A windfall tax is a tax assessed on a company or industry when usually high profits are made. Unexpected high profits are sometimes referred to as “windfall profits,” explaining the origins of the term “windfall tax.” The practice of levying additional taxes in a year of windfall profits is not universal and it is highly contentious in many regions of the world, with people both for and against the concept arguing their points passionately.
The obvious benefit to a windfall tax is that it increases government revenues, allowing governments to more comprehensively provide social services and other benefits to citizens, ranging from improving roads to increasing military strength. Having additional funds can also allow a government to address its debt and may strengthen the economy. However, windfall taxes can also act as a disincentive for companies. If companies operate in awareness that windfall profits will be taxed specially, there is no particular reason to seek out such profits with innovative inventions and business practices.
Some advocates for the windfall tax argue that in fact this penalization can be intentional. A windfall tax may be used to punish companies supposedly operating for the public good, like privately held utilities, serving as a reminder that the government does not view exploitation of consumers favorably. However, companies cannot always control windfall profits; oil companies making unusually large profits in one year, for example, are obviously benefiting from high energy prices but didn't necessarily create those prices.
For windfall taxes to be approved, taxation agencies must generally propose a tax and have it voted on by a legislature. Citizens can participate in shaping tax policy by contacting their representatives to make their views known. Since tax increases are often viewed unfavorably by the population, politicians are often reluctant to approve any initiatives for tax hikes, including initiatives to restore rates of taxation slashed during periods of tax cuts.
Taxation can be a hot issue in many nations, as there are disputes about what kind of taxation is fair and how taxes should be applied. Most nations want to achieve a balance in their tax structures and this usually involves differing taxes for individuals and companies of different sizes. This can have the effect of appearing to punish people and companies that make more money, and some people prefer the idea of a flat tax levied equally on all members of society because they believe flat taxes are more fair.
