Prices for a gallon of gasoline are posted on
the sign of an Exxon station, March 7, 2022,
in the Capitol Hill neighborhood of Washington.
Sen. Bernie Sanders recently introduced the Ending Corporate Greed Act.
The act would
impose a 95 percent tax rate on the
excess profits of large corporations that
earn more than $500 million a year.
Excess profits are defined as profits that exceed
the corporation’s average profit level from 2015 to 2019,
adjusted for inflation.
This excess profits tax will be imposed over and above the normal corporate tax
of 21 percent, but the two rates will be
coordinated so that the maximum combined tax rate
will not exceed 75 percent of income for any year.
The tax will be a temporary
emergency measure, applying only in 2022, 2023, and 2024.
Like many of Sen. Sanders’s ideas, this sounds
radical (95 percent taxation!), but in fact it is not.
The Sanders proposal is entirely in line with both
the tradition of U.S. corporate taxation and with its underlying economic
and regulatory rationales.
History:
During the First and Second World Wars and the Korean War, the United States implemented
a broad-based windfall profits tax. During World War II, the tax rate
reached as high as 95 percent, which ensured that
companies could not profit from war.
In addition, the United States enacted a windfall
profits tax on oil and gas companies as recently as the mid-1980s.
The idea underlying these prior efforts was that companies should not profit
from raising their prices in hard times including Inflation.
The COVID pandemic raised the profits of companies like
Amazon to record levels, and
the war in Ukraine, which did the same to oil and gas
companies,
fully justifies reviving the windfall profits tax.
The Sanders proposal is essentially identical with the Word War II version of
the tax, including the reliance on
a pre-war average,
the 95 percent rate, and
the limitation on the overall effective tax rate.
Monopolies' and Oligopolies' EXCESS profits, with lack of competition:
Economists distinguish between
normal returns to capital, which are subject to competition and therefore
are relatively constrained, and
rents or excess returns, which are not.
Normal returns are a legitimate target of
taxation, but the tax rate should not be too high because a high rate would
deter companies from socially useful investments. Excess returns, on the other hand, are
those that are not subject to competition.
They are the returns a company that enjoys
quasi-monopoly status like
Amazon or Google, or
quasi-oligopoly status like
ExxonMobil or Chevron,
earns from their access to a unique resource and their domination of the
market.
Because excess returns are not subject to competition, taxing them at even very
high rates will not deter investments because the remaining after-tax profit
will still be a windfall.
The Sanders proposal correctly distinguishes between normal profits taxed at the
regular 21 percent rate and extraordinary profits
taxed at 95 percent.
Regulate increasing profits ( excess profits during Inflation).
The tax includes tax incentives (for example, green-energy credits) and
disincentives (like the proposed tax penalties for investing in Russia).
But imagine how Corps might reduce
their tax burden by INCREASING WAGES !
and induce a fall in prices, which would benefit everyone (except
shareholders).
$400 billion tax revenue if Corps. don't change.
But if such a price decrease and wage increase does not happen, the tax would
raise significant tax revenue (according to Sen. Sanders, an estimated $400 billion in one year from 30 of the largest
corporate profiteers alone).
These tax revenues could be used to subsidize working
families that suffer the effects of rising prices, and to accelerate the
shift to renewable energy so that the economy is
less at the mercy of the oil companies, domestic and foreign.
