Inflationomics

Excess Profits?

What are they in excess of? A fair amount? Who can determine what is fair or excessive? Voters who know nothing about the business? Politicians who just want to get votes for having done something for the voters?

“Excess,” “fair,” “obscene,” “windfall,” and “weapons of mass destruction” are all inflammatory words/phrases designed to incite envy, anger, panic, and action (or perhaps passivity) in voters’ minds. They are politically expedient terms used by politicians to garner votes. They only exist in the political world.

In the business world, however, there is no such thing as an “excess” profit. Assuming no fraud is involved, large profits can be used to discover and develop new resources, improve existing methods and efficiencies, pay employee and vendor bonuses for excellent service, endure lean times ahead, or pay dividends to shareholders. When large profits are earned, they are a signal that there is either great demand for, or a limited supply of something. They act as an incentive for producers to produce more of that good/service. And in the long run, if the producers are successful, prices will decline as more supply comes on line.

But let’s assume those large profits are taxed away. Not only does one lose the incentive to produce more, but also the means with which to produce more. What’s more, if more of that good isn’t produced, prices will likely continue to rise. In short, “excessive profits taxes” on large profits decrease the likelihood that more of that good will be produced. “Excessive profits taxes” are simply another means for politicians to finance a fiscally irresponsible government in a politically expedient fashion.

In the long run, if “excess profits taxes” are levied on large profits, large profits will disappear, waste will be encouraged, very profitable businesses will move to less tax-hungry countries, and standards of living will decline in the tax-hungry countries.

Rather than encouraging governments to tax “excess” profits and chase profitable companies away, we should encourage governments and politicians to cut waste. Perhaps someone should recommend an “excess waste tax” if they want to fight something that’s excessive. But of course, the biggest waster is government! How could you impose a tax on government? It doesn’t have anything of its own. It has to obtain everything from those of us who are earning a profit! Talk about a conflict of interest and an incentive to find new tax revenues! Wow!

Robert Jackson Smith

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