TAXES: End to the Profit Motive

Defense to date has been a boom. Last week the Treasury served notice, through its recommendations to raise an additional $3,600,000,000 in new taxes, that from here out defense will mean sacrifice. It was the Administration’s bluntest effort yet to take the sugar coating off the emergency. As far as business was concerned, it meant that the profit motive is practically out for the duration.

Defense’s first year looked, to. some like a three-cornered race for “fat” among business, labor and agriculture. The Na tional City Bank estimated that 390 leading industrial corporations lifted their profits by 32% in 1940. The boom also upped manufacturing labor’s payrolls by 27% (partly due to re-employment, partly to wage increases, partly to over time). Agriculture, its income up only 6% in 1940, felt business and labor had been going ahead too fast; so agriculture demanded increased subsidies to keep up in the race.

The Treasury’s tax proposal would in effect increase the regular corporation tax from 24% to 30%, to raise $534,500,000 extra. It would also crack down much harder on “excess profits” by reducing exemptions on the invested capital basis from an 8% return to a 6% return, by cutting exemptions on the earnings basis from 95% of 1936-39 earnings to 75%. This would cost business $400,000,000 additional. The two changes represent about a third increase in taxes on corporate profits.

Only businesses which will escape are industries with enormous capital invest ments and bad earnings records — meaning, above all, the railroads. Most of the carriers can multiply their profits before they reach the excess-profits minimum.

But for most companies, the projected excess-profits tax (along with the in creased regular corporation tax) now will take 65% of all earnings over a consider ably lowered base exemption.

No less drastic than this liquidation of the profit motive is the Treasury’s direct attack on consumer buying. This is the first tax proposal in U.S. history deliberately planned to cut consumption hard.

Although the Treasury refused to recommend a general sales tax and refused to suggest lower income-tax exemptions, it cracked down so hard on the incomes of the articulate middle class that it scared Congress stiff (see p. 21). Heretofore, most families with incomes from $2,000 to $10,000 have been taxed a lower per centage of their incomes than the poor (who are hit hardest by consumption tax es) and a lower percentage than the rich (who have real trouble with surtaxes). The Treasury proposed to end this free tax ride abruptly by imposing an 11% surtax on top of the present 4.4% income and defense tax in the very lowest taxable bracket. Higher incomes also face stiff increases, but none so great proportionately. In addition, the Treasury proposed to syphon off still more purchasing power through a long list of excise taxes on consumption (Congress, eager to lower the more obvious direct tax burdens, suggested adding still more consumption taxes).

Specifically, the Treasury proposed to leave consumers in all groups with less money for their purchases by levying additional excise taxes as follows:

Taxes Estimated yields (millions of $) Tobacco 188.3 Liquor 177.6 Gasoline 255.0 Soft drinks 132.5 Automobiles 79.9 Amusements (including bowling alleys, cabarets, etc.) 59.4 Checks (20 each) 57.0 Tires and tubes 52.5 Telephone and telegraph 69.0 Transportation tickets 37.6 Miscellaneous 124.4

One direct and immediate purpose of these levies is to take the heat off Leon Henderson in his job of preventing price inflation. If the boom were to remain unchecked, Henderson would be swamped by civilian demand competing for goods in a market restricted by defense priorities.

Under the new proposals, the middle and upper classes would have less money to spend next year, would be in no position to help bid prices up. Lower-class purchasing power would be curbed, though in lesser degree, by the new consumption taxes. In effect, all this adds up to one additional means of giving defense priority over consumer purchases.

Presented as an emergency measure, the Treasury plan is still closely in line with the New Deal’s general tax philosophy, whose purpose for years has been to prevent “oversaving” by taking money away from the savings classes. Its first result will be to make it difficult or almost impossible for middle-and upper-class families to continue saving money. But these taxpayers, who formerly had a margin for savings, will not be so quick to cut down on consumption as if they had not had such a margin of “fat” to work on.

Businessmen are so strong for a balanced budget that they raised little audible protest over the higher taxes on business when the news came out. Last February executives voted more than 2 to 1 in the FORTUNE Forum for heavier taxation, even though they were warned that business would have to pay most of the bill. But the Treasury’s tax plan is almost the exact opposite of the program advanced by the management men—a program whose No. 1 and No. 2 planks were a lowering of income-tax exemptions, and a general sales tax.

In World War I, taxes were enacted for revenue only. Biggest single fact about the new tax bill is that taxes for revenue alone are as dead as a mackerel and will remain so until the war is over.