Today’s podcast starts off in the year 1175 BC, where the legendary Pharaoh Ramses III was readying himself for battle against one of the most mysterious enemies in all of human history.
Ramses was literally fighting for the survival of his kingdom, and for all Egyptian civilization. And fortunately for Egypt, he won. But it came at a great price.
Ramses’ treasury was depleted from costly battles (not to mention the vast numbers of expensive monuments and temples that he built). And so to make ends meet, he did what any politician would do– he raised taxes.
The ancient Egyptians were legendary record keepers; we have detailed accounts of their commercial activities, financial transactions, and even tax receipts. And we can easily observe the trajectory of Ramses’ economic frustration: tax receipts were declining, evasion was becoming rampant, and production continued to decline.
It’s ironic that, even though Ramses III saved his civilization from marauding invaders, his dynasty soon collapsed due to economic mismanagement.
This is an important lesson that politicians have to relearn over and over again: taxation is a huge disincentive. Whenever you impose a tax, you get less of it.
Policymakers understand this in theory; as Mayor of New York City, Mike Bloomberg famously imposed a ‘soda tax’ on sugary drinks. He knew that imposing such a tax would curb people’s behavior and they would purchase less soda.
This is also why taxes on cigarettes and alcohol exist; politicians understand very well that people will consume less of something that is heavily taxed.
But for some reason, they fail to apply the same logic to productive economic activities. They fail to understand that if you place heavy taxes on capital gains, you’ll end up with fewer investments. If you increase corporate tax rates, businesses will leave for lower tax jurisdictions.
And if you impose absurd taxes on oil companies… then oil companies won’t invest or produce as much. Duh.
Yet this seems to be the new rallying cry of the ruling mob; they claim that “war profiteering” oil companies are benefiting from the “windfall of war” and generating “excess profits”.
And their solution, naturally, is an ‘excess profits’ tax.
There is actually precedent for this. The US government started passing excess profits tax as early as 1916. And it still ranks as one of the most complex, bureaucratic, incomprehensible taxes in history. Trust me, if you think your taxes are complicated now, try being a US company during World War I.
They rolled it out again during World War II, charging a tax as high as 95% on ‘excess profits’.
Obviously the concept of ‘excess profits’ raises a number of questions: ‘excess’ according to whom?
But naturally the people who come up with these ideas have no understanding of business of finance. A few months ago, for example, the President of the United States was whining about Exxon-Mobil’s profitability, and he proclaimed:
“We’re going to make sure that everybody knows Exxon’s profits.”
Now I know the guy is a bit slow and doesn’t usually know where he is half the time.
But apparently he doesn’t even realize that Exxon is a public company, i.e. Exxon’s profits aren’t some closely guarded secret. They HAVE to report their profits. Exxon already makes sure that everybody knows Exxon’s profits…
Yet even the most basic understanding of capital markets and financial reporting remains elusive to the people who set economic policy.
Now there’s obviously an election next week, so I’m not terribly concerned about an Excess Profits tax becoming reality.
But here’s something they could (and would) probably do.
There’s a rather obscure tax called the Accumulated Profits Tax that’s already on the books. This is a tax that corporations are supposed to pay if they hold ‘excess’ (there’s that word again) cash profits.
This tax is rarely enforced. But that’s more of a policy choice than anything else. They could change that policy overnight. And since the tax already exists, they could enforce it immediately as a way to penalize oil companies.
Obviously this would be heinously stupid. Penalizing energy companies means creating more long-term problems with energy supply. And problems with energy supply will keep energy prices high, which will keep inflation elevated.
Will that stop them? Probably not. Bad ideas and terrible outcomes never seem to matter. So they may very well plow ahead with enforcing the Accumulated Profits Tax, or as I like to call it, the Excess Stupidity Tax.
This is the topic of our podcast today, which you can listen to here. I hope you enjoy.
Today we’re going to go back in time to the year 1175 BC to northern Egypt along the eastern portion of the Nile River Delta. It was the 11th year of the reign of the pharaoh Ramses III. And in 1175 BC, ramses was getting ready to fight the battle of his life. He was literally fighting for the survival of his kingdom, the survival of Egyptian civilization, against probably one of the most mysterious enemies in all of human history. This is a period of history known as the Bronze Age, and you’re probably familiar with the term.
Historians often refer to prehistory or early history in Stone Age, Bronze Age and Iron Age terms. It goes in that order. The Stone Age was first. It lasted literally millions of years. Archeologists have come across sites of excavated crude tools and evidence of bone and stone tools dating back three and a half, 4 million years ago.
They found in places in Africa, et cetera, but along the way where human beings again, this is going back millions of years, hundreds of thousands of years with human beings with very, very crude, very rudimentary tools. Eventually, people learned how to mine. They learned how to extract rock out of the ground or off of mountainside, etc. Or and then they learned smelting the art and science of extracting metal from rock ore using heat. And one of the most important metals that they are able to extract was tin, simply because tin had a melting point that was easily achievable to very ancient prehistoric people.
Ten melts at about the same temperature as you might bake bread in your oven about 450 degrees Fahrenheit. And this was a temperature that was very easily achievable just with fire and wood as a fuel. And so, little by little, human civilization figured out in different pockets in different regions around the world, little by little started to figure out between five and 100 years ago, they said, oh, well, we can actually take this rock, take this ore. We could smelt the tin and we could mix it with copper. And the alloy of the two of those together created something that we call bronze.
And this ushered in, again, what historians refer to as the Bronze Age. The Bronze Age was a big deal because the first time ever we actually had metallic tools and metallic weapons, and we could use it for everything from warfare to building construction. And so it was a really big deal and was a major advancement in human civilization. But tin was actually a pretty scarce resource back then. They had to literally scrape it from it was a rock called cassidorite.
