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The Debate | Should superprofits and superdividends be taxed?

To make up part of the public deficit, the government is preparing to open the hunt for pensions. The contours of these “rents” are not yet precisely defined, but we can think of the superprofits made by certain groups and sectors of activity. Two economists are debating. For Philippe Trainar, taxing would be economic nonsense; for Alain Trannoy, a pragmatic tax is needed.

Taxing superprofits and superdividends is economic nonsense – Philippe Trainar

The taxation of the “rich”, the “superprofits”, the “super dividends”, the buybacks of shares has become the commonplace of French political life… Served up in all sorts of ways, it is indicative of the disappearance of any effort to reflect on economic policy. Often presented as economically equivalent, these different measures are in fact economically very distinct.

Wealth is not particularly related to “superprofits” or “super dividends”. The truly rich are natural persons not legal persons, yet natural persons received in 2022 only 19% of dividends distributed in France, the bulk (66%) having been received by companies to which these dividends are necessary to finance their activity.

As for “superprofits”, they themselves are hardly related to “super dividends” or share buybacks, since “superprofits” are generally attached to profitable investment and reinvestment opportunities that provide little incentive for dividend payments or share buybacks. In fact, the notion of “superprofit” is purely subjective. For example, Oxfam, a confederation of charities, arbitrarily defines “superprofit” as the average amount of profits over the past four years (adjusted for growth). This definition is economically absurd insofar as the volatility of profit varies greatly from one sector to another, and that the overtaxation of “superprofits” as defined by Oxfam would in fact lead to an overtaxation of the riskiest sectors of the economy, which are also the most innovative, thus giving a competitive advantage to companies with little or no innovation.

As far as the notion of “super dividends” is concerned, it is largely misleading: “super dividends” generally occur not when the company makes “super profits” but when a company’s investment and profit opportunities dry up and it is desirable to reallocate capital to other, more promising companies, for this to do so it is necessary to start by returning the capital to the shareholders. Taxing “super dividends” by discouraging the reallocation of capital gives an unfair competitive advantage to less productive companies with no future. The taxation of share buybacks is subject to a similar analysis.

Only the overtaxation of monopoly profits would make economic sense… However, in developed economies, particularly in Europe, the dismantling of monopolies no longer requires taxation but the control of competition. The competition authorities thus seek to reduce the risks of monopoly inherent in the GAFAMs while not harming the dissemination of the innovations that these companies carry. There is no need for taxation.

However, the measures to overtax “excess profits”, “super dividends”, share buybacks or, more trivially, the “rich” have this in common: they would reduce investment by the amount of the revenue from the surtax (bearing in mind that this revenue would probably feed into final consumption expenditure) to which would have to be added the consequences of the disincentive to invest resulting from the fall in the return on capital induced by the surtax.

In the case of France, this would be doubly catastrophic. On the one hand, because the French economy suffers from a chronic shortage of domestic capital, which constrains investment

and which makes it dangerously dependent on foreign capital. On the other hand, because France is the developed economy where inequalities are the lowest, where they have continued to fall in recent decades and where compulsory taxes are the highest, with the result that France is one of the few OECD countries where there is no urgency to reduce inequalities and where the rise in marginal tax rates no longer makes it possible to increase the tax revenues (the famous “Laffer” effect). A measure that should therefore be avoided as much as possible.

On the usefulness of taxation, measured but certain – Alain Trannoy

The poor results of public finances with a larger than expected deficit for 2023 (5.5% instead of 4.9%) lead to questions about different avenues for raising taxes. Unsurprisingly, the French are in favour of taxing the richest and superprofits. An examination of the second option suggests that there are possibilities for action in two directions, the taxation of share buybacks and that of energy companies outside EDF.

The starting point is to agree on a definition of surplus profit. The economist nourished by market analysis learns that surplus profit is profit beyond the return on capital invested in a risky activity in an economy of pure and perfect competition.

The company in a purely competitive situation (it cannot pass on an increase in costs in its prices) now exists only in a few sectors of the economy, in particular in agriculture, and this is one reason for the economic difficulties of this sector.

A majority of companies find themselves in a situation where the entrepreneur has opportunities to make a profit because the competition regime is very imperfect with local monopoly situations. A high-profile example is the case of shipping where the rate of profit to turnover was 40% during the pandemic. But it can also concern the small craftsman in the construction sector in a tourist area. Excess profit can therefore be widespread, and this makes any regulation by a competition authority potentially sprawling.

Despite many microeconomic examples where it seems easy for the entrepreneur to make a margin, the distribution of value added between the remuneration of labour and that of capital at the macroeconomic level, according to the national accounts in France, can always be schematized by a macroeconomic production function where factors would be remunerated at their marginal productivity in a situation of pure and perfect competition. It’s a bit of a micro/macro paradox. Overall, there is no overall surplus profit made by companies operating in France.

On the other hand, there may be excess profits generated by French multinationals in their global activity. The question is whether they are taxable in France, and the answer in the case of current international legislation is probably no, but the situation can evolve as illustrated by the agreement initiated by the OECD on the taxation of multinationals.

However, the issue of share buybacks, which reached €30 billion for CAC 40 companies, raises questions. The logic of paying generous dividends and distributing free shares to employees is understandable, but a company that uses its profits to drive up its stock market in the current situation, where companies need to invest to change the growth model, is not defensible from a collective point of view. I support the same type of provision contained in the Inflation Reduction Act passed by the US Congress in the summer of 2022 which introduced a tax on share buybacks (1% of the value of the transaction).

There remains an easy case to deal with, that of the surplus profit generated by the regulatory and fiscal activity of the State. According to a report by the Court of Auditors, all energy companies have made €30bn in exceptional profits. This is a matter of fiscal taxation, except for EDF since the State is the sole shareholder!