Windfall This!
How Governments Could Soon Hit Investors With a Windfall Profits Tax
by Doug Casey
International Man: What is a windfall profits tax?
It seems like a vague and arbitrary concept politicians use to justify taking more wealth from people they don't like.
Doug Casey: That's quite correct.
It's defined as the taking of "unusual and unearned" or "exploitative" profits.
The application of a windfall profits tax always has to do with the concept of "fair." Whenever you see the word fair being used, be on alert. "Fair" is among the most dangerous words in the English language.
Everybody approves of the idea of fairness in theory, in the abstract. But in practice, it's a chimera, a will o' wisp. Individuals of good will try to treat others fairly, i.e., with honor and justice; it's a question of doing what you say you'll do and not aggressing against other persons or their property. But the concept of "fair" usually connotes a sense of forced division of spoils. At the level of government, where coercion is overtly or tacitly in the picture, fairness tends to be no more than a political buzzword. They manufacture artificial notions of "fair" profits, "fair" prices, a "fair" wage, "fair" housing, and the like. These are arbitrary and pernicious concepts that tend to rationalize envy. This is entirely apart from the fact that taxes—the forceful taking of another's property under cover of the law—are themselves immoral. But that's a subject for another day.
Government takes it upon itself to tax what they consider windfall, or unfair, profits. Occasionally they pass out huge amounts of money to cover windfall losses on the part of favored corporations. Both windfall profit taxes and subsidies are symptomatic of the accelerating takeover of the economy by the political class. In a free society, profits are rewarded, and losses are punished by the market—end of story. In addition to moral benefits, that incentivizes businesses to create wealth, which benefits everyone. That's how countries grow rich and stay free.
Windfall profits themselves are almost always caused by the imposition, or the unraveling, of politically caused distortions in the market. Gold is a classic example. When the government raised the price of gold from $20 to $35 in 1933, it created windfall profits for speculators. It had been inflating the currency while maintaining a fixed price of gold in dollars until it became impossible.
The same thing happened again in 1971 when, after controlling the gold price at $35 an ounce while inflating the dollar for 38 years, they were forced to let it float. The metal ran to over $800 by 1980. Speculators and mining companies again made huge windfall profits because of State intervention in the market. The same thing happened in a different way with the other big "political" commodity, oil. Silver, which was controlled at $1.29 an ounce for decades until 1965, is another among many examples.
Windfall profits are usually a consequence of government intervention in the economy. Government typically finds a different type of poison to act as an antidote to the first type of poison they've injected into the economy.
When a corporation has windfall profits taxed away, it amounts to punishing foresight. A business makes windfall profits by positioning itself to provide goods and services when and where they're most needed, allocating them via market prices. It's counterproductive and quite insane to have a windfall profits tax.
The solution to "windfall profits" and the envy they engender is to totally remove governments and their central banks from the economy. I don't expect that to happen anytime soon, though, so speculators and smart businessmen will hopefully continue to reap windfall profits while the State will, idiotically, attempt to punish them.
by Doug Casey
International Man: What is a windfall profits tax?
It seems like a vague and arbitrary concept politicians use to justify taking more wealth from people they don't like.
Doug Casey: That's quite correct.
It's defined as the taking of "unusual and unearned" or "exploitative" profits.
The application of a windfall profits tax always has to do with the concept of "fair." Whenever you see the word fair being used, be on alert. "Fair" is among the most dangerous words in the English language.
Everybody approves of the idea of fairness in theory, in the abstract. But in practice, it's a chimera, a will o' wisp. Individuals of good will try to treat others fairly, i.e., with honor and justice; it's a question of doing what you say you'll do and not aggressing against other persons or their property. But the concept of "fair" usually connotes a sense of forced division of spoils. At the level of government, where coercion is overtly or tacitly in the picture, fairness tends to be no more than a political buzzword. They manufacture artificial notions of "fair" profits, "fair" prices, a "fair" wage, "fair" housing, and the like. These are arbitrary and pernicious concepts that tend to rationalize envy. This is entirely apart from the fact that taxes—the forceful taking of another's property under cover of the law—are themselves immoral. But that's a subject for another day.
Government takes it upon itself to tax what they consider windfall, or unfair, profits. Occasionally they pass out huge amounts of money to cover windfall losses on the part of favored corporations. Both windfall profit taxes and subsidies are symptomatic of the accelerating takeover of the economy by the political class. In a free society, profits are rewarded, and losses are punished by the market—end of story. In addition to moral benefits, that incentivizes businesses to create wealth, which benefits everyone. That's how countries grow rich and stay free.
Windfall profits themselves are almost always caused by the imposition, or the unraveling, of politically caused distortions in the market. Gold is a classic example. When the government raised the price of gold from $20 to $35 in 1933, it created windfall profits for speculators. It had been inflating the currency while maintaining a fixed price of gold in dollars until it became impossible.