And this considerate rock was just scraped off of mountainside and some Luyu fields from Afghanistan and a lot of stan countries in Uzbekistan and Tajikistan, in Central Asia, as well as in southern Turkey. The copper came from Cyprus, the tin came from kind of faraway places, and it was a very, very scarce resource back that it was very difficult to acquire and had to go a really, really long way to get it. Ironically, even today it’s still the same. A lot of people in the ten industry talk about peak ten and that the world is running out of ten. And some people predicted about 20 years ago that the world was going to run out of ten in 20 years.
Having said that, they are constantly making new discoveries, have been new discoveries of ten in places like Colombia and Mongolia. Top producers today are China, Russia, places like that. But again, back then they didn’t have our globalized economy and they were just pulling rocks out of the ground and it was really, really hard to find. And curiously enough, that one of the places in the ancient world that may have been very, very connected to this was the city of Troy. Troy, of course, is located in the Dartnells in modern day Turkey.
This is the narrow strait, that very narrow area that basically connects the Mediterranean to the Black Sea. That was a really important, very strategic location back then, because if you think about it, if you were mining tin in Afghanistan or northern Iran, basically it would be carted to the Black Sea, put on a boat from the Black Sea into what is today modern day Turkey, across through the straits, through the Dardanelles and into the Mediterranean. So that was an incredibly strategic location. The Dard mills have always been a very, very strategic location throughout history. So Troy, the city of Troy, which is right there in the Dardanelles, was sitting right in that all important trade route you had.
Just to the west you had the island of Cyprus, where they reminded the copper, and to the east and to the south they had the tin mines. And so Troy very well may have been the main, one of the main trade routes, main trade arteries in a very strategic point in that trade route for the tin and the copper. Trade very important in the Bronze Age. And it’s entirely possible. And there’s been obviously a lot of speculation over the past several thousand years about the Trojan War and why it occurred and whether or not it did occur.
And there’s a lot of historical agreement now that it did, in fact occur probably around the same time, around 1200 BC. So just really a few decades before Ramsey III came around and may very well have been about trade, could have been about ten, it could have been a territorial war where somebody came in and said, we want to take over the ten trade and the ten mines that are nearby. And of course, according to legend, the legend and the Elliot that was handed down by Homer Troy was famously vanquished after Odysseus, the king of Ithaca, came up with this fantastic idea about, let’s give him a horse and let’s all hide in the horse and then we go in and slaughter all these people. Who knows if that actually happened? But according to legend, of course, Troy was vanquished and there might have been this widespread migration of all the Trojans leaving their city that had been destroyed.
And that leads to this group of people that again, historians refer to as the Sea Peoples. This is this very, very mysterious group that there’s intense historical and archeological debate about who these people were, what are their origins, and there are so many theories. And there are some people that historians who believe and archeologists who believe that the Sea Peoples were the remnants of the defeated Trojans, that after their city was destroyed and sacked, they fled and they migrated. And they sort of cobbled together in this band, this multinational mob that just sort of came together as an army that just viciously raided all across the Mediterranean. Some people say it might have been Italians that were fleeing famine from the Italian Isles.
Some people might say it was people from different regions in the Balkans and so forth. But this is a very, very mysterious group of people because there’s very scant historical and archeological evidence about their origin and who exactly they were and where they came from. But we do know that they existed because they referred to over and over and over again. And the Sea Peoples were terrifying. They were like the Mongols at a certain point.
When the Mongols came over thousands of years later and just destroyed everything in their path. This is what the Sea Peoples were doing. The Sea Peoples were vanquishing kingdom after kingdom after kingdom, but they didn’t stop and settle. They’re more like scavengers. And they took Cyprus, which again was where the copper was.
They took Turkey, which is again where a lot of the tin was. They destroyed the city of Hattusa, which were they burned it to the ground. This is the capital city of the Hittite Empire, which is in modern day Turkey. You hear a lot of these lot of these terms in ancient Assyria, they took canaan, a lot of these terms. If people read the Bible or heard some of these stories, you hear a lot of these.
You hear about the Hittites and the Canaanites, etc. So the Sea Peoples were vanquishing all these kingdoms and they’re spreading down through the Mediterranean, going south towards Egypt, and they were terrifying. Everybody was terrified of the Sea Peoples. And we hear there are some historical records of this talk about these people that were coming down and they were absolutely terrifying. And so Ramsay is the third now, it’s 1175.
Ramsay’s the Third now knows he has to face the Sea People. He had faced them before, a couple of years prior, in 1078 BC. But he needed one. But it wasn’t a decisive victory. He had fought them and he had taken his army all the way up to modern day Lebanon and had fought the Sea Peoples there in 1178 BC.
But it wasn’t a decisive victory, and the Sea Peoples were returning, and he knew it. And so Ramsay’s hatched a plan. And the plan was, let’s lure them into the Nile River Delta. This is our turf. We know this ground very, very well, and we can lure them in their ships into the Nile River Delta.
And from what we can tell, it was a really interesting battle. Tactically. Ramsays used his navy to pin Sea Peoples to the coast so that they couldn’t actually proceed down the river. That would have been actually very bad because then they could have taken over the rest of the Nile Valley. So Ramsay’s actually used his navy to blockade them and pinned them to the coast.
Meanwhile, on the coastline, he had a combined arms force. He had infantry, he had cavalry, he had archers there ready. And they just really destroyed the Sea People, neutralizing the Sea Peoples before they could even get off of their ships. And it was a very, very decisive victory. And Ramsay is supposedly to have settled whatever remaining Sea Peoples had survived the battle to settle them said, look, we defeated you once and for all.
You’re done. You’re no longer a threat. Those of you who survived, as long as you live in peace, you can stay, but I’m going to tax the shit out of you. And that’s what he did. And of course, Egypt at the time had actually a very, very well advanced tax system, and taxation, tax revenue was really important to them because this battle really the war against the Sea People, and there were so many battles, and Ramsey III had to fight lots and lots and lots of battles.
