A windfall tax on the energy companies: good short-term politics, lousy long-term economics

Lindsay Hoyle, the Labour MP for Chorley, has been on the news calling for a windfall tax on the energy sector, claiming that he has seventy colleagues who are supportive of his call. It is reassuring to know that Old Labour isn't dead, but they clearly haven't learnt anything new about economics whilst in their political coma.

In fairness, a windfall tax would probably be very good politics, in that there are many people in this country who would happily see the likes of BP and Shell get a 'good kicking'. Higher petrol prices and higher fuel bills add more pain to already suffering consumers, and an opportunity for revenge, encouraged by the likes of the Daily Mail and Daily Express, will be willingly taken.

However, simply grabbing the money is one thing, what you do with it is more important. This government has often demonstrated an enthusiasm to raise money which, once raised, it tends to redistribute ineptly. How would the funds raised be used? How do you ensure that those in most need actually get the support they deserve? Labour struggle with the concept that government is a blunt implement, not a scalpel.

Liberal Democrats have opposed a windfall tax, believing that working with the utilities to target help towards the most vulnerable is the way forward. They know who their customers are, they have the power to adjust their rates, offer discounts and they can work out who is struggling long before the Government can come to the rescue.

However, there are other factors to be considered. If you are a major company operating in the United Kingdom, the prospect of the Government picking on you because you're successful will lead your finance director to ask the question, "should I be looking for a new fiscal residence?". It's a cruel world, international corporate taxation. Your assumptions in government can be shattered by corporate tax rate cuts in neighbouring jurisdictions, and company law is wonderfully opaque, certainly as far as the public are concerned.

There are already signs that our tax base is vulnerable. The process of company migration has begun, with a number of companies upping sticks and moving towards low tax economies in search of competitive advantage. Whilst corporation tax is a relatively small proportion of the overall tax take, when you're in the red as much as Alastair Darling is, every billion counts.

The Conservatives are likely to take a similar view to ours in private. Whether they hold the line in public is a different matter altogether, as there is little short-term advantage to taking an orthodox economic position. It will be a sign of their readiness for government if they bottle this one for short-term political popularity.