On Monday Italy announced a 40 per cent windfall tax on the extra profits its banks have made from higher interest rates. By Tuesday afternoon, shares of major Italian banks were down by between 5.9 and 10.8 per cent with a total €10 billion loss in market value. Yesterday evening the finance ministry partially backtracked, clarifying that the impact may be limited for some banks and the levy won’t exceed 0.1 per cent of a firm’s assets (a fifth of the level that Citi analysts had earlier estimated). Taxing those who have benefitted from an unusual situation to help those who are struggling sounds sensible. In practice, it’s complicated. A windfall tax can hit investor confidence and future business prospects, distorting an economic cycle that’s already slowing the economy. Its success or failure also depends on how the revenue is used, and the Italian government’s aim doesn’t seem to be mitigating inequalities. The tax still needs to secure parliamentary approval, but if it proceeds, Italy will become the biggest European market to impose windfall taxes on banks profits after Spain, Hungary, the Czech Republic and Lithuania. When Spain’s government announced its own windfall tax on bank profits last summer, shares dropped as much as 10 per cent.
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