And by the time they finally defeated the Sea Peoples and it wasn’t their only adversary, but by the time they finally defeated the Sea Peoples in 1175 BC, the Egyptian treasury was pretty much depleted. They were all out of cash. They had to completely rebuild that, rebuild a lot of things in their civilization, their provincial security. So many things had been just a tremendous disruption. And at the time, Egypt had, which was very common in the ancient world, a very agrarian economy.
It was a very advanced agrarian economy. Egypt was legendary for its aggregate economy, for its yield, because it had predictable flooding. They had managed to harness the flooding of the Nile River Valley and turn that into incredibly advanced agrarian yield, very productive and fertile fields. But you have to think about and today we think about agriculture as just purely food. But back then, agriculture, I mean, that was it.
But it wasn’t just food, right? Agricultural production was food, but it was also industrial products. So papyrus would be grown. They would turn it into paper, reeds and straw that would be turned into building material. They would grow textile products for clothing, they would grow different berries and things like that, that they would turn into dyes.
And so these are all actually industrial supplies. Agriculture in the ancient world wasn’t just about food. Agriculture was everything. And even the industrial economy was powered on agriculture. It was basically, it had agriculture and they had mining.
And those two things, they would develop all the raw materials that they needed because they didn’t have chemical industries and things like that, that we have today. So all that basically came from mining and it came from agriculture. And frankly, most of it really from agriculture. But the wars, the wars against the sea people, the battles of the sea people, and all the different battles that they had against their adversaries and maintaining security in Egypt in this period of the new kingdom, really resulted in a decline of production. Their agriculture was in decline, and that was a normal thing.
Enemies that would come into Egypt, anytime there would be an invading enemy, really anywhere in the ancient world, usually the first thing they would do is destroy the fields. They would destroy the fields, they would destroy the crop production. A lot of times, armies would go in and they would sow salts into the soil to make sure that nothing is ever going to grow here again. So they would devastate, and that was really a tactic to devastate the local economy. And if they devastate the local economy, they knew they would deplete whoever they were invading.
They would deplete their ability to resist and deplete their ability to fight. And this is what happened in Egypt in the war. The battles, all the military conquests resulted in a decline in production. And that decline in production meant lower tax revenue, because Egypt was taking the Egyptian government was taking a portion of its agricultural production as tax revenue. So now they’re getting lower tax revenue.
What do governments do when they have lower tax revenue? They raise tax rates. They say, oh, well, our 10% tax rate isn’t generating enough tax revenue, so now we have to double the tax rate to 20% just so that we get the same amount of tax revenue we were getting before. And this is the period of time where we start seeing literally some of the first historical evidence, at least in recorded history, of tax evasion. People were literally disappearing with gold and corn and things like this.
And we actually know this to be true, because the Egyptians, the ancient Egyptians were incredible record keepers. They had a really great scribe system, they had a really great accounting system. Egypt had well developed the Egyptian language and the hieroglyphics that was very noun heavy, which is really great when you’re trying to look at records, because that’s essentially what you’re looking at. You’re looking at nouns and you’re looking at numbers. And in the system that they had the writing system and the scribe system, they had lots of nouns and lots of numbers.
The Egyptian numerology was very interesting because they didn’t have a zero, at least in the same way that we think about it today. They had a symbol, for example, the number one, that was just a vertical hash, just a straight line, a vertical line that meant number one. You see 12345 ones and that meant five. They had a different symbol for ten and 1010 and so forth, and they would go on. And so if you wanted to represent a symbol for like 1110, you would show the symbol for 1000, the symbol for 100, and the symbol for ten.
So it was a little bit maybe like Roman numerals, where they didn’t have a zero and you’d have C, DXI, that sort of thing that you would see written out. So it was a little bit like that. The funny thing is the symbol for a million, all the rest of them are sort of more, a little bit more sort of lines and squares and things like that. The symbol for a million is literally a little pictograph of a guy holding his hands above his head as if exasperated that a number that big would even exist. That’s the symbol for 1 million in ancient Egypt.
And we know all this because we have so many records. And we can see in one of these Bronze Age societies, there are several of these like this. We can go back and we could see even ancient Sumerian tablets in the code of Hammurabi and Babylonian records and so forth. Very, very well developed accounting systems. And the Egyptians were no different.
Their tax system was kind of an inkind system. So it wasn’t just money. They would actually go and collect grain. They would actually collect the agricultural products that they were growing and say, hey, a portion of that belonged to the state. And they would put it in granaries and they would put it in temples and they would keep very detailed records.
And we can actually see people disappearing. And in some cases the tax collectors themselves were the ones that were going and doing this. There was one story of a ship captain. This was actually even a couple of decades after the defeat of the Sea Peoples. And there was a ship captain who was sailing, he had all this grain and gold and so forth that they had taken.
It’s supposed to be a tax revenue. This guy just disappeared with the money, he disappeared with the grain, and nobody ever found this guy ever again. And so we start seeing the records of the tax receipts and the shipments and so forth, and we can see tax revenue in decline, we can see the decline. And of course, tax rates start going up and we get inflation and we get declines in production, we get tax evasion, we get internal conflict, all these sorts of things that creates really a lot of economic turmoil, in fact, during the rain and the 29th year of Ramses III, to be actually very specific, this is just to tell you how good the record keeping was. It was literally the 10th day of the second month of the 29th year of the reign of the Pharaoh Ramses III.
There was the first recorded labor strike in human history. It was a place called Djarrell Medina. And there were construction workers that were building a vast complex. And the construction workers weren’t getting their rations, and they were just tired of it. They were sick of it.
They were tired of not getting what was owed. They were tired of the inflation. They were tired of the corruption, the incompetence, the taxes, and they went on strike. And you actually read this. There is a story.
There are written records of the workers, and they go past the guards, they go past the administrators and say, we’re not working, and it’s a standoff. And the administration actually caved after just two days. But the strike went on for another three months. After two days, the administration said, okay, fine, fine. We’re going, we’re getting rations for you, and here you go, here’s your food, here’s your rations.
