Tax Plaza
The Tax system explained!
Excess profits tax
An excess profits tax is a tax on any profit above a certain
amount. A predominantly wartime fiscal instrument, the tax was
designed primarily to capture wartime profits that exceeded
normal peacetime profits. In 1863 the Confederate congress and
the state of Georgia experimented with excess profits taxes. The
first effective national excess profits tax was enacted in 1917,
with rates graduated from 20 to 60 percent on the profits of all
businesses in excess of prewar earnings but not less than 7
percent or more than 9 percent of invested capital. In 1918 a
national law limited the tax to corporations and increased the
rates. Concurrent with this 1918 tax, the federal government
imposed, for the year 1918 only, an alternative tax, ranging up
to 80 percent, with the taxpayer paying whichever was higher. In
1921 the excess profits tax was repealed despite powerful
attempts to make it permanent. In 1933 and 1935 Congress enacted
two mild excess profits taxes as supplements to a capital stock
tax.
The crisis of World War II led Congress to pass four excess
profits statutes between 1940 and 1943. The 1940 rates ranged
from 25 to 50 percent and the 1941 ones from 35 to 60 percent.
In 1942 a flat rate of 90 percent was adopted, with a postwar
refund of 10 percent; in 1943 the rate was increased to 95
percent, with a 10 percent refund. Congress gave corporations
two alternative excess profits tax credit choices: either 95
percent of average earnings for 1936–1939 or an invested capital
credit, initially 8 percent of capital but later graduated from
5 to 8 percent. In 1945 Congress repealed the tax, effective 1
January 1946. The Korean War induced Congress to reimpose an
excess profits tax, effective from 1 July 1950 to 31 December
1953. The tax rate was 30 percent of excess profits with the top
corporate tax rate rising from 45% to 47%, a 70 percent ceiling
for the combined corporation and excess profits taxes.
In 1991 some members of Congress sought unsuccessfully to pass an excess profits tax of 40 percent upon the larger oil companies as part of energy policy. Some social reformers have championed a peacetime use of the excess profits tax, but such proposals face strong opposition from businesses and some economists, who argue that it would create a disincentive to capital investment. George W. Bush, elected president in 2000, does not favor such taxes. Whatever the peacetime policy, it remains to be seen whether excess profits taxes will reappear during the "war on terrorism" that the U.S. government launched after the 11 September 2001 attacks on the United States.
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