Tax me if you can: Why windfall taxes are a bad idea

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Tax me if you can: Why windfall taxes are a bad idea

Windfall taxes” – smash and grab

I thought that all high-ranking Tories understood the fundamental principles of taxation as set out by the father of classical economics, the great Adam Smith (1723-90). Smith set out the criteria for just taxation in no uncertain terms in The Wealth of Nations (1776 – the year of the American Declaration of Independence).

Smith contended that, in a prosperous and civilised society, taxes must be crafted in accordance with the four principles of fairness, certainty, convenience and efficiency. A so-called “windfall tax” – or the “25 percent energy profits levy”, whatever you want to call it – on the profits of the oil majors which pay tax in this country defies all those four principles. The levy is set to last for three years or “until energy prices return to normal levels” – whatever that means.

It is unfair for the state to suddenly point a finger at one industrial sector and to say “We’re coming for you” just because it has become cash generative. And if a government, when facing inclement economic conditions, alters its tax rules short-term to cover a deficiency, that breaks the principal of certainty. Multinational corporations invest in countries where they have reason to believe that fiscal arrangements will be consistent over time.

Convenience? The oil majors pay corporation tax at a higher rate than other companies – about 40 percent – so the Exchequer will already have netted a nice trawl of cash from them this year. That rate of corporation tax is set to rise significantly over the next two years anyway. Lastly, this will be a most inefficient tax. HMRC officials (no doubt working from home) will take many man years to finalise this superficially instant policy, given its complicated attendant tax reliefs on new investment.

In short, if all taxes are state-sponsored theft, “windfall taxes” are a smash-and-grab raid.

The money raised from the “energy profits levy” – an estimated £5 billion – will partially finance a grant of £400 to every household for energy costs (paid directly to the power companies), £650 for everybody on benefits, £300 for pensioners and £150 for the disabled. That package will cost the government about £15 billion according to the Resolution Foundation and comes on top of the £150 council tax rebate (for homes in bands A to D) announced in February. Thus, the energy levy still leaves the government £10 billion short.

Many people will think that £400 to be paid in October will not be enough, given that the energy price cap is likely to rise to £2,800 by then, and does not come soon enough. The cost of petrol is continuing to rise, despite the Chancellor’s five pence cut in fuel duty. Even higher income households are feeling the pinch, and many people are resorting to debt to make ends meet. According to the Bank of England, consumer credit is growing at an annualised rate of 5.2 percent. In aggregate, UK households are borrowing about £1.5 billion every month. Prestige Pawnbrokers is reporting that business is brisk.

The Tories now in power have succumbed to the left-wing myth that social problems should be solved by soaking “the rich” – whether that means rich individuals or rich corporations. They think – unlike Margaret Thatcher – that the state knows how to spend money more productively than businesses. And they now seem to have given up on the notion that they are the party of low taxes.

Corporation tax is scheduled to rise from 19 percent to 25 percent, thus reversing a decade or more of incremental cuts in the headline rate. National Insurance Contributions (NICs) have been increased for both employees and employers. Admittedly, the threshold at which people start paying NICs (the “primary threshold”) has been raised in line with the threshold at which people start paying income tax (the “personal allowance”). But this may have the unintended consequence that many low-paid and part-time workers will cease to accrue rights to their state retirement pensions. (That unexploded bomb, I predict, will go off soon). Further, the tax on dividends is going up, thus reducing returns for retail and institutional investors alike.

This windfall tax was largely driven by popular sentiment whipped up by the Daily Mirror and its political wing, the Labour Party. It was a stick with which to beat the fat cats who are now depicted as the tormentors of those in energy poverty. But it isn’t that simple. It might look popular, but it makes Britain look uncompetitive. Significantly, we also learnt this week that France had beaten Britain in the race for new overseas investment for the second year running.

The UK is one of only two nations which has never defaulted on its national debt in the modern era – that’s the world since the late 16th Century. (It’s true that the Kingdom of England defaulted on its loans to Italian merchants under Edward I in the 1290s). The other is the USA (which has not been around that long, historically speaking). It seems short-sighted to put our reputation fiscal consistency at risk for a relatively modest short-term increase in the tax-take of about £5 billion.

There is a lack of empathy with business here. The prime minister, as far as we know, has never run a business or written a business plan. (Few Tory leaders have, though at least Mr Cameron was once a partner in a wine bar). Mr Sunak, an alumnus of Goldman Sachs and a gilded luminary of Silicon Valley, believes that everything can be fixed by a little ingenious financial engineering and a modicum of judicious risk management. That is how the caste of globalist magi thinks.

Resistance is not futile

The commentator Matthew Lynn has suggested that British businesses should go on a tax strike. Why not? The tubes and trains are out on strike, or will be soon, proclaiming their workers’ victimhood. Extinction Rebellion can bring motorways to a halt with apparent impunity. Charlie Mullins, founder of Pimlico Plumbers is even threatening to stop paying his taxes until civil servants get back to their offices. He has a following.

If energy companies are just to be used as cash machines by a government reeling from an inflationary shock, they can effectively signal their displeasure by cancelling their investment plans – and that is exactly what is now happening. This comes at precisely the moment that we are supposed to be reducing our dependence on imported hydrocarbons, particularly from Russia. The Kremlin further concentrated minds this week by cutting off new supplies of oil to Shell completely.