But the strike went on because it wasn’t just about the rations. It wasn’t just about the food. People were just sick and tired of all of it. They had reached their breaking points. They were tired of the inflation, the corruption, the incompetence, and they retired of the high taxes.
And we can see this, the longer term consequences. We can see that eventually even the pharaoh himself, Ramsey III, was assassinated, led to a succession crisis, which led to even more taxes. New taxes. New taxes. They just started taxing new things as, oh, now we’re going to tax this, we’re going to tax that.
They just came up with new products and everything they could get their hands on to tax that’s. What they were taxing. We start seeing because of these new taxes, we start seeing declines in more production, we start seeing more and more economic turmoil. And eventually this period in Egyptian history, this particular civilization, the New Kingdom, just vanished into the history books. This is a very important lesson, and it’s a lesson that governments have to relearn from time to time.
And the idea is very simply, that taxes, taxation itself creates disincentives. And politicians know this. They know this in theory, and they apply this. This is why they have cigarette taxes, because they want to discourage smoking. And so they tax it.
They tax it very, very heavily. They also tax it because they know that people are addicted to it and they’ll just pay it. This is why when Mike Bloomberg was mayor of New York City and he imposed this soda tax because he’s trying to create disincentives, so they said basically any sort of liquid beverage that’s like really high in sugar and really high in Carbs, we’re going to put a tax on it in New York City. It is very paternalistic behavior, but he did that because he knows that taxes are a disincentive. And the idea is that if we tax something, it will obviously influence behavior.
And politicians know that, and that’s why certain of these taxes exist. But for whatever reason, they say, oh, if we apply a soda tax, people will consume less soda. But they don’t apply that same logic to productive economic activities. They don’t apply that same logic to capital gains taxes and taxes on financial transactions and taxes on really just any productive economic activity, even income, the production of goods and services. They don’t apply that same logic and realize, well, jeez, if we tax something beyond a sort of normal rate, particularly a rate that people are accustomed to, and we start taxing something too much, it’s going to cause a backlash.
It’s going to cause people to gain the system, it’s going to cause people to produce less. It’s going to have an adverse impact. And this is what happened in ancient Egypt. This is what happens over and over again throughout human history. And you reach a point of diminishing returns, and it really creates a vicious cycle of diminishing returns.
Higher taxes mean less production, less production means less tax revenue. And just like in ancient Egypt, less tax revenue means, oh, now we have to raise tax rates because our overall tax revenue is lower. So again, since 10% wasn’t getting the job done, now we’ve got to raise tax rates to 20%. Well, higher tax rate means even less production, which means less tax revenue, which means higher tax rates. And you end up in this cycle, this really, really vicious cycle.
Governments always seem to forget that lesson. They also vastly underestimate human creativity to avoid taxes that are unnecessarily high, completely unreasonable. Egypt learned this the hard way. Many governments had to learn this the hard way. Many governments have to relearn this lesson over and over again.
As an example, I’m going to pick on jolly old England for a little bit. In the year 1660, the British government, this wasn’t really British back then, so the English government passed something called the Hearth tax. So the Hearth Tax is a tax on fireplaces. So what do people do? They just ripped in their fireplaces.
So there were tax collectors that went to people’s houses and said, okay, I see one, two, three fireplaces, so this is how much you’re going to be taxed. It was a per fireplace tax. So people just bricked in their fireplaces, or they built elaborate facades around their chimneys and around their fireplaces to disguise them as something else. It was a piece of art and not a fireplace. People do all sorts of crazy things to try and get around the tax, and yet even still, they weren’t really collecting any revenue from it.
But the tax remain on the books for three decades. Even dumber, still jolly old England. Now this is, I guess, technically now we’re getting into Great Britain and eventually into the United Kingdom. They passed a candle tax in 17 seven. Now, the candle tax was an excise tax and excise tax is also essentially a per unit tax on the production of a particular good or service.
So every single candle or certain number of candles was taxed. And so what ended up happening? People said, I’m not going to pay that tax. They just switched fuel sources. Instead of lighting their homes with candles, with wax candles, they switched.
And they actually end up switching to a less efficient fuel source, something called rushlight. Rushlight is like dried brush, basically something that you could grow dry out and dip in lard or, you know, some kind of animal fat or oil or something like that and light it on fire. It was actually a much less efficient source of fuel. Rush light would burn out usually in about 30 minutes. Candles could last hours and hours, days, weeks, potentially, depending on the candle, but people just start using a less efficient source.
So the candle industry plummeted. People just stopped buying candles to avoid the tax. And even still, the law remained on the books for 126 years. In 1710, they started texting playing cards and all that did was it led to widespread forgery of playing cards. So official playing cards had to come with some tax stamp and people said, I’m not going to pay that crazy tax.
So people just started using forged playing cards. The government then even threatened a capital punishment. You would literally be hanged if they caught you with forged playing cards. And people did it anyways because they weren’t willing to pay the tax on playing cards. People thought, that’s ridiculous, I’m not going to pay tax on playing cards.
In 1745, they passed a tax on glass. This was a tax that was based on the weight of the glass. So heavier glass was taxed more than lighter weight glass. So what do people do? The glass manufacturers across England just started hollowing out the glass.
So they had the pain in the front, the pain in the back, and inside it was just hollow, which is obviously lower quality glass. And people didn’t like the low quality glass. So what happened? The entire glass industry moved to Ireland, because in Ireland, they didn’t tax glass. So basically, England lost its entire industry to a place that didn’t tax it.
Bang up job government. By passing this stupid tax, you essentially destroyed an entire industry. Your country could have benefited from this, but instead it moved overseas and went to Ireland. And the Irish economy flourished because of the glassmaking industry. In 1784, they passed a brick tax.
This was really hilarious. They said, okay, we’re going to charge four shillings for every thousand bricks. So what ended up happening? Bricks just got bigger. So instead of the normal small bricks, manufacturers started making really huge ultrasized bricks to get around this with the people.
