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It’s Time to Revive the Excess Profits Tax – The American Prospect



A recent New York Times headline summarizes one of the biggest economic impacts of the current pandemic: “Big Tech Could Emerge From Coronavirus Crisis Stronger Than Ever.” At a time when many Americans and their businesses suffer catastrophic economic damage from the coronavirus recession, some corporations, such as Amazon, 3M, Gilead, and Zoom, see their profits rising dramatically because of the pandemic.

Given that most corporations are losing money but some are now earning excess profits due to the crisis, it is time to revive the wartime excess profits taxes that the U.S. deployed in World War I and World War II to prevent the winners of those emergencies from achieving this form of opportunistic unjust enrichment.

The most recent US excess profits tax was enacted even before the U.S. entered World War II, as the government ramped up defense production. It was first adopted in 1940, amended in 1941, 1942, 1943, and 1945, and repealed in 1950.

Excess profits taxes are designed to tax the proportion of profits that derives from some external event not of the company’s making. The U.S. excess profits tax was adopted by Congress to “siphon off war profits.” For profits resulting from the war, the tax rate was set at 95 percent. This made the definition of normal profits crucial, since those profits would only be taxed at the regular corporate rate. Any profit above normal profit was deemed to be excess profit.

There were two methods used to calculate what effectively were normal profits exempt from the excess profit surtax: the “average earnings” method and the “invested capital” method. The average earnings method of calculating the excess profits tax credit began by looking back at the years 1936, 1937, 1938, and 1939 (prior to the war) and determining a monthly base-period average income. The amount of the credit was 95 percent of the “average base period net income,” plus 8 percent of the corporation’s net capital addition (or minus 6 percent of net capital reduction). The result created a deduction from excess profits tax net income.  

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Alternatively, the invested capital method assumed that a fair return on invested capital is 8 percent on the first $5 million, 6 percent on the next $5 million, and 5 percent on invested capital beyond $10 million. Calculating invested capital involved summing all of the cash and property invested in the corporation and all profits prior to the taxable year, then reducing that figure by “all the distributions that have been made to stockholders out of other than earnings and profits,” plus 50 percent of current debt. Further calculations were then required as well. We won’t spell them out here, because while the defense contractors of World War II were making major capital investments, the firms that would be subject to an excess profits tax today are largely not engaged in capital intensive activities.

That means that if Congress wanted to impose a modern excess profits tax today, the tax should use the average earnings method, based on 2016, 2017, 2018 and 2019. For example, it could start with the net income of Amazon for 2020, subtract a credit for average 2016 through 2019 earnings plus 8 percent of research and development (the main capital investment), and apply a 95 percent tax rate to the excess profits. The resulting tax can be reduced by credits for wages of additional employees hired in 2020 to encourage the winners to hire and pay well during the recession.

As the nation and world undergoes the coronavirus crisis, it is unconscionable that some corporations would profit while everyone else suffers. Moreover, the federal government will be spending trillions to save the economy, and much of this spending will benefit these winners since it will be spent on their services. There is no reason not to use this opportunity to revive the excess profit tax and apply it to profits that derive entirely from the pandemic. 

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