A windfall profits tax is a one-time surtax levied on a company or industry when economic conditions result in large and unexpected profits. Historically, such taxes have targeted oil and energy companies when costs have risen, especially from war or other crises.
What is the Purpose of a Windfall Profits Tax?
One reason governments propose a windfall profits tax is to generate additional revenue. Another reason is that proponents hope to encourage companies to reduce prices for the benefit of the consumer.
However, over the long run, such efforts may actually cause companies to reduce investment. From a producer’s perspective, volatile commodity prices can mean some periods of great profitability and other periods of loss. An investment earns its keep mostly in the years of great profitability.
In the absence of high profitability in years of high prices, the investment might no longer be worthwhile, resulting in greater shortages and higher average prices.
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