Evening star., 1940-08-08
Figures
What TheyMeon
BY JOHN L. BECKLEY,
Associated Press statistician.

NEW YORK, Aug. 8.-What can
be done to prevent armament manu-
facturers from making an unfair
profit out of the present national
emergency, and yet not penalize
them with more than their proper
share of the cost of rearmament?
That, in a nutshell, is the crux of
the amortization problem which is
now delaying important defense
contracts, as business executives ex-
plain it.
If manufacturers are allowed to
charge off their plants too quickly,
1t will make their earnings look
small in the near future when the
excess profits tax is heavy, and in
crease them in later years. But If
they are not allowed to charge OF
quickly enough those plants which
they have built for war purposes, it
may cause them heavy losses.
Case Of Airplane Maker.
For example, take the case of an
airplane manufacturer who erects a
81 900 900 plant for the express pur-
pose Of filling defense orders. If
he Is allowed to charge of the plant
in a f1ve-year period, as is now
requested by private industry, he
will deduct 100000 year from his
earnings before paying taxes.
At this rate, the equipment will
be entirely written of at the end of
five years and he will no longer be
able to make any deductions for it
from net income. If the plant should
be worthless at that time because
of the termination of the rearma-
ment effort, the manufacturer would
at least have his investment back.
However, If the demand for air.
planes for other purposes should at
that time justify continuing the
plant in operation, the manufac-
turer's net income would increase
because he would no longer have to
charge himself anything for the use
Of the plant.
Fears Farfetched.
Fears that armament makers
would get rich because these plants
might be useful after the rearma-
ment program are said by leading
industrialists to be farfetched. The
principal gain would be that the
increase in income reported for tax
purposes would tend to come at. a
later date when excess profits levies
might not be so severe.
AS an example of the other side of
the question, let's consider the case
Of railroad equipment manufac-
turer who is asked to build a 81 ,OOO,-
600 factory for the fabrication of big
shells. Assume that he is forced by
the Treasury to write of his invest
ment over 20-year period instead Of
five years. ...-
Under this schedule, he can deduct
only $50, 900 each year for deprecia-
ton before reporting his taxable in
come. As q result, If the rearma-
ment program should terminate at
the end Of five years and the plant
become worthless for production
purposes, the manufacturer would
still have $3.50 900 tied up In it.
Now suppose Congress has been
generous enough to allow the manu-
facturer to earn 10 per cent per an
mum on his investment after all
taxes-arf estimate which is prob
ably on the large side. This would
mean that his income from the fac
tory over the five-year period would
have totaled $500,000.
In other words, II the machinery
in the plant could be sold to scrap
dealers for $4,000, the net loss to
the manufacturer would be 5000, 900.
And while he has been forced to take
this loss, manufacturers Of radios,
fountain pens, furniture and other
peace-time goods would have en-
joyed their normal income and at
least part Of the excess profits
brought by the war boom in business.