The debate on the taxation of extra-profits is an issue that is animating the political and economic landscape, and with good reason. Many argue that these gains, particularly those of banks, are like unicorns: creatures that exist only in the imagination. If unicorns titillate the imagination of children, the extra-profits capture the attention of populists, regardless of their political affiliation. But beyond the rhetoric, what is true about this story?

The Political Perspective: Extra Profits as ‘Social Injustice

In the view of many politicians, the banks’ extra-profits are inherently ‘unfair’. The main argument is that these exceptional gains are not the result of particularly brilliant corporate management or significant innovations, but rather a direct consequence of extraordinary external circumstances. A prime example is the increase in interest rates decided by the European Central Bank (ECB). In this view, the taxation of such profits is presented as a measure of ‘social fairness’, a way of taking money that was not earned in free market conditions and redistributing it to the community, helping families and businesses that have been penalised precisely by this context of economic crisis.

The Economic and Legal Perspective: Extra Profits as Pure Fantasy

On the other side of the fence, economists and jurists question the very validity of the concept of ‘extra-profit’ as an economic and legal category. In a market economy, a profit is the natural outcome of a business activity. Labelling it as‘fair‘ or‘unfair‘ is, according to this view, a groundless political exercise.

A tax on extra-profits could be seen as a form of discrimination against a specific sector, with the risk of having long-term negative effects, such as alienating investors and reducing future investments. Furthermore, there are doubts about the methodology of calculating these profits. Interest margins, for example, do not represent the total profit of a bank, which must also consider operating costs, depreciation and loan loss provisions.

The impact on customers: Who pays the bill?

This is where we come to the crux of the matter: banks have three main sources of income:

1. Net interest margin: the difference between interest on loans granted and interest paid on customer deposits.
2. Commissions and commissions: the revenues generated by the services offered.
3. Trading and investment activities.

Considering a possible tax on extra profits, one question arises: when faced with an unexpected outflow of money, how could a bank compensate for this loss? The most likely answer is that the burden would fall on customers themselves, in the form of an increase in service fees.

Italian government has already attempted to introduce such legislation in the past, to little avail. The reason is simple: taxing something that has no clear legal or economic definition, and which exists mainly in the collective imagination, is a difficult task. As long as the concept of extra-profit remains a theoretical ‘unicorn’, it will be difficult for any government to turn it into a stable and legal source of revenue. We shall see.