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| Inequality |
Daniel Smith, in Stuff. Aug 31 2022
At the start of the Covid-19 pandemic, experts warned of a “K-shaped” economic recovery in which the wealthy became richer while those on low incomes missed out.
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| Craig Renney |
Massive profits
The massive company profits reported by companies this month occurring alongside a cost of living crisis was a sign the K-shaped recovery was well and truly here, he said.
“Overall New Zealand company profit has jumped 60% in the past two years. It is certainly the case that the big end of town has done really well and is not struggling in the same way as many SME businesses,” Renney said.
Most energy companies made large profits this year, led by Genesis Energy’s 600% profit increase.
Major construction manufacturers such as Vulcan Steel (91%) and Fletcher Building (42%), also reported big profit gains, as did fuel companies and supermarket chains.
But at the same time, workers were trying to cope with increasing costs of living, high inflation and a lack of meaningful wage increases, he said.
“Workers are falling further behind. The things that are getting more expensive are non-discretionary, which means workers don’t have a choice but to pay them. They are ending up with less choice and less money,” he said.
Companies Windfall gains
Businesses that have made excessive windfall gains due to factors outside of their control should be taxed higher, especially as the cost of living hurts workers, says CTU director of policy Craig Renney.
While some companies said they had no choice but to pass on the costs, that was not the whole story, Renney said.
“If your profit margin is a percentage of the product cost, and the cost of the product doubles, then nominally your profit margin doubles. Increases in costs for some companies have certainly led to large increases in profit,” he said.
On one side of the K 36% of workers did not receive a pay rise last year despite inflation running hot, he said. And on the other side, wealthy individuals with investment portfolios took a share of the huge company profits through dividends and value growth, Renney said.
To address this imbalance, Renney proposed the Government introduce a windfall tax, a one-off tax placed on companies that made excess profits from something they were not responsible for.
The UK introduced a windfall tax in May which added a 25% surcharge on the extraordinary profits oil and gas companies had made as a result of the war in Ukraine.
Renney said a similar solution was needed here.
“You have firms here that have made huge windfall gains because of Covid, supply chain shortages, market power, global commodity price rises. None of this is a function of smart investment made by astute and agile firms. It was just Russia invaded Ukraine and the price of oil went up.”
Consumers were footing the bill for cost of living increases and a rebalance was required, he said.
“All the options should be on the table when you are dealing with consumer welfare losses of this size due to huge, genuine windfall gains.”
Windfall tax not the answer
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| Eric Crampton |
“A windfall profits tax winds up hitting exactly the firms that should be expanding.”
The high profits being reported were driven in part by continued fiscal and monetary stimulus, and would not be uniformly distributed, Crampton said.
Companies that were experiencing smaller increases in demand for their goods and services would not be making those higher profits, he said.
High profits in some sectors gave businesses the incentive and ability to expand, by attracting workers and materials away from other sectors to areas where their services were more valuable, he said.
A windfall tax would blunt that signal and reduce a firm’s ability to lure workers away from areas where their services were less valuable, he said.
But some means of redistributing profits needed
But Crampton agreed the Government should consider redistribution of excess company profits, just not through a windfall tax.
Instead he recommended a carbon dividend, a system used in Canada that taxes the sale of fossil fuels and redistributes the revenue to an entire population to be used on carbon efficient household or business purchases, as a more direct and efficient redistributor of wealth.
Government needs to do something
Regardless of the solution, Renney said it was clear the Government needed to do something.
“This is not just about business profit. It is about a rising demand for state housing, more people trying to access the Winz emergency payments or food banks, at the same time as we are seeing enormous company profits.
“New Zealand needs to ask itself which kind of country it wants to be,” Renney said.
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Read more ... BERL report on Inequality in NZ
https://berl.co.nz/our-pro-bono/inequality-and-new-zealand
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