Types of windfall gains
Examples of windfall gains include, but are not limited to:
- Gains from demutualization
- Unexpected inheritance
- Lottery or sweepstakes winnings
- Abundant winnings from gambling
- Returns on investments
- Proceeds or profit from a large sale
- Unexpected gift from a wealthy person
- Game show, casino, or other contest winnings
- Employment payroll bonus
- Natural resources
- Foreign aid
- Proceeds from an insurance claim
- Settlement from a lawsuit
Uses of windfall gains
What people do with windfall gains is subject to much debate. While they differ from one account to the next, most economists hypothesize that the majority of the gains are saved, due to the Permanent Income Hypothesis.
Windfall profits are a type of windfall gain. They can occur due to unforeseen circumstances in a product's market, such as unexpected demand or government regulation. Since the profits were unforeseen, some legislators believe that taxing them at a higher rate, or confiscating them outright, should not hurt the company. This type of taxation is known as a windfall profits tax.
Regardless of taxation, some businesses view windfall gains as a liability, as it creates difficulties when it comes to managing cash flow and investor expectations. It may also indicate a problem with the company's strategy and the ability of executives to forecast the market. That said, windfalls also present a substantial opportunity for reinvestment and helps buffer the company's bottom line.
Barack Obama has proposed a windfall profits tax on oil company profits in his New Energy for America plan. However, Obama shelved this plan in December 2008 when oil prices dropped below $50 a barrel.
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