Beyond ideology, we need an emergency tax for emergency times: what the UK could learn from tax debates in Latin America

29 September 2022

Matt Barlow - Associate Lecturer in Politics, University of York

Paying for the energy price guarantee has highlighted a deep political cleavage around tax ideology. Reframing windfall as emergency will be critical to leverage a change in direction.

Tax is always contentious. Debates surrounding who should pay, how much, and where the revenues are redistributed to are the heart of state power and national and global political economies.

No one likes paying taxes but seeing tax only through the lens of either powerful interest groups or electoral politics misses the extent to which the contemporary tax debate in the UK, in particular in relation to so-called ‘windfall’ taxes on energy companies is driven by ideology.

Ideas of tax – which ones should be levied, at what rate, to whom – are embedded in wider ideas of state and the role of government in socio-economic life.

In the UK, political parties that call for higher taxes are associated with an interventionalist and redistributive state, while those who argue for low taxes believe in individual responsibility and markets. But the UK is currently facing an unprecedented economic crisis and the decision not to backdate taxes on the extraordinary profits energy companies have been making to pay for state intervention in energy markets in September 2022 is based on ideology – underpinned by a set of ideals and ideas – when what is needed is a pragmatic response to an emergency.

If opposition parties could move away from the language of ‘windfall’ that suggests the need to ‘punish’ companies for excess profits and speak instead of the need to come together to respond a national emergency, it might help them cut through the government’s ideology approach. To do so, there are lessons that can be learned from elsewhere, in this case Latin America.

Tax as Ideology

Less than 24 hours into her premiership, Britain’s new Conservative Prime Minister Liz Truss made clear her position on energy taxes was driven by ideology. During Prime Minister’s Questions that day, the cost-of-living crisis and the taxes that would pay for any government intervention to ameliorate its impacts took centre stage. Whilst the fiscal details of this latest intervention would not be set out by the Prime Minister until the following day, both Labour and Conservative set out their relative positions in terms of ideology.

Labour Party leader Sir Keir Starmer called for a ‘temporary and targeted’ 25% energy and profits levy – implemented under former Chancellor Rishi Sunak – to be backdated over oil and gas companies. He labelled this a windfall tax on excess profits. Liz Truss dismissed this as ideology (ignoring her own), saying ‘there is nothing new about a Labour leader who is calling for more tax rises. It’s the same old, same old; tax and spend’. She rejected calls to increase the windfall tax over oil and gas companies whilst signalling she would announce a wider raft of business-friendly tax cuts in the weeks ahead. She restated her own (ideological) vision, based on a blanket rejection of all tax increases because, she claimed, taxing business is bad for investment and ultimately bad for growth.

The government’s alternative plan was for an energy price guarantee which would fix the annual energy charge at £2500 per household for 2 years. This too was informed by pro-market ideology, though rather more subtly. To avoid taxing the energy companies, the funding would come through additional government borrowing. Tax policy has become a key ideological fault line. On the one hand, there is a plan to backdate taxes on business’ excess profits, on the other, a plan to borrow now and for consumers and citizens to pay back in future. Unless Labour reframes its approach, it will never escape the charge that it wants to tax the energy companies because it is anti-business and anti-growth.

From Windfall to Emergency

Opposition parties are failing to capitalise on the reason energy taxes are on the agenda. We are in an emergency that could become a ‘critical juncture’ in our national economy. Critical juncture literatures argue that when there is a deep crisis, space is sometimes created for the introduction of genuinely new approaches to old problems. It was acknowledged throughout the summer that the country was confronting an emergency and was in crisis because of the scale of the fiscal challenge that British people faced; yet the it was also clear that proposed taxes did not match the narrative of emergency. One way out of this ideological impasse is to present ‘windfall’ taxes differently, as emergency taxes, and link them to a more consensual and equitable response to a wider ‘national’ emergency.

This approach has been implemented previously and effectively in Latin America, where economic growth is often predicated on exports of natural resources. Perhaps the most salient example is Argentina in early-2002 in the midst of spiralling economic and political crisis during the aftermath of the world’s (then) largest debt default.

Emergency export taxes were levied on export companies which were, at the time, highly profitable because of high commodity prices – and they were accepted by exporters of agricultural commodities, as part of a wider package of emergency measures, because of the crisis. In this light, emergency bestowed legitimacy on new and higher taxes, and ones that had previously generated intense social and political conflict. Emergency taxes represented over 22% of the total Argentine tax take in 2002 and enabled the introduction of a raft of policies to keep people out of extreme poverty.

Of course, emergency taxes cannot last forever; events in Argentina also show that massive tax hikes on key economic sectors cannot be easily made permanent. But there is little doubt that UK needs a similar response now, to see the country though a crisis that will otherwise intensify already deep inequalities, with inflation in the UK in double digits and 6.5 million homes estimated to already be in fuel poverty.

Opposition parties have a small window of opportunity to capitalise on the fact of ‘emergency’ and reframe their arguments to cut through the ideological debate and leverage a change of direction so that the poorest in society are not left to shoulder the future burden of interventionalism.

Related posts

Rishi Sunak

5 April 2022

George Osborne’s ‘omnishambles’ of 2012 is generally regarded as politically the worst budget of modern times. But it will surely be run close by Rishi Sunak’s Spring Statement two weeks ago, which has had a disastrous reception in the press and within his own party. It was not just the criticism it attracted for doing so little for those on the lowest incomes in the face of the cost of living crisis. It was its nakedly political intent.

Read more

Industrial pipes and tubes

14 September 2022

Drawing on newly published research, this blog argues that while Liz Truss and Rishi Sunak both stated a desire to introduce tax cuts and reduce the size of the British state, history suggests that once in office either candidate would have resorted to industrial policy in the shadows.

Read more