Shooting themselves in the foot over extra profits

Every year in Italy, there is talk of taxes on windfall profits (or ‘solidarity levies’, if you prefer). A brief recap: in 2022, the Draghi government introduced a levy on all energy companies and a specific one on renewable energy producers; in 2023, the Meloni government added an additional IRES levy on energy companies; at the same time, a tax on banks’ windfall profits was introduced (with the option for credit institutions to avoid paying it if they bolstered their reserves); with the latest Budget Law, IRAP has been increased for three years on banks and insurance companies; Finally, the ‘Bollette’ decree raises the IRAP rate for energy companies. Meanwhile, similar taxes have been proposed for pharmaceutical companies, insurance firms and the defence industry.

There is now renewed discussion of a tax on energy and banks for the forthcoming budget. Although technically different, all these levies share certain common features: they generally generate less revenue than estimated; they give rise to protracted legal disputes; and they do not address the root causes of the issues they are intended to tackle. In particular, they fail to distinguish between price rises caused by structural imbalances (as in the case of fuel) and those linked to unfair practices (which should be proven and stopped by the Competition Authority). But there is another, more general aspect: the premise underlying taxes on windfall profits – namely, that excessive profits should be confiscated – is the exact opposite of that underlying the bailout of ailing firms. The latter practice, in fact, rests on the principle that excessive losses should be written off. But punishing those in the black and supporting those in the red is precisely why productivity trends in Italy are as they are: instead of going after those who make profits, we should be asking ourselves why so many firms do not make profits or have such slim margins. Taking profits away from a successful business does not restore a faltering one to health: it also cripples the one that, on its own, would be doing well.