Windfall tax in UK

HyeMin Lee

Due to the effects of the Russia-Ukraine war, there has been an increase in oil and gas prices. A windfall tax is an extra levy imposed by a government on a company. It targets firms that benefit from something they were not responsible for - in other words, a windfall (BBC, 2023) Due to the increased demand after Covid restrictions were lifted, oil and gas prices have increased, leading to higher profits for oil and gas companies.

In Figure 1, the initial equilibrium a is at the intersection of supply curve S and demand curve D1. At the initial equilibrium of a, the demand rises due to the covid restrictions being lifted For instance, after the covid restrictions have been lifted, consumers’ income has risen as consumers have gone back to their normal workplaces. Thus, there is an increased percentage of income spent on gas and oil, increasing the demand. Another reason can be that as more people are out of Covid quarantine, there is an increase in the use of energy, leading to an increase in demand Also, after the covid restrictions were lifted, businesses or factories re-open, leading to increased use of oil and gas. Thus, leading to increased demand for oil and gas. So there is a rightward shift in the demand curve from D1 to D2. At the initial price P1, increased demand results in shortage, so the quantity demanded is larger than the quantity supplied. The price of oil and gas will rise until the shortage has disappeared Thus the price rises from P1 to P2, and quantity rises from Q1 to Q2 The price rises from P1 to P2 and quantity rises from Q1 to Q2. At the initial equilibrium, the demand rises after the covid restrictions were lifted so there is a shift to the right in the demand curve from D1 to D2. As the demand curve shifts, a new equilibrium b is formed at the intersection of S and D2

The government imposes windfall tax on oil and gas companies to reduce the benefits that the companies are not responsible for The tax is imposed to decrease the supply As the supply shifts to the left from S1 to S2 and creates a new equilibrium (c) at the intersection of S2 and D2. When the equilibrium changes the quantity supplied decreases from Q2 to Q3 and the price increases from P2 to P3 At the new equilibrium, the price paid by the consumers increases to P3 and the quantity purchased falls to Q3 The producers receive P3 per unit but they pay the government P3 to P4 which leaves the producers with the final price of P4. This leads to a fall in the firm’s revenue from P2 x Q2 to P4 x Q3. The government receives tax revenue of (P3-P4) x Q3, as shown in the shaded region in Figure 1

An advantage of the windfall tax is that the government gains revenue

Since windfall tax is taken from oil and gas firms that gained profit as there was an increase in the price of gas and oil after covid. The companies gain higher profits and the government will put higher taxes on them. As the government earns more, it may lead to an increase in the government investment which is used in public goods However, whether society benefits from increased government revenue depends on how much the government spends on public goods. As the UK finance minister has stated that the government has “plans for higher taxes and cuts to public spending”, society does not benefit greatly from the windfall tax

A disadvantage would be the windfall tax leading to a decrease in the profit for the firms since they have lost a lot of money as a result of stopping investments in Russian oil firms. The taxation will increase as they earn more profit, meaning the firms will be worse off. Firms will have less to invest which will show a decrease in investment However, it depends on the company because for some firms, “company’s planned UK investments would carry on regardless of any windfall tax” (BBC, 2023) Furthermore, as the price increases but the quantity decreases, it is a disadvantage to the consumers.

A disadvantage would be the windfall tax leading to a decrease in the profit for the firms since they have lost a lot of money as a result of stopping investments in Russian oil firms The taxation will increase as they earn more profit, meaning the firms will be worse off. Firms will have less to invest which will show a decrease in investment However, it depends on the company because for some firms, “company’s planned UK investments would carry on regardless of any windfall tax”.(BBC, 2023) Furthermore, as the price increases but the quantity decreases, it is a disadvantage to the consumers

When the windfall tax is imposed, the price increases so the quantity of oil and gas will decrease. Windfall tax is good for the government since they take the profit from the energy companies that make unreasonably high amounts of profits This tax is a convenient way for governments to raise a large amount of revenue quickly. However, windfall tax is not good for the firms because it will decrease the amount of profits the firms are earning In conclusion, even though windfall tax has negative effects on firms, windfall tax is effective in reducing the companies’ profits that they are not responsible for

Bibliography:

What is the windfall tax on oil and gas companies? (n d ) BBC News https://www.bbc.com/news/business-60295177 https://www.cnn.com/2022/11/17/economy/windfalltax-nuclear-uk-budget/index.html

Ziady, H. (2022, November 17). UK to raise $65 billion from windfall tax on energy companies | CNN Business. CNN.