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Impact of the Excess Profits Tax of 1952

3 min readBy: TF Staff

Business has been operating under the Excess Profits TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Act of 1950 for nearly two years. Actual experience has borne out the validity of the strong arguments made against the tax when it was proposed. As the date of its expiration nears (June 30, 1953) these arguments merit re-examination in the light of specific company or industry experience.

Limited examination of corporate annual reports and national magazines reveals numerous instances of management difficulties in trying to run a business successfully in the Pace of the many defects in the Excess Profits Tax Act . Statements from some 85 companies in a dozen industries reemphasize the arguments made two years ago.

The major argument against EPT, supported by many case histories, is that by severely penalizing small or growing companies the tax inevitably retards expansion of the economy. Similarly, established companies complain that EPT kills any incentive for plant expansion or for increased production in existing plants. Companies in diversified fields report that EPT prevents the expansion of productive capacity in two other ways: it limits capital available for reinvestment and repels outside investors by reducing profits and dividends available for distribution to stockholders.

The tax further strangles productive effort by affecting a tax-orientation of management. Elimination of the profit motive as an incentive to cut production costs and avoid extravagance results in managerial decisions not wholly based on sound business considerations and efficient, low-cost production. At the sane time, this factor contributes to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. by, exerting an upward pressure on prices, stimulating competitive bidding for scarce manpower and materials, and encouraging debt.

From a purely mechanical standpoint, experience demonstrates that EPT is difficult to administer and does not provide adequate relief in inequitable or harsh cases. Not only does EPT greatly increase the accounting burden, controversy, litigation and cost of compliance, but it makes extensive research necessary in the fields of economics, business and related subjects in order to settle tax liability.

Short of an amendment to the law, it is difficult or practically impossible to grant relief in those cases where the tax has a particularly harsh impact. Ample evidence of this fact lies in the 23 technical and structural changes made in the Excess Profits Tax Act by the Revenue Act of 1951–with special provisions for companies that had been able to convince the tax-writing Congressional committees of particular injustices.

The result is not one broad excess profits tax law for the whole corporate economy but a series of individual excess profits tax provisions for specific industries. Since every month brings to light more and more inequities, the law seems destined to become a hodge-podge of special provisions.

The generally unsatisfactory results of EPT have prompted current efforts to let the law the on its expiration date next June.