Instead of having to buy a thousand bricks to build a house, they could buy 100 bricks and not pay the tax. So the government then started reregulating and said, no, you have to make bricks a certain size and all these sort of things. And then people said, okay, screw it. I’m going to switch. And they switched building materials, they switched to timber, and they switched to straw.
And again, that lasted decades until well into the 18 hundreds. And they realized, wait a minute, this is stupid, and this is really holding back our industrial development. But this is the thing with taxes, that they pass taxes. The taxes never generate the revenue that they’re supposed to. People engage in all sorts of behavior to avoid the tax, and they learn the lesson that all it does is actually hold back industrial development.
All it does is actually cost the economy. And yet these laws still remain on the books for years and years, if not decades. And that brings us to today. We’ve been hearing a lot about new taxes. We’ve been hearing a lot of people whine and complain about excess profits, windfall profits, war profits, even.
And this is quite interesting, because, of course, all that ire is directed at energy companies. Energy companies been raking in big profits because, oh, wow, what a surprise. Oil prices are high, supply is constrained. Well, duh. There’s a reason for that.
There’s a reason why oil prices so high. There’s a reason why supply is constrained. Of course, the politicians, the people in charge, love to blame Vladimir Putin, and obviously Putin has a significant impact on oil markets, but it goes way beyond that, because, if you remember, oil prices are rising, and gasoline prices, they think we’re so stupid that we don’t remember that. We don’t remember that oil and gas prices were rising way before the invasion of Ukraine, way before Putin was gallivanting around the border with his army. That all.
Throughout, even early 2021, prices were rising. And they think we’re all so stupid that we don’t remember that. But that’s the deal. The truth is, is that oil prices, gasoline prices, were all rising in 2021, way before Putin was even a problem. Why is that?
Well, it’s because especially in the United States and a lot of places around the world, you’ve got a lot of government action specifically against oil and gas companies, against energy companies. They’re canceling pipelines. They’re refusing to lease federal land and provide oil concessions, which it’s not an optional just so you guys understand, it’s actually required by law that the federal government is supposed to lease land that has these mineral resources, that has these hydrocarbon resources. You’re supposed to have an auction. You’re supposed to lease them to the old company.
It’s required by law. It’s not optional. But they just refuse to do it anyways. They create mountains of regulations, not only at the federal level, but the state local levels as well. They create new laws, but they passed a methane tax.
Now they say, oh, now we want you to put the SEC comes and they want you to put your CO2 emissions as liabilities on your balance sheet. All these sorts of things that just make it more and more and more difficult. And it’s not even just governments. You’ve got even private industry. You got people like Larry Fink who are sitting on $10 trillion, $10 trillion at BlackRock.
If it were its own economy, it would be one of the largest economies in the world. $10 trillion in other people’s money. That’s not Larry Fink’s money. That’s other people’s money. And he uses this and he’s weaponized other people’s money to push a very much anti fossil fuel agenda, forcing banks to reduce their loans to oil companies, forcing investors to turn their backs on oil and gas companies, pushing activist hedge funds into taking over boards of directors.
You’ve got major super, major oil producers now that have these activist hedge fund managers that are trying to push them into green energy initiatives. So instead of actually drilling for oil and gas to say. Oh no. We should go and invest in cornbased ethanol. Which is really one of the dumbest inventions.
One of the dumbest things you could possibly do. Because cornbased ethanol. By most objective calculations. Is actually a negative return on investment. Meaning that you actually spend more energy producing cornbased ethanol than you actually get out of the cornbased ethanol.
So it’s one of the dumbest things you could do. But, hey, it’s green because it’s not oil. But it’s just these stupid economically irrational things. And that’s not even the government. This is private industry.
So you have these people that have weaponized other people’s money to push a completely economically irrational agenda, and the end result is DA. Oil prices are high. You end up with less oil, less investment in oil, less production, fails to keep up with rising demand. Demand rises and rises and rises every year. So just to keep oil prices the same, you’ve got to continue to increase oil production in line with rising oil demand.
If you want oil prices to come down, then oil production, the growth in oil production has to exceed rising demand. I mean, that’s just basic common sense. It’s basic economics. But none of these people seem to figure it out. So instead they have this very vocal war against oil companies.
The President of the United States incredibly vocal against oil companies. Just in the last couple of days, he’s been talking about oil companies having the windfall of war, war profiteering, excess profits, and all these speeches that he give. My favorite one, though, was from a couple of months ago where he talk about he says, oh, Exxon Mobile. They made more money than God. And actually what he said, they make more money than God.
And he says, and I quote, we’re going to make sure that everybody knows exxon’s profits. And to be honest, we got to file that away under no shit. Exxon is a public company, dude. It’s a public company. They’re supposed to report their profits.
Everybody knows Exxon’s profits because they have to report them. It’s required. Every public company reports its profits. They have earnings calls every quarter. They wave their hands, say, here’s how much money we make.
And they want to make more money and makes their stock price goes up. But the President United States doesn’t even seem to understand basic financial markets, saying, we’re going to make sure everyone knows exxon’s profits. Yeah, Exxon makes sure that everybody knows Exxon’s profits because they’re a publicly traded company. How does he not know this? It’s just so embarrassing.
But now the thing that they’re talking about is something called an excess profits tax. You’re hearing a lot more people. It’s the usual suspects. We don’t need to mention their names. It’s the usual suspects talking about excess profits, and we need to tax those excess profits.
And frankly. This goes back to this goes back to even I remember watching when one senator. Hillary Rodham Clinton was running for president back in 2008. 2008. Not even 16.
- And she was talking about all the money that the oil companies were making. Because if you remember. This was before the global financial crisis. And oil prices had reached what was at least a high back then.
Close to $150 a barrel. And of course, oil prices were high, and the oil companies are making lots of money. And Hillary Clinton said, all these companies are making so much money and they’re making so much profit. And what I want to do is I want to take those profits, and I want to put them in a fund run by the government. This is what she said.
