excess profits tax

excess profits tax

[ek-ses prof-its]
excess profits tax, levy on any profit above a standard level. Chiefly a wartime phenomenon, it is intended to increase revenue during periods of distress and to prevent businessmen from taking unfair advantage of the increased government spending and consumer demand that normally accompany wars. In 1917 the U.S. federal government adopted such a tax, which continued in various forms and at increasing rates until 1921. It was revived by federal legislation during World War II and during the Korean War. The tax was imposed on the excess over a firm's peacetime earnings or over an arbitrarily decreed earning rate. Great Britain levied an excess profits tax from 1915 to 1921, with a rate varying from 40% to 80%. During the era of World War II, Britain's excess profits tax was revived, with tax rates increased to 100%. Critics contend that such levies discourage productive enterprise by eliminating the profit motive.
An excess profits tax is a tax on any profit above a certain amount. A predominantly wartime fiscal instrument, the tax was designed primarily to capture wartime profits that exceeded normal peacetime profits. In 1863 the Confederate congress and the state of Georgia experimented with excess profits taxes. The first effective national excess profits tax was enacted in 1917, with rates graduated from 20 to 60 percent on the profits of all businesses in excess of prewar earnings but not less than 7 percent or more than 9 percent of invested capital. In 1918 a national law limited the tax to corporations and increased the rates. Concurrent with this 1918 tax, the federal government imposed, for the year 1918 only, an alternative tax, ranging up to 80 percent, with the taxpayer paying whichever was higher. In 1921 the excess profits tax was repealed despite powerful attempts to make it permanent. In 1933 and 1935 Congress enacted two mild excess profits taxes as supplements to a capital stock tax.

The crisis of World War II led Congress to pass four excess profits statutes between 1940 and 1943. The 1940 rates ranged from 25 to 50 percent and the 1941 ones from 35 to 60 percent. In 1942 a flat rate of 90 percent was adopted, with a postwar refund of 10 percent; in 1943 the rate was increased to 95 percent, with a 10 percent refund. Congress gave corporations two alternative excess profits tax credit choices: either 95 percent of average earnings for 1936–1939 or an invested capital credit, initially 8 percent of capital but later graduated from 5 to 8 percent. In 1945 Congress repealed the tax, effective 1 January 1946. The Korean War induced Congress to reimpose an excess profits tax, effective from 1 July 1950 to 31 December 1953. The tax rate was 30 percent of excess profits with the top corporate tax rate rising from 45% to 47%, a 70 percent ceiling for the combined corporation and excess profits taxes.

In 1991 some members of Congress sought unsuccessfully to pass an excess profits tax of 40 percent upon the larger oil companies as part of energy policy. Some social reformers have championed a peacetime use of the excess profits tax, but such proposals face strong opposition from businesses and some economists, who argue that it would create a disincentive to capital investment.

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