Wednesday, 27 August 2008

Why Support The Windfall Tax?

Calls for the imposition of a windfall tax on energy companies have been one of the hottest topics of debate on the domestic politics front over the past month. Divided roughly along typical left-right lines (with some exceptions), the proponents of the tax include the social democrat think-tank Compass, Polly Toynbee, and Cath Elliott. The most vociferous opponent (at least in blog-land) is Tim Worstall, a classical liberal who has consistently opposed the measure, with convincing economic as well as libertarian justifications for his position.

This afternoon Conor Foley, writing on Liberal Conspiracy, posted in support of Tim Worstall's view that the windfall tax is a bad idea that will have counterproductive implications.

"Taxing energy production to subsidise energy consumption – which seems to be the way that the current campaign is being sold – is just daft." - Conor Foley
As you might expect, I am in agreement with Tim Worstall and Conor Foley. Aside from the worrying implications of the government introducing what is in effect a retro-active tax on the basis of an arbitrary determination of 'too much profit', the proponents of this idea appear not to take into consideration the law of unintended consequences.

Tim explains pretty clearly why this is so important in his article for Comment is Free. Taxing energy profits will have the effect of reducing supply (by reducing the incentives to search out and start exploiting new sources; an expensive process) and increasing demand. The more cynical your view of how the business world works, the more obvious this should be, surely - so why are so many lefties falling for this bad idea?

This may sound like a daft question (one person I asked this to immediately responded "because leftists are idiots?"), but I contend that it's one worth asking. When something that just a pinch of critical thinking and economic realism would tell you is nonsensical is promoted so enthusiastically, one has to take a moment to consider the reasoning, flawed as it may be, of its proponents.

The first dubious conviction (aside from the arguments countered in Tim's article) that becomes apparent on reading the articles in favour of the windfall tax is that the money raised in this way will go to people who need it, specifically those who have found themselves struggling to pay electric & gas bills as their costs have increased, owing to higher oil & gas prices. This is a variation on Kip's Law* - "Every advocate of central planning always envisions him/herself as the central planner" - just because, say, Neal Lawson would make sure that all of the re-appropriated profits made their way to the elderly and poverty-stricken does not mean that Labour can be trusted to do the same. This kind of woolly thinking can be observed over and over again in the writing of leftists if you know what to look for.

Even if that were not the case, and somehow the promised redistribution of the money were to materialise, the second problem overlooked by tax proponents such as Cath Elliott (repeating something claimed by Polly Toynbee the day before) is that the windfall tax as currently advocated is surely likely to be anything but a one-off.

Unless you think that the cause of the energy price increase has nothing whatsoever to do with a reduction in supply coupled with an unchanged or increased demand - if so, a decidedly unconventional and counterintuitive position - all that your proposed measures are going to do is store up problems for next winter and the winter after etc.

This is a decidedly short-termist view of the situation. An easing of the energy cost burden in 2008 will come at the cost of crisis in future years, as efficiency has not improved (since inefficient energy use was subsidised by the windfall tax), new sources have not been identified (since profits that could have been used for R&D were taxed away) and demand has stayed at its present high level. Crazy. So why propose it?

It's because in the parallel universe inhabited by Toynbee & co, being 'on-message' is all that matters, and damn the reality. Profit-making businesses and those who run them are by definition bad; always making "obscene profits" - defined however you want in order to best demonise the usual suspects; since the Marxist mindset never quite went away.

According to said mindset, the windfall tax makes perfect sense, or so it seems at first glance, until you learn to read between the lines. I for one am damn glad there are people like Tim around to tell it like it is and counter this nonsense. I just wish there were more like him.

* Credit to Tim Worstall for pointing me in the direction of Kip's Law; I predict that this is the first of many times it will warrant a mention here.


TBRRob said...

This is all very true. A windfall tax would be a disaster.

Neil Harding said...

There are two things going on here.

1. Redistribution to the poorest who are suffering from high fuel bills - which is what the Left really supports (and even the Right find impossible to argue against - much as they really want to) and...

2. A tax on the profits of energy companies which is the proposed means of funding said redistribution (and as you correctly argue a much easier target for the Right).

I agree that a windfall tax is not the best way to redistribute money, but nothing is ever black and white.

