THE EXCESS PROFITS TAX
By W. S. ASCOLI
THERE is surely no part of our war effort so absurd as the I interpretation and taxation of excess profits. Much that is taxed is not " excess " profit in any logical sense. The tax is inequitable ; it restricts the yield of taxation generally ; it cramps initiative ; it hinders production—all unsound canons of taxa- tion. Its original excuse, political expediency, has failed in its purpose, as, indeed, any hybrid politico-economic device having contrary objectives was bound to. Indeed, the Chancellor him- self must have been in some doubt as to the interpretation of excess profits in the earlier Finance Acts, as, in introducing the 1941 Act, he stated in Parliament that he must take care that what he was taxing was actually an excess profit—a doubt which, unfortunately, was not reflected in the dispositions which found their way on to the Statute Book. The anomalies and absurdities of the present E.P.T. actually extend to most of its provisions— the fixing of the basic period, the lack of differentiation between business and business, the drain on working capital, the basis for substituted standard profits in old and new businesses, the 100 per cent. basis, &c.—throughout the whole field of pro- duction. In fact, it may be said that the incidence of E.P.T. is Justifiable only in a very small minority of cases and is a clear Illustration of the ineptitude of the bureaucratic mind in dealing With a vitally important issue of the war effort without the advice and guidance of persons experienced in practical industry and Production. Let us examine briefly a typical case and then apply sound reasoning to show how these absurdities may be corrected to give the desired results.
'A' and 'B' are two engineering concerns, each with a million Pounds paid-up capital and equally efficient. 'A' specialises in armaments, and during the E.P.T. base period (1935-37) made good profits—say L200,000—from the rearmament programme. B made locomotives for export and for the same reasons as 'A' —the approach of war—made losses throughout the base years, accumulating a debit balance of j,400,000, and thus came under the nile of substituted standard profits. Both were engaged on Ma-production since the outbreak of war, but B,' unlike 'A,' had to instal new plant which will not serve its trade after the *11'1 Both make L200,000 profits annually during the war: 'A' retains the whole of its profits and continues paying dividends trills shareholders ; B,' through lack of pre-war profits and by
further adjustments for loss of capita: (caused, be it noted, by the circumstances which brought grist to 'A's' mill), has to accept a profit standard of about L36,000—insufficient to pay its fixed obligations—and has to hand over £164,000 to the Treasury in E.P.T. Furthermore, 'A' pays Ltoo,000 in income tax which is passed on to its shareholders, while 'B' is liable for £18,000, which it cannot pass on to its shareholders as it is unable to dis- tribute any dividends owing to its adverse balance. Thus, while both concerns serve the war effort equally, 'B' which, for no fault-of its own, had to meet the full blast of economic adversity in the pre-war period, has to pay 82 per cent, more tax than A,' which can continue paying handsome dividends throughout the war, while 'B' has no prospects of making any return to its proprietors. But this by no means exhausts 'B's' hardships ; it may have to provide for the day of reckoning after the war when, to resume its normal trade, it will have to scrap the new plant installed for tank production : whence is provision to be made for restoring the shops to efficient peace-time trade?
This illustration shows the absurdity of the present basis of E.P. taxation, it is by no means exceptional, but is typical, if not in detail in incidence and effect, of a large majority of all sorts of enterprises, old and new, engaged on war production. If the new Minister of Production is anxious to put a bottom to his new drive he would be well advised to make a conference with the Chancellor his starting-point.
Let us now examine an alternative method of levying the tax which would meet all the requirements of sound taxation and all reasonable political demands. In the first place, it will be generally agreed that the principle of the E.P.T.—that nobody should enrich himself out of the country's extremity—is indis- putably right. But that very principle, applied through the bureaucratic mind, begs the whole issue ; in applying it to industry it says in effect that no business shall make a larger (global) profit than it did in its selected standard year (or in an arbitrary computation of such profits), whereas the only con- sideration which would prevent the exploitation of the country's
needs is that no increase in the rate of profit over the normal or
pre-war rate of any article can be tolerated. In other words, the real principle—and the only one consistent with sound business —implies that the State has the right to demand that its needs should be supplied on the same competitive basis as if a free market, and not famine conditions, existed ; if that basis should result in larger individual earnings the correction should be made on the individual income. Otherwise, if the present system is adhered to, a direct brake on production—the outstanding need of the moment—will persist, because, no matter how much we moralise, neither management nor proprietor is constitutionally different from the workpeople, who expect and receive reward for their endeavours. Taxation on the individual can always be applied equitably—even if he does squeal ; taxation on the machinery of production itself is invariably unsound as it has the effect of putting sand, not oil, in the wheels.
If E.P.T. took the form of a levy on any increased profit-rate on supplies over the pre-war rate a direct incentive would be
present to increase output to the maximum, as each additional unit of output would increase retainable profits ; if the yield of E.P.T. fell that of income and super tax would increase and be further emphasised by the increased earnings of workpeople. It can be shown that in certain cl-sses of business, under expert management and with the necessary incentive, output can be increased three- and four-fold--in itself a potential source of excess profits owing to the decreased incidence of overheads. Even in engineering concerns where normally plant severely limits output, great increases would be practicable by the induce- ment to sub-contracting components not specially suited to their lay-out among smaller shops—thus bringing other latent resources into fuller use.
To clinch the argument, let us take as illustration the original example as affected by E.P.T. levied on the rate of profit instead of on the annual profit. It might be argued that B,' having turned over to tank manufacture since the outbreak of war, would have no pre-war cost-basis on which to work. In that and similar cases the Ministry of Supply would indicate the price it was paying to A,' and it would thus be up to the management of 'B' at least to equal 'A's' cost, and thus, if equally efficient, instead of being put at an initial disadvantage of L164,000 per annum, it would be able to retain an equal volume of profit even if, with an eye to retaining its position as a locomotive manufac- turer, it did not distribute the same or any dividend. It is scarcely questionable either that 'B's' proprietors would be fully entitled to their better position or that a real incentive would be present to increase the production of tanks, and it is doubtful whether the Treasury would lose more on the swings than it— or anyhow the Ministry of Supply—would gain on the roundabouts.
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