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What is a Windfall Tax?
Mary McMahon
Mary McMahon
A windfall tax is a tax assessed on a company or industry when usually high profits are made. Unexpected high profits are sometimes referred to as “windfall profits,” explaining the origins of the term “windfall tax.” The practice of levying additional taxes in a year of windfall profits is not universal and it is highly contentious in many regions of the world, with people both for and against the concept arguing their points passionately.
The obvious benefit to a windfall tax is that it increases government revenues, allowing governments to more comprehensively provide social services and other benefits to citizens, ranging from improving roads to increasing military strength. Having additional funds can also allow a government to address its debt and may strengthen the economy. However, windfall taxes can also act as a disincentive for companies. If companies operate in awareness that windfall profits will be taxed specially, there is no particular reason to seek out such profits with innovative inventions and business practices.
Some advocates for the windfall tax argue that in fact this penalization can be intentional. A windfall tax may be used to punish companies supposedly operating for the public good, like privately held utilities, serving as a reminder that the government does not view exploitation of consumers favorably. However, companies cannot always control windfall profits; oil companies making unusually large profits in one year, for example, are obviously benefiting from high energy prices but didn't necessarily create those prices.
For windfall taxes to be approved, taxation agencies must generally propose a tax and have it voted on by a legislature. Citizens can participate in shaping tax policy by contacting their representatives to make their views known. Since tax increases are often viewed unfavorably by the population, politicians are often reluctant to approve any initiatives for tax hikes, including initiatives to restore rates of taxation slashed during periods of tax cuts.
Taxation can be a hot issue in many nations, as there are disputes about what kind of taxation is fair and how taxes should be applied. Most nations want to achieve a balance in their tax structures and this usually involves differing taxes for individuals and companies of different sizes. This can have the effect of appearing to punish people and companies that make more money, and some people prefer the idea of a flat tax levied equally on all members of society because they believe flat taxes are more fair.
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
Learn more...
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
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Discussion Comments
Another thing is, when have you ever heard of a government wanting to spend less money? You see, maybe they have this pot of gold they can grab from the oil companies, or the insurance companies, or whatever new target they can find.
But these companies are smart. Take their profits and they will make sure to shift expenses and operations around so that they don't have any next year, or at least not as many. The oil and gas companies have accounting and legal teams that are masters at moving money around on paper.
What happens then is the next year, the "windfall profits" aren't there to tax. But the government is used to the money now. And maybe they started a popular new program with the money and people (voters) are going to be mad at them if they take it away. So now they need to fund it. Guess who they're coming to for the money? Oops.
@KLR650 - What entitles you to their money just because they have a lot of it? Everyone seems to be so generous with other people's money. If these programs you want are so great, why don't you support raising everyone's taxes to pay for them yourself?
I think it is a really dangerous slope to get on when you start thinking that anytime a corporation or group of people has some extra money, that it is a pot of gold to be looted by the tax man and spread around to fund every little pet project. It may sound good to you at first, but one day maybe they'll want to take money from something that you like.
@bigjim - Why should these billion-dollar corporations get to keep all of that extra money they made by jacking the prices so high for all of us? Gas prices are so high now, everything costs more, it's hard to be able to drive where you need, and there's no end in sight. Meanwhile these rich CEOs are traveling around in jets and living large with all the money they take from us.
There are so many things that money could pay for: Education, health care, more help for struggling families.
I say set a a reasonable windfall tax rate and let these fat cats start paying their fair share!
This kind of thing makes me mad. It seems like just because some company has a good year, the government suddenly things it should be able to get its grubby paws on even more of the money that is generated.
You saw this a couple of years ago with the first big jump in oil and gas prices. I didn't like to pay them any more than the next guy, but suddenly people see this pot of money that the companies had and they want to tax this so-called windfall profit to pay for who knows what.
I didn't hear any politicians talking about lowering gas taxes to help out with the high prices, or complaining about all of the increased sales taxes they were making on the higher prices.
It seems like any amount of money the government can find, they want to take, but yet we go deeper and deeper in debt.
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