The University of Chicago Booth invited leading European and American economists to debates at the IGM Forum to express their views on whether a windfall tax could be effectively implemented with revenues used to provide relief to poorer households, and what impact it would have on incentives for companies and consumers. The experts were asked to state whether they agreed or disagreed with the following statement, and if so, how much and with what degree of confidence.
- A windfall tax on the excess profits of major oil and gas companies – with the revenue returned to households – would be an effective way to provide the average household in European countries with temporary relief from rising energy costs.
- Fiscal measures that would set a ceiling on consumer energy prices would be a more appropriate immediate response to increased inflation in the eurozone than raising interest rates.
Out of 48 European experts, 33 took part in this survey at the end of June 2022. In the first statement, opinions were mixed. Weighted by each expert’s confidence in their answer, 4% of the panel strongly agreed, 46% agreed, 33% were unsure, 17% disagreed, and 0% strongly disagreed. There are also some notable caveats among those who agree with the first statement. Charles Wyplosz of the Graduate Institute in Geneva says: “It’s a poor substitute for a completely reduced carbon tax, but it’s a better approach to raising revenue than a general tax or a deficit.”
Franklin Allen of Imperial College London comments: “This redistribution may have some long-term impact on investment, but it seems appropriate given the current situation in many countries.”
Among those who say they are unsure, several panelists note the challenges of implementing windfall taxes. Patrick Honohan of Trinity College Dublin notes: “Geopolitical circumstances could justify an excess profits tax, but successful implementation in a multi-country world is difficult.” And Nicholas Bloom of Stanford speaks from personal experience: “Having been the official responsible for the UK oil windfall in 2001, I know it’s a lot more complicated than it seems.”
Other concerns mentioned by experts who say they are unsure include those expressed by Jan Eeckhout of the Universitat Pompeu Fabra in Barcelona: “I’m not sure about collecting ad hoc taxes on ex post results, take Norway as an example: 78% profit tax, always.” Costas Meghir of Yale adds: “Excess profits are very difficult to measure, and profitability should be measured by long-term return on capital.” And Christian Leuz of Chicago Booth notes: “The introduction of such a tax is unclear, but important. In addition, there are many problems with the constitutionality and implementation of this tax.”
Kjetil Storesletten from the University of Oslo is also in the camp of those who disagree with the statement. “People invest because they think they can get a return. Subsequent taxation violates property rights and destroys investment incentives.” And Jan Pieter Krahnen from Goethe University Frankfurt concludes: “An energy windfall and relief for poorer households are two different things that must not be directly linked.”
Capping energy consumer prices
Regarding the second statement submitted to the European panel, whether capping consumer energy prices would be a more appropriate immediate response to increased inflation than raising interest rates, most panelists say they disagree with such a statement. Weighted by individual experts’ confidence in their answer, 4% of panels strongly agree, 11% agree, 7% are unsure, 36% disagree, and 43% strongly disagree.
For example, Oliver Blanchard from the Peterson Institute also agrees with the statement, who claims: “This is a case where a larger fiscal deficit can make the job of monetary policy easier.” However, Jan Eeckhout, who is not quite sure, objects: “Interfering with the price system leads to an imbalance that someone has to pay anyway. Better monetary and fiscal policy plus redistribution.”
Of the panelists who disagree, some focus on alternative ways to help poorer households. Jan Pieter Krahnen says: “You will not manipulate market prices due to adverse allocative consequences. Poorer households can receive compensation directly.” Ernst Fehr of the University of Zurich suggests: “Instead of a cap on energy prices, poor households should receive a cash transfer to ease the burden of high energy prices.” Jean-Pierre Danthine z Federal Polytechnic School of Lausanne dodáva: “I do not support such a measure for environmental reasons. Direct subsidies for poorer households are more appropriate.”
Others also worry about the impact on incentives to reduce energy consumption. Franklin Allen answers: “Such a restriction would blunt incentives to reduce energy consumption and thus be counterproductive.” And Charles Wyplosz adds: “Energy prices should rise because supply is shrinking and that’s good for the long term. Inflation is another matter.”
Other experts focus directly on inflation and potential policy responses. Lubos Pastor of Chicago states: “Inflation has a broader base that goes far beyond rising energy prices.” Patrick Honohan says: “The shift in energy prices is not – and should not be – likely to be temporary, a strongly negative nominal interest rate is now difficult to justify.” Harvard’s Paul Antras says: “Inflation has a broad base. Price regulation would reduce energy costs, but would likely encourage spending, thereby increasing inflation. Monetary policy must be tightened.” And Ricardo Reis explains: “Monetary policy is the right tool to deal with inflation.”
Finally, two experts also looked back into history. Kjetil Storesletten notes: “In the 1970s, we tried price ceilings as a tool to limit inflation. It didn’t work then and it won’t work now.’ Nicholas Bloom agrees: “Price controls do not work – there is a long history of evidence of this. In fact, I don’t even understand why it’s even being talked about.”