Parliament published last year estimated that a 33% tax on energy companies’ windfall profits — defined as earnings that exceed 120% of the average profit margin over the period 2018-2021 — would generate €106 billion.

The new study, by contrast, defines “excess profits” as a ratio of pre-tax earnings to net revenue above 10%, if and when this threshold has been breached over the previous two years or in at least two of the previous four years (where the average over this period also exceeds 10%).

While this is based on the OECD’s own recommendation, it goes beyond it by extending the definition to include financial institutions and “extractive” businesses such as energy companies, which it estimates account for more than half of all excess profits generated in the EU.

By contrast, the new report’s definition of “excess profits” is in effect more restrictive than the Parliament’s definition. For instance, the earnings of small solar power producers are not considered excessive and Big Oil’s profits are lower than reported elsewhere.

[Edited by Anna Brunetti/Chris Powers]

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