The construction of new oil rigs is a highly expensive and risky business. And where will the funds now come from to restore our inadequate gas storage capacity? Mrs May’s government closed the Rough Storage Facility in 2017 because she was advised that plentiful supplies of cheap liquid natural gas (LNG) would keep us warm indefinitely. The lack of storage capacity makes it difficult for Centrica and others to strike long-term contracts with overseas suppliers. We are now, as a nation, in deep energy insecurity.

We should also remember that Shell, BP, Centrica and the rest are not just oil and gas companies. They are diversified energy companies which are investing heavily in new zero carbon technologies such as hydrogen. In so doing, they are allocating capital which may not generate returns for many years. Banks are already under pressure from activist shareholders to stop lending to oil and gas companies. Why make life even more difficult for them?

True, Shell and BP have made a lot of money in the last year as the oil price has soared. But it was not so long ago that the oil price was depressed. The oil companies made relatively modest profits in the recent past. Yes, the oil price is trading at around $117 a barrel this morning – but it was down to around $23 as recently as March 2020 when the coronavirus pandemic kicked off. That’s below the breakeven extraction cost.

EnQuest has already announced plans to invest in offshore rigs in Malaysia rather than in the North Sea where it has invested around £4 billion over the last 12 years, including the Kraken field. We can expect further similar announcements.

Free school meals for all – a truly universal benefit

We have a problem. Almost one in 20 British households told a recent survey that one of their family members had gone a whole day without eating in the past month because they couldn’t afford to buy food.

I’ve been talking to people who run food banks in Norfolk, and I’ve established the following. First, the number of “clients” food banks are servicing is soaring. (People – mostly mothers – must register to use a foodbank for a peppercorn fee before they can use it). Second, demand for their products spikes during school holidays. (This half term week coincides with the Jubilee weekend, and demand is higher than ever). Third, the inflation rate on basic foodstuffs is outstripping the CPI or RPI. Fourth, a lot of foodbank clients are homeless, or live in hostels equipped with just a kettle and a microwave. I’m told they mostly live on pot noodles. Charities like The Trussel Trust, are working flat out to supply food banks right now.

There is a lively debate about the provision of free school meals. Currently, school pupils qualify for free meals only if their parents or guardians are on benefits – except in Reception and Years 1 and 2 of primary school where all kids are fed at state expense. It is the responsibility of county councils to pick up the tab for this. So, low income families who do not receive Universal Credit and so forth must fork out around £12 per week per child – or they can provide their children with a packed lunch every day. Depressingly, packed lunches, I am told, consist largely of processed foods and chocolate bars.

I’ve now come round to the view that making cooked lunches available to ALL school pupils, would be hugely beneficial on several counts. Although expensive, it would be more cost-efficient than other forms of welfare. Firstly, it would remove the stigma associated with designating a minority of school kids as needy. Second, it would encourage school kitchens to raise their game. Third, it would instil a sense of communal eating that is so important to our social fabric. Fourth, we could be reasonably confident that no youngster would go undernourished.

Let’s make these school meals as delicious and nutritious as we can. There are specialist catering companies which already do this. And some schools, it was explained to me, have excellent kitchen facilities which produce enough meals to supply their own school and neighbouring schools as well. In World War II, Churchill and his food minister, Lord Woolton, rolled out British Restaurants at a time of food rationing. Let’s make school dining rooms available to both pupils and their parents (for a modest fee) even in the school holidays – and call them British Restaurants.

Decent free lunches for all school pupils would encourage children to adopt good eating habits and to learn to socialise at mealtimes instead of eating out of Tupperware on their own. As the great Nigella argues, people need to learn how to eat rather than just how to cook. (The infinity of TV cooking programmes doesn’t seem to make much difference to the eating habits of people who are hard up and time poor).

Children’s’ palates need to be educated as well as their brains. If they could be introduced to good, simple delicious meals made with locally sourced ingredients they would be less inclined to graze on highly processed foods which are the main driver of the obesity epidemic. They would take home ideas about food which they would share with their hard-pressed parents. They would become more conscious of the environmental impact of the food they eat.

Another idea: let’s twin schools with farms. Specific farms would supply ingredients to partner schools. We could pay farmers to conduct school visits in which children would learn how the food they eat is grown or reared. Apparently, some children don’t even know that sausages begin life as pigs.

The Tories need a big idea. This could be it. It would have greater impact than just raising the rate of Universal Credit, which is Labour’s reflex response. Unless this government grabs the initiative on welfare, we shall probably get a socialist-dominated government come 2024. Time is running out.

***

This weekend, we celebrate the unprecedented Platinum Jubilee of HM the Queen. Even if it feels that we are back to the Silver Jubilee of 1977 – with rampant stagflation, industrial disputes, a burgeoning public sector, soaring national debt, rising interest rates, plummeting productivity and crippling taxes.

But let’s look past these things, at least for the weekend, and enjoy the party. Here’s to you, Ma’am. Cheers.

Listed companies cited in this article which merit further analysis:

  • BP (LON:BP)
  • Shell PLC (LON:SHEL)
  • Centrica (LON:CAN)
  • EnQuest (LON:ENQ)


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