EMERGENCY EXCESS PROFITS TAXATION AND PROPOSED MODIFICATIONS*

Abstract

A PRELIMINARY INVESTIGATION showed excess profits taxation to be unduly complicated, capricious, and repressive. Some of its irregularities and unneutralities could be eliminated or reduced, but most of them are inherent in any attempt to define and measure excess profits. However, an empirical study of corporate profits has shown that the existence of excess profits has been greately exaggerated mainly because the definition of excess profits has been in absolute rather than relative terms. By defining excess profits as relative rather than actual increases over base-period earnings, the excess profits tax could be confined to a much smaller area and an increase in the corporate income tax could be substituted for much of it. The net incomes of 115 corporations for the 8 years 1945-52 and of 18 of these corporations for the 18 years 1935-52 were obtained from Moody's Industrials. Net incomes were before federal income and excess profits taxes and, in order to account for changes in invested capital, net incomes were expressed as percentages of net worth. On the theory that an increase in the corporate income tax could be used instead of an excess profits tax if the changes in profits were uniformly distributed among all corporations, only relative changes in a corporation's profits were considered relevant. In order to remove the changes in the average level of profits of all corporations, the earnings of each corporation were expressed as index numbers, using the average earnings of 115 corporations as the base and equal to 100 per cent. The conclusion reached from this empirical study was that excess profits (when defined as greater-than-average increases in earnings) are far less marked than is generally supposed. On the basis of this evidence it was proposed that each taxpayer's average earnings credit be increased to reflect changes in the average earnings of all corporations. This new definition of excess profits would