So this is a person that was advocating for the confiscation of privately generated profits. And this is now what people talk about again today, an excess profits tax. They’re complaining that oil companies are making excess profits, failing to understand the reason why they’re making excess profits is because oil prices are high, and they’re doing everything they can to prevent oil companies from actually investing in more production and producing more oil. So that’s why oil companies are making so much money. Their own deliberate actions on the part of the government and the private sector are making it so that oil companies are making record high money.
But instead of saying, oh, you’re making excess profits, and now we want to tax those profits, this is called an excess profits tax. And it’s a real thing. You have to look at in the United States what the Constitution says about taxation. There’s terminology. You might have heard this before if you’ve ever studied the Constitution, people talk about direct taxes and indirect taxes.
Direct taxes are taxes that are generally directly on the consumer. From a constitutional perspective, sometimes direct taxes are referred to as would be direct taxation of the states themselves. Indirect taxes are so an income tax, for example, is a direct tax. Now you’re directly taxing individual people, as opposed to an indirect tax, which would be something like an excise tax. Again, an excise tax would be per unit.
Very famously, right after the Revolutionary War was won, the federal government passed an excise tax on whiskey. And this was hugely unpopular, right? So this is now everybody that produces whiskey, there is a tax that has to be paid per unit on every barrel of whiskey that gets produced. Well, back in the late seventeen hundred s, the US. Was a whiskey nation.
It was, it was in the same way that, you know, the French love their wine, americans loved their whiskey. Whiskey was so prevalent in the United States, it really even at an economic level, that whiskey was often used as a currency. It was a store of value and even a medium of exchange that people would trade whiskey with each other to settle debts and things like this. It was a really big deal. And excise taxes are called an indirect tax because like a whisky tax, where they say, we’re going to tax every barrel of whiskey that’s produced, well, obviously that tax is eventually going to be born by the consumer.
The producers are going to pay the tax, but then they’re just going to raise their price and the consumers are going to end up paying for it. So this is why they call it an indirect tax. So indirect taxes, like excise taxes, those are constitutional and they were actually authorized by Article One, section Eight of the Constitution. Direct taxes are like an income tax. This was a big no no, and this was one that they actually had to pass the 16th Amendment to the United States in order to be able to legally pass an income tax.
Prior to that, the Constitution said that these things had to be apportioned among the states and done based on state population, based on what the census said, but they never really bothered to do that. There were a couple of very small instances of income taxation, but the permanent income tax came about because the 16th Amendment was passed in 1913. And right on the heels of that was the Revenue Act of 1913. So initially the tax rate that was set on corporations was just 1%. And that was based on corporations with income of about $5,000 a year.
So if you had a corporation making $5,000 a year in today’s money, that would be $250 to $500,000. It depends on how you look at inflation. So $250 to $500,000, if you make more than that, then you’re getting taxed at 1%. Well, literally the next year. In 1914, world war I broke out.
They didn’t call it world war I, obviously. They called it the great war eventually. But as the great war broke out, there were a lot of US. Companies that were making a lot of money. The US.
Was not in the war, obviously, at the very beginning, but there are a lot of companies in the US. That were trading with German companies and British companies, and potentially even both german and British companies. They were on both sides of it, and they were making lots and lots of money. Originally, this tax was kind of nicknamed the goulash tax because a lot of the trade was based on food. Ghouls is a stew that’s very popular in central Europe.
And so they called it the goulash tax because a lot of the tax, a lot of people doing the trade, they were trading with Germany and the European nations and so forth, they were making money, were foodrelated. So they called the Gulash tax. But a lot of people, the ones making most of the money, as you can imagine, were munitions factories, people that are manufacturing weapons and ammunition and selling them overseas. And so all of a sudden, you have these companies that are making a lot of profit. And there was a lot of talk, and it was global about saying, hey, there are too many companies making too much money here, and we need to tax that.
And the idea of an excess profits tax took off very, very quickly. By 1917, there were 13 civilized industrialized countries that had passed something similar to an excess profits tax. So it was not just in the United States, but this happened. It happened in 1916 with the revenue act in 1916, and followed up in 1917. When the US.
Actually did enter the war. They had a war revenue act in 1917. There was a consolidated revenue act in 1918. They kept obviously adjusting it and so forth. It was extremely confusing.
If you think your taxes are complicated now, you should try being a corporation in 1918. It was utterly bewildering. I think back to the hieroglyphic of what the Egyptians used as a symbol for 1 million. A guy just throwing his hands in the air, exasperated. That’s what taxes were in 1918.
Think of the Egyptian hieroglyphic for 1 million. So the basic idea, what they were trying to accomplish, let’s say you were making whatever, I’m just going to use a big round number. Say you’re making a million dollars before the war. Now it’s the war, and you’re making $1.5 million. So they’re going to say, okay, that $500,000 is excess profits, and we’re going to tax that.
What they actually had was two profits taxes. They had an excess profits tax, and they technically also had a war profits tax. They were peddling a fiction that was only one tax. But the truth is, there are actually two taxes. An exosprofits tax and a war profits tax, and they were calculated differently.
But you can kind of see, you start looking at different examples. You go, okay, hold on. So I made a million dollars before the war. I’m making one five. The difference between the two is $500,000.
We call that excess profits. But what about inflation? What about a new company? What if I was a new company? I didn’t even exist before the war.
Now I’m a new company during the war. How do we know what my excess profit was? Because I wasn’t even making any profit before it’s. Excess according to whom? Based on what standard do we go back and look at the year before?
Do we look at two years before? Do we average the last five years? Do we average the entire history of our company? And then what about other basic things? What if I had been building a factory?
What if I’m a manufacturing company and I’ve got a lot of demand for my products? And so I say, okay, I’m going to start building a factory. And, you know, I spent three years building my factory, and right when I finished my factory, now the war kicks off. So now there’s a war. But I just invested so much money in this new factory.
