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How about windfall tax on defense sector profits?

  • April 27, 2023

For weapons makers and defense companies, war is good for business. The war in Ukraine, as well as simmering geopolitical tensions in the South China Sea and elsewhere, has driven a surge in orders in the global defense sector.

Figures released this week by the Stockholm International Peace Research Institute (SIPRI) showed that global military expenditure reached an all-time high in 2022, hitting €2 trillion ($2.2 trillion) for the year.

The two largest US defense contractors Lockheed Martin and Raytheon reported record weapons orders earlier in 2023.

In Germany, the defense sector is beginning to reap a historically large dividend. Rheinmetall, the country’s largest defense contractor, expects sales to hit €7.6 billion in 2023, up from €6.4 billion last year.

A picture of the Rheinmetall headquarters in Dusseldorf, Germany.
Germany’s Rheinmetall has seen profits rise on the back of strong demand for its weapons and ammunitionImage: Norbert Schmidt/picture alliance

Hensoldt, the German company responsible for providing much of Ukraine’s air defense radar, has seen its shares rise throughout 2023 amid booming orders. The share prices for Rheinmetall, Lockheed Martin and Raytheon have also been on sharp upward curves for many months.

War tax

The arms sector is not the only one where financial fortunes have improved in the past year. Oil and energy companies scored record profits amid soaring prices in the aftermath of Russia’s invasion. Governments in several countries introduced windfall taxes after coming under huge pressure to do so.

There have been some calls for defense companies to be hit with similar levies but generally, the topic has not been a matter for discussion says Lucie Beraud-Sudreau, director of the military expenditure and arms production program at SIPRI.

“I don’t think we’re there,” she told DW. “I think the hot topic right now when you’re talking about the arms industry in Europe is more about increasing production and capacity because there’s this big need to help supply ammunition and weapons to Ukraine and then to replenish stockpiles.”

Such has been the intense demand from Ukraine for weapons to defend itself, the major arms makers and the myriad of companies in their vast supply chains have been struggling to keep up.

Who profits from the global arms trade?

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In January, Raytheon and Lockheed Martin said supply chain problems meant they were struggling to keep up with orders. “We’ve got the orders, we’ve got the capacity. We just need to bring the materials in,” Raytheon Chief Executive Greg Hayes told investors, US newspaper The Wall Street Journal reported.

It’s a similar situation in Europe where companies have found it hard to keep supplying Ukraine and replenish national stockpiles in various countries due to major supply chain issues.

In that context, Beraud-Sudreau says talk of curbing profits at defense companies unable to keep up with orders would send the wrong message.

“I think if you were to see an emergence of a windfall tax or that type of thing then you sort of send a mixed signal to the industry,” she said. “You cannot on the one hand ask them to do more, produce more and invest in their production capacity and at the same time tax them more. This is a bit of a contradictory message if we’re going to go down that route.”

Little momentum behind windfall tax idea

Governments across Europe tend to agree, with little momentum behind any calls for extra taxes to be leveled. Although the youth wing of Germany’s center-left SPD party has called for action, it is barely a topic in national debates in Germany or elsewhere.

That is as much driven by the figures as by the urgency of the security situation. The energy sector windfall taxes were prompted by the huge profits made by oil companies.

Some of the biggest raked in annual profits more than fivefold what they had been the previous year. While arms makers have been doing well, their profits pale in significance compared to those in energy.

However, Greenpeace says an excess profits tax for arms companies would be “consistent”.

“The EU passed such a tax last year for energy companies whose profits skyrocketed as a result of the Russian war of aggression on Ukraine,” Alexander Lurz, a campaigner for peace and disarmament with Greenpeace told DW. 

“The same must apply to the extra profits for arms corporations. If Exxon’s profits with Putin’s war are limited, then this must also apply to Rheinmetall Co.”

A demonstration of anti-war protesters in Berlin demanding an end to the war in Ukraine
Anti-war protests aside, there is little momentum behind calls for windfall taxes in defenseImage: Marc Vorwerk/SULUPRESS.DE/picture alliance

Peacetime profits less popular

The Russian invasion of Ukraine has upended the European security picture while increased wariness around China’s intentions towards Taiwan has further mobilized defense spending in the US and Europe.

“It seems across the board there is consensus on increasing defense spending, of making defense a priority in terms of public spending,” said Beraud-Sudreau. “So I think the public sort of senses that this is justified.”

However, she thinks that could quickly change if the war were to end.

“Imagine if peace were to return to Europe, and let’s hope that comes as soon as possible,” she said. “Then maybe you could see a change in the public opinion. There might be less justification to see high defense spending, which of course translates into profits for the defense companies.”

For now, though, the world’s biggest arms makers are less concerned about getting taxed more than they are by keeping up with demand.

Edited by: Uwe Hessler

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