Extra taxes and profits: the targets of European populism

The UK Chancellor of the Exchequer, John Healey, is considering a tax on banks’ ‘windfall profits’. The Burnham government’s first budget is approaching, and so ways are being sought to plug the £4.7 billion deficit in public finances. This story bears a striking resemblance to the situation in Italy, where Deputy Prime Minister Matteo Salvini has returned to the issue, stating that banks “will have to be asked to contribute billions, given their profits”. Thus, despite opposition from Forza Italia, it is likely that the additional levy on credit institutions will be introduced in the autumn (as has been the case for the past three years), modelled on the Spanish system, which the minister cites as an example in this instance. But who actually pays? This is the question posed by Andrea Beltratti, professor of finance at Bocconi University and author of the book Il Tempo e il denaro, who has recently sparked a debate on LinkedIn, explaining that the tax on banks’ so-called ‘extra profits’ risks having repercussions on “households, pension funds and banking foundations, which use dividends to fund social, cultural and healthcare initiatives across the country”. A viewpoint that those proposing this solution – whilst touting social justice as their aim – have probably failed to take into account. “My reasoning is this,” Beltratti tells Il Foglio, “according to some estimates based on data from the Bank of Italy, foreign investors hold around half of the share capital of Italian listed companies. Therefore, if an extraordinary levy reduces distributable profits and the value of the companies concerned, part of the cost is borne outside Italy, namely by international investors. This might seem like a good thing, but it is only part of the equation.” The other part, which is never mentioned, is that Italian listed companies have thousands of small investors, households and institutions such as foundations, which now represent a pillar of the welfare system in a country where public resources are scarce. “There is also a less immediate effect, which is political risk,” observes the economist. “If, every year when the Budget Bill is debated, there is renewed discussion about which sector to tax in order to balance the public accounts, effective tax rates become less predictable: this uncertainty could become a systematic component of country risk.”

Taxing windfall profits is therefore not simply a matter of wealth redistribution, as people are often led to believe. “The likely outcome,” warns Beltratti, “is an increase in the cost of capital, not only for banks or energy companies, but potentially for all Italian businesses. And the immediate benefit would have to be weighed against a possible future cost, namely a reduction in the attractiveness of the Italian market.” If, however, in addition to Spain, a country such as the United Kingdom is also considering this, it means that this solution is gaining ground. “In fact, the United Kingdom itself is no stranger to similar measures. It happened back in 1981, when the Thatcher government managed to raise around 400 million pounds through an additional tax on bank profits, and in 1997, when Tony Blair’s government imposed one-off extraordinary levies on privatised utilities, such as telephone companies, to plug a 5 billion pound deficit.”

The right and the left have therefore behaved in the same way in the UK, even though these were isolated incidents. “There has also been some debate recently in Germany, and I would not rule out the possibility that we will see other governments adopting similar measures. After all, there are several countries in Europe experiencing a disproportionate rise in the debt-to-GDP ratio at a time when the need for public spending is becoming more pressing. Politics does not have the power to escape this. These practices have a populist character even when implemented by governments that profess to be moderate, with the ultimate result of increasing the political risk for the country itself”.

And yet, when there is talk in Italy of taxing windfall profits, the opposition remains silent. “They could, instead, seize the opportunity to turn the narrative on its head: to say that we are in favour of regulatory certainty and of protecting those who invest capital in Italy. A completely different line of argument.” But then, the expert concludes, nobody knows exactly how much Italian banks have actually contributed to the state coffers in recent years. “If it were ultimately discovered that it was minimal, as some suspect, it would be a case of adding insult to injury for the country’s credibility.”