So now that I have a new factory, of course my revenue is going to increase. Of course my profit’s going to increase because I had invested in my business. But it’s not like that profit really has anything to do with the war. It has to do with the fact that I invested in my business years ago. So now all of a sudden, I’m recouping some of that investment, the return on that investment that I made in my business, but now I’m making more money.
But you’re saying, oh, this is an excess profit. It’s not an excess profit. I invest in my business. What about a gold miner? You think about back then, in 17 1918, gold was a fixed price.
So a gold miner is already selling his product at a fixed price that can’t go up. So how can you say a gold miner is generating excess profits or war profits when the price of gold isn’t changing at all because of the war? So all these weird, different things. Of course the politicians didn’t think of any of this stuff because they’re politicians. They’re not business people.
They’ve never run a business in their life. But they tax and they regulate businesses. You would think that doing that would require some knowledge of the thing that you’re regulating. It would be like me, who doesn’t know anything about open heart surgery, sitting on some medical board saying, here’s what open heart surgery is supposed to be. It would be a disaster.
I don’t know anything about open heart surgery. And you’d think you would leave that to the surgeons, but instead you have a bunch of politicians who don’t know anything about business. They don’t know anything about the private sector. Say, oh, we’re going to have this war profits tax. We’re going to have an excess profits tax.
Technically, there are two different taxes. We’re going to pretend that they’re the same. We don’t have a clue about how we’re going to implement it. And so then businesses started saying, well, wait a minute, I don’t even know how to calculate this. How is this even possible?
And so that’s why they kept revising the law. They came up with new, more and more and more regulations, totally bizarre solutions. They tried in some respects and said, okay, if you make investments in your business and that’s going to grow your revenue, that’s going to grow your profits and your cash flow, then we’re going to assume that we’re going to cap out a rate of return. We’re going to say you can make 8%. So if you invest in your business, we’re going to say you can make 8% on any investment that you make in your business, and above 8%, that’s going to be considered excess profit.
All these really, really bizarre solutions, every single one of them obviously had consequences. So when you for example, when you cap somebody’s rate of return, especially at a rate that’s relatively low, like 8%, well, 8% is okay if you have if you’re in a relatively low risk business. But if you’re in a really speculative business, 8% is crazy, right? So imagine something like back then, the big speculative industry of the day was the motion picture industry, charlie Chaplin and all that, right? Motion picture was very speculative.
You could put money into a motion picture and you could lose 100% of your money, or you could make a hundred times your money, right? But everybody knew that motion picture was really, really speculative. It was high, high, high risk speculation. So who’s going to risk 100% loss when your investment return is capped at 8%? So what happened?
People just stopped investing in motion picture. They stopped investing in this new thing, this new technology. So, again, it was so complicated and so completely stupid. And the law that they passed in 1918 was actually the dumbest one of all because that’s the one where they told everybody, they said, okay, we’re consolidating all of this stuff and there’s going to be the tax, and this is actually going to go away. So after another year or two, we’re going to suspend and then repeal the tax altogether.
And they told everybody that. So now just imagine you’re a producer, you’re a timber producer, an oil producer, or any kind of industry. You’re saying, all right, you’re telling me that if I invest in my company now and I produce and I actually do my best to generate a healthy profit, you’re going to tax me today, but if I wait and do all that stuff next year, then you’re not going to tax me next year. Well, duh, I’ll just wait until next year. And that’s what happened.
Coal companies, oil companies, agriculture businesses, timber companies, factories, anybody that had the ability to delay their production did so. So what happened? You got less there was less supply in the US. There was less production. And of course, you have the consequences that you got a lot of debt, you got a war going, you’ve got less production.
You end up with inflation simply because you create all of these obscene economic disincentives. This is what happens. And it brings us back to oil supply. We already have a lot of problems with oil supply. You’ve got the countries in the we will call OPEC plus Nigeria, and all these countries that are already failing to meet their oil production quotas simply because most likely they just don’t have enough capacity.
Saudi Arabia has already told the world we’re tapped out once we get to 13 million barrels a day. We just don’t have the ability to raise our capacity. That is the limit of our capacity. And these factors. Energy prices are one of the most important drivers of inflation.
It is impossible to overstate how important energy prices are in reining in inflation. If you have high cost of energy, you will have the high cost of everything, because literally everything that we do, every product that’s made, every service that’s rendered requires some kind of energy. And if energy production costs are high, those high energy prices get passed on in the form of higher prices to consumers. So high energy prices, high oil prices are absolutely inflationary. And high oil prices are a result of demand and supply.
We already talked about demand is growing. It grows year after year after year. There are more people in the world, and the people that are in the world are consuming more energy because they’re getting wealthier. And all these things that are happening driving energy demand higher and higher and higher. What’s happening with supply?
The Saudis are tapped out. OPEC plus is already below its quota levels. There are lots of supply problems. And then you’ve got all these idiotic politicians that are saying they’re being demonizing. The oil companies, the investors, and the bankers and the stupid activists and everybody that are creating problems for the oil companies.
And now the oil companies in a scenario where they’re damned if they do, damned if they don’t, if they do produce more than the environmentalists want to kill them. And if they don’t, then the President of the United States is saying that you’re greedy. So it’s an impossible situation to be in. And now the solution is, oh, now we’re going to tax them, as if that’s going to be helpful. We already have a problem where we have shortages of a really important critical resource, and now we want to go and tax the companies with some excess profits, tax the people that are responsible for producing the thing that we need more of and we’re going to create economic disincentives.
It is literally the opposite of what any rational person would do. But we all know these people are not rational. So an excess profits tax, we have to say in fairness, is hardly a foregone conclusion. There is an election next week in the land of the free, so a lot of things could change. But there is a very important thing that I wanted to raise and bring to your attention.
