Excess Profits Tax

What is an Excess Profits Tax?

An excess profits tax is a special tax that is assessed upon individual or corporate income past a predetermined amount of return on invested capital, as a rule in excess of what is considered to be a normal income. An excess profits tax can be carried out fully intent on lessening income inequality, rearranging windfall gains that might result from special conditions or government policies, or generating emergency revenue for the government in times of crisis. Excess profits taxes might be transitory measures or a permanent feature of a tax system.

Understanding Excess Profits Tax

An excess profits tax is an extra tax imposed on business profits or income over a predetermined rate of profit. Any companies or self-employed individuals who earn over the predetermined level need to pay an extra tax on that income. An excess profits tax is assessed notwithstanding any individual or corporate income tax currently in place. In effect, an excess profits tax addresses an increase in marginal tax rates on profits in higher tax brackets.

Along these lines, an excess profits tax addresses an increase in the progressivity of the tax system, by taxing higher income individuals and businesses at an even higher rate than normally forced. A few financial experts and policymakers who are critical of income inequality in society advocate for excess profits taxes as a method for lessening or slow the wealth gap. Naturally, excess profits taxes are not famous with free-undertaking masterminds who feel that it beats productivity by diminishing the profit motive for businesses down.

Excess Profits Taxes in Extreme Circumstances

Excess profit taxes can likewise be forced to straightforwardly rearrange windfall profits that outcome from random, extreme events. For instance assuming construction supply companies are able to make higher than normal profits by charging higher prices in the wake of a hurricane, the government might consider carrying out an excess profits tax on them because their higher profits are due to the random occurrence of the hurricane as opposed to great business sense or management rehearses. The tax could apply to any increase in the rate of profit these businesses receive relative to normal times.

On the other hand, an excess profits tax might be forced in the event that the windfall profits are due to a deliberate government policy. For instance, on the off chance that a war breaks out and the government unexpectedly increase demand for weapons, then an excess profits tax could likewise be exacted on ammo manufacturers and providers of related raw material, for example, copper or lead to make up for the increased rate of profit these businesses will appreciate because of increased government demand. In this case, the tax itself may be forced on the difference between the amount of profit that a company generally earns during peacetime and the profits earned during times of war.

History of Excess Profits Taxes

Congress established the main American excess profits tax in 1917 with rates going from 20 to 60 percent on the profits of all businesses in excess of peacetime earnings. In 1918, a law limited the tax to corporations and increased the rates. In 1921 the excess profits tax was canceled notwithstanding strong endeavors to make it permanent. In 1933 and 1935 Congress ordered two gentle excess profits taxes as enhancements to a capital stock tax.

During World War II, Congress passed four excess profits statutes somewhere in the range of 1940 and 1943 with rates going from 25 to 50 percent. During the Korean War, Congress likewise forced an excess profits tax, effective from July 1950 through December 1953. The tax rate right now was 30 percent of excess profits with top corporate tax rates rising to 47 percent from 45 percent.

In 1991, a few individuals from Congress endeavored to pass an excess profits tax of 40 percent upon the bigger oil companies as part of energy policy, yet that work was fruitless. A few activists have advocated for a peacetime utilization of the excess profits tax, however such proposition face strong resistance from businesses as well as certain lawmakers and financial experts who contend it would make a disincentive to capital investment.

Recent Excess Profit Tax Proposals

During the coronavirus episode of 2020, financial experts Emmanuel Saez and Gabriel Zucman proposed an excess profits tax on businesses who profited from the effects of the pandemic and the government enforcement of related public wellbeing limitations. Fears of the disease itself as well as forced quarantines, business terminations, cover in-place orders, and social removing measures hurt numerous businesses, yet in addition helped some, especially electronic and remote services. Online shopping, cloud computing, remote business applications, media web-based features, and social media have all seen major increases in traffic and business volume as additional individuals work, shop, and socialize from home over the internet.

Simultaneously, the federal government emphatically increase spending by passing a stimulus package to offset the economic damage brought about by the virus and the public wellbeing response to it. Saez and Zucman proposed the excess profits tax to help pay for the emergency spending and to assist with ensuring that the windfall profits of the individuals who have profited from the coronavirus are shared with the people who have endured.

Features

• In the U.S., excess profits taxes have more than once been forced by the federal government during periods of war and different emergencies.
• In 2020, a federal excess profits tax was again proposed by Berkeley financial specialists Emmanuel Saez and Gabriel Zucman during the coronavirus flare-up.
• Excess profits tax can be brief or permanent and are typically expected to offset income inequality, especially that due to windfall profits.
• An excess profits tax is an extra tax forced on business profits or income over a certain rate.