A windfall profits tax is a one-time surtax levied on a company or industry when economic conditions result in large and unexpected profits. Inheritance taxes and taxes levied on lottery winnings can also be considered windfall taxes on individual profits.
What is the Purpose of a Windfall Profits Tax?
One reason governments propose a windfall profits tax is to generate additional revenue. In some cases, a windfall profit tax is levied to encourage companies to reduce prices for the benefit of the consumer but may actually cause companies to reduce investment.
Historically, such taxes have targeted oil and energy companies when costs have risen, especially from war or other crises. These taxes are designed to temporarily regulate the market they target during periods of unusual volatility.
For example, if a natural disaster results in skyrocketing energy prices, and therefore unusually high profits for energy companies, the government may implement a windfall profits tax on the industry in response.
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