Passed at Last

Last week the long-delayed Excess Profits Tax of 1940 emerged from conference in final form, passed Senate and House without a roll call, went to the President's desk for signature. The bill had been ordered by the President two months ago to prevent war millionaires. Far from doing that, shouted Massachusetts' Allen Treadway, "this bill sets up a new class of war millionaires--namely, so-called tax experts. Anyone who can explain this can become a millionaire overnight." Senator Vandenberg, who had had a succes with the phrase a few weeks before, repeated "I still think it is an imponderable mess." The President himself, in signing the bill, was this week expected to remark on its shortcomings.

But he had three good reasons to sign it: 1) It contained a repeal of the Vinson-Trammell profit limitation on ship and aircraft suppliers to the U. S. 2) It provided a five-year amortization of defense plants completed since June 10. Both these measures have been long needed to speed defense. 3) Inscrutable and inequitable, the bill nevertheless gave corporation comptrollers something definite to figure on. They found:

Normal Tax Upped. The bill is expected to yield the Treasury an extra $400,000,000 to $500,000,000 this year. Most of this, however, will probably not come out of "excess profits," but normal corporate earnings, on which (for all incomes above $25,000) the normal income tax is upped from 20.9 to 24%.

What Is "Excess"? In addition, "excess profits" are taxed on a graduated scale from 25% (under $20,000) to 50% (over $500,000). There are two ways to figure the excess, and a corporation may choose either: 1) Any profits over 8% on invested capital. (Such capital may include all equity capital, but only half the debt.) 2) Any profits over 95% of the average profits of 1936-39.

Under either method, the first $5,000 of excess profits is taxexempt. Small corporations may carry over unused portions of their excess-profits credit from year to year, but large ones (earning over $25,000) may not. Partly exempt are the profits of mining companies, airlines. Scattered through the bill is many another exemption, qualification, abstruse gimmick. Finally, cases of "abnormalities" may be adjudicated by the Treasury's Commissioner of Internal Revenue. Since such "abnormalities" are not defined, the Wall Street Journal foresaw that corporations would pay the tax only under protest. Under such a bill, "abnormalities" will be easy for any corporation to find.

Effect. As statisticians began making "horseback appraisals" of who would pay what, the new bill's grander follies began to take shape. Most startling example was the contrasting cases of U. S. Steel, a leading defense beneficiary, and Philip Morris & Co., Ltd., cigaretmakers, who are likely to get little benefit from a defense boom. Having had three very poor years in 1936, 1938 and 1939, Big Steel will undoubtedly figure its excess profits by return on its capital. By this method, it can earn up to some $112,000,000 over and above its normal tax before paying on any excess at all (Big Steel's 1939 net income before taxes: $54,095,000). Philip Morris, on the other hand, earns far more than 8% on its capital, would normally choose the base-period option. But because it has forced its way into the big money in the last five years, its average net income in 1936-39 is much less than it will be this year. Philip Morris, like many another young, fast-moving company, will therefore get it in the neck. Similarly the railroads (who will do a lot of defense hauling), sluggish for years, will escape the tax, while aircraft makers will be hard hit. Other marked victims: makers of rayon, paper, heavy machinery, electrical equipment. Others comparatively untouched: utilities, oil, department stores, airlines, mines.

With all its faults, the bill gave businessmen a rough idea of just how big (by & large not very) their next year's taxes may be. But many businessmen read it just for the exercise. They sensed that no taxes might be paid under its present provisions at all. Reason: Congress has already marked its handiwork "temporary," is reconciled to the necessity of doing the whole job over again next session.

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