New-York tribune., 1921-05-15
Pre-War Profits

The solution or remedy is not to be
found IN the use Of average or pre-war
profits as normal deduction. This
proposal contains truth Of great i'm
portance. The principal element, per-
haps, III determining normal profits
should ne past profits, and this is true
not only for war profits tax, but FOR
an excess plotits t9.. A business con-
Germ which can truthfully be said to
have established a given level or vol
ume of profits, may fairly claim that
volume OF profits as its normal return.
Yet this also is truth Of limited
application. The profits for two OF
three years before cha war do not es-
tablish such a norma return Such
profits may have been abnormaIly high
or abuormally low. Consider a heavy
investment made in *he expectation OF
distant returns. Here The original in
vestment has more significance than the
income record of the company in con-
trolling the normal return. Or con.
slider a corporation, tha stock of which
is still held wholly or mainly by the
original subscribers and which by some
happy combination Of circumstances or
by starting undet some particularly
ausplcious star had made from the be-
ginning abnormally high profits. This
was the case approximately with the
automobile industry, which as an in
dustry may be said to have been abnor-
mally, prosperous from It's real begin
ning until recent months.
Consider finally the concern which
has had abnormally low profits in the
past. 1t is certain that the Legislature
will recognize this hardship by grant
ing a deduction based on capital or
something else than past profits But
If prior profits may be subnormal, they
may in other cases be supernormal
Forgetfulness of this truth is perhaps
responsible for the general dissatisfac-
tion with the pre-war profit standard
in Great Britain. The latter (like most
other devices in the British Iaw) has
been used-I think wisely-to save the
taxpayer from rather savage tag
levied in times of stress. But in the
long run sound tax statute must pro-
tect the government as we'll as the
taxpayer. In any event, it is most sig
nifcant that such dissatisfaction does
exist. 1t was voiced by the Chancellor
of the Exchequer in explaining the
financial statement of April 10, 1920:
II would remind the committee that
under the provisions of the excess
profits duty prosperous concerns with
a large pre-war standard may escape
liability for the tax because their pres
ent profits. though high, arc not in e&-
cess of their standard, and, at any
rate, they pay tax on what all of US
think an unduly low scale"
Per Cent Deduction
1t is reflected also in Professor Haig's
conclusion that, after all, the percentage
deduction is preferable to a pre-war
profits deduction
'If we are to continue profits taxa
ton, the general standard prescribed
in our present law for determining the
richness of the profits should be re-
tanned. The best British opinion sup
ports the view that percentage Of in
vested capital is more satisfactory
test than the earnings of some previ-
Gus period in a tax of this character,
and they have shown how that per-
centage can be cleverly varied to meet
the peculiar conditions in each line of
business"
What then is the true normal deduc-
ton? The writer, ct Least, must answer
that question in the words Of 8 wise
and liberal American financier, Otto II.
Kahn:
st seems TO. me that the excess
profits tax must 90. am sorry to say
it, because in theory it is wholly just
tax. ! wish some one would invent a
way by which the excess profits tax, or
som ething in the nature of an excess
profits tax, could continue" The orig
inal capital invested has in some cases
real significance, but in the majority
of cases it should be replaced by some
later reproduction value. The percent
age deduction should vary with the
risk, but in the main the risk element
should be eliminated (along with much
of the tax b. averaging losses and