Thursday, October 27, 2011

Excess profits

The Correct™ view is that these are profits that exceed historical norms:
The first effective national excess profits tax was enacted in 1917, with rates graduated from 20 to 60 percent on the profits of all businesses in excess of prewar earnings but not less than 7 percent or more than 9 percent of invested capital. In 1918 a national law limited the tax to corporations and increased the rates. Concurrent with this 1918 tax, the federal government imposed, for the year 1918 only, an alternative tax, ranging up to 80 percent, with the taxpayer paying whichever was higher. In 1921 the excess profits tax was repealed despite powerful attempts to make it permanent. In 1933 and 1935 Congress enacted two mild excess profits taxes as supplements to a capital stock tax.
Sharp increases caused by external changes to the structure of an industry or nation-state's economy are the key metric, and Social Justice™ calls for remediation.  You see, these excess profits accumulate in the hands of a small set of lucky individuals.  Rather than earning profits (and their pay) honestly like the rest of us, they use their position to extract excess wealth from the masses who simply don't have any choice but to pay.  Well, Okay then, let's follow this idea down the logical rabbit hole.

A major change to the Republic's economy occurred with the New Deal.  A further major change occurred with Great Society, and a third may have just occurred during the last three years of bubble-popping, international financial crisis recession.  After all, never let a crisis go to waste, right?

Via Insty, we find this interesting intellectual bon-bon:
Holmes issued his famous quote back in 1904, during the 142 year period between 1789 and 1931 when peace time federal spending as a percentage of GDP never exceeded 4 percent. I note today that under policies Professor Sachs supports, federal spending as a percentage of GDP–at 24 percent– is now six times greater than it was during Justice Holmes’ prime.
The quote, of course, is from Chief Justice Oliver Wendell Holmes famous dictum that "Taxes are the price we pay for civilization".  Let's think about prices for a second.  A price has two components: cost and profit.  While profit may actually be negative, it's a simple mathematical relationship between the three.

Holmes identified the cost of civilization (using his framework, which is likely a crock, but work with me here).  And so to The Question: What's the price of civilization, and what's the profit?  And to whom does the profit accrue?

The Price used to be 4% of GDP.  Now it's 24% and rising thanks to the New Deal, Great Society, and Obamanomics.  Some think that this is value for money, admittedly.  But some is profit, and quite frankly you can lay almost all of the current contempt in which the population holds the Government at the feet of that sad door.

Are the profits excessive?  Application of Excess Profit Theory (a six-fold increase over prior periods) would suggest that they are.  And qui bono - who comes out ahead?  Well, who do you think?
Still, a critic might suggest that my solution for helping the poor is one of growing the pie rather than dividing it equitably. They might ask, would it always be the case that the pie could be grown? What if it couldn’t be? Would I then favor a redistribution? Yes, I would, but I’d favor doing it in a very different way from the way that those who favor current leftism (which I call RPL, Rich People’s Leftism) would favor. They would want a big federal agency handling the redistribution, and they would want a certain type of person to be the head of that agency and to get certain things for being head. That is, the following four things can be said about the head of their redistribution agency:

1. They would come from a wealthy background.
2. They would have gone to an elite school like Harvard or Yale.
3. They would have a big, fat salary.
4. They would have the job permanently.
Excess Profit Theory (backed up by accepted notions of Social Justice) demand an excess profit tax on Ivy League graduates employed the Federal Government.  They are, after all, the 1% (in Intellectual terms at least, by definition).  They need to pay their Fair Share to slobs like me who went to State U.

And while this is certainly fun snark, there would actually be considerable real social justice in such a scheme.  It would devalue the elite credential, meaning that more Ivy Leaguers would go to those schools for actual learning rather than merely as a launch pad into a career of lording it over the masses.  It would open up job opportunities to a much more diverse set of folks - and while they might not do a better job, Lord knows they couldn't do any worse.

And it would expose actual rent seeking for what it is.  A permanent upward ratchet of great paying jobs for insiders at the expense of increasingly immiserated masses.

And best of all, this whole argument is framed in the terms currently in vogue by our Intellectual Betters!  I'll just wait quietly over here for my Nobel Prize ...

Of course, classical economics says that excess profits lead to entry by new competitors, who increase supply and bid down prices.  You could always just introduce choice into, oh I don't know, public education or retirement savings, or healthcare or all sorts of things.  Competition would drive the price down (and the quality up), and the poor especially would benefit.

Sure, a bunch of Ivy League grads would lose their great, high-paying jobs, but what is it that we're always being told about those at the top?  Eggs, omlettes.  And they have some stuff and we want to take it.  We are, after all, the 99% (who didn't go to Harvard and Yale).


LSP said...

Great post - I for one look forward to telling my Yale friends about their new Tax.

They've had it too easy for too long. And the lefties that went to Duke can pay triple.

Mark Alger said...

I would say that any use of the word "excess" juxtaposed with the word "profits" should be considered prima facie evidence of bad faith.