Windfall taxes sound great: if profits just fall into the lap of certain companies, why should they be allowed to keep them? We’ve all thought it.
But if you stretch a toe beyond the ‘superficially attractive’ line, windfall taxes don’t look so good. Consider luck: it plays a part in all commercial relations - indeed in all relations. We very often don’t get what we deserve, and neither do companies. It feels that most often, the breaks work against us.
But can we trust out ‘feelings’ on this? Over the last year or so we’ve been given a lesson royal in how someone’s ‘truth’ can be a function of personality quirks, and that, after all, recollections can vary.
A company may one day ‘get lucky’ after several years of unrewarded dogged effort and financial pressure. My guess is that this is rule rather than the exception.
When a government intervenes to strip companies of ‘undeserved lucky’ profits, they are warning companies they’re happy to punish success. So why take the risk of investing? This will matter if a nation, or a government, particularly desires and needs an industry to invest and expand. This is the situation today with energy companies.
More importantly, predatory windfall taxes send out the signal not just to the companies involved, but to the wider economy generally.
We should also be careful what we wish for: if the state has a right to confiscate ‘lucky undeserved profits’ then most British home-owners should get their cheque-books out to repay the windfall gains delivered to them by successive quantitative easings.
There’s surely gold in tham thar London hills. How much? Well, let’s see: estimated 3.6mn dwellings in London, with an average price in July of £543,517 according to the ONS. So the value of London’s capital stock is now £1.956tr. Back in 2009, at the onset of quantitative easing, using the same numbers, the capital stock was £900bn (3.6mn homes at £249,991 average). So we’re looking at a ‘undeserved lucky’ capital gain of about £1.057tr.
And considering the role that London played in collapsing the global financial system, and the unprecedented government bailout it won as a reward, was ever a windfall less deserved?
Imagine even a modest 33% windfall tax on London residential property: it would bring in about £350bn to the exchequer. Hurrah!
For all that, the circumstances driving energy companies’ profits right now are truly exceptional: they are the direct result of a (largely self-imposed) energy blockade of Europe by its chief gas supplier, Russia. And that in turn, is the direct result of Russia’s war on Ukraine.
It’s not difficult to characterize energy company profits as war profits. Indeed, it is very hard to see it any other way. It is right that the energy companies should be reminded of this, and vigorously.
The solution, surely, is publicly to expect these exceptionally lucky companies to play a major role in financing the energy price cap. How? Well, if the government decides to issue 15yr Energy Bonds to finance the cap, then energy companies should be told, quietly or publicly, that they are expected to be the main buyers and holders of these bonds, up to an appropriate amount of their ‘war profits’. Their holdings of these bonds should be a separate line-item on their balance sheet, to demonstrate these companies’ active social patriotism, or lack of it.
There’s almost no downside as far as the energy companies are concerned. Because they are buying a truly fungible financial asset against which banks can lend, holding them is no drain on their ability to invest in their core businesses. Meanwhile, it absolves either the larger tax payer, or the Bank of England, from conjuring up the necessary funds.
So here’s my suggestion: Kwasi Kwarteng should invite individual energy company bosses for a quiet discussion about the options before him and them. Whether they are offered coffee will depend on whether they get the point. When one energy company accepts the offer, the others will follow. A financial solution which recognizes how Mr Putin has gifted energy companies an extraordinary bounty, without killing the investment environment, and without stressing financial system, will have been achieved.