Madison County Democrat. (London, Ohio) 19??-1958, 1951-01-02

IiliIllstTdIlVe burden OF an excess
profits tax can be minimized.
The next major problem is to
assess the general economic eff
feets of an excess profits tax.
There is a strong tendency for
such a tax, which falls heavily on
the margin of effort, to restrict
the economic incentive to effiei-
ency and greater production, par
ticularly if it is levied at a high
rate. Control over costs is relaxed.
Waste ard extravagant expendi-
lures are stimulated, with the at
titude that such spendings is on
the Government.
Tax evasion may take such form
as advertising campaigns for pro-
ducts not yet available; and the
camouflaging powers of expense
accounts may prove quite re-
markable. If businesses are allow
ed Only meager margin on Gov
ernment contracts, which they
consider purely temporary, they
may be inclined to give preferen-
tial treatment to private orders, in
the interest of assuring a market
in the postwar future. Further
more, in the absence of a wage
freeze, wage increases will be
granted more readily as a means
Of keeping labor forces intact.
This is particularly serious de-
feet because, from the standpoint
of initiation, an increase in pro-
fits is probably less dangerous
than an increase in wages. A high
er proportion of gain in profits
is likely to be saved than in the
case of a wage increase. Another
economic disadvantage lies in the
fact that high excess profits tax
makes it difficult for businesses
to retain an adequate proportion
of their earnings. Yet under the
inflationary conditions which us
ually accompany heavy defense
expenditures, an increase in re-
tained earnings is necessary if
properties are to be maintained in
efficient working condition. Ac-
cordingly, a high tax becomes in
effect a capital levy.
On the other side Of the econ
omic ledger we may list the anti
inflationary poteEtialities of an
excess profits tax. Like other
taxes, it reduces disposable in
come, and SO tends to curtail pri-
Nate spending. 1t may we'll re-
strain business expansion, at
least until a successful end Of
the war is in sight. In addition,
if the base period selected for the
computation of normal profits is
generous enough to allow some
expansion of profits before liza
bility is incurred, and if the tax
is not levied at confiscatory rate,
the damage TO economic incentive
may rot be too serious.
The third question which must
be asked of an excess profits tax
concerns its equitability. The
principle TO be followed in this
respect is to determine as pre-
cisely as possible that the profits
taxed have arisen from the war
emergency, and not from other
causes.
1t is necessary, therefore, 20
select peacetime period on which
to base a computation of normal
prewar profits. 1t is then assumed
that profits in excess of this
amount are war profits, on which
the special tax can justifiably be
levied. Accordingly, the base per-
iod used to determine normal pro-
fits should be as close as possible
to the war, and should include an
adequate number of years of GER
eral prosperity. Nevertheless, the
tax will discriminate against new
and growing firms, and against
firms whose profits fluctuate
widely and were not in line with
the profit level of business in
general during the base period.
Some allowance for this can be
made by permitting firms to cal
culate their normal profits on
the basis of a percentage of their
normal profits on the basis of a
percentage of their invested cap
ital. This percentage standard,
however, should not be so high
that it provides exemption for
heavily capitalized Industries with
a normally low rate of return.
Further assistance can be pro-
vided for firms whose expansion
is necessary for the armament
program, by allowing credit for
new capital.
Companies with heavy borrow
ing, whose rate of return on
equity capital is frequently sub
ject to wide fluctuations, will OBJ
tain relief If they are permitted
to include part of their fixed debt
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