TAXES: The UK and Europe have taken the lead imposing excess profits or ‘windfall’ taxes on their energy and utility sectors and recently on the banks. The US has not, maybe learning from its miss-steps at using this tax tool last century and with its high share ownership levels boosting the political cost. Its become a driver of Europe’s widening sector-by-sector valuation discount in our view. Italy’s bank’s windfall tax has joined Spain, Czech, and Hungary. Whilst Sweden and UK still have financial crisis linked levies in place. Energy windfall taxes are even more common, ranging from EU’s 33% ‘solidarity contribution’ to UK’s up to 35% ‘energy profit levy’. @Italian-Heritage.
HISTORY: Windfall taxes were pioneered in the US, but their lack of success has combined with current political gridlock and costs – with share ownership levels so high – to prevent their further use. The US had an excess profits tax in the first world war that accounted for a huge 40% of wartime taxation. Though later iterations in WWII and on oil profits in 1980 were more distortive and less successful. The UK and Europe got off to a later tax start, with the UK having a one-off tax on bank deposits in 1981 and on privatized utility profits in 1997. But Europe has since become a big user, bolstering its fiscal coffers but helping worsen its stocks valuation discount.
IMPACT: The windfall tax impact on company valuations is two-fold. It 1) reduces profits and profitability, and 2) increases investor uncertainty of future action. Both depress valuations and have contributed to the widening valuation discount of UK and European assets vs the US, in our view. Whilst the revenues governments raise often disappoint as the biggest and most global companies find ways to mitigate the tax, often at the expense of smaller companies, and may curb local investments. We don’t think it’s a surprise that the most impacted financials and energy sectors are those with some of the most discounted valuations vs US peers (see chart).
All data, figures & charts are valid as of 09/08/2023.