Definition
Excess Profits Tax
An excess profits tax is an additional tax levied on the earnings of a business that exceed a predetermined level of profit. This type of tax may be instituted during periods of national emergency, such as wartime, to help generate additional revenue for federal governments. The premise behind this tax is that certain companies may experience extraordinary profits due to circumstances like increased demand for war-related supplies or services, and these extra earnings can be taxed to aid in national efforts.
Distinguish from Windfall Profits Tax
The excess profits tax is often confused with windfall profits tax. However, they serve different purposes:
- Windfall Profits Tax: Imposed to tax extraordinary profits that are realized through sudden and unexpected events, such as natural resource discoveries or significant price spikes in commodities, to prevent companies from benefiting excessively from such situations.
Examples
- World War II: During World War II, the United States implemented an excess profits tax to capture additional revenue from businesses that benefited significantly from the war economy.
- Korean War: An excess profits tax was reimposed during the Korean War under the Excess Profits Tax Act of 1950 to raise funds necessary for defense expenditures.
- Economic Booms: In some cases, countries may impose an excess profits tax during economic booms to ensure that sectors or companies that profit massively aren’t gaining at the expense of the broader economy.
Frequently Asked Questions
1. When is an excess profits tax typically applied? An excess profits tax is usually applied during periods of national crises or emergencies, such as wars, in order to raise needed revenues for the government.
2. How is ’excess profit’ calculated? Excess profits are typically calculated as profits exceeding a determined baseline or normal earning threshold, which could be an average profit level based on past earnings or a standard rate of return.
3. How does an excess profits tax differ from regular corporate profit taxes? Regular corporate taxes are levied on all profit made by business entities, whereas excess profits taxes specifically target profits that exceed a predetermined normal level.
4. Can the excess profits tax rate vary? Yes, the rate can vary depending on policy decisions, economic conditions, and the specific legislation enacted during the time the tax is imposed.
5. Are there any sectors exempt from excess profits tax? This depends on the legislation, but typically, there may be specific exemptions or allowances for certain sectors deemed critical for public interests.
Related Terms
- Corporate Tax: A tax on the profits of corporations, distinct from excess profits tax, which only targets profits above a normal level.
- Windfall Profits Tax: A tax on profits that are deemed excessive due to unexpected or extraordinary events.
- Progressive Tax: A tax system in which the tax rate increases as the taxable income increases, which is not the same but often compared to principle-based frameworks of excess profits tax.
- Revenue Act: Legislative acts that often include the imposition of various federal taxes, including excess profits tax during specific eras.
Online References
- Internal Revenue Service (IRS)
- Investopedia: Excess Profits Tax
- Economic History Services - A history of tax policies and economic impacts.
Suggested Books for Further Studies
- “A History of Taxation and Taxes in England” by Stephen Dowell: Provides a historical perspective on various types of taxes.
- “Federal Taxation in America: A Short History” by W. Elliot Brownlee: Detailed analysis of tax legislations in U.S. history.
- “The Economic Consequences of the Peace” by John Maynard Keynes: Discusses, among other things, the implications of taxation during post-war periods.
Fundamentals of Excess Profits Tax: Business Taxation Quiz
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