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...