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Books in Review

Financing Big Business

(December 1942)

From New International, Vol. VIII No. 11, December 1942, p. 348.
Transcribed & marked up by Einde O’Callaghan.

Financing The War, A Symposium
The Tax Institute, Philadelphia. 336 pages and Index

This book is a symposium on a subject of interest to everyone in the country. The mass of workers have become tax conscious – most of them will be paying an income tax (or the five per cent victory tax) for the first time next year (and expect to have additional tax obligations thrust upon them, perhaps as “forced loans”). They know that this is equivalent to a wage cut, or what is the same thing, a rise in the cost of living as effective as that which would follow an inflationary rise in prices.

In fact, that, and not the raising of revenue, is the main reason for including the lower-income brackets, that is, the workers, in the new income tax law. The same aim – the reduction of the purchasing power of the masses in face of a declining output of consumer goods and an increasing production of war materials – lies behind the drive among the workers to obtain their purchase of war bonds.

Through taxation and borrowing, as we are told in the first chapter in the volume under review, the state has taken over the distribution of national income and the allocation of national output. More exactly, these techniques of war finance are the “pecuniary counterpart” of the war economy supplementing and complementing such methods as priorities, allocation, price and wage controls and rationing.

What are the objectives of war financing policy? The chief objective is the diversion of the resources of the country for the production of war materials. To this is added the objective of so distributing national income “as to cause a minimum of impairment of the existing pattern of the social structure – the so-called national culture or ‘way of life’ – the preservation of which is the presumable objective of the military effort.” And here is the key to any discussion of war finance.

Preserving the Bourgeois Profit System

The existing pattern of the social structure, that is to say, capitalism, the private monopolistic ownership of the productive resources by big business and the gross inequality of income, must be preserved whatever the emergency measures undertaken. If the old “price system” is replaced by state control of the economy, the old property relations and the old increasing inequalities must be maintained by the state through war finance.

The contributions to Financing the War are therefore discussions of the various methods of best achieving these ends. From this viewpoint they are by and large interesting and informative. The most valuable chapter is the one on the Influence of Excess Profits Taxation on Business Policy, contributed by Frank E. Seidman, a certified public accountant. While the recent tax bill has resulted in increased excess profits tax rates, the basic features of the act are the same as those considered by Mr. Seidman.

It is not surprising to learn that “one immediate effect that this program had on business was almost completely to cure the unemployment problem among lawyers and accountants”! Examples of how these experts advised the big corporations to comply with the law and avoid or minimize excess taxes are given by Mr. Seidman. For example: under the law the invested capital of a corporation includes not only the amount paid in for its shares, but accumulated earnings as well. Corporations adopting the invested capital method paid out less of their profits in dividends, thus accumulating greater profits, increasing the “invested capital” and thereby decreasing the tax. Or then again the law permits 50 per cent of borrowed capital to be included in invested capital and allows the interest on the non-included debt as a deduction in arriving at excess profits income. Dividends for preferred stock are not deductible for income or excess profits tax. So many corporations replaced their preferred stock, and in some cases common stock as well, by bonds in order to reduce their excess profits tax obligations. They further borrowed money at low interest rates even though they did not actually need the money for business. (The new excess profits tax provisions now encourage the unloading of these bonds and debts – obtained to avoid tax payments under the old law – by permitting corporations to use the 10 per cent credit of their excess profits tax payments for liquidation of these debts!)

Big Business Is the Winner

One more method employed by the big corporation to avoid paying excess profits taxes should be mentioned.

“One of the most popular indoor sports in recent months, however, is that of acquiring more or less defunct corporations that have large initial capital investments. Under the law, an operating deficit of a corporation does not have to be taken into consideration in computing invested capital. Thus, if a corporation has $10,000,000 of capital originally paid in and $9,900,000 of deficit, its invested capital is not $100,000, but $10,000,000. Furthermore, if such a corporation has sustained operating losses during the past two years, these losses can be carried forward and applied against subsequent earnings. Also, if a corporation has not absorbed its excess profits tax credit in the past, these too can be carried forward and applied against subsequent earnings. It can be readily seen what tremendous tax appeal a corporation in this position may have.”

Mr. Seidman’s conclusions are worth quoting. He writes:

“The major fault with the present act is that it literally writes profiteering into law. This is accomplished by giving corporations the option to establish unusually high deductions in computing excess profits taxes. As I have already indicated, the tax rates only begin to operate after profits have passed the average earnings in the four-year base period, 1936-39, or if earnings have passed an eight per cent return on the first million dollars of invested capital and a seven per cent return beyond that amount. The way this formula works out, the strong corporations inevitably will become stronger and the weak ones weaker.

“Corporations that were fortunate enough to make large earnings in the pre-emergency period earn big profits without paying any excess profits taxes. This means that the railroads, the heavy industries and many other ‘war baby’ corporations, which are really getting the major benefits of war orders, escape this tax almost completely. Thus, for instance, United States Steel, whose profits in the preceding four years had averaged about $46,000,000, had a net in 1940 of $102,000,000 and did not pay a penny in excess profits taxes. Republic Steel, with a four-year average of $7,000,000, passed a $21,000,000 net in 1940 and went excess profits tax free. The railroads, whose profits have enormously increased as a result of the defense program, have to date escaped the excess profits tax almost completely ... It is an amazing situation in view of the anti-war-millionaire label that was attached to this tax.”

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