Evening star., 1940-09-01
Excess Profits Bill Permits
Two Methods of Computing ak
Objeetives Include Curb on Firms Net, Aiding
Of Industry and u S. Revenue

ings. The bill now before the Sen
ate combines both methods.
The first method is based on the
premise that a certain percentage
on invested capital Is normal Re-
turns beyond this percentage are
subject to an excess profits levy.
The computation of the tax under
this method is comparatively easy,
once the earnings and the invested
capital of company are known.
To ascertain the invested capital
and the amount actually put into
a. company by its stockholders Is
not always easy.
when excess profits are calcu-
lated in reference to invested capi-
tai, inequalities may easily develop
as between corporations which are
amply capitalized, and those which
are not" Willard D. Arant, research
director of the National Economy
League, pointed out in a pamphlet
recently published by the league.
"a corporation which is overcapi-
talized and which has a sizable
fraction of its capital invested in
cash or low-rate securities, may
escape the tax entirely, even though
it makes large return on the part
of its capital actually used in the
business. The use of historical rec
ordS to determine how much has
actually been put into the corpora
ton by its stockholders is always a
long and difficult process and some
| times it is not possible at all If
current value Of business assets
were used, the tax authorities would
face all the familiar problems which
arise in attempts to determine the
fair value of public utilities for
rate making purposes"
The Second Method.
Under the second method-that
of standard returns or average earn
ings-the profits earned by a cor
poration during certain base
period are taken as its standard or
normal profit and earnings above
this level are considered excessive
| and subjected to the profits levy
This method, according to its pro-
ponents, is particularly well adapted
to the recovery of profits due to a
sudden boom in ornaments. AS the
base period. the House Ways and
Means Committee has selected the
years from 1896 to 1899, inclusive
| The Federal Reserve Board index
of industrial production averaged
l0l for these years. So this period
seems to offer a satisfactory yard
stick for measuring excessive profits
caused by an armaments boom.
| In appearing before the House
committee, Ellsworth C. Alvord
chairman of the Committee or
Federal Finance of the United
States Chamber of Commerce
claimed the following advantages
for the average earnings method OF
computing excess taxes.
First. its simplicity. both in its ad =
ministration and in its computation
by the taxpayer
Second, it confines an excess pro-
fits levy to profits which have in
/ creased after the launching of the
arms program.
Third, it taps all sources of earn
ings, including the value of manage
ment services and the contribution
of intangibles to earning power
Fourth. it imposes no discrimina-
tions among corporations and in
dustrieS as to size, capitalization
and risk.
Not Complete.
The average formula, however, is
inadequate, Mr.. Alvord told the
committee. in the case of corpora
tions having abnormally low earn
ings in the base period and those