Adam Smith Institute

In an interview with The Telegraph yesterday, John Hutton, the business secretary, effectively ruled out a windfall tax on energy companies.

Good. I was getting thoroughly sick of the received wisdom surrounding a Windfall Tax on Oil and Gas Companies that said because the public would support it, it’d be a good idea. It wouldn’t. Rather than regurgitating Mill, talk about the tyranny of the majority, or generally waste time by going into details, here are 5 quick reasons why that Windfall Tax would have been a terrible idea:

1. Retrospective action by any government is illiberal. End of.
2. The UK is facing an energy crisis with estimates suggesting £100bn of investment being needed to secure future power generation. Taxing profits is going to make the UK energy market much less attractive for investment. That means prices will get higher as storage capacity, distribution networks, and generation become increasingly creaky. That’s even before the rolling blackouts start.
3. What even is excessive profit? How do you define it, let alone measure it? Companies exist to make profit: it smacks of moving the goal posts to penalise firms for being successful. If you think high energy prices are a result of the energy market being insufficiently competitive then give OfGem a ring. If you want to wreck the economy with higher corporation tax rates, be honest about it rather than spouting this mealy-mouthed rubbish.
4. It’s economic insanity. We need to increase the supply-of and reduce the demand-for energy. A Windfall Tax is only going to do the opposite. How about privatising the remaining utilities and putting the cash into making low-income homes energy efficient instead?
5. The reality of the situation: any rise in taxes will be passed straight onto consumers as price rises. So firms will be annoyed at the tax, investors will be scared off, and consumers still won’t get cheaper energy. Surely after committing political suicide on a seemingly weekly basis even Gordon Brown has the sense to leave this well alone?

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