Excess profits tax

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Definition[edit]

An excess profits tax is a tax on returns or profits which exceed risk-adjusted normal returns. The concept of excess profit is very similar to that of economic rent.[1] Excess profit tax can be imposed on individuals or corporations [2]. Excess profit taxes are usually imposed on monopolist industries [3].

Excess profits taxes have often, but not exclusively, been imposed during wartime or in response to an event which provides some with an extraordinary ability to earn windfall gains. Windfall taxes have often been proposed, and sometimes imposed, in order to discourage profiteering from temporary increases in resource prices, such as those for oil or gas. Wartime excess profits taxes, or War Profits Taxes, have been employed to reduce perverse incentives to engage in war profiteering. Excess profit taxes are used during times of difficulties in a country because it reduces income inequality and redistributes wealth [4].

Excess Profit Tax in COVID-19[edit]

In history, excess profit taxes were imposed during times of war as war requires an excess amount of money. [5] However, many countries imposed an excess profits tax during COVID to fund extra healthcare workers and to implement protection, such as masks. Equally, from the onset of the pandemic to March 2021, the global fiscal response to mitigate the extensive health and economic impacts was unprecedented, totalling USD 16 trillion in 2020 (IMF, 2021). However, the pandemic's impact on businesses was uneven, with some sectors, notably information technology and pharmaceuticals, seeing significant profit surges and increased stock prices in the year following the outbreak [6].

History[edit]

United Kingdom[edit]

In Great Britain in World War I, the Treasury rejected proposals for a stiff capital levy, which the Labour Party wanted to use to weaken the capitalists. Instead, there was an excess profits tax, of 50 percent of profits above the normal prewar level; the rate was raised to 80 percent in 1917.[7][8] Excise taxes were added on luxury imports such as automobiles, clocks and watches. There was no sales tax or value added tax at this time in Britain.

United States[edit]

In 1863, the Confederate congress[9] and the state of Georgia[10][11][12] experimented with excess profits taxes, perhaps the first time it has happened in American history.

The first effective American 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.[citation needed]

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.

Hungary[edit]

Hungary imposed an excess profits tax to address fiscal needs and economic imbalances exacerbated by global challenges such as the COVID-19 pandemic and rising inflation. Hungary recently imposed an excess profits tax aimed towards specific industries such as banks and airline industries [13]. As with most excess profit taxes it is temporary. The imposition of this tax is expected to bring in 800 billion HUF a year [14].

See also[edit]

Notes[edit]

  1. ^ Hebous, Shafik; Prihardini, Dinar; Vernon, Nate (September 2022). Excess Profit Taxes: Historical Perspective and Contemporary Relevance. International Monetary Fund. Retrieved 17 April 2024.
  2. ^ "Excess Profits Tax". Investopedia. Retrieved 2024-04-21.
  3. ^ Hebous, Shafik; Prihardini, Dinar; Vernon, Nate (2022). "Excess Profit Taxes: Historical Perspective and Contemporary Relevance". IMF Working Papers. 2022.187. Retrieved 2024-04-21.
  4. ^ "Excess Profits Tax". Investopedia. Retrieved 2024-04-21.
  5. ^ Hebous, Shafik; Prihardini, Dinar; Vernon, Nate (2022). "Excess Profit Taxes: Historical Perspective and Contemporary Relevance". IMF Working Papers. 2022.187. Retrieved 2024-04-21.
  6. ^ Hebous, Shafik; Prihardini, Dinar; Vernon, Nate (2022). "Excess Profit Taxes: Historical Perspective and Contemporary Relevance". IMF Working Papers. 2022.187. Retrieved 2024-04-21.
  7. ^ Anthony J. Arnold, "‘A paradise for profiteers’? The importance and treatment of profits during the First World War." Accounting History Review 24#2-3 (2014): 61-81.
  8. ^ Mark Billings and Lynne Oats, "Innovation and pragmatism in tax design: Excess Profits Duty in the UK during the First World War." Accounting History Review 24#2-3 (2014): 83-101.
  9. ^ Confederate States of America. "An act to levy additional taxes for the common defence and support of the government". Laws of Congress in Regard to Taxes, Currency and Conscription, Passed February 17, 1864.: 22.
  10. ^ "Act of April 18, 1863". Acts of the General Assembly of the state of Georgia, passed in Milledgeville at an annual session in November and December, 1862; also extra session of 1863: 176–177. Retrieved 28 March 2024.
  11. ^ "Act of December 14, 1864". Acts of the General Assembly of the State of Georgia : passed in Milledgeville at an annual session in November and December, 1863; also extra session of 1864: 80–81. Retrieved 28 March 2024.
  12. ^ "Act of March 11, 1865". Acts of the General assembly of the state of Georgia : passed in Milledgeville, at an annual session in November, 1864 and February and March, 1865: 66. Retrieved 28 March 2024.
  13. ^ Kardos, Dóra (August 2022). "Hungary Extra Profits Tax Levied on Various Sectors". BDO Global. BDO International. Retrieved 2024-04-21.
  14. ^ Kardos, Dóra (August 2022). "Hungary Extra Profits Tax Levied on Various Sectors". BDO Global. BDO International. Retrieved 2024-04-21.

Further reading[edit]

  • Billings, Mark, and Lynne Oats. "Innovation and pragmatism in tax design: Excess Profits Duty in the UK during the First World War." Accounting History Review 24.2-3 (2014): 83–101.

External links[edit]