UK energy bills for an average household have doubled since the end of the pandemic and the onset of the war in Ukraine. Following repeated rounds of sanctions on Russian oil and gas they are likely to increase again by an astounding 50% to 100% by this winter. While this is bad news for everyone, it’s particularly bad news for those households at the bottom of the income distribution ladder, who were already struggling to pay their energy bills even before the pandemic. The UK government estimated that 3.1 million households (about 13% of the population) lived in fuel poverty in 2020 – that is had to make serious sacrifices in other areas of their lives to cook their food, heat their homes, and heat their water. (The exact definition of fuel poverty is rather complicated and needn’t bother us too much.)
The same government report estimates that the financial shortfall for an average household in 2020 in fuel poverty was about £225 pounds – i.e. about the cost of a first-class train trip from London to Edinburgh in Scotland. This shortfall has now increased by a multiple of two to six times.
The government’s response has been, rather belatedly, to announce a windfall tax on the very high current profits of oil and gas companies operating in the UK’s North Sea, and to propose one on electricity generation companies, which have also made large profits from the hike in energy prices. In my view this policy is stupid and self-defeating: We need oil and gas, at least over the next three to five years, while Europe weans itself off Russian oil and gas. We also need massive investment in renewable energy generation capacity, all of which is coming. But what kind of a signal does it send when well-run businesses, doing the right thing, are prey to sudden arbitrary windfall taxes because they did the right thing already?
It was all needless, and there was and is a much better alternative: a windfall tax on high-income earners. This is all about the politics, and not the economics.
Let me explain why I hate paying my taxes. I work very hard, earn a lot of money, and the government takes just over a third in tax. My marginal tax rate is 45% (that’s the tax I pay on the final dollar I earn – the numerically-minded among you can now work out how much I earn). Obviously, I hate that fact, but if I get Utopia in return, I probably wouldn’t mind. Instead, I get very little in return: I pay for my kids’ education (including tertiary education, although disgracefully that is still subsidized in the UK), for my own family’s medical care and health insurance, for my transport needs and so on. From the government I get public safety, law and order, defence, and I suppose I get my garbage collected, although I pay for that over and on top and it’s not very reliable. It’s not nothing, but it’s not much, given what I pay.
Meanwhile I get to watch politicians of both sides grandly promising more spending of my taxes on things I don’t want and from which I won’t benefit: More NHS hospitals and state-funded schools, tube lines in Central London I won’t use, higher state pensions and so on. No wonder John McAfee committed suicide in a Spanish jail rather than paying his taxes, claiming ‘I get jack-shit in return.’ When Boris suggests building a bridge to Northern Ireland from Great Britain I know it’s for his benefit, not mine.
And yet: If the government asked me and everyone as lucky as me to pay an extra 1% income tax for three years to pay the increase in fuel bills for those living in energy poverty, I wouldn’t hesitate. I’d pay with a song on my lips.
Why? First, because I hate the idea of others in my country going naked and cold while I sit in my hot tub. Yes, I am that human. Second, because I know that the money will go to do genuine good. I’m not against useful redistribution, I just don’t believe that’s what my government generally does. I think my government wastes most of my taxes on pointless, wasteful, inefficiently delivered acitivites such as the Forestry Commission – a public agency which basically plants and harvests conifer plantations. I work in a private organization where I know we can be wasteful (although we try not to), but I also know the government isn’t even trying. The government doesn’t even know what property it owns or rents.
Third, I know we are all bearing the costs of Putin’s aggression in the Ukraine and the ensuing sanctions, but I know that only a few of us will reap the peace dividend when he loses, as he surely will, even if it takes ten years for the chickens to come home to roost in the Kremlin. Why should poor households share disproportionately in that cost when they will not benefit proportionately from the benefits?
Finally, and most importantly, I live in the UK. I live here because it’s great here. It’s civilized, advanced, comfortable and safe. It will remain so as long as everyone else who lives in the UK feels the same way as I do. If you can’t keep your family warm this winter, why would you feel that way? So, it’s in my interests to help you.
I’ve polled all my millionaire friends to ask them if they would also be willing to pay 1% extra marginal tax income for three years to fund the increase in fuel bills for the poorest 20%. Not a single one answered in the negative. They all know the price we pay for living in such a country of opportunity and comfort is to help the less comfortable. They’d probably all do it anyway: people who make their own money are good people, in my experience. Not all UK millionaires have always made their own money, but today the vast majority have. That is a major difference between the UK today and in the past.
The wider point is that so long as we know Boris is not going to waste our money on some stupid, quixotic venture, but actually help those in dire need, we’ll always be happy to help. We don’t mind helping, but we hate waste. We don’t tolerate it in our businesses, and we see far too much of it by governments.
Let’s do the sums. According to the Inland Revenue, the top 1% of income tax payers paid 29.1% of all income tax in the year 2019-2020 from 12.5% of all the income. (This is the most recent year for which I could find data.) Total income tax revenue amounted to £633.3 billion. In 2021-2022 this revenue increased to £718 billion. Assuming the shares haven’t changed much (they almost certainly haven’t), the top 1%, who are roughly but not quite the higher-rate taxpayers on 45% marginal tax (there are more 45% tax payers than the top 1%), the total income tax paid by the top 1% was about £209 billion. Increasing that by 1% (not quite the same as a hike in the higher-rate but you can see where I’m going), would raise income tax revenue by £2.1 billion per year. It’s very unlikely this kind of increase will induce large distortions of the kind I discussed in previous articles. Especially if it’s purely temporary (put in a sunset provision of three years) and hypothecated (only to be given to those in fuel poverty through the universal credit system, which currently doesn’t work but needs to be made to work).
The increase in fuel poverty (not total fuel poverty, but the increase) probably is about fourfold because of the Russia-Ukraine war and the pandemic. Food bills, especially for the poor, will go up too. Let’s be generous and call this an increase of £1,000 per year for those 3.1 million households. That makes a funding need of £3.1 billion (the cost of a reasonably large government IT contract). A 1% increase in the higher rate of tax from 45% to 46% would probably do it, to a rounding error. An increase of 1.5% would more than cover it. Add a plan to increase oil, gas and renewable production to bring down prices over three to five years and we’re done.
Boris Johnson, the consummate Brexit politician of 2016, would have done this. Boris the Marie Antoinette of today doesn’t get it. He’s not even thinking about it. If he got it, he would never have countenanced the self-defeating windfall tax. A temporary, hypothecated extra income tax on the truly well-off to fund the shivering poor next winter is exactly the sort of thing which brings us together to defeat Adam-Zad, the Bear that walks in the shape of a man.