The expression windfall tax denotes a tax levied on an unforeseen or unexpectedly large profit—especially a profit that is considered to be excessive or unfairly obtained.
This expression occurs, for example, in the following from What is a windfall tax and will it be extended to UK energy providers?, by Alex Lawson, energy correspondent, published in The Guardian (London and Manchester, England) of Thursday 11th August 2022:
What is a windfall tax?
A windfall tax is a one-off levy on a sector that has made huge profits from something they were not responsible for. The government has imposed windfall taxes on industries before: in 1981, the then Conservative chancellor, Geoffrey Howe, levied the banks, arguing they had benefited from high interest rates. In 1997, the Labour chancellor, Gordon Brown, raised £5.2bn from a windfall tax on privatised utilities. The pressure is on energy and electricity companies to ease the cost of living crisis, with Brown having called for suppliers who cannot lower bills to be temporarily brought into public ownership.
The noun windfall denotes:
– (literally): something blown down by the wind;
– (figuratively): a piece of unexpected good fortune, especially financial gain.
The noun windfall is used figuratively, for example, in the following passage from The saiynges of Marcus Tullius Cicero, in Apophthegmes, that is to saie, prompte, quicke, wittie and sentēcious saiynges, of certain Emperours, Kynges, Capitaines, Philosophiers and Oratours, aswell Grekes, as Romaines, bothe verie pleasaunt and profitable to reade, partely for all maner of persones, and especially Gentlemenne (London: Printed by John Kingston, 1564), the translation by the English schoolmaster and playwright Nicholas Udall (1504-1556) of Apophthegmata, by the Dutch humanist and scholar Desiderius Erasmus (circa 1469-1536):
Upon an other certain persone, who after being come to a good wyndefal of inheritaunce, was first of all the coumpaignie asked his sentence in a matter of consultacion, whereas before the obteinyng of thesame inheritaunte [sic], he was reputed for the veraiest foole in the worlde, Tullius sembleablably iested, saiyng: Cuius hereditas quam vocant sapientiam: yͤ is, whose liuelehood whiche they callen wysedome.
It seems that it was the British economist Arthur Cecil Pigou (1877-1959) who coined the expression windfall tax in the following letter, published in The Times (London, England) of Friday 2nd July 1909:
THE INCREMENT AND REVERSION DUTIES.
TO THE EDITOR OF THE TIMES.
Sir,—In the mass of detailed discussion to which the Budget proposals for land taxation have necessarily given rise there is some danger lest the more general considerations relevant to the subject should be lost sight of. I should be grateful if you could allow me space for a few lines concerning two of the proposed taxes—the increment duty and the reversion duty.
There are two distinct standpoints from which all taxes need to be examined—the standpoint of distributive justice and the standpoint of production. We do not wish to raise revenue in ways that are “unfair” to particular persons; nor do we wish to raise it in ways that impede industry and thus diminish the country’s annual production of real wealth.
Both these canons of taxation point directly to the wisdom of collecting revenue, wherever that is practicable, by taxes upon “windfalls.” Such taxes, like Government levies in respect of treasure trove, are not in any ordinary sense “unjust” to anybody. Furthermore, since windfalls are, by definition, unexpected strokes of fortune and not the fruits of enterprise, the knowledge that they will be taxed cannot check enterprise or in any way impede production. Such taxes, therefore, ought to be employed wherever they are practicable. Any Chancellor who finds a way to bring some new class of windfall under the hand of the Revenue officials has done a good work for the country.
Now, Mr. Lloyd-George’s increment tax and reversion duty are attempts to secure for the State a part of a certain class of windfall. If we are of opinion that they really achieve this object in a reasonable manner, the fact that the Budget does not also incorporate attempts to strike other sorts of windfall is no argument against them. Much that has been said and written about the “unfairness” involved towards owners of land as distinguished from owners of other property seems to me to miss the essential point. A tax upon land in general is in a sense “unfair,” just as a tax upon tea in general, or, indeed, upon any single commodity, is “unfair”; for it does not strike all members of the community “equally.” But a tax upon windfalls in land, if it can be devised, escapes even this obstructive objection, from which no ordinary tax is exempt. If a man’s estate were miraculously doubled in the night, whether in physical area or in value, would not the occasion be a specially suitable one for a tax? Let us by all means tax other windfalls besides those in land if we can, but do not let us employ against the levying of one good tax the argument that other good taxes can be conceived which at present are not levied.
What I have written is intended not as a defence of the Chancellor’s two proposals, but as a suggestion concerning the lines along which those proposals should be examined. The question is, Will they really operate mainly as windfall taxes, or will they strike something that they are not intended to strike? If they are to be successful in their object, the utmost care will be needed in putting them into final form. There would be some safeguard against failure if considerable changes of value only, and not small changes, were made the occasion of taxation. It would also seem necessary to make some provision in the valuation clause to avoid levying a tax on such merely apparent increments of value as may come about in consequence of new gold discoveries or other incidents connected with the precious metals. If, for instance, all prices double, so that it needs £2 to buy what £1 will buy now, a rise in the money value of an estate from £10,000 to £20,000 will not represent any rise in real value; and yet, under the Budget scheme as it stands, the owner would have to pay £2,000 to the Treasury. In like manner, in the event of a general fall in prices, real increments of value might emerge in gold prices as apparent decrements, and the tax would miss its mark. No doubt this difficulty could be partially avoided by the employment of some sort of index number. The fact, however, that it exists illustrates the technical complexity involved in this taxation and the need for meticulous care in its construction.
I am, Sir, yours, &c.,
A. C. PIGOU.
King’s College, Cambridge, July 1.