Labour gets itself in a pickle over utilities tax

There's no such thing as a popular tax, even when it happens to be one directed at the hated privatised utilities. Labour would do well to heed this ancient truism as it digs itself ever deeper into the mire over its windfall profits tax proposal. It could all end up backfiring.

But then we mustn't call it a tax, must we? What is proposed, as Gordon Brown, the shadow Chancellor, constantly insists, is "a levy". We've had this shilly-shallying with the semantics of taxation once before; on that occasion it was Mrs Thatcher and her ministers who ridiculously continued to refer to something they called the community "charge" even as the hoi polloi were rioting on the streets over what everybody else termed the poll tax.

In this case there is rather more justification for labelling it a levy, for unless Labour changes its mind again - and it has pirouetted on this so many times that there is no reason to believe it won't - this will be a one-off charge levied on a specific type of company, those that happen once to have been owned by the state.

It is perhaps the case that the discriminatory, arbitrary and essentially random nature of this tax justifies the term levy. All the same, most of us will continue to think of it as a tax and for that reason the Conservative Party is probably on to a winner in identifying it as a campaigning issue. Furthermore, if ministers can undermine the credibility of the idea sufficiently as to make it seem unworkable, then Labour is in difficulty as the election approaches, for this is the only revenue-raising proposal it has yet come up with. It will, as a consequence, form a cornerstone of Labour's first tax and spending Budget. Strip out the windfall profit tax and Labour will be hard-pressed to deliver on promised spending.

On this front, too, Kenneth Clarke may be on to a winner. On virtually every level you care to take, this is a tax hard to justify and hard to implement. The first rule of taxation is that it should be consistently applied in a non-discriminatory way. On this test, the proposal fails on every score, so much so that Labour's tax lawyers and financial advisers are still, years after the proposal was mooted, wrestling with the legal difficulties of defining those the party wants to penalise.

This week we have been treated to a fully blown and increasingly hysterical demonstration of disarray over the issue. It kicked off with a stroppy little letter to the Independent from Tony Blair's head of press, Alastair Campbell, in which he complained bitterly about something written by our good selves on the subject. In the process, he referred to a tax levied on "privatised monopoly utilities".

Given the sensitivity of the issue, you might have thought Mr Campbell would have taken care to get his definitions right. Certainly PowerGen and National Power took it seriously enough to declare "party time", for whatever else they are, they are not monopolies. Unfortunately for them, Mr Campbell seems to have been a touch sloppy in his drafting.

According to Her Majesty's Daily Telegraph, an odd place for Mr Campbell to spin his view of the world, the tax will actually apply to 30 privatised companies. The only pure privatised monopolies are the water and electricity distribution companies and they number 25. So there are five non-monopoly "mystery" companies that will be hit, too. Which are they? Not saying, Labour retorts, which is hardly surprising since it appears not yet to know.

So much for the problems of definition. Then comes the even thornier question of how to levy the tax. For this I have turned to the famous "leaked" City report from which Labour seems to have garnered its list of 30 "comfortably" able to afford the pounds 5bn-pounds 10bn Labour wants for its training proposals.

Funnily enough it didn't take long to unearth this document since it turned out to be nothing more remarkable than a four-page circular to clients from SBC Warburg, which has been hanging around on my desk for the past week. As it happens I have been "leaked" another two quite similar reports over the past month which I would be happy to forward to the Labour Party should they wish to give me a bell. No doubt it is quite a compliment to SBC Warburg to be used as the basis for Labour's latest musings on the subject, though its clients among the utilities might think otherwise, but really.

If policy is now to be defined on the basis of those "able to afford it", I can think of a whole host of others just as deserving of a windfall tax. Let's begin with all those fat cats in the City, which we all know to be essentially a monopoly. A retrospective tax on City bonuses will do for starters. Now, let's see. Who's got a bit of money to spare? I know. How about Glaxo Wellcome? Sting Sir Richard Sykes for 500 mil and he'd barely notice the difference. Then what about old Wafic Said? Oxford dons have just turned down his offer of pounds 20m towards a business school, so thanks very much, we'll have it instead.

I exaggerate, of course, but to be honest, not very much. You might as well target any company or individual who has enjoyed "above average returns" for all the difference it would make. If there is an intellectual justification for it as far as the privatised utilities are concerned, it is to do with the contention that these companies were hopelessly undersold at the time of privatisation and that the taxpayer has been short-changed as a consequence. Well, perhaps, but it is also the case that they were sold for the best that could be achieved at the time commensurate with the Government's other aim of wider share ownership. That they were not sold for more is in part down to the Labour Party, which did its utmost to undermine each successive privatisation.

To turn round now and say let's have a bit more money is like the man who sells his house for too little and then later tries to reclaim the difference; it is not the way of the world. Furthermore, in a great number of cases, the present generation of shareholders are not the ones that have enjoyed the windfall gains. US companies buying into our regional electricity industry have done so at the top of the market. If Labour attacks them, retaliatory action will be taken by the Clinton administration against British interests in the US.

Not that there is any chance of Labour backing off here. Labour leaders may be divided on the detail of this new tax but they are united in believing it a reasonable way to raise money. All the same, the precedent is an awful one, which one way or another, utility customers will end up paying for. Strangely, the easiest and fairest way to raise money for spending, increasing corporation tax across the board, seems to have been missed by the Labour Party. But then that's one Labour would be well advised not to trumpet from the rooftops.