A Monument to Expediency

The Excess Profits Tax

Not since Prohibition has there been a U.S. law so widely condemned as the excess profits tax, which will die on June 30 unless Congress, heeding the President's appeal last week (see NATIONAL AFFAIRS), extends it. Nobody hates the tax more than Treasury Secretary George Humphrey. "Its worst enemy can very well voice our feelings about it," says he. "It's a bad tax." But he and President Eisenhower feel that the U.S. needs the $800 million that an extra six months of excess profits taxes would yield. Thus, Congress itself must decide whether expediency shall outweigh an admitted evil.

The evil arose in logical enough fashion. In World War I, the first excess profits tax was slapped on to prevent war profiteering. Its yield of $2.5 billion was big for those days, when a whole year's war budget was only $6 billion. In World War II, EPT's yield was tremendous: $28 billion, or 58% of all corporate taxes paid during the war. The tax again made a rough sort of sense because the bulk of industry was mobilized and fared equally under EPT. But when EPT was slapped on again in 1950, even the tax's Fair Deal advocates admitted that it was unsound--although its very name made it politically popular. In a semi-mobilized economy, such a tax could not skim the profits from arms contracts without also spooning out the legitimate profits of consumer industries.

Actually, "excess profits tax" is a misnomer. The law does not merely take the "excess" profits, but starts its levy as soon as profits reach 85% of "normal," i.e., what they were during the "base period" of 1946-49. Furthermore, the tax has a built-in discrimination in the choice of payments. A company may elect to pay a tax based on its 1946-49 earnings, or one based on a fixed return (8%) on its total capitalization. Thus, debt-ridden companies with huge capitalizations, like many railroads, escape the tax. But well-run companies that keep their debt low can only choose a profits base--and then be penalized when greater efficiency increases their profits. To make allowance for such inequities, Congress included so many exemptions and exceptions that no two accountants can agree on a company's EPT bill. As a result, virtually every payment has been protested. Another discriminatory result is that EPT affects only 15% of all corporations paying taxes and consequently yields comparatively little revenue (only $2 billion a year out of a total of $21 billion in corporate taxes paid last year).

The tax has penalized growth and efficiency. It hits the smaller companies hardest. It confiscates the profits needed for expansion, and keeps the return so low that small companies have found it difficult or impossible to borrow money needed for expansion. Example: Georgia's Southwire Co., which saw an opportunity to cash in on the South's utility expansion, had the ill luck to go into business in 1950 after EPT. It was able to make only 1 1/4% profit despite a tripling of sales--a return so low that banks would not risk giving it a loan. Michigan's Whirlpool Corp. (washing machines) doubled its sales during the EPT period and made $28 million in profits (before taxes). But it was $32 million short of the cash needed for expansion. Yet big, established companies have been able to borrow all the money they want, and under EPT's mad logic, have been able to reduce their tax by using the loan to increase their capital base.

In EPT's topsy-turvy world, the accepted standards of business thrift and prudence go out the window. Companies in the EPT bracket have no hesitation spending money on extravagant projects. Example: Reynolds Metals Co., wanting to show off its new Jamaica bauxite mines, chartered an ocean liner and gave 130 bigwig guests an eight-day cruise to Jamaica and back. Of the total cost, the company really picked up only 18% of the check. The remaining 82% was EPT money which, if not spent, would have gone to the U.S. Treasury.

The Administration's decision to ask EPT's extension is based simply on the belief that Congress would not pass alternative measures--such as a small, temporary boost in the regular corporate-income-tax rate--to yield an equivalent revenue. Though Secretary Humphrey predicts that the tax will be extended, there is a good possibility that Congress may kill it, since it can do so by simply doing nothing. If EPT does die, it will hardly be a national tragedy. And the $800 million predicted yield for a six-month extension may be made up by increased collections of the regular corporate tax. In World War II, EPT's final year yielded $4.9 billion, slightly more than the $4.6 billion from regular corporation taxes. But in the three years after EPT was killed, the wave of business expansion was so great that the collections of the regular corporate tax soared to $11 billion. There is no reason to doubt that the death of the excess profits tax now would have an equally liberating effect on the whole economy.

This file is automatically generated by a robot program, so reader's discretion is required.