Release Britain from the Treasury’s clunking fist

A windfall tax is the latest Brownite idea promoted by officials who care little about economic growth

It is said that the great scientist Michael Faraday once presented his work on electro-magnetism to Gladstone, then chancellor of the exchequer. Gladstone interrupted him to ask: “But after all, sir, what use is it?” Faraday replied: “Why, sir, there is every probability that you will soon be able to tax it!”

So how to extract tax money from energy companies has been on the Treasury’s mind right from the start – although I doubt Gladstone would have been quite as casual with the cash as most of his successors.

It’s not surprising, then, that an energy windfall tax is on the agenda again. Two months ago, the Government was resisting it. Two weeks ago, the ground shifted and the Chancellor seemed to be looking at the issue again. Then, this Tuesday, Conservative MPS voted against it in the Commons, and a day later Boris Johnson said that “we do not want to do it”. I believe him.

This on-off policy-making is not limited to the windfall tax. In the March Budget, we were promised tax cuts in 2024. Now, at the CBI dinner this week, the Chancellor promised tax cuts for business “this autumn”. Meanwhile, we know that the Treasury is considering an online sales tax and “climate border adjustment measures” – trade tariffs by another name – against countries wise enough not to cripple themselves with net zero-related energy costs.

In this stop-start policy-making we see a tension between the official “Treasury view” and that of politicians who don’t accept it, but haven’t insisted on an alternative.

The Treasury is obsessed with taking in money wherever it can, a philosophy that has been evident under governments of both parties. The modern Treasury has become just a Budget Ministry, barely caring about reform and growth. Rather than cutting taxes, it likes to collect them, and dole the receipts out to deserving recipients.

The official Treasury mind believes that every fiscal change, however minor, has to be financed – ideally, year on year. They fear “unfunded tax cuts” and don’t pay much attention to dynamic accounting or incentive effects. They like clever schemes to defeat “avoidance”, whatever the complexity, and so have been waging a self-defeating war on the self-employed for years.

This Treasury conventional wisdom got the Government to break its manifesto pledge on personal tax rises last autumn. That done, it is all too easy to do it again. The Government will now be told that dealing with the cost-of-living crisis must mean raising more money from somewhere. Ministers will be told this will have no effect on energy company incentives now or in the future. And they will be told that it doesn’t matter that no one in the country can be confident that the taxman won’t come for them next.

Actually, it does matter. No aspect of economic policy needs stability and predictability more than tax policy. Random changes to the tax system play havoc with everyone’s plans.

Moreover, taxing companies is not free money. The separate existence of companies is a legal fiction. In the end, all taxes are paid by real people: by customers (in higher prices), investors (in lower dividends), or employees (in lower wages). If you doubt that, think of the TV licence. It may be formally levied on televisions, but it’s not the televisions that pay, it’s the owners.

Worse, windfall taxes, because they are retrospective, amount to the expropriation of legitimately earned profits – which, by the way, feed back to all of us in dividends to pensions and savings plans. They are also inherently unfair because if a company makes a windfall loss in future, there will be no “windfall tax credit”. That’s why if reports are correct that David Canzini, the Prime Minister’s deputy chief of staff, described this as an unconservative policy, then he’s right.

This obsession with collecting tax rather than encouraging growth is destroying the competitiveness of our tax system. The Tax Foundation, the independent Us-based research group, puts the UK 22nd out of 37 advanced economies for tax competitiveness. The Centre for Policy Studies notes that next year, when the planned tax rises come in, we will fall to 30th. That really isn’t good enough. Tax competitiveness is crucial to where international companies invest, and has been particularly important to the UK. But we are not in a good place, and things are getting worse. The low-tax Britain of the Conservative governments of the 1980s and 90s is a long way off.

The system is also incredibly complicated. The Office of Tax Simplification has clearly failed. (Its most recent project was a review of itself.) The tax code is longer than ever. The system is riven with perverse incentives. Only experts can understand it.

I am confident Boris Johnson and Rishi Sunak know this. I don’t believe they really want a continuity Gordon Brown tax policy, courtesy of their officials. It’s time to make a break. We simply can’t afford more tax increases. Chancellor, put the official Treasury back in its box and focus on growth. Give us an emergency Budget before the summer, reverse the planned tax rises, take VAT off energy – and give consumers a break.