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Windfall tax/housebuilders: optics trump logic when targeting business

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Politicians around the world are imposing or at least proposing windfall taxes on energy groups. One justification is that profits are “too high”. But slippery politicos weaken their own argument by declining to follow it to its logical conclusion: that any mature business with fat profits should pay extra taxes.

Consider Persimmon. The UK housebuilder reported first-half results on Wednesday. Profit margins, as defined by ebita, were 26 per cent, according to S&P Capital IQ. That compared with a figure for BP of 24 per cent over the period.

Persimmon and three other UK housebuilders — Taylor Wimpey, Barratt and Berkeley — have all made fatter profits on this measure than BP and Shell over the past 12 months.

You could argue the case for windfall taxes is stronger. Housebuilders have received heavy indirect government support via subsidies for homebuyers. New housing supply is artificially constrained by an unwieldy and restrictive planning system. Both factors keep prices and margins high.

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Persimmon has returned £3bn in dividends over the past five years, more than three times as much as in the preceding five-year period. This year’s payment is expected to match last year’s record £750mn.

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There are several reasons UK housebuilders evade calls for excess profit taxes. It would mean indirectly taxing new homebuyers, some of whom were receiving countervailing subsidies, for example.

But energy groups are candidates for special financial punishment for cognitive as much as practical reasons. The sting of higher energy bills is felt by all consumers at the same time, even as energy companies announce higher profits.

In contrast, the discomfort of paying steep prices for new homes afflicts a minority intermittently. Subsequent house price gains mollify the victims.

In both cases, the case against windfall taxes is the same: they stifle investment, reduce supply and lift prices higher.

There is a respectable argument that persistently high profits are a symptom of market failure. The solution to that would be market reform. But policymakers and the public will always prefer lashing out selectively at business to remedying wider flaws.

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