And this is something called an accumulated earnings tax. Now, you probably know the term, but accumulated earnings are what a corporation retains once it pays out dividends to its shareholders. So again, let’s use round number example. We’ve got a company that makes a million dollars and a million dollars in profit. So that’s profit even after tax, right, pays it’s got a million dollars left over.
Well, what does it do with that million dollars? A company, a corporation could decide that either. They say, you know what, we don’t have anything to do with this money. We already have some cash on our books. So you know what, let’s just distribute the whole million dollars and pay a dividend to our shareholders.
And so that million dollars, which again, the profits have already been taxed at the corporate level. The company pays corporate profits tax and then it’s got a million dollars left over. And then it passes that whole million dollars to its shareholders. The shareholders then receive a dividend. Well, guess what?
The dividend is taxed. Again, the shareholders have to pay a dividend at 15% 20% plus the Obamacare surcharge and all that. So that money is basically the corporate profits are taxed twice. Once at the corporate level and once at the individual level when the dividend is paid. But a corporation could also decide, hey, you know what, we actually have a lot of opportunity.
There’s a lot of really cool things happening in our industry. We could invest in our company. We could invest in more production. We could invest in more research and development. We could do a lot of things to invest back in the business.
And so that’s what we’re going to do. We’re going to invest in the business and so we’re going to hold on to that million dollars, right? And so that’s what’s called retained earnings. And over time, year after year after year, a company has its accumulated earnings. So this is over time that a company that has generated a lot of profit and has accumulated all these earnings has retained all those earnings.
And so imagine a company that’s made a million dollars a year, year after year after year, and after ten years it’s got $10 million in cash, right? Ten years of these profits that it’s never paid to its shareholders. It’s just building up this big cash reserve. So those are its accumulated earnings. Well, guess what?
There actually already something on the books called the accumulated earnings tax. And it’s a little bit weird, but basically the accumulated earnings tax, the rules say that a corporation can hold a certain amount of money in cash, it can accumulate a certain amount of earnings, right? And the amount is actually ridiculously low. It’s laughably. Hilariously low is the amount of money that they say a corporation can accumulate in earnings.
And that technically anything above that level, which is literally as low as $150,000, so that anything above that level is subject to a tax. The idea is they don’t want companies to earn a profit. They pay corporate tax. And corporate taxes are lower than, in many respects, individual tax rates. And they don’t want companies to accumulate a bunch of profit and then just sit on that profit because they want to get the second tax revenue, right?
They want to get the dividend tax revenue from the individual. And so they want to create the idea here is to say, well, it’s a penalty. If you don’t distribute this money to your shareholders, then we’re going to tax you 20% of your accumulated earnings. So this is a law that is actually on the books, the accumulated earnings tax, it’s on the books. It’s not a law that needs to go through Congress.
It’s nothing they need to pass. It’s already on the books. The thing is though, it is really almost never enforced because when you look at companies like Apple, right, there are tech companies that have hundreds of billions of dollars of cash on the books. Realistically, they don’t need that money. Of course, like a company could make an argument and they could say, no, no, we need that money because we’re going to do some future investment.
We need that money because of X-Y-Z. And they make a case for why they need to keep that money. And it’s just sort of been a thing that over time, the Treasury Department, the executive branch, the IRS, has just turned a blind eye and said, okay, fine, Apple, you can have your hundreds of billions of dollars in the books and it’s fine. But that’s literally a policy that could change overnight. They could decide, you know what, we’re going to go after accumulated earnings now.
And the laws on the books, they don’t need to do anything different. They don’t need to pass a law. They could just start doing that and they could go to all these companies that are sitting on hundreds of billions of dollars. They could go to the oil companies in particular. They could single out oil companies and say, you know what, the accumulated earnings rules say that you can hold a large cash balance if you can demonstrate their specific need for you to have that cash balance.
And so they could say, well, we believe the tech company, we believe that Google and Facebook and all these tech companies, they have a legitimate need for their cash. But Exxon and chevron, oh no, you don’t have a need for your cash, so we’re going to tax you at 20% literally on your cash balance. So in a way it’s almost like a corporate wealth tax. And they could absolutely do this clearly will be challenged in court. And because it defies, it’s legally dubious, it defies precedent, etc.
But this is obviously an administration has been very happy to ignore legality and precedent and constitutionality, etc. And so it’s entirely possible that this is an approach. The consequences will be nasty if they start passing accumulated profits taxes, they start implementing accumulated earnings taxes. I mean, we could see big stock market declines, huge share declines, I mean, really, really nasty disincentives to production. It be really just another horrible idea, but it would give you a really good idea of what these people are thinking.
Their whole approach has been create hassles for the energy companies and then whine and complain when energy supply actually suffers as a result of it. But all these things is just really bad for energy supply. It’s bad for energy companies, which is bad for energy supply. Bad energy supply is really bad for inflation. And you’ve got, in the meantime, a Federal Reserve that is hell bent on raising interest rates to the moon, whatever it takes.
Very panicky monetary policy that just raised rates by three quarterback 75 basis points, three quarters of a percent earlier this week. And it’s early November 2022. They just raise rates again. And then it wasn’t enough just to raise rates. Then the chairman of the Fed had to go out and give a speech and say we’re going to keep doing it.
By God, we’re going to keep doing it. We’re going to raise rates until the end of time and really just scared the shit out of everybody. And yet it’s not bringing inflation down. That’s because they’re not solving the fundamental issues that are really driving inflation, which is the supply side of things, including and especially energy supply. Instead they’re making things more difficult for the energy companies and they’re threatening the energy companies and they want to tax the energy companies.
And now they have this wide open approach through the accumulated earnings tax, which again is already on the books. So I wouldn’t be surprised if they rolled this out and all these things just because they are completely clueless in everything that they do. And at the end of the day, it seems very obvious that none of this, none of this is about excess profits. It’s really about excess stupidity. And there is so much of that and I think I’m going to go ahead and stop there.
I appreciate, as always, your time and attention and we’ll talk to you again soon.