Necessary remedy or bad misdevelopment?
Germany is currently discussing the introduction of an excess profit tax. The reason for this is the high profits that companies in the energy and logistics sectors in particular achieve. The tax, in turn, is intended to skim off unjustified profits. But: Does the excess profit tax make sense or is it even part of an undesirable development?
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Excess tax: The situation
The situation in Germany in terms of excess profit tax currently seems clear. Energy, raw material and logistics companies generate enormous profits while the population suffers from high energy and food prices.
It is therefore an obvious consideration if the state takes part of the profits from the beneficiaries of the high prices, i.e. the corresponding companies, in order to be able to use this income to relieve the burden on the citizens of Germany. So far, so easy.
A questionable argument
But if you take a closer look, you will see an argument that sounds so simple and sensible that you should be suspicious just because of that. On the one hand, there are clear “bad guys”, namely the companies that are currently able to demand high prices for certain goods and can thus increase their profits by leaps and bounds.
On the other hand, there are a large number of “losers” who are easy to identify, namely the citizens of our country, especially the consumers, who, because of these high prices, especially for energy, for gas and oil and for food, have less and less money to spend have life available.
The call for the state to eliminate this “injustice” is therefore getting louder, because it cannot be that the “bad companies” benefit from the high prices on the backs of the “weak” consumers, which ultimately only benefits the shareholders this company benefits.
The state as caretaker
It’s hair-pulling. The past few years and the upheavals in the economic sectors resulting from the pandemic, combined with the effects on people, seem to have awakened only one wish in our country. After all, the state should take care of everything because it’s the only one who knows who to take money from and who to give it to.
Excess tax: who is affected?
It is not at all clear who is to take something. Because if you look closely at what sparks the discussion of the excess profit tax, then there are a few companies that, due to special situations, are reporting leaps and bounds in profits or paying unnaturally few taxes on their profits.
Hapaq-Lloyd is one such company, having increased its profit sevenfold in 2021 compared to 2020. A profit is expected in 2022, which, by the way, will double that of 2021 again. We’re talking about 16 to 18 billion euros here. In 2021, the profit was around nine billion euros, with taxes of around 61 million being paid.
This results in a tax rate of around 0.65 percent. A scandal, so they say. Other companies worth mentioning are those in the energy and petroleum sectors. For example, BP tripled its profit in the second quarter of 2022 compared to the previous year. And Shell, Repsol or Total fared similarly.
Which profits are affected?
But what does that mean exactly, where do these profits come from? For one thing, the gains come from the fact that the market prices at which oil and gas can be sold have increased massively. However, the cost of funding has remained relatively the same.
Hapaq-Lloyd or its competitor Maersk benefit from a similar effect because freight rates have skyrocketed. Well, then you just take away from them what these companies got. Because these jumps in profits are a blatant injustice.
But when exactly is there an unjustified jump in profits? And when exactly is the leap due to an external event beyond everyone’s control and not to very good management?
Because other companies are also making a name for themselves time and again with jumps in profits. For example, Amazon made a profit of around 2.5 billion US dollars in the first quarter of 2020. In the second quarter it was around 5.2 billion, a doubling.
Are there unfair profits?
That was celebrated by analysts. Incidentally, in the third quarter of 2021, profit was around 3.1 billion, while in the fourth quarter it was 14.3 billion. What a brilliant company, isn’t it? Or is it just well managed – or is it taking unfair profits due to its market power?
Of course, one can now quickly object that there is a difference here. This is because Amazon does not benefit from circumstances that, in turn, lead to increased spending by consumers, namely those that consumers cannot control. And that is certainly true.
But one thing is clear here: Amazon can also show jumps in profits. However, these have not led to loud calls for an excess profit tax, just as there are many other companies that have experienced the same thing and have not raised calls for higher taxes either.
Excess Profit Tax: A multitude of uncertain variables
So when you start thinking about who is going to pay the excess tax, and when you try to objectively identify the relevant companies or “crisis winners”, you quickly realize that you have to deal with quite a lot of uncertain variables. When is a jump in profits to be qualified as one that is unfair in terms of how it came about?
“Unfair” is extremely subjective in this context. As I said above, the picture is just too good: bad companies on the one hand and poor consumers in the truest sense of the word on the other. Subjectively, companies cannot win here.
Objectively, however, the question arises as to which companies should be affected. Really only those in the energy sector, for example? Everyone else can’t stop laughing when they also generate profit jumps, but are not seen as “evil”?
When is a win an over win?
And when you have arrived at this point, and here you justifiably get into argumentative wobbles, then the next point comes. Because when is a win a surplus? Italy made it easy here, for example.
The government has estimated that energy companies made around 42 billion more in profits between October 1, 2021 and April 30, 2022 compared to the corresponding previous period.
Of this, the companies should give 25 percent through a tax. All companies were affected whose profits increased by five million euros or more in the period in question – this affected a total of around 11,000 companies.
Excess profit tax: Open the floodgates to arbitrariness
Anyone who reads this must get scared and anxious. Just because the profit was higher than in a comparable period, did this lead to a tax of 25 percent? Without clarifying why the profit was higher? It doesn’t get much more arbitrary – especially because this skimming sounds so easy. Or to put it bluntly: if you do good business, you will be punished with higher tax payments. What has become of the principle that performance must be worthwhile?
Of course, the companies did what is probably the only right thing to do in this situation. They sued, and en masse. The argument? The arbitrary levying of the excess profit tax. The outcome of the dispute is currently still open.
Reliability dies
And then there is another argument: we all, companies and consumers alike, appreciate the reliable regulatory framework in Germany. It is true that we now have to bear an excessively high total tax burden, but in return we as citizens get quite a lot from the state, also in the overall view.
What taxes are to be paid and what services the state provides in return is clearly regulated and is provided fairly reliably. An excess profit tax would interfere with this reliable system. Because the profits that the companies generate were generated on the basis of certain framework conditions.
In these general conditions the excess profit tax played no role. If this is suddenly introduced with a calculation that is not easy to understand and that only affects a certain type and number of companies, then the reliability is gone.
And apart from that, the principle of equality is also being massively attacked, which extremely questions the legality of an excess profit tax.
Excess profit tax: A personal conclusion
In summary, it must therefore be said that the demand for an excess profit tax solves what appears to be a clear problem at first glance and “points at exactly the right thing”. At second glance, however, it quickly becomes apparent that it does not solve any problem at all, but only fulfills the desire to quickly grab money where a lot of money is currently being made – but without asking why and why.
On the contrary, it would make more sense if our state finally began to give responsibility for their own lives back to its citizens and to provide them with the appropriate means to do so – without having to decide in more and more areas who gets what money, why and for what period gets.
Because this only increases the injustices, as the question of the basic need and the amount of the allowance moves further and further away from objective criteria. It would be better to enable citizens to participate in the profits of the economy instead of redistributing them through unfair means such as an excess profit tax.
It would make much more sense to promote the acquisition of company shares so that the citizens can benefit from the good vocabulary of the companies. This is exactly what is happening to Hapaq-Lloyd shareholders now. And for that to happen, we need more economic understanding among the population. This could be achieved with much more teaching in business-related school subjects.
Of course, such ideas will bring nothing in the coming weeks and months. But it is frightening when short-term solutions have been preferred to long-term solutions for years and now the last bastion, namely the reliability of the existing regulatory framework, is being sacrificed.
Businesses aren’t stupid. They will take such uncertainties into account in their further planning. In the short term, there may be relief for citizens. In the long term, I fear huge disadvantages that cannot simply be got rid of.
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