Menu
Tax Notes logo

Tax History: If the Pandemic Is a War, Should We Consider a War Profits Tax?

Posted on Mar. 30, 2020

“I’m a wartime president,” President Trump declared in a recent media briefing. “This is a war — a different kind of war than we’ve ever had.”

Trump’s effort to claim the mantle of wartime leadership isn’t unreasonable. After all, plenty of other people have used martial metaphors to describe the fight against COVID-19:

  • “This is a war. And in war, strategy is important.” Dr. Tom Frieden, former director of the Centers for Disease Control and Prevention, “There’s a Long War Ahead and Our Covid-19 Response Must Adapt.”

  • “Our current efforts to fight Covid-19 are the equivalent of fending off a surprise attack. Next we have to wage a sustained war.” Richard Danzig, former secretary of the Navy, and Marc Lipsitch, professor at the Harvard T.H. Chan School of Public Health and director of the Center for Communicable Disease Dynamics at Harvard, “Prepare Now for the Long War Against Covid-19.”

  • “Just as in a time of war, we’ve been attacked by this virus and we have to pull together,” Ohio Republican Gov. Mike DeWine said recently.

Even historians — usually skittish about drawing lessons from the past — have been willing to compare today’s public health mobilization to the history of American war-making. A few have even suggested that specific policies from past wars might be useful in the current emergency — including one particularly controversial fiscal policy.

“You know what else happens in war time?” suggested University of California, Berkeley economist Gabriel Zucman on Twitter. “Excess profit taxes.”

Lessons From World War II

In a recent piece for Politico, historian Mark R. Wilson of the University of North Carolina, Charlotte, offers a broad look at U.S. mobilization during World War II. He begins, however, with a common observation about the present: In these early days of the battle against the coronavirus, America is desperately short of crucial materiel.

“One urgent problem is the shortage of key pieces of equipment, including high-quality masks, test kits and — perhaps most important of all — ventilators,” Wilson writes. “It seems hundreds of thousands of lives might be saved, if only manufacturers could quickly ramp up the production of such equipment, perhaps by a factor of 100 or 1,000, within a few weeks.”

There’s precedent for that sort of rapid mobilization: eight decades ago, when the nation ramped up quickly to fight World War II. “At that time, there was a desperate need to radically accelerate the output of items such as ships, tanks and bombers,” Wilson writes. “With decisive government action, including taking a little bit of control from corporations, this effort was hugely successful.”

Wilson tells the story of that decisive action in Destructive Creation: American Business and the Winning of World War II, a prize-winning study of the war’s domestic political economy. His Politico piece distills key elements of that book into five straightforward lessons for current policymakers. All seem relevant and potentially useful; two include specific implications for tax policy.

First, Wilson counsels, “if the government wants machines fast, it better promise to buy them.” During the First World War, manufacturers got no such guarantee, and many ended up with unneeded and unsalable products. Two decades later, policymakers tried to assuage the resulting anxieties by guaranteeing a market for wartime production. “The lesson for 2020 is that if we want more ventilators as soon as possible, the national government needs to guarantee it will purchase them,” Wilson writes.

Second, the government explicitly encouraged manufacturers during World War II to work together, sharing designs and production techniques in the interest of streamlined, high-quality production. “Today, public authorities and business leaders might use a similar approach, by arranging to have the best versions of key items like tests, ventilators, medications and vaccines made by multiple companies, using temporary deals that would bypass delays that might come from concerns about proprietary technology and competitive advantage,” Wilson suggests.

Third, World War II revealed the inescapable pitfalls of a global supply chain. Eighty years ago, the biggest supply chain problem concerned natural rubber, which at the time was sourced principally from Indonesia. Japanese victories in the Pacific cut off that supply, and the United States was forced to develop synthetic alternatives — a difficult but ultimately successful process. “Today, as the disruption of global supply chains is making it harder to procure a variety of key components for the coronavirus fight, it makes sense for policymakers and business leaders to engage in some quick planning and cooperation, to find and finance domestic substitutes,” Wilson suggests.

Doubts About Tax Credits

Wilson offers two tax lessons for current policymakers. The first concerns the construction of production facilities. In the 1940s, policymakers boosted war production quickly and dramatically through the construction of government-owned, contractor-operated (GOCO) factories. Notable GOCO examples included the Kaiser shipyards, as well as many bomber and airframe plants, all of which were known for turning out military equipment at breakneck speed. “By eliminating risk to private producers and their bankers, this model of government financing and ownership proved much more effective than other schemes used during World War II, including tax incentives and government promises to buy privately financed plants over a five-year period,” Wilson explains.

It seems unlikely that the current crisis will last long enough to make such arrangements feasible or relevant. But the timely development of a workable COVID-19 vaccine is no certainty; we might be fighting this particular virus for quite some time. And in any case, the value of GOCO arrangements might still prove relevant when planning for future emergencies.

Wilson’s warning about the limited efficacy of tax incentives seems likely to resonate with many contemporary fiscal experts, who have learned (over these past seven decades or so) to be wary of many indirect efforts to encourage private sector behavior. But his warning also seems likely to be ignored by policymakers, who have shown a durable enthusiasm (over these same seven decades) for incentives of all kinds, especially as an alternative to more direct forms of government action.

