What Exactly Do We Tax When We Speak of 'Excess Profits'?
A closer look at excess profit taxation, based on our 2023 research paper and an accessible summary published in the Frankfurter Allgemeine Zeitung (FAZ+).
Excess profits cannot be measured economically
In economic theory, excess profits are the portion of profits that exceeds the returns originally expected. These expectations, however, are neither observable nor objectively measurable. A sound empirical identification of excess profits is therefore fundamentally impossible.
Taxation consequently relies on an approximation
The regulation introduced in 2022 does not tax excess profits in the strict economic sense, but increases in profits. In the energy sector, profits earned in 2022 and 2023 were subject to an additional tax of 33 per cent if they exceeded the average for 2018–2021 by more than 20 per cent.
Approximated excess profits are not exceptional
An analysis of Orbis data shows that approximately 41 per cent of companies meet this definition of an “excess profit”. This finding applies across industries: such increases in profits occur at all times and in all sectors.
At the same time, only very few taxpayers face a substantial additional burden
The regulation applied only to companies in the crude-oil, natural-gas, coal, and refinery sectors. Of more than 100,000 companies with available financial statements, only 80 were affected. A substantial share of the tax revenue was attributable to ESSO Deutschland.
This raises fundamental questions of justification
If approximated excess profits occur systematically across industries, why are they taxed in only a very small part of the economy?
The tax is based on relative rather than absolute ability to pay
The level of income or wealth is no longer decisive for the amount of tax; instead, the determining factor is the relative change. This can result in less wealthy economic actors with temporary increases in profits being taxed while consistently highly profitable companies remain unaffected. Relative performance thus becomes a new basis for taxation that still requires justification.