Windfall-acious Taxes Must Be Halted
Windfall taxes are best seen as an economic vajazzle. While seeming like a sensible idea at first, you soon find yourself left with a nasty infection taking a stubbornly long while to heal. But perhaps even more equal to vajazzles – windfall taxes are best left in the years of New Labour.
On a recent meander through the festering cesspit that is my Instagram discovery page I stumbled across the following graphic:
Ever suspicious of policy proposals splattered onto a bile coloured background, my expectations were fairly low. The post and accompanying caption served to convince the unfortunate bugger ensnared by the despotic colour scheme that their current hardship is due to profiteers exploiting them.
But while the idea that profit is something that should be actively attacked was largely confined to the sulfuric fissures of left-wing academic journals, it has recently found its way into government policy.
Last month, the Conservatives announced a 25% windfall tax on oil and gas producers in the North Sea. It was predicted to raise £5 billion and would be used to help households with soaring energy bills.
However, a raid on corporate profits should not be the way this is funded. It would offer little more than a momentary sugar rush and fails to address the cataclysmic UK energy market.
Look beyond the headlines and the idea of greedy capitalists rigging energy markets to their own benefit soon crumbles. The reality is that energy companies are at the complete mercy of global markets.
One research paper went as far as to estimate that 85% of the change in energy prices are the result of global crude oil prices. With the Russian invasion of Ukraine exacerbating post-Covid supply issues, crude prices spiked from $75/barrel from the start of the year to around $120/barrel by March.
With it, a predictable jump in household’s energy bills. April 2022’s 54% increase in the energy price cap has consumers now paying far higher rates than they were previously.
Yet, those with a vested interest in smearing private companies have recently reared their heads in order to point to energy company’s ‘record profit’ in recent months. One particular headline gaining attention was BP’s second quarter profit of £7.6 billion. An immense figure that many are saying should be put towards helping those struggling with their energy bills. This reasoning is akin to a pseudo-Land Value Tax. Once described as ‘the least worst tax’, it is levied on what is described as ‘unearned’ gains. So in this case, energy companies profiting from a war that has caused scarcity for their good and drove up prices.
This idea holds vastly flawed logic. If a company is liable to be raided for its ‘unearned’ profits, where can the line be realistically drawn? Should a company making face masks be forced to pay higher tax during the outbreak of Covid-19? Or what about a company making strawberries when their rival’s plantation burns down?
Besides being a haphazard policy, it also has a highly stifling effect on the overall prospects for the UK. Critics of a windfall tax rightly point to the disinvestment that would likely follow. The nature of the tax is that it is applied retrospectively upon profits already earned. With this being the new boundary drawn, prospective investors would be expectedly deterred away.
Worst still, this could greatly derail progress towards Net Zero by 2050. Concerns have been raised regarding windfall taxes and the expected diversion of billions of pounds worth of investment away from Net Zero infrastructure. While the Treasury have recognised this by giving sweeping tax relief on new investments, they would be mistaken to think they can continue making threats of further windfall taxes with little repercussion.
The damage that a windfall tax will cause is wildly disproportionate to the minimal help it would provide. The latest Treasury windfall will only reduce energy bills by £400 – a tenth of the likely cost come January. Instead, focus should be on a policy that involves a far less distortionary effect upon markets and is more generous in support provided. This is best achieved through an expansion in the Warm Homes Discount (WHD) and increases to Universal Credit. Doing so will offer a clean solution to our current energy crisis and target help where it’s needed most.
The one silver lining is Number 10 frontrunner Liz Truss categorically ruling out a further windfall tax if elected. We all should hope she makes good on this promise and banish such a feckless policy to where it belongs – the history books.