Are Profits Too High?

December 27, 1948

Congressional leaders are planning a new boost in corporate taxes. They seem to be divided only concerning whether this should take the form of an increase in the regular corporate tax rate or an “excess-profits” tax. Few voices are being raised to point out that either type of increase now would retard future American production. Corporate taxes are already harmfully high. They represent a form of double income taxation that directly discourages venture capital and industrial growth.

In dollar terms, present corporation profits seem high. Labor leaders charge that the corporations are “gouging” the public. But all this is simply a consequence of monetary inflation. As Keynes pointed out 28 years ago (see my column “Lenin Was Right,” Sept. 22, 1947), when the currency unit is debased by governmental policy high corporate profits “are a consequence and not a cause of rising prices.”

Moreover, the profits resulting from inflation are in large part illusory. In my column of Oct. 25, 1947, I pointed out that they were being greatly exaggerated, because sufficient allowance was not made either for unreal inventory profits, for inadequate depreciation charges, or for the shrunken purchasing power of final net dollar profits even after these had been correctly calculated.

The illusory nature of the profits resulting from inflation is no sudden new discovery, even though only a few are just becoming aware of it in this country. It was clearly pointed out by the Austrian economist Carl Menger as early as 1892. But from the recent hearings before a Congressional committee we are indebted to two economists, Sumner H. Slichter of Harvard and William A. Paton of the University of Michigan, for powerful restatement of the point.

“During the last three years,” Professor Slichter calculates, “American corporations have overstated their profits by approximately $16,400,000,000. This is the amount by which the reported statements of profits exaggerate the amount of income available to pay dividends, to expand plant, to increase wages, or to reduce prices.” While reported profits for 1948 will be between $20,000,000,000 and $21,000,000,000, Slichter estimates that real profits will be only about $16,000,000,000.

These wide discrepancies between real and reported profits come from two principal inaccuracies. “One arises from the fact that most corporations still insist on counting a rise in the cost of replacing inventories as profits. The other is that more corporations count the rise in the cost of replacing plant and equipment as profits. It is obviously ridiculous to count a rise in costs as profits and yet most corporations do it, and pay stiff taxes on the amount so reported.”

Are profits “excessive”? “The answer to this question depends upon how fast the community wishes industry to expand. If profits are causing industry to expand faster than the community would like to have it expand, they are excessive. If profits fail to bring as rapid an expansion of productive capacity as the community would like to have, profits are inadequate.”

Not merely present but prospective profits, in short, must be great enough to “induce the investment of capital at the present cost of construction and at the present prices of equipment.” This inducement, so far as the American public is concerned, doesn’t seem to be very great. In 1946, 1947, and the first half of 1948 “less than one-tenth of all personal savings went into corporate securities.” New financing through issue of common stocks has only been a trickle for years. This situation, as Professor Paton comments, “does not suggest that now is the time to try to pick a little more meat from the stockholder’s bones.”

On the contrary, it suggests that by overreaching themselves now, both labor leaders and our taxing authorities will retard the capital investment upon which the country depends to provide new factories and tools, to increase future real wages, and to enlarge future government revenues.