A windfall tax would be both effective and fair

This week we’re examining whether calls for a windfall tax on excess profits by oil and gas companies stack up in terms of the policy arguments, and in terms of fairness.

Will Snell

Chief Executive Fairness Foundation

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You know the story by now. BP and Shell have announced profits of £12 billion in the first quarter of this year. These excess profits are largely due to the war in Ukraine and rapidly rising energy prices.

Campaigners are calling for a one-off windfall tax so that some of these unexpected profits can be used to help millions struggling with the rapidly increasing cost of living.

The government has so far pushed back, with the Prime Minister arguing that a windfall tax would discourage investment by the fossil fuel companies, although the Chancellor has said that “nothing is ever off the table”.

The objections to a windfall tax don’t survive serious scrutiny.

Would it discourage investment?

Tessa Khan (CEO of Uplift) has comprehensively demolished this argument. And she’s backed by none other than Bernard Looney, CEO of BP. BP has pledged to invest up to £18 billion in renewable and fossil fuel projects in the UK by the end of 2030. When asked by the Times whether a windfall tax would stop any of these investments from going ahead, Looney said “there are none that we wouldn’t do.”

Would it hurt pensioners who are shareholders?

Common Wealth has found that Britain’s main pension funds own less than 0.2% of Shell and BP shares, while the largest holdings are by US investment companies, such as BlackRock and Vanguard, and Norwegian pension funds.

Would it be moving the goalposts?

These are unplanned excess profits caused by events that the companies in question had not foreseen. Bernard Looney boasted in November that BP was a “cash machine”. As the Institute for Fiscal Studies has pointed out, “there are strong arguments in favour of taxing excess returns and of taxing them at higher rates than normal returns”.

The UK government has introduced windfall taxes many times in the last hundred or so years:

• During the First World War (50% on any profits exceeding a firm’s pre-war average)
• During the Second World War
• In 1981 (when Margaret Thatcher backed the imposition of a windfall tax on clearing banks, which had made large profits during the recession due to high interest rates)
• In 1982 (a ‘special tax’ on North Sea oil and gas to capture more revenue from oil price increases)
• In 1997 (when New Labour brought in a windfall tax on privatised utilities)

The money raised from a windfall tax would support those households hardest hit by rising bills. High gas prices led to a 54% increase in household energy bills last month, with six million households now facing fuel poverty and costs set to increase further in the autumn. A windfall tax won’t solve the cost of living scandal by itself, but it will help. A windfall tax is needed as part of a broader package of reforms to make the tax system fairer by cracking down on tax avoidance, closing tax loopholes and taxing income derived from wealth more effectively. And it’s popular with the public (79% of red wall voters support it, including 84% of Conservative voters and 85% of Labour voters).

Taking a step back, there are strong arguments for introducing a windfall tax on the profits of energy companies from a fairness perspective.

Three of the five Fair Necessities come into play here:

Fair rewards (proportionality)

Just as individuals (or companies) should be compensated for unearned bad luck, so their unearned good luck should be shared. They should be rewarded for their own efforts, for what they have earned, for the fruits of their ingenuity.

But these excess profits are pure ‘brute’ luck, the result of external forces outside their control. As such, it is only fair that they are shared widely, especially when others have been disadvantaged by the same external forces (see below).

These excess profits are also ‘economic rents’ derived from the energy giants’ monopoly positions in the economy. So these companies are likely to continue to enjoy ‘unearned’ profits for years to come, and we need to think about how to tax their profits on an ongoing basis, not just through one-off windfall taxes.

Fair exchange (reciprocity)

Individuals should contribute to society, through taxes, in return for the support that they receive from the state throughout their lives, in the form of healthcare, education and so on. The same logic applies to companies, who benefit from state investment in a healthy and educated workforce as well as in physical infrastructure and the rule of law.

The energy sector has been the recipient of enormous state subsidies in recent years, which are exacerbating the climate breakdown. These need to stop, but at the same time, a windfall tax would help to redress the balance.

Fair fundamentals (basic needs)

Six million households are facing fuel poverty due to the cost of living crisis, with energy prices a major factor. Research published today by the Food Foundation shows that more than two million adults in the UK have gone without food for a whole day over the past month because they cannot afford to eat.

The government has a duty and a responsibility to ensure that the basic needs of its citizens are met, and it is failing at a mind-boggling scale. The proceeds from a windfall tax would help to provide these basic needs.

“Earnings inequality had been falling for some years before the pandemic hit, with low-paid workers seeing the strongest pay growth. The recent surge in pay among financial sector employees – particularly among top earners in the sector – has led to a reversal of this trend.” Xiaowei Xu at the Institute for Fiscal Studies describes how the return of bumper pay growth in finance is fuelling a new rise in earnings inequality.

“Destitution, which means that people cannot afford to buy the absolute essentials that we all need to eat, stay warm and dry, and keep clean, drives the need for food banks in the UK.” The Trussell Trust’s shocking new briefing on food banks is quoted by Paul Lee in his Sense of Fairness blog about fairness and inflation, which also cites analysis by the New Economics Foundation showing that poorly targeted policy is failing to prevent an income crisis.

“A range of community voices and robust academic evidence shows that black, Asian and minority ethnic people have experienced significant inequalities as a result of systemic racism throughout the pandemic both in general and across the main areas of focus for the inquiry. For instance, there is continued disproportionality in deaths and infections for black, Asian and minority ethnic people.” Jabeer Butt at the Race Equality Foundation has written to the Chair of the Covid-19 inquiry, along with eight other organisations, asking for a clear plan to secure better evidence on the impact of COVID on ethnic minorities and how to protect them from future pandemics, a rapid evidence review and a stronger focus by the Government on racism and racial inequality.

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