WINDFALL PROFITS

Just a little note before I get started. I have seen Hugo Chavez on Peruvian local news every night since the election of Ollanta Humala. I rarely saw him before Humala won. Last night he was reiterating his "Good Soldier" comment about Humala and blaming the USA for the fall at Peru's Bolsa de Valores.
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Don’t worry it won’t cost you a dime! Is this what Humala is trying to sell Perú’s taxpayers? I think it is. Humala claims he will fund his social programs with “windfall profit taxes” on mining operations within Perú. Mind you other attempts at this have come up short around the world. By their very title and nature windfall profits taxes are transitory and temporary. But we have Humala saying he will build his social programs on the back of windfall profit taxes. So let us think about this. Humala is going to build long term government entitlement obligations (with end of life durations) from money that can only be collected when prices are moving up. Is that like trying to support your family on your winnings from gambling?

Windfall profits are a type of windfall gain. They can occur due to unforeseen circumstances in a product's market, such as unexpected demand or government regulation. Since the profits were unforeseen, some legislators believe that taxing them at a higher rate, or confiscating them outright, should not hurt the company. This type of taxation is known as a windfall profits tax.

Now, aside from the fact that most companies (although generally stealthily) respond negatively to windfall profit taxes (which I will mention more about further on), let’s consider what happens when the commodity prices remain stable or fall. They always do at some point. It really isn’t complicated at all. Windfall profit taxes dry up, but the government entitlement programs continue on. So they have to be funded. And that funding can then come from only the general fund (temporarily) or higher taxes on businesses and taxpayers (long term). When commodity prices fall it can be assumed there is a high probability that the economy in general (perhaps worldwide) is not doing well either. So you are then ensnared into the unpleasant decision of raising taxes (at a time when lowering taxes is necessary to restore economic growth) or cutting back programs that people's lives and the economy have come to rely on. In most cases these government entitlements have created generations of dependent people.

So your choice: Trojan Horse or Wolf in Sheep’s Clothing? This is the problem with most of these socialistic government programs that seek to enslaved the poor through the redistribution of other people’s money, rather than build a robust and diverse society. Based on strong values, education, hard work, competition, moral obligation, independence, self reliance and individual creativity. A society that offers a prosperous future to all who care to work hard, move beyond that which keeps them poor and partake of the opportunities available in the modern world. Of course there will always be those who can’t or will not work. So those people receiving government (other people's) money should be highly scrutinized and that money should come with obligations and requirements that need to be met. Not just a free for all! Mind you I consider government “safety-net” services for those unable to pay an essential responsibility of government. But there are better ways to pay for those services.

Mining: Most big mining companies are diversified around the world. They are not just going to sit still and take what the government hands out. First they will, if the market allows, try to pass on their cost of new taxes to the customer. If that is not possible maybe they will curtail production and reinvestment at mines in Perú for five years (basically a holding pattern waiting for a change of political leadership) and leave more of the product in the ground to be harvested later. Then they can focus their energy on other properties outside of Perú. If they think there is even a slim possibility of nationalization of their business in Perú, why invest anymore heavily than functionally necessary to keep operations going? If Humala is going to institute mandatory employer paid health and life insurance for all employees, the mines are going to be looking for ways to get it done with less people, and curtailment would help accomplish that. I’m not sure which direction they will go or all the options open to them, but I do know they will explore every avenue to avoid paying new taxes.

Around four million Peruvian people directly of indirectly depend on mining for their livelihood.
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A recent article from Real Clear World

"Humala seeks to reassure Peru mining companies on tax"

A couple of  sources:
Windfall profit tax are inconsistent source for program funding.
What's dumb about a windfall profits tax?
 
On the Dark-side:

Living in a prosperous Peruvian economy can make you forget the world economy is hundreds of trillions of dollars in the red. Any changes to correct that are met with street riots and anarchy. The Worlds economic downturn is far from over. It has just been corralled temporarily while all these nations look for a way out of an impossible economic mess. A mess, that by the way, was created by government entitlement programs and packages. You can look at one example: The Great Depression of the USA and the world. One day everything was fine and the next day everything turned a dark smelly shade of brown and all the stores were empty shortly after that. You can't eat mining products.

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