Windfall taxes are unfair - but easy
Of course business objects to the threat of a windfall tax, but if politicians have to collect revenue from someone, companies making windfall profits are an easy place to start.
The UK parliamentary select committee on business – chaired by a Tory MP – has suggested a modest windfall levy on energy companies because of the profits made from the free allocation of permits under the EU’s emissions trading scheme.
Given the record profits being announced by oil companies, they are an obvious target. Even Robin Hood worked out that you rob the rich because the poor haven’t got anything worth taking.
Such taxes are bad because they select particular industries rather than raise money across the board, they are uncertain and they can be malicious – choosing targets for political rather than economic reasons.
The new Labour government’s widespread application of windfall taxes on privatised companies in 1997 was as political as it was economic – a one-off punishment for being sold too cheaply by the Tories.
Yet governments have to raise money and governments facing recession have to raise even more. So the good points are that windfall taxes reduce the supernormal profits created by factors outside the companies’ control – high commodity prices or ill-based EU permit schemes – and the revenues can be hypothecated to relieve particular problems.
The Conservatives’ 1980s windfall tax on high bank profits caused by high interest rates set the precedent for governments raiding the coffers of particular sectors but there was no suggestion of using the proceeds to offset, say, high mortgage bills. A tax on energy companies could be justified by using the proceeds to cut the fuel bills of the hardest-hit consumers – or to develop new capacity.
Taxing profits reduces companies own ability to invest as well as the value of their shares help by pension funds. But however much companies complain, they have no votes - whereas a tax on unpopular targets such as banks or petrol suppliers may gain votes even before the proceeds are put to good causes.
Companies must accept that they are easy prey for cash-strapped chancellors and flaunting their excesses is likely to encourage a tax raid.
