Windfall taxes are only the answer if you ask a silly question.

Many Labour MPs have found the answer – windfall taxes. They are proposing a veritable blizzard of these windfall taxes – one for the oil companies, one for the electricity utilities, and yet another for the banks! It leaves the sane asking “What then was the question?”

Would windfall taxes bring down inflationary price pressures? No, not by one penny. Indeed, if the companies they want to tax have real market power as they suppose, they would put their prices up to help pay the tax!

Would windfall taxes make the government popular? Unlikely, as people are fed up with not having enough money in their own pockets – lining the governments pockets some more is not going to make them feel better off.

Would windfall profits improve the efficiency of the sectors paying the taxes? Of course not. It would be more likely to lead to delay or cancellation of some capital investment that could make them more efficient or raise capacity.

Could windfall taxes be routed directly to those who have been losing out under this government? Yes, they could , but that doesn’t look likely. If they used them to pay for the restoration of the 10p tax band that could help a little, but it would still leave us with more damage to business. The government seems resolute in not wanting the cancel its Income Tax hike from the last budget.The banks need more capital, not less. Taxing them more delays the day when they have enough capital to lend on a sensible scale to lift the economy.

Would windfall taxes cheer the left of the Labour party because it would be bashing shareholders, pension funds and savers? Would it be another good hit at the managing and saving classes? Yes, undoubtedly.

Windfall taxes would be great news for the Conservatives, as it would confirm Labour had lost the plot, but bad news for the country.

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8 Comments

  1. mikestallard
    Posted July 28, 2008 at 6:17 pm | Permalink

    Just as to you – and indeed to most bloggers on this site – cutting government spending and reducing taxation is the obvious answer to the credit crunch; to the TUs, the Labour grassroots and indeed the Mail today, the obvious answer is to skin the rich.
    The Labour Party is deep in debt and the country is sinking fast into debt. What better way to get it out of its troubles, painlessly, than to soak the "rich"? (Always excepting Carol Vorderman).
    What, of course, will happen, is that – as ever – the taxes will be deflected to hurt the poor even further. and that will exercise the Unions and that will cause strikes and that will cause, if allowed, runaway 1970s inflation.
    So you – we – were right in the first place; cut government spending fast.

    Reply: Yes, the left always overestimate how many rich there are, and underestimate how good they are at moving put of the UK or buying good tax advice.

    • Acorn
      Posted July 28, 2008 at 7:14 pm | Permalink

      They just don't understand how the world works. Windfall taxes always come back as higher prices, for exactly the reasons JR stated above.

      Take EDF, a big player in our energy market nowadays. If you look at their 2007 group accounts, you will see that they made an operating margin (EBIT/Sales) of around 9.6% in the UK. They made a op' margin of 13.3% in the rest of the EU. The EDF group, as a whole, made an op' margin worldwide of 16.7%. These are the sort of margins you would expect from a well run energy sector company, in the 07 market. You will not find a reason to apply a windfall tax to the UK earnings of this company. Keep in mind that EDF is still 85% owned by the French government. Sarkosy could get upset and insist we join the Euro!!!!

  2. Matthew
    Posted July 28, 2008 at 6:43 pm | Permalink

    This is a sensible point – one of the most bizarre bits in Mrs Thatcher's autobiography is when she claims the 1980 windfall tax was a good thing (on banks) as their profits were due to government policy not 'increased efficiency' or 'better service'.

  3. Stuart Fairney
    Posted July 28, 2008 at 8:14 pm | Permalink

    Are you seriously telling me that there is this great socialist train of 'thought' which says the answer is to make banks LESS liquid at the moment?

    Because really, if you were a teacher and some fourteen year old kid proposed this in GCSE economics, you'd have to wonder if he really had a grasp of the subject!

    It honestly makes me weep when I hear the government come out with palpable nonsense like this.

    • David morris
      Posted July 29, 2008 at 11:57 am | Permalink

      That's the problem with New Labour, most of the government have never had a proper job, nor had to survive in the real world, and are still playing student politics, except it's the rest of us who have to pick up the completed unconsidered consequences.

  4. Iain
    Posted July 28, 2008 at 8:30 pm | Permalink

    Question is has the Conservative front bench worked out a line of attack to oppose a winfall tax, for with Brown politically drowning he is going to attempt to grasp hold any populist measure?

    The obvious response is going to be the fact that a windfall tax is going to suck billions out an industry which we are going to need to build the next generation of power stations etc, but a better response I would suggest is to say that if the power generation companies are making excessive profits then the problem is with the market, and then question what labour have done to make the market so ineffectual, which would question the vertical integration they have permitted, as well as allowing British generation companies to be bought out by foreign concerns, and question if its wise, when the market isn't functioning properly to allow the French Government owned EDF, who already has a sizeable chunk of our market to take a majority holding in another 25% of the market when acquiring British Energy.

  5. DennisA
    Posted July 29, 2008 at 12:40 pm | Permalink

    The government of course, are currently enjoying massive windfall taxation on fuel.

  6. The Lakelander
    Posted July 29, 2008 at 7:43 pm | Permalink

    As a matter of interest, what did BP pay in tax in the UK last year?

    "Windfall tax" may grab headlines, but surely a statement by companies like BP, clarifying what they already pay in tax, might add some balance to the debate.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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