My Prime Minister went to a party and all I got was this lousy windfall tax

You may have seen this headline on Wednesday morning.

Now, there may be good reasons and bad reasons for introducing new taxes but surely doing so when it officially goes against your political instincts and possibly your economic judgement isn’t good at all.

Cards on the table, my personal instincts are towards keeping the tax burden low.  I prefer governments that reduce taxes.  This doesn’t mean that I can’t ever see a reason for some taxes to be increased. Just the other day, I shared a proposal which would mean a tax increase of sorts, through National Insurance.  Nor is it because I don’t think measures should be in place to help the poorer in society, or that those who are better off shouldn’t pay a greater share of taxation.  I also happen to think that things like education and health care should be free at the point of use.[1]  So with that out of the way, here’s why I’m not a big fan of windfall taxes.

My primary reason is the same reason as to why I prefer lower taxes generally.  The burden of taxation tends to fall harder on the just about managing and the not well off. Why? Well because those who are better off, richer people and large corporations are better placed to find ways to either avoid or pass on their tax bill. 

It’s worth noting that despite our current fuel and energy bills being eye wateringly high and despite them being expected to rise further, that the current cost of gas and oil is reasonably low here in the UK. So, why are the bills so high and why haven’t they come down as costs have been reduced? The answer seems to be that our bills and pump prices are being set not by the cost historically or now but by what the companies expect the cost to be in the future and they are expecting those costs to spike as the war in Ukraine continues and as European countries lose the supply of Russian fossil fuels which will push up demand. 

In other words, the energy companies are seeking to provide a cushion for themselves against the future. They will need to pay dividends to their share holders at the end of the year.  Incidentally, those share holders may well include pension funds, another way in which ordinary people are hit by tax decisions. So, putting up taxation further may simply encourage further price increases.

The second reason concerns the specific idea of a windfall tax.  The principle is that companies and individuals shouldn’t be able to benefit excessively from an unexpected situation, especially where that situation creates hardship for others. I appreciate the sentiment but it leaves us with the question “How exactly do we judge that?”  The risk is that our decisions are driven more by envy than by what is actually needed and will actually work.

Now, it is a perfectly reasonable position to suggest that in a society, we should all be able to earn about the same amount.  Indeed, that’s the classic socialist position. But if that’s our position, then surely the answer is to set a cap on earnings and profits and ensure that the tax system facilitates that. Indeed, that’s how Labour Party policy functioned back in the 1970s.  The windfall tax concept seems to have come to the fore when Tony Blair, Gordon Brown and Peter Mandelson decided that New Labour were “relaxed about people becoming filthy rich.” They realised that a lot of people wanted to become rich and so didn’t like the higher marginal tax rates but that they still were suspicious of certain people getting rich. 

Thirdly, I’ve always felt that taxing, processing money through Government funds and then spending it is an inefficient way of doing things and so there is no guarantee that the money will reach it’s intended beneficiaries. At the moment we continue to have a huge deficit and even larger national debt, the NHS is stretched following the pandemic and we are probably going to be looking to boost defence spending as well following the escalation of tension with Russia. 

So, it’s worth asking what we would want to do with the windfall tax money should the Government be able to get access to it. Presumably, one immediate desire would be to subsidise the bills of those struggling the most.  Well, what if we asked the energy companies to do that directly?  What if we insisted that part of their terms of trading was to ensure that they supported those most in need. There is precedent for this with for example the requirement for building projects to include some social housing provision. 

So, here’s the proposal.  We put in place a “Gleaning Law” drawing on the Old Testament principle that the edges of fields should be left unharvested.  This then requires energy companies to set aside a proportion of their profit in order to subsidise the bills of customers that fall below a certain threshold. 

This law could be extended to cater for things like food poverty.  Imagine this.  You go to Sainsburys and when you get to the till, you swipe your rewards card. The till then automatically calculates if you are entitled to a discount and by how much. Not only that but this would enable individual shoppers to contribute as well. Instead of buying an extra tin of beans which you put in those sad little boxes by the tills to be collected by a food bank where the poor must queue with their vouchers, you could opt to allocate your reward points or pay for additional points to go into the gleaning fund and so be picked up by someone in greater need.

Instead of just rushing to knee jerk headline grabbing responses to the current crisis, especially when the motive seems to be to distract people from bad political headlines, we would do better to encourage a bit of creative – and dare I say Biblical- thinking about how we solve it.

[1] I’d also extend things like free prescriptions so that those with chronic conditions are not penalised.

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