Czech prime minister’s economic adviser Křeček: Government’s windfall tax proposal is a travesty

As we reported in the second half of last week, the Ministry of Finance presented the parameters of the windfall tax, or tax on unexpected profits (hereinafter WFT), which had been announced for several months. Along with the parameters for calculating the tax, the ministry also presented the expected tax revenue – CZK 85 billion for 2023. Of this, the banking sector is expected to pay CZK 33 billion, with the remainder to come primarily from the energy sector. However, economists have been unable to arrive at the stated tax revenue from the banking sector. Economist and prime ministerial adviser Štěpán Křeček even described the proposal as a travesty.

Ministry of Finance “travesty”

Economist Štěpán Křeček described the proposal as a travesty on CNN Prima News for several reasons. For example, he said the tax is too high. According to him, this travesty could become an even greater travesty during the legislative process. Like many other economists, he was unable to arrive at the stated revenue from the banking sector.

“I am concerned that substantially less will be collected,” Křeček said, adding that he believes roughly half will be collected from the banking sector.

Křeček particularly criticised the 60% corporate income tax surcharge. According to him, it is inappropriately high, and he referred to the Laffer curve, which hypothetically illustrates the relationship between tax revenue and a given tax rate. As the economist explains, the curve shows that if taxation is taken too far, less revenue is collected despite the higher tax rate.

Justification for the WFT falls short

Moreover, returning to the very justification for the WFT, Finance Minister Zbyněk Stanjura defends introducing the tax for banks on the grounds that they have unexpectedly high profits. However, the data do not confirm this. This is pointed out by one of the leading Czech economists, Jakub Seidler, who refers to banking sector statistics from the Czech National Bank (ČNB). As he notes, while absolute profits are higher, the sector has also grown significantly in terms of assets. Profits therefore may not be extraordinary.

The same point is also made by Jan Juchelka, chairman of the board and CEO of Komerční banka. In a debate on ČT24, his opponent Libor Dušek, a member of the government’s National Economic Council, was unable to respond to his remarks.

As for the energy sector, the Commission’s original proposal did not consider the introduction of a price cap for producers compatible with further taxation of electricity producers’ profits. The reason? The Commission believed that setting the price cap alone was sufficient and would not jeopardise investment in new electricity generation sources. However, this was removed from the approved proposal.

Nevertheless, other aspects of the WFT’s design also raise concerns. Why is the base from which the tax is calculated fixed at the 2018-2021 average for the following three years rather than shifting over time? Unfortunately, the ministry did not provide a justification.