Excess Profits Tax Passed with Corporate Lobbying Loopholes

Congress passes the Excess Profits Tax Act on October 8, 1940, establishing graduated taxes on corporate profits exceeding pre-war averages. While ostensibly designed to prevent war profiteering and ensure shared sacrifice, the legislation contains numerous loopholes secured through corporate lobbying that allow companies to minimize tax liability while reaping enormous wartime profits.

The excess profits tax responds to public outrage over profiteering during World War I, when corporations extracted billions from government contracts while ordinary Americans sacrificed lives and livelihoods. President Roosevelt and Treasury Secretary Henry Morgenthau push for aggressive profit taxation, but face determined opposition from business interests.

The National Association of Manufacturers and U.S. Chamber of Commerce lobby intensively to weaken the bill. Their efforts yield several major concessions: generous base-year averaging that allows companies to choose favorable pre-war years for comparison, deductions for advertising and executive compensation that reduce taxable profits, and accelerated depreciation provisions that shelter income in new plant and equipment.

Most significantly, the law allows companies to choose between two calculation methods, an “invested capital” standard and an “average earnings” standard, selecting whichever produces the lower tax bill. This optionality enables sophisticated tax planning that minimizes effective rates well below statutory levels.

While the statutory rate reaches 95 percent by 1944, effective rates paid are far lower. A Treasury analysis finds that through various provisions, credits, and accounting techniques, actual excess profits tax payments average approximately 40 percent of excess profits. Corporate after-tax profits still reach record levels during the war, more than doubling between 1939 and 1944. The excess profits tax, though better than nothing, fails to prevent the massive wartime wealth accumulation that business interests feared it would curtail, establishing precedents for complexity and loopholes that characterize the postwar tax code.