8 MISC. PUBLICATION 570, U. S. DEPT. OF AGRICULTURE 



thirds of all State revenue. In 1941, when receipts from the income 

 tax were much less than in 1943, almost half of the Federal revenue 

 was from taxes on consumption. 



The principal taxes which have a tendency to restrict new invest- 

 ment are the so-called business taxes. The two main types on corpora- 

 tions are the excess-profits tax and the corporate income tax. Both 

 are levied by the Federal Government, although many States also have 

 corporate income taxes. 



The excess-profits tax was brought into existence as a war measure, 

 with the primary aim of preventing abnormal profits as a result of 

 war production. With numerous qualifications respecting refunds, 

 limitations, and exemptions on the amount of net income that may 

 be taken through a combination of Federal taxes on corporations, the 

 Federal excess-profits tax approximates a rate of 90 percent on the 

 profits of corporations in excess of their profits during the pre-war 

 base period 1936-39. This tax — like price control, rationing, and allo- 

 cation of industrial materials — is an important and necessary wartime 

 measure. Moreover, it is a very important source of Federal revenue 

 and hence a significant means of financing the war. 



But once the war is over and business has gone through most of 

 the transition from war to peace production, an excess-profits tax 

 may act as a serious deterrent to new investments. Investors are not 

 likely to put their money into venturesome and uncertain new enter- 

 prises, in preference to Government bonds or other similarly secure 

 fields, unless there is the incentive of the possibility of substantial 

 profits. Attempts to limit profits to some pre-war base period will 

 almost certainly limit the amount of new investments. Yet the 

 maintenance of full employment demands a continuous flow of funds 

 into new investment channels. The country can hardly afford to run 

 the risk of discouraging private investment and encouraging business 

 extravagance and inefficiency by levying an excess-profits tax in the 

 post-war period. This type of tax was used during World War I, 

 but was repealed after that war. 



But reductions in business taxes will not automatically make more 

 investment or more employment — those must still be created by the 

 actions of investors and employers. During the war period, corpora- 

 tions have generally widened their profit margins by more than the 

 amount of the excess-profits taxes. As a result, profits before taxes 

 are now far above pre-war levels, both in percent of sales and in 

 percent of assets. In industries where competition is not keen and 

 where post-war demands will be large, there will be a great tempta- 

 tion for businessmen to maintain these unusually high profit rates, 

 even after wartime profit taxes are reduced. If they should do so, that 

 would keep large amounts of money out of the markets for goods, 

 and increase the difficulty of maintaining national markets for all 

 that can be produced. If, on the other hand, they should follow a 

 policy of low prices, high wages, and low profits per unit of sales, they 

 would help stimulate sales, maintain employment, provide demand 

 for the production from increased facilities, and thereby stimulate 

 investment. Steps to reduce business taxes will thus help to maintain 

 employment only if they are accompanied by wise and far-seeing 

 business policies with respect to prices, wages, and profits. 



The excess-profits tax represents an extreme form of business taxes, 

 just as a general sales tax represents an extreme form of taxes on con- 



