Excess Profits Tax

NBC reports that the President will announce an escalation in the Iraq War as a remedy for the blood and treasure that he has already squandered. A central theme of the President’s address will be “sacrifice”. Let us take a brief look back at how corporations were asked to sacrifice in previous wars.

The theory behind an excess profits tax is that profits stemming from war should be taxed at a higher rate than peacetime profits to help cover the added financial obligations of the government waging war. Corporations, like individuals, must sacrifice in a time of crisis. From the Civil War to the Korean War, corporations paid anywhere from 20 percent to 60 percent in additional taxes on profits during war that exceeded their profits during peacetime. For example if, in 1939, ammunition company ABC made 1 million dollars in profits, they paid the normal corporate rate of about 30 percent. Congress enacted the first of four WW II excess profits tax acts in 1940. If ammunition company ABC posted a 10 million dollar profit in 1940, the excess 9 million dollars would be subject to the additional excess profits tax at a rate up to 50 percent. Coupled with the normal corporate rate, this would have meant that ammunition company ABC would have owed an 80 percent tax on 9 million dollars or 7.2 million dollars. By 1943, corporations were effectively paying a 95 percent tax on excess profits.

How long do you think this war would last if such a tax were enacted today?