Dusseldorf Taxes are popular with the population when a majority does not have to pay these compulsory taxes. This is probably one reason why politicians and parties want to impress voters at irregular intervals by demanding a wealth tax or an increase in the tax on the wealthy.
In view of rapidly increasing energy prices, fans of such taxes have found a new favourite: the excess profit tax. Also because such taxes have already been introduced in Spain, Italy and Belgium.
The Greens co-chairman Ricarda Lang is even trying to cover up serious mistakes made by her party friend, Economics Minister Robert Habeck, in the gas levy by demanding such a levy. Their argument: It disturbs the sense of justice that companies that made high profits are now relieved of their higher gas costs by means of a levy.
On the other hand, it is legally difficult to limit such a levy to individual companies that are systemically important or threatened with insolvency. Political solutions are therefore needed in situations in which law and justice diverge. The “logical consequence” is therefore not the correction of the messed-up gas tax, but “an excess profit tax for energy companies,” said Lang.
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With this demand, Ms. Lang – like other advocates of such a tax – speaks from the soul of a large majority of the population. According to an ARD survey, 76 percent of Germans consider an excess profit tax to be correct. But as politically easy as it may be to comply with the voters’ wishes, it is difficult to introduce such a new tax with legal certainty.
High burden for companies in Germany
The first thing to note is that companies in Germany are treated differently for tax purposes, depending on their legal form. Partnerships do not pay income taxes. The owners are taxable with all income, regardless of whether these companies are a fast food company, a global industrial automotive supplier or an energy trader.
Nevertheless, many large companies are corporations, which are taxed in Germany at a good 30 percent at company level, which is quite high in international comparison. This total burden consists of the trade tax, which varies from region to region, the corporation tax and the solidarity surcharge. German corporate tax law does not have a progression as in income tax. Since the distributed profits are subject to withholding tax for the shareholder, the total burden adds up to almost 50 percent.
With an excess profit tax, progression would find its way into corporate tax law. To do this, the legislature would have to define with legal certainty that part of the annual profit that is to be regarded as “excess profit”. Whether a special tax consideration of “excess losses” should be provided for inversely has not yet been discussed.
Irrespective of this, the Treasury would have to clarify, taking into account the principle of equality, which taxpayers should be burdened with such a tax in addition to gas dealers – for example artists who, after a three-year corona break, went on highly successful tours, pharmaceutical companies that brought a particularly successful drug onto the market, Armaments companies, which are enjoying unexpected demand due to the Ukraine war, the operators of coal-fired power plants that have already been written off and are now being reactivated, or the manufacturers of heat pumps that have recently been in great demand and have therefore become very expensive.
More Handelsblatt articles on the subject of excess profit tax:
>> Record results at RWE, Shell and Co.: Support for excess profit tax is growing
>> Debate about special tax: should the state skim off the billions in profits from the oil companies?
>> “European partners showed us how” – SPD and Greens are increasing the pressure on excess profit tax
If you believe analyst estimates, 15 of the 40 Dax companies will make record profits in the current year, including companies that are not suspected of striving for war profits, such as the Post Office, Telekom, Merck or BMW.
In addition, “profit” is not a clearly defined quantity. Business economists know a large number of different definitions and calculation methods. Likewise, the assessment bases for trade and corporation tax are not determined in the same way. This raises the question of which profit an excess profit tax is to be applied to.
Depending on whether and to which existing tax the excess profit tax is linked, the question then arises as to the sovereignty over earnings. The federal government is entitled to the solidarity surcharge, the federal and state governments are jointly responsible for corporate income tax, and most of the trade tax revenue goes to the municipalities. Experience teaches that the federal states are unlikely to be willing to voluntarily forgo a share of the revenue from an excess profit tax.
In addition, the by no means trivial question arises as to whether the excess profits of the current year can still be taxed. Because in German tax law – for good reasons of planning security – retroactive effects are inadmissible. However, the Federal Constitutional Court distinguishes between impermissible real and permissible spurious repercussions.
Genuine retroactivity occurs when a law is retrospectively applied to a situation that has already been resolved. False retroactivity, on the other hand, means that a law is applied to a situation that has not yet been completed but has already been partially implemented. Most tax obligations, such as income tax, corporation tax and trade tax, only arise at the end of the assessment period.
Changes in the law in the current year are therefore considered to be “falsely retrospective” since they only relate to taxes that will arise in the future. The legislature would therefore possibly have legal leeway if it were to pass the excess profit tax in the current year and if it were to relate to an already existing tax.
Income from the excess profit tax would be manageable
What this would look like with a completely new tax would be new legal territory. However, the past teaches that the Federal Constitutional Court is critical of new special taxes. This court declared the nuclear fuel tax to be unconstitutional and in June 2017 ordered the repayment of the income generated in the years 2011 to 2016. At the time, the federal government lacked the legislative competence to enact such a tax. By no means would the federal and state governments have a free “right to invent taxes”, the supreme court decided.
Last but not least, it is questionable whether the excess profit tax makes sense. It would undoubtedly have a high symbolic effect and would presumably alleviate popular displeasure at high energy prices – although the fiscal yield would be manageable. Corporate tax revenue currently amounts to EUR 40 billion and, according to current tax estimates, is expected to remain below the previous year’s level this year.
The “excess profits” would therefore be kept within very narrow limits, while the costs of collecting this new tax to be borne by the federal states would probably be high. The reason: There is no experience and therefore no EDP to calculate taxable excess profits. In addition, there is a high degree of legal uncertainty, since the companies affected are likely to sue the tax.
Whether these costs and the legal uncertainty are worth the short-term political and macroeconomically manageable fiscal yield has hardly been discussed to date. The financial administration is already lacking thousands of civil servants, so that the speedy implementation of the existing taxes is not guaranteed. Before the coalition makes the quick shot of the excess profit tax, it should consult independent tax experts on the risks and side effects. Otherwise the excess profit tax is threatened with a similar fiasco as the messed up gas tax.
More: Oil companies make enormous profits – and continue to invest in fossil fuels