An extra tax for the beneficiaries of the crisis?

A drinking fountain next to my apartment building in Berlin – built with tax money

In Germany, introducing a new tax is currently being hotly debated. Proponents would like to implement a so-called excess profit tax (“Übergewinnsteuer”) to tax those companies especially that make high profits in times of crisis. Mask and vaccine manufacturers in the corona pandemic, energy companies in times of high energy prices.

As always, with questions of justice, almost everyone has an opinion. Basically, there are two camps. On the one hand, there are those who advocate such a tax, who say it is unfair if a few benefit from social crises. Therefore, such profits should be returned to society through an excess profit tax. On the other hand, people say that high prices indicate how vital these products are in times of a crisis. Manufacturers of such essential products should be supported, not penalised by an extra tax.

Economists sometimes hold back on such debates. Because justice issues are complex issues. Plus, they are based on opinion and subjective values. Far and wide to see no hypotheses that could be empirically tested. Economists sometimes feel uncomfortable in such environments.

This is not to say that economists have nothing to say on the subject. They have thoughts about the consequences of introducing such a tax. For example, they can predict how high the revenue from such a tax would be. Or they may point out that if an excess profits tax was introduced, the incentives to produce high-demand crisis products could decrease.

The wonderful Steven E. Landsburg, an American professor of economics at the University of Rochester in the state of New York, once (in this book) told the following story. 

Having dinner, Landsburg’s dinner companion “was passionate in her conviction that the rich pay less than their fair share of taxes.” To clarify what she means by “fair share of taxes”, Landsburg asked her the following question: Suppose that Jack and Jill draw equal amounts of water from a community well. Jack’s income is 10,000 dollars, of which he is taxed 10 per cent, or 1,000 dollars, to support the well. Jill’s income is 100,000 dollars, of which she is taxed 5 per cent, or 5,000 dollars, to support the well. In which direction is that tax policy unfair? 

I find this simple example impressive. Because it challenges the familiar notion of a fair tax system. Because most people think that a progressive income tax is an appropriate income tax. So that the more someone earns, they not only have to pay proportionally more taxes but disproportionately more. 

The Jack-Jill example questions that general view. Two people get the same benefit but pay different amounts for usage. The one who earns more pays more (5,000 dollars), the one who earns less pays less (1,000 dollars). Most people probably think that’s fair. However, the well is not financed by a progressive tax but a degressive one. Jill, who earns more, has a lower tax rate (5 percent) than Jack, who earns less and has a higher tax rate (10 percent).

With that little example, I don’t want to discourage you from participating in societal debates about a fair tax system. On the contrary, justice is essential for social coexistence. We will support the society we live in if we believe that it is a reasonably just society. I just want to promote the fact that it can sometimes be helpful to question one’s own concept of justice. To be open to new arguments. 


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