To the Editor:
Suggestions to revive an excess profits tax in this country, as described in Joseph J. Thorndike’s recent column (“Should We Tax Excess Profits or Pandemic Profits?” Tax Notes Federal, Apr. 20, 2020, p. 399), seem to overlook important economic differences between prior U.S. military conflicts and our current fight against the COVID-19 virus. As described in a 2011 report of the Institute for Economics & Peace (“Economic Consequences of War on the U.S. Economy“) military conflicts can have positive short-term economic effects. For example, GDP growth in this country was over 17 percent in 1942 and was in double digits in 1951 during the Korean War. To be sure, the longer-term consequences of these types of conflicts may be less positive once the impact of increased debt, disruptions in investment and consumption patterns, and inflation are taken into account. But because the short-term gains are unlikely to be spread equally across the economy, there is a case to be made for a temporary war-related profits tax. As economist Edwin R.A. Seligman explained, “it was a natural feeling that no private enterprise should be permitted to make inordinate gains out of the misery of humanity, and that the community is entitled to a great part of the profits for which no individual enterprise is really responsible” (“The War Revenue Act,” 33 Pol. Sci. Q. 1, 25 (1918)).
The short-term economic gains from a military conflict may be more than offset by short-term losses resulting from military and civilian casualties, destruction of property and infrastructure, and psychological harm. But here, the United States’ experience has been extremely fortunate. Since the Civil War, with some notable but limited exceptions (conflicts with Native Americans, Pearl Harbor, 9/11), the United States has not had to endure armed conflict on its shores. Thus, its domestic business operations could continue more or less unimpeded by its involvement in military conflicts and benefit from the increased war-related demands.
Finally, the United States’ neutrality for over two years while World War I raged abroad gave its home industries a major advantage over foreign competitors situated in one of the warring countries. A somewhat similar opportunity to realize large economic profits occurred at the start of World War II.
None of these factors is present today. The United States does not anticipate large (or any) short-term economic gains, the fight is clearly taking place on our shores, and the nation has not been granted an over two-year exemption while the rest of the world is engrossed in the battle. Any windfall profits of the few industries potentially benefitting from the pandemic in the short term, such as those producing health-related materials or facilitating or providing services at a distance, would seem to represent a very modest tax base hardly justifying the administrative and enforcement costs of a new levy. Businesses that successfully discover and produce effective treatments or vaccines may experience significant gains, but would we really want to promise at this time reduced after-tax profits in the unlikely event that their efforts prove to be successful? Finally, other longer-term winners — those that adapt best to our uncertain, future environment — would appear to be no different from any enterprise that is able to navigate changed circumstances successfully. In Seligman’s words, individual enterprises would be responsible for those profits and, therefore, there is no special case to make them the community’s.
Proponents of an excess-profits tax may be merely using the current crisis opportunistically to further pre-virus preferences for higher taxes on capital. But as a tax specifically addressed to the consequences of the pandemic, the case seems very weak.
Sincerely,
George K. Yin
Charlottesville, VA
Apr. 28, 2020