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Frank Demby

What Are the Facts on the Gov’t
Excess Profits Swindle?

(September 1940)

From Labor Action, Vol. 4 No. 22, 9 September 1940, p. 3.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

While the final text of the proposed excess profits and amortization bill is still to be prepared, the Bill as passed in the house indicates that one of the most gigantic swindles in the history of the country is now being prepared in Washington. In order to offset the growing clamor from labor unions, some sections of the press and public sentiment, that if the workers are to be conscripted, and offered to the sacrifice, the only fair thing to do is to conscript capital as well, the ROOSEVELT ADMINISTRATION IS PREPARING AN EXCESS PROFITS AND AMORTIZATION BILL THAT WILL SEEMINGLY REQUIRE SACRIFICES OF CAPITAL, BUT WHICH WILL, IN REALITY, GUARANTEE THE CAPITALISTS HIGHER PROFITS THAN THEY HAVE MADE IN MANY A LONG YEAR.

Manufacturers are holding up hundreds of millions of dollars worth of army, navy and air contracts because, as they say, “We don’t trust the government; we must have absolute guarantees (of our profits) before a wheel turns.” Just imagine what a hue and cry would arise from the paid propagandists of the capitalist press if the workers, after the conscription bill is passed, said, “We refuse to allow ourselves to be conscripted until we receive absolute guarantees that any war this country engages in will not be for imperialist purposes but in the interests of the working masses of this country!” Cries of “traitor,” “red,” “fifth columnists,” etc. would be hurled at the workers. But when a manufacturer refuses to sign a “defense” contract until his profits are guaranteed, that is true patriotism.

Millions for the Millionaires

The President has already said “there will be no new millionaires as a result of the armaments program. However, the tax bill in preparation, gives the lie to this high-sounding phrase. Not only will there be new millionaires, but the present millionaires (according to a recently issued statement of the Treasury, 50 individuals filed income taxes for 1939 showing incomes of a million dollars and more in 1938) will make even more millions than they have in the past.

What worries our patriotic manufacturers most appears to be the amortization measure. Their argument runs something like this: “These new contracts require us to erect new plants. These new factories will cost huge sums of money and they will be practically worthless once the war is over. Unless we are allowed to write-off (amortize) the cost of the new factories in a ‘reasonable’ period of time (five years or less), we will lose our shirts.” Normally, a manufacturer writes-off the cost of new plant equipment (capital investment) in a period of 20 years by setting up a sinking fund. In other words, if a five year period is decided upon, approximately 20% of the cost of new plant equipment will be added to expenses. Since in this modern day of mass production, fixed capital (machines, etc.) constitutes an ever-increasing proportion of the total capital accumulation of the modern corporation, this means that sums running into the millions and millions will be deducted from profits AND THEREFORE NOT ELIGIBLE TO THE EXCESS PROFITS TAX.

In addition to this gravy which will be secured to the capitalist, there are any number of other considerations which are positively fascinating in their appeal to the manufacturer’s patriotism. Suppose, for example, the war and/or the “defense” program lasts more than five years; having already written-off the cost of the new factories, profits will be absolutely fantastic. Even should the war period end in the next five years, an airplane manufacturer, to take just one example, will certainly be able to use his new factories in peacetime pursuits.

Finally, in many cases, it will undoubtedly be found that these new factories erected for “defense” purposes will not fill only government orders. Many of them will be able to fill private contracts for England. In such cases, a manufacturer may well decide to use his new plants to fill U.S. Government orders, since these may be subject to various restrictions (Walsh-Healy Bill, for example) and his old plants to fill other contracts. Truly, the prospects of coining huge profits are so good that it actually staggers the imagination. AND SINCE ROOSEVELT AND ALL CONGRESSIONAL LEADERS HAVE ALREADY STATED THEIR WILLINGNESS TO GUARANTEE THE PASSAGE OF AN AMORTIZATION MEASURE PROVIDING FOR EVERYTHING THE MANUFACTURERS WANT. WHAT IS REALLY DISTURBING OUR PATRIOTIC MANUFACTURERS?

Just a Tiny Fly in the Ointment

It is simply the insistence of the Administration, fully aware that an election is coming up in November, in coupling the amortization measure with an excess profits tax. The politicians know that if they give the capitalists everything they want in regard to the amortization measure, mass resentment will be extremely high (and will cost votes) unless this is compensated for by placing a ceiling on profits. That is why Roosevelt has turned a deaf ear to the pleas of the New York Times to pass only an amortization bill now and spend the rest of the year studying the problem of excess profits very carefully since “it is so complicated and can’t go into effect until the 1941 income tax returns are made.” Excess profits, of course, are a “complicated” question, but not conscription. Present signs, however, indicate that an excess profits tax will be passed. But what kind? – that is another question. Without going into the technical complications, and the various alternatives, which require a Philadelphia lawyer to disentangle, the basis of the proposed bill is TO EXEMPT FROM AN EXCESS PROFITS TAX, PROFITS AMOUNTING TO A SUM EQUAL TO THE AVERAGE NET PROFIT MADE DURING 1930–1939. For most of the large corporations, this is a pretty favorable period. It has only one bad year included – 1938. It includes two fairly good years, 1936 and 1939 – and one exceptionally good year, 1937. In addition, the average earnings during this base-period will be increased by 8% of new capital invested. This means that large corporations (say General Motors or U.S. Steel, who will certainly get their .share of the contracts) will make from 8 to 10% and more profits, without having to pay an excess profits tax.

There may not be many new millionaires, but a lot of the old ones are going to increase their fortunes sizeably. Moreover, should profits now run so phenomenally high, it doesn’t follow that the portion of profits which is subject to the excess profits tax will be confiscated by the government. So far, the highest excess profits tax proposed is 50%. The average rate aimed at is apparently 25%. Thus, the manufacturer will be allowed to keep a goodly portion of the excess profits. Certainly, no restraints on “private initiative” here!

The sacrifices that capital will be required to make “in the interests of national defense” will, consequently, be largely on paper. They will be useful for bamboozling the workers, but they will not interfere with the patriotism of the bosses – which, as always, centers around their pocket-books.

Just in case the above analysis has been a bit too difficult for you to follow in detail. THE SINGLE FACT WHICH EXPOSES THE EXCESS PROFITS SWINDLE MORE THAN ANYTHING ELSE IS THAT THE ESTIMATED YIELD OF THE PROPOSED EXCESS PROFITS TAX FOR 1940 IS $300,000,000. This, of course, is mere chicken-feed. It is a drop in the bucket when compared with the billions and billions of dollars now being spent on armaments. It is even less when compared with the billions of dollars that corporations will make. It clearly shows that the Government does not expect very much help in meeting the costs of “defense” from the excess profits tax. As always, the costs of war will be borne by the masses – not by the bosses.

One immediate conclusion that every worker must draw from this situation is to raise in his union the demand for NATIONALIZATION OF ALL WAR INDUSTRIES. THIS IS ONE WAY OF STOPPING THE PROPOSED EXCESS PROFITS SWINDLE.

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