David Gauke: My instincts are against corporate tax hikes and energy windfall taxes. But my judgment is that resisting both this fall just won’t work.

David Gauke is a former justice secretary and was an independent candidate in South West Hertfordshire in the 2019 general election.

Taken as a whole, Big Business is a force for good. Profit is an essential element of our economic system, encouraging investment and the efficient allocation of resources. Business taxes should be competitive, predictable and stable.

Such views are not as trivial as they might be. Big business is often characterized as exploitative and irresponsible. The perception of many is that they are dodging their taxes and bending the rules. They sacrifice the interests of consumers, employees (other than top management, of course) and society as a whole for the benefit of the interests of shareholders.

I do not accept this. Yes, there are examples of bad behavior, but the contribution to society of big business – in terms of business investment, tax revenue and consumer service – is immense. Where, for example, would we be in the Covid pandemic without Big Pharma?

The point of business investment deserves some attention. It is widely recognized that we have a disappointing business investment problem since 2016. If we are to increase productivity, we need more business investment. Inevitably, much of this will come from big business.

The reason companies invest is because they believe they will make a return. There are many factors that will determine the rate of return on investment, but one that the government has the ability to control to a greater extent than others is the corporate tax regime. Taxing profits reduces the rate of return on investment and, other things being equal, will reduce investment. Uncertainty about the tax regime increases uncertainty about investment returns, which will also reduce investment, all other things being equal.

For these reasons, I spent six years at the Treasury trying to reduce the corporate tax rate and increase the predictability and stability of the tax system. Many have argued – including Rishi Sunak – that this policy has failed due to weak corporate investment records since 2016. I would accept that a competitive corporate tax system was not enough to counter the uncertainty created by the results of the EU referendum and the 2017 general election. but that a competitive corporate tax regime is still vastly preferable to a non-competitive regime, even if it is not a question of a panacea.

I make these remarks because I believe that a sensible government should establish and maintain an investment-friendly environment for business, resist pressures to be anti-business, and be prepared to articulate a defense of the role of business. This all sounds like something out of a Liz Truss speech. But my concern, however, is that his incoming administration will attempt to do so in a way that is politically unrealistic and counterproductive.

We should not underestimate what is about to happen to the economy and society as energy prices soar in October and, most likely, again in January. Although the government will respond with a substantial package of measures that will soften the blow for many, this winter will remain extremely difficult with a drop in living standards.

Under these circumstances, the public will be angry. Some of this anger is going to be directed at energy retailers, even if they don’t benefit from wholesale price increases. Some of the anger will be directed at “profiteering” energy producers. The accusation of “profiteering”, in the sense of an accusation of morally wrong behavior, is unfair – their profits are the consequence of an extraordinary market price that they do not control – but we will hear a lot about it. Some of the anger will extend to supermarkets charging us more on our food.

Labor’s flagship policy is a taxpayer-funded energy price freeze. This is good policy, but flawed policy. It is extremely expensive because it is poorly targeted and in no way promotes the reduction in demand that will be necessary during the winter. But it is simple, direct and complete.

In addition, Labor will advocate for a broader windfall tax on oil and gas producers. Some on the left will go further with calls for the nationalization of energy companies, food price caps and a one-off tax on supermarkets.

It should not be fooled into thinking that support for these policies will be limited to the traditional far left. In difficult times, there is a strong sense of “fairness” – a belief that everyone should feel some of the pain and no one should benefit from the misfortune of others. This sense of fairness is likely to push public opinion to the left in the coming months, especially in the context of big business.

Windfall taxes are likely to be particularly problematic. Truss and Kwasi Kwarteng, his likely chancellor, have repeatedly said they oppose windfall taxes in principle. We should generally be wary of using them due to their inherent unpredictability but, under current circumstances, the case for them now is surely irresistible. Energy producers may not deserve moral praise for making huge profits due to extraordinary market conditions, but, for the same reason, this is why a windfall tax is justifiable. Done sensibly, this should not discourage future investment.

By failing to pursue such a policy, Labor receives an easy answer when asked about the fiscal sustainability of their higher spending policies. The amounts may not add up, but they can still say they can afford to do more because they would be looking for a windfall tax.

Similar arguments apply to corporate tax cuts. During last week’s raids in Birmingham, Truss was asked if she would support the most vulnerable during the cost of living crisis. Within seconds, she was talking about lowering corporate taxes. Again, I have some substantive sympathy (I was one of the few who criticized Sunak’s announcement of a corporate tax rate increase), but it will be nearly impossible for the government to win the argument that reversing the corporate tax hike is the right priority now.

First and foremost, it lacks empathy for households facing a financial crisis, it gives Labor another source of income (probably spent many times over) and may increase hostility towards big business which is seen as not bringing a fair contribution. A strategy of reducing the rate over time would make more sense.

There’s something admirable about taking a stand and saying it’s the right thing for the country, regardless of the political consequences. But the risk is that Truss’s approach to corporate taxation will be seen as so out of touch with the public mood that it will be a soft target for opponents of the government, steering the debate in a much more hostile direction. to business. In doing so, she would inadvertently harm not only the Conservative Party, but the pragmatic and pro-business cause more generally.

Luisa D. Fuller