The same thing happened again in 1971 when, after controlling the gold price at $35 an ounce while inflating the dollar for 38 years, they were forced to let it float. The metal ran to over $800 by 1980. Speculators and mining companies again made huge windfall profits because of State intervention in the market. The same thing happened in a different way with the other big "political" commodity, oil. Silver, which was controlled at $1.29 an ounce for decades until 1965, is another among many examples.
Windfall profits are usually a consequence of government intervention in the economy. Government typically finds a different type of poison to act as an antidote to the first type of poison they've injected into the economy.
When a corporation has windfall profits taxed away, it amounts to punishing foresight. A business makes windfall profits by positioning itself to provide goods and services when and where they're most needed, allocating them via market prices. It's counterproductive and quite insane to have a windfall profits tax.
The solution to "windfall profits" and the envy they engender is to totally remove governments and their central banks from the economy. I don't expect that to happen anytime soon, though, so speculators and smart businessmen will hopefully continue to reap windfall profits while the State will, idiotically, attempt to punish them.
International Man: Thanks to destructive ESG policies, Western sanctions on Russia, and rampant money printing, energy prices have soared recently. As a result, energy companies have seen their profits rise.
Recently, the European Union announced they are looking into implementing a windfall profits tax on energy companies.
What's your take on this?
Doug Casey: Again, like all state intervention in the economy, it's both economically and morally destructive.
By taxing energy companies, they're taking away the capital needed to produce more oil and create even more profits. It's not just energy but absolutely any kind of production, creation, or business. The fact that any good return on investment can be arbitrarily taken away discourages investment. But it's worse than that. The current mania for Environmental, Social, and Governance regulations hamstring production and immensely raise costs. Businesses now must hire legions of Karens to ensure there are enough people of the right gender and race, as opposed to competence. Essentially worthless busybodies justify their existence by bureaucratizing every move to assure that it's politically correct.
ESG and windfall profits taxes don't solve anything. On the contrary, they're making real and imagined problems much worse. This is how to not just destroy prosperity but bring on a new Dark Age.
International Man: There's precedence for a windfall profits tax in the US.
In 1980, Congress passed the Crude Oil Windfall Profit Tax Act, which taxed up to 70% of "windfall profits" of domestic oil producers.
What happened then, and how could it apply to what is happening today?
Doug Casey: Few people seem to remember that, at the top of the last oil boom in 1980, oil companies, drilling companies, and others in the energy space equaled about 30% of the S&P 500's market cap.
But by about this time last year, they'd fallen to about 3% of the S&P 500 market cap. It's been a long bear market, at least in relative terms, for oil companies. They've recovered a bit since, but are still very cheap.
People have also forgotten that, in the past, oil was both easier to find and easier to produce. At this point, most of the world's shallow, high-grade oil has been found and is being produced.
New oil fields today tend to be far offshore in deep water or other very problematic and expensive places. Not to mention the much greater political risks. It's much harder to produce oil than it used to be, even with the great technological advances that have been made. Voracious tax regimes and new ESG and DEI (Diversity, Equity, and Inclusion) rules make it even harder and more expensive. Most petroleum and mining companies now have more lawyers and human resources supernumeraries than they do geologists and engineers. The situation has become insane and unsustainable.
Many oil companies—Shell and BP are examples—have said that they're actually getting out of the energy business because it's more trouble and risk than it's worth.
But oddly enough, profits, windfall or not, are not going to be the problem in the years to come. As the Greater Depression deepens over this decade, profits of any kind—at least for productive businesses—are going to be in short supply. So, worry about losses bankrupting corporations in the future. The great parasite, the State, is on the ragged edge of killing its host.
International Man: If governments can implement a windfall profits tax on energy, it probably wouldn't be a stretch for them to do it in other areas.
If the price of gold explodes, couldn't Congress pass a "Fair Share Gold Windfall Profit Tax Act" levying a tax of 70% more on gold profits?
What are the implications of this political risk for investors in this space?
Doug Casey: Absolutely. The Prime Directive of all living things, from an amoeba to a person, to a State, is: Survive! Especially now, with most governments on the edge of bankruptcy and taxes already at onerous levels, nothing is off the table. If the State "needs" to take a "fair" share of oil profits or gold profits, maybe they can and will take a fair share of real estate profits on your house too.
In an era of housing shortages and finding places other than Martha's Vineyard to put millions of migrants, you may find your spare bedroom is up for grabs. If you bought a house years ago for $100,000 and today it's worth $2 million, perhaps the locked-up profits in your house should be taxed as being an unfair windfall profit as well.
What I'm trying to emphasize here is that, in today's world, although your investment risks are huge, the political risks of owning any assets today are even greater.
People don't realize that the government isn't their friend. It's become a predator. The State and its minions are actually your enemy. They can and probably will do almost anything to survive. And since the government is the only entity in society that can use force to survive, that's exactly what it will do.
We're in for a rough decade.