Excess Profits Tax

Wilson’s second tax lesson concerns the same issue raised by Zucman in his tweet: corporate taxation, and excess profits taxes in particular. “Raising corporate taxes can be a good thing,” Wilson writes. During World War II, “U.S. authorities successfully contained the problem of profiteering — and, perhaps more important, the problem of public outrage at perceived illegitimate profit-taking in time of crisis — with a multidimensional array of controls.”

Some of those controls were direct and heavy-handed, including direct price caps. Government contracts included renegotiation clauses, which allowed the government to claw back profits after the war when they seemed excessive.

Most notable, however, were a range of tax provisions directed at corporations. Those included not simply high regular corporate tax rates, but a special excess profits tax designed explicitly to curb profiteering. Such a tax had been implemented during World War I, but despite the best efforts of its most ardent fans, it disappeared after the war ended. (Champions of the tax believed that taxing companies on outsize profits was desirable in peacetime as well as during wars as a matter of both justice and economic efficiency.)

The interwar years featured a long-running debate over the need to limit war profits, chiefly as a matter of morality, but also to prevent munitions manufacturers from agitating to start armed conflicts. Such debates produced little in the way of actual legislation, but they provided an important backdrop when lawmakers got serious about a new excess profits tax in 1940.

As America ramped up its rearmament campaign, Congress began deliberations on how best to limit the profits of companies that would benefit from the new defense spending. The central question was how “excess” should be defined. On one side of that debate were Treasury officials who wanted to define excess in reference to a predetermined, “normal” rate of return on invested capital. That rate might be arbitrarily established by government officials, or it might be derived from the prewar rate of return enjoyed by a given company.

On the other side of that debate were congressional experts, who tended to support an average-earnings method of calculating excess profits. Under that technique, any earnings in a given tax year that exceeded the average earnings of a three-year, prewar base period would be subject to the new tax.

The fight over how to define excess profits was bitter, but its resolution was a happy one for most taxpayers, who were allowed to choose whichever of the two methods they preferred (subject to some rate penalties for choosing the average-earnings method). As the war progressed, statutory marginal rates for the tax continued to rise, eventually reaching a peak of 95 percent, but relief provisions also proliferated. The tax remained a heavy one, with an average effective rate of more than 70 percent, but it was generally well tolerated by the companies that paid it.

The political resilience of the excess profits tax was a reflection of its perceived necessity, both as a revenue tool and as an instrument of justice. The tax reflected a “widespread determination that the misfortunes of war should not be taken advantage of to create a lot of millionaires,” explained economist Roy Blakey, one of the era’s leading tax experts. “It was an answer to those who sought insurance that none would profit from the nation’s misfortune,” explained another tax luminary of the period, the economist Harold Groves. “The profits tax, as a war measure, stems from sound roots in the soils of expediency and principle.”

Corporate Taxes for COVID-19?

In his Politico piece, Wilson suggests that WWII-style corporate taxes might have a role to play in the current emergency. “In 2020, targeted taxes and controls could similarly limit hoarding and profiteering, boosting public morale,” he writes. “And if emergency stimulus measures are so big as to trigger inflation, sharply progressive taxes could be an equitable way to tame a rise in prices, while holding down deficits.”

There’s something to that argument, especially regarding inflation. But inflation seems like a distant and unlikely problem in the foreseeable future. We should be so lucky as to have problems with inflation; that will be a challenge for the recovery, not for the emergency itself. At that point, we can revisit the utility of progressive tax hikes.

As a matter of politics, Wilson may be right about the question of anti-profiteering taxes. In past wars, that issue has typically surrounded the production of military equipment, hence the epithet “merchants of death” that critics used to describe munitions manufacturers in the 1930s.

Recently, we’ve seen the anti-profiteering argument surface around the issue of vaccine pricing. On Twitter, Dutch historian Rutger Bregman responded to a New York Times article on vaccines — headlined “Drug Companies Will Make a Killing From Coronavirus” — with a three-word suggestion: “Taxes taxes taxes.”

The leap from wartime taxes on arms manufacturers to contemporary taxes on vaccine producers may seem reasonable. It certainly has some intuitive appeal.

But that leap is far from obvious or uncomplicated. It depends on the general proposition that no person should get rich from the suffering or misfortune of another. Which seems plausible as a moral precept, but taken at face value, might rule out the compensation we typically provide to many physicians, and certainly to many specialists.

More broadly, that precept would challenge the basic premises of free market healthcare. That may be where the United States is headed. But it’s not where it’s been, and it’s not where it is right now.

As a matter of history, moreover, past arguments for excess profits taxation don’t translate especially well to our current situation. In the 1940s, the case for taxing excess profits hinged on the notion of shared sacrifice: Companies (and individuals) were taxed as a way to compensate for the sacrifice soldiers were making on the battlefield. Groves made the case explicitly: The excess profits tax “was demanded as a monetary counterpart to the sacrifice being made by persons who entered the armed forces,” he wrote.

The “shared sacrifice” argument doesn’t translate especially well to the vaccine argument. That doesn’t mean there isn’t a case for regulating the price of a coronavirus vaccine — perhaps even for using a tax device. But I don’t think that argument is bolstered significantly by the wartime experience with taxing excess profits, which was really about a different set of issues.

Sometimes history offers useful lessons. Other times, we have to find our own way.

Copy RID