To accept Worstall's world is to accept that NONE of the profits of energy companies are being used inefficiently and that these profits have not been IN ANY WAY produced by means of a cartel or monopolistic control of supply (I find this very doubtful when you look at the post-privatised nature of the industry).

I agree that any tax will impact on R&D and real investment in supply is critical at this juncture. So I would propose instead a widening of the bands of council tax as a better means of redistributing to those who cannot afford their energy bills. If you live in a big house, you can always move to a smaller property - something that needs to be considered when a lone pensioner living in a large four bed house moans about her bills while a family of four living in a crowded flat are paying almost as much (thanks to our Tory imposed tax that Labour have been too cowardly to address).

Richard Allan said...

It's a form of Land Value Tax as these companies are gaining a benefit from their control of natural resources. Of course this issue highlights one of the problems with LVT, in that it can be difficult to separate Land from Labour and Capital. These companies have spent much of the latter searching for the oil deposits, and as everyone has rightly attested, to tax them entirely on the Land they use is to discourage them from searching for any more in future. And to tell them that their costs in searching and building the wells will be covered is to invite them to pad those costs remorselessly. A windfall tax should be non-distortionary in that once the companies have found the oil, someone be digging it up as long as they can cover their costs. But as long as it discourages searching, it will of course be distortionary.

The way I would do it is to invite companies to bid for the right to a certain area of seabed for some years. The winners of the bid should be the company with the best idea of how much oil is where, and how to get it out most cheaply (second-price sealed-bids, naturally). The trouble is setting the lifespan of the right; too long, and companies get all the ground rents (which is inequitable), but too short a time before they have to re-bid could mean that a company would find the oil and then have no chance to profit from it. Maybe something like 10-20 years (assuming that the lifespan of an oil/gas well is 40 years or so, anyone?) If this system was in place, however, I would be unlikely to use windfall taxes in the case that the bid ended up being too low, as this would generate too much uncertainty.

PS. QT, check your LPUK forum PMs

QT said...

@richard: I haven't received any PMs - try sending me an email instead?

@neil: I am not entirely in disagreement with you here. I don't oppose subsidisation for the poorest who are struggling with increased energy costs, but I certainly don't think that the windfall tax proposed by Compass is a sensible way of going about doing so, and I think that anyone who does believe this has not thought the implications through properly. That is what the post was about.

One of the main reasons for the Government might try to move forward with this despite the problems described by Tim and here is that it has populist appeal (because the simplistic 'obscene profits' mantra is what gets through) and will not generate the kind of oppobrium that council tax or income tax increases would.

MJW said...

The economics are not hard to grasp, the more interesting question is why people ignore economics in favour of populist idiocy.

The MPs who support this are effectively taking a gamble on a "slash & burn" confidence trick in the hope that it will prove populist, and possibly boost their flagging fortunes just enough to save their own skins.

There are people out there who want to be conned over this, just as there are people out there like Toynbee & Co who are paid handsomely to go along with the whole charade because it has no real impact on them.

The whole gamble is whether the populism can deliver a positive result to those pushing it, before the inevitable backlash.

Longrider said...

If you live in a big house, you can always move to a smaller property

Well, I bet no one thought of that. It's easy too isn't it? Just put your house on the market and wait for all those offers. Oh, wait...

cj said...

Taxes or no taxes - They’re at it again - The liberal paternalists are proposing to ban the display of tobacco in shops and are currently soliciting the opinion of their electorate.

Banishing cigarettes will cost ordinary taxpayers more money, inconvenience thousands of consumers, and threaten the livelihoods of shopkeepers all over the UK.

I’m sick and tired of more of the same from Nanny - obsessed with dictating how people live their lives but brushing the big issues, like knife crime and recession, under the carpet. They’re planning to hide tobacco, and they are already policing alcohol, red meat, fatty foods, and salt to name a few.

I’m sick of seeing pubs closing down where I live. I’m sick of being made to feel guilty because I eat and drink as I please.

I’m sick of Nanny. How about you? Register your support - Say NO to Nanny

richard allan said...

Interesting spam from cj there!

QT said...

I've spotted similar comments from CJ at Old Holborn's and DK's blogs. I've left it, but do you really think this is a good way of promoting your cause, CJ?