WHAT IS Excess Profits Tax

Excess profits tax is a special tax that is assessed upon income beyond a specified amount, usually in excess of what is deemed  to be a normal income.

BREAKING DOWN Excess Profits Tax

Excess profits tax is assessed in addition to any corporate income tax already in place. Excess profit taxes are primarily imposed on selective businesses during a time of war or other emergency, or beyond a certain amount of return on invested capital. Excess profits taxes are designed to generate emergency revenue for the government in time of crisis. The tax itself is imposed on the difference between the amount of profit that a company generally earns during peacetime and the profits earned during times of war.

These taxes are also intended to prevent astute business owners from reaping inordinate profits as a result of increased wartime governmental and consumer spending. Excess profits taxes were levied in the U.S. during both world wars, as well as the Korean War. The World War II excess profits tax was set at 95 percent of all corporate income in excess of what was considered normal. This tax is not popular with free-enterprise thinkers who feel that it discourages necessary wartime productivity with its removal of the profit motive.

History of Excess Profits Tax

Congress enacted the first effective American excess profits tax in 1917 with rates ranging 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 In 1921 the excess profits tax was repealed despite powerful attempts to make it permanent.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.

During World War II, Congress passed four excess profits statutes between 1940 and 1943 with rates ranging from 25 to 50 percent. During the Korean War, Congress also imposed an excess profits tax, effective from July 1950 through December 1953. The tax rate at this time was 30 percent of excess profits with top corporate tax rates rising to 47 percent from 45 percent.

In 1991 some members of Congress attempted to to pass an excess profits tax of 40 percent upon the larger oil companies as part of energy policy, however that effort was unsuccessful. Some activists have advocated for a peacetime use of the excess profits tax, but such proposals face strong opposition from businesses as well as some politicians and economists who argue it would create a disincentive to capital investment.