For people saying "It won't make a difference on capital investment" I point you to the Windfall Profits Tax in Mongolia. It was a 68% tax on any mining deposits found.
Well, so what? If you're profitable, who cares if some is taken off the top?
But if you thought that, you'd be mistaken. Simplified example:
You're thinking of building a mine. It's going to cost you $100M. There's a 50% chance the mine contains $220M in deposits and a 50% chance it's a total dud.
With no windfall profit tax, your average return is:
.5(-$100M) + .5($220M-$100M) = +$65M profit, for a 65% return.
Of course, you'll never get $65M. You'll either wind up -$100M or +$120M.
Buuuut, if the government taxes that at 50%, your new EV is:
.5(-$100M) + .5[($220M-100M)/2] = -$40M average return, for -40%.
Those aren't funny numbers. A 50% tax on profits drives capital out of risky-but-lucrative industries, since you're holding the bill if it fails but you're writing a fat check if it succeeds.
It's a simplification. In theory, you could maybe create a conglomerate that averages all sorts of bets like that together. But in reality, there will be some companies that have a 50% chance of losing everything, and a 50% chance of more than doubling your money... that work out mathematically with low-ish taxes, but aren't endeavored with higher taxes.
Mongolia repealed the windfall profits tax a few years ago, by the way, and billions of investment capital went in almost immediately into mining.
That doesn't seem correct. For the second case, where the mine contains $220M in deposits, shouldn't it be:
-$100M cost to build mine
+$220M revenue from sale of deposits
------------------------------------
$110M profit
That leaves you with $220M from the sale of deposits less $55 million for the 50% tax on the $110M profit, so you end up with $165 million.
So, starting with $100M to invest, half the time you end up with $0, half the time you end up with $165M, giving an average outcome of $82.5M, for an average return of -17.5%.
Without a tax, half the time you end up with $0, and half the time you end up with $220M, so the average outcome is $110M, for an average return of 10%.
I agree with the reduction in expected value, and on its effect in reducing investment in risky-but-lucrative industries, but I think even as a simplified calculation you should consider the tax deduction from the capital loss which can usually be carried over several years.
If I have (say) a 5 year period to carry forward capital losses and that over that time I can open several mines (as you suggest), then the tax is essentially applied to the average profit as opposed to the peak profit. I suspect this tax-efficiency of scale is a significant reason for why you end up with huge corporations in such industries (oil and gas, minerals). Opening a single "mine", the failure of which results in bankruptcy and no future profits from which to deduct losses, is essentially taxed out of viability in an expected-value sense, whereas a large portfolio in an enduring profitable company is profitable in an expected sense.
Well, so what? If you're profitable, who cares if some is taken off the top?
But if you thought that, you'd be mistaken. Simplified example:
You're thinking of building a mine. It's going to cost you $100M. There's a 50% chance the mine contains $220M in deposits and a 50% chance it's a total dud.
With no windfall profit tax, your average return is:
.5(-$100M) + .5($220M-$100M) = +$65M profit, for a 65% return.
Of course, you'll never get $65M. You'll either wind up -$100M or +$120M.
Buuuut, if the government taxes that at 50%, your new EV is:
.5(-$100M) + .5[($220M-100M)/2] = -$40M average return, for -40%.
Those aren't funny numbers. A 50% tax on profits drives capital out of risky-but-lucrative industries, since you're holding the bill if it fails but you're writing a fat check if it succeeds.
It's a simplification. In theory, you could maybe create a conglomerate that averages all sorts of bets like that together. But in reality, there will be some companies that have a 50% chance of losing everything, and a 50% chance of more than doubling your money... that work out mathematically with low-ish taxes, but aren't endeavored with higher taxes.
Mongolia repealed the windfall profits tax a few years ago, by the way, and billions of investment capital went in almost immediately into mining.