Smith Claims Excess Profits Tax Would Threaten Economic System

Adoption of an excess profits tax under present conditions of partial mobilization would be dangerous to the efficiency and growth of our economic system, writes Dan Throop Smith, professor of Finance at the Business School, in the November number of the "Harvard Business Review." "The real loss to the country from the enactment of excess profits taxation," the author believes, "would come from waste and from undeveloped potentialities--potential new companies and potential areas of new development for established companies."

"Excess profits taxation leads to waste and inefficiency even in the best run corporations. This is not necessarily due to a sense of perversity on the part of management; it is an almost inevitable human reaction to a system in which 66, or 80, or 95 percent of any expense, depending on the marginal tax rate, comes out of taxes and is paid by the government. As one writer put it recently, excess profits taxation constitutes a standing offer by the government to put several dollars down every rat hole in which a business concern drops one dollar.

"During a war the waste and extravagance induced by excess profits taxation are limited in two ways. A sense of urgency and a concentration of effort exist which probably cannot be maintained during a long-continued defense effort short of total war. Also, limitations on available manpower and materials make it physically impossible to do many of the extravagant things which would be done in the absence of widespread controls and allocations. But with the represents of short manpower and short materials loss strong in a semimobilized economy, the tendency to waste engendered by an excess profits tax would have more 'room to play.'

. . . "Since we contemplate adopting the tax for the indefinite future, the seriousness of the inequities and administrative complexities would compound over the years and produce confusion and indecision in business," Smith says in summary. In fact, it is hard to imagine a tax which, over a long period, could be worse.