The debate over windfall-profit taxation has once again moved to the centre of Italy’s political agenda, initially with reference to banks and now also to energy companies.
The starting point is understandable. When a particular industry earns exceptionally high profits because of external circumstances — rising interest rates, an energy crisis or geopolitical tensions — it may appear reasonable to ask that industry to make an extraordinary contribution to support the households and businesses most affected by those same events.
But who actually pays a windfall tax?
To answer this question, it is not enough to identify the company receiving the tax bill. Companies are not abstract entities. They belong to their shareholders, employ workers, purchase goods and services, sell products to customers and finance investment.
A tax formally imposed on a bank or an energy company may therefore ultimately be borne, in different proportions, by shareholders, customers, employees or suppliers.
A transfer between households and institutions
If we initially consider a closed economy, windfall taxation can be seen primarily as an internal transfer. The government takes part of the income accruing to the shareholders of the affected companies and uses the revenue to finance tax reductions, subsidies or public services benefiting other households and businesses.
No new wealth is directly created. Its distribution is changed.
The picture is particularly complex in the Italian banking sector. The shareholders of some major banks include fondazioni di origine bancaria — foundations created during the privatisation and restructuring of Italy’s former public-sector banks. These foundations use the dividends received from their shareholdings to finance social, cultural, educational and healthcare initiatives, as well as projects supporting local communities.
A reduction in distributable profits may therefore also reduce the resources available for these activities.
In this case, taxation does not necessarily transfer wealth from shareholders to the most vulnerable members of society. It may instead shift resources from a decentralised and territorially based form of redistribution, carried out by banking foundations, to redistribution managed through the national public budget.
The net social result depends on the quality and allocation of public expenditure: which local projects will no longer be financed by the foundations, and which households or businesses will actually benefit from the additional tax revenue?
It is therefore not sufficient to say that the tax takes resources from banks and returns them to society. Some of those resources were already being used for social purposes, although through different channels. Assessing the real redistributive effect requires considering not only who pays the tax, but also how the taxed profits would otherwise have been used.
More generally, the assessment depends on at least three questions: who benefited from the exceptional profits, who receives the revenue collected by the government, and which behaviours are changed by the tax?
If the burden falls mainly on high-income investors and finances targeted assistance for vulnerable households, the measure may have a progressive redistributive effect. If it leads instead to higher prices or reduced access to credit, part of that benefit may be offset by its indirect consequences.
Foreign investors change the calculation
Italy, however, is not a closed economy. According to estimates based on Bank of Italy data, foreign investors hold approximately half of the equity capital of Italian listed companies.
This introduces a dimension that is often overlooked in the public debate.
If a windfall tax reduces distributable earnings and the market value of the companies concerned, part of the burden is borne by foreign shareholders. The transfer therefore does not take place exclusively among Italian households, companies and institutions. Part of the resources may be transferred from international investors to the Italian government and, through the public budget, to Italian citizens.
At least in the short term, this may represent a net benefit for the country.
It would be wrong, however, to conclude that half of the tax is automatically paid by foreign investors. The actual proportion depends on the ownership structure of the companies affected, the reaction of their market prices and, most importantly, the extent to which companies can pass the burden on to other stakeholders.
The indirect consequences
In the banking sector, a higher tax burden may result in lower dividends. But it may also lead to less favourable conditions for depositors and borrowers through lower deposit rates, wider lending spreads, higher fees or reduced credit availability.
In the energy sector, part of the burden may be transferred to final prices or lead to lower investment. The latter is particularly important at a time when substantial capital is required both to strengthen energy security and to finance the transition towards lower-carbon sources.
There is also a less visible but potentially significant consequence: political risk.
If windfall taxation returns every year as part of the budget debate, the effective tax rates applied to companies become less predictable. Corporate taxation risks being transformed from a relatively stable set of rules into a variable used to close the public-budget gap from one year to the next.
This issue is particularly relevant for a country with a high level of public debt, where governments may have strong incentives to obtain additional revenue from whichever industries happen to be reporting the highest profits at the time.
Investors must then consider not only the business and financial risks faced by a company, but also the possibility that an unexpected share of its future profits will be absorbed by new fiscal measures.
This political risk may become a systematic component of Italian country risk. Investors may consequently require a higher return to hold Italian equities, reducing their market prices, other things being equal.
The resulting loss affects all shareholders: international investors, Italian households, pension funds, institutional investors and banking foundations. Even when a new tax has not yet been introduced, repeatedly discussing it can impose a cost by increasing uncertainty and reducing the attractiveness of Italian equity investment.
Foreign shareholders may therefore bear part of the initial loss, but they can also reduce their exposure to Italy in the future. The immediate fiscal benefit must be compared with the longer-term cost of weakening Italian companies’ ability to attract capital.
What is a “windfall profit”?
A further conceptual problem remains: how can an ordinary profit be distinguished from a windfall profit?
Higher earnings may reflect an unexpected economic rent, but they may also be the result of previous investment, risk-taking, greater efficiency or compensation for losses incurred in earlier years. Selecting a single comparison year can produce a very different assessment from one based on average profitability over an entire economic cycle.
A well-designed windfall tax should therefore be temporary, clearly defined and applied to a tax base capable of identifying genuinely exceptional rents. It should avoid discouraging investment and should not be repeatedly revised after being announced.
Italy’s experience shows how difficult it is to achieve this balance. The bank windfall tax announced in 2023 caused an immediate fall in bank share prices and was subsequently amended. The OECD has observed that the rapid introduction and revision of the measure created uncertainty and may have affected investment decisions and banks’ willingness to provide credit.
From political debate to economic analysis
The relevant question is not simply whether banks or energy companies should be “made to pay”. The economically meaningful questions are more specific.
Who ultimately bears the burden? How much falls on Italian shareholders and how much on foreign investors? How much is passed on to customers and businesses? How many resources are diverted from the social activities financed by banking foundations? How will the government use the revenue? And what will be the effects on investment and the cost of capital?
The large presence of international investors means that windfall taxation may initially benefit Italy’s national income: part of the resources collected may effectively come from abroad.
But the same mechanism may generate a longer-term cost if fiscal unpredictability reduces the attractiveness of the Italian market. If investors begin to assume that any particularly profitable industry may become the next target of an extraordinary levy, they will demand a higher return for investing in Italy.
The potential result is an increase in the cost of capital not only for banks or energy companies, but potentially for all Italian businesses.
The conclusion is not that windfall taxes are always right or always wrong. They should be evaluated as complex redistributive operations in which immediate tax revenue represents only one part of the overall result.
Taxing a company is straightforward from a formal perspective. Understanding who ultimately pays — and which activities will no longer be financed — is much more difficult.