Economic Insanity

Anyone who has the most basic understanding of Economics knows that if the government taxes something more heavily, this will nearly always send the price of that commodity upwards.

So clearly those MPs who are complaining about the high price of energy and proposing a "Windfall tax" on energy companies in response do not have even the most basic understanding of economics.

We are going to need huge investment in energy over the next few years just to keep the lights from going out, and that's irrespective of your position on global warming, carbon, nuclear power etc. The recent collapse of the proposed deal with a French energy company shows how challenging it will be to secure the necessary investment - turning round and putting windfall taxes on people in an emotional spasm just makes matters harder.

There are a very small number of circumstances, as when Howe and Lawson did it a few decades ago, when you can get away with a windfall tax. The people whose profits you are raiding have to be left with enough after the tax that it is not in their interests to take their ball away, their investment programmes must be complete or at a stage such that they can still be funded from the reduced profits after the tax, and conditions of demand and supply in the industry have to be such that the tax does not give them the opportunity to simply put prices up further.

The Lawson-Howe windfall tax, imposed on companies which had already built their oil wells, which would have been profitable at the much lower oil prices expected when they were built, and where those companies did not have the market power to affect the world price of oil, met all those criteria.

All the ideas which have recently been floated for "Windfall taxes" on energy fail one or more of these three tests. Most of them would either curtail the investment which Britain needs or put up the energy bills paid by British consumers even further.

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