Excise Profit Duty (First World War)

Grey Havoc

ACCESS: USAP
Senior Member
Joined
9 October 2009
Messages
19,710
Reaction score
10,141
Norma Cohen is an Honorary Research Fellow at Queen Mary University of London, and a former FT journalist. Her PhD thesis, on the finance of the First World War, is entitled 'How Britain Paid for War: Bond Holders in the Great War 1914-1932.'. In this post she argues why an Excess Profit Duty, implemented in 1917 to help pay for the war, ought to be reconsidered today.

Britain’s indebtedness, relative to output, has risen to levels not seen since wartime. That fact has caused many to draw parallels between battling the Covid-19 pandemic and that of waging war.

Some are appropriate. Both the waging of war and the blockage of a highly contagious, deadly illness require supply chain disruptions. These lead to distortions in both the supply of, and demand for, goods and services. This, in turn, leads to distortions in prices and profits of the sort we are seeing now.

Britain’s response to the onset of war in 1914 was characterised by two slogans; the first was ‘Business as usual’. Chancellor David Lloyd George insisted that commercial life would go on as before. The second, ‘Home by Christmas’, indicated government’s belief that the war would be short-lived. While neither slogan has been expressed in exactly these terms by the Johnson government, both have been themes running through its response. Now, as then, both have proved woefully inadequate.


Why an Excess Profits Duty was needed
Today Britain is bracing for the Chancellor’s next budget on March 3, with the expectation that the gaping deficit will be addressed with some tax increases. Among the ideas circulating – as in the years after the First World War – is that of a tax on wealth.
So it is helpful to take a close look at what became one of the most significant tools in financing the First World War; the Excess Profits Duty (EPD). It may be that aspects of the EPD – signed into law in 1915 but which first took effect in 1917 – could be helpful in thinking about how Britain will repay its debt. A tax designed along similar lines today would allow the government to extract higher revenues from businesses able to exploit the effects of the pandemic, while shielding the weakest.

Economic historians Stephen Broadberry and Peter Howlett describe EPD as “probably the most significant wartime fiscal innovation.” It was the first time that tax was levied on corporate, rather than individual, income. By the last fiscal year of the war, 1918/19, EPD accounted for a third of revenue raised by Britain and was nearly as great as the money raised from income taxes on individuals, which had been vastly increased during wartime.

The tax was adopted amid a raging debate in Britain about how the debt burden should be shared. At the outbreak of war, the living standards of the poorest took a hit, not because these became unemployed – indeed, labour demand rose during wartime – but because wartime demand and skewed supply chains pushed up prices much faster than wages. The immediate effect of the outbreak of war in 1915 was to send the prices of basic goods soaring; the price of a standard 4lb loaf of bread rose roughly 40 per cent to 8d in the opening weeks of war. By December 1918, The Economist index of wholesale prices had more than doubled from the outbreak of war. The perception was that business owners were getting very rich at the expense of their workers. Strikes – several in key industries supplying war materials – ensued.

It was quickly becoming apparent that ‘profiteering’ was more than just economically destabilising. It was politically destabilising as well. Among the first notorious operators to attract public odium was the Cardiff-based milling firm, Spillers and Bakers. In April 1915, The Times reported that the company was able to pay shareholders a 17½ per cent larger dividend and still have retained earnings equal to 54 per cent of the value of its outstanding share capital. It was only one of several corporate announcements that economist and statistician Josiah Stamp described as having “aroused the public to the fact that there was a ‘war profits’ problem”. By December 1916, producers of boots and clothing saw profits double from the pre-war levels while wool and worsted producers saw profits jump by 60 per cent.


The design
EPD was passed into law in 1915, but its real effects took hold in 1917. Originally aimed at munitions manufacturers who sold war materials to government, the Act was expanded to cover all businesses except for partnerships such as legal firms. Economists including J.M. Keynes and George Paish had urged higher taxes as a tool for controlling raging inflation; with less cash in their pockets, consumers would spend less, easing pressure on prices.

Businesses were to pay tax on a rise in profits more than £200 (£14,189 in 2020) above the average they achieved in two of three years between 1911-13. Alternatively, they could pay tax on profits that were more than £200 above a 6 per cent return on capital employed as of August 1914. These ‘excess profits’ were to be taxed at 50 per cent. The level fluctuated over the course of the war and it was designed to expire in 1922.


The case today
Of course, there are several important distinctions between wartime 1914-18 and the current pandemic. While the outbreak of war was accompanied by a surge in demand by government for goods and labour, the current pandemic has been characterised a severe withdrawal of demand by consumers and employers in their efforts to limit the spread of a killer disease without a cure. Now, capital is cheap and plentiful; in wartime, Britain could barely borrow for 10 years at rates below 6 per cent.

Nevertheless, what is very clear is that, as in wartime, the pandemic’s economic effects have been wildly unequal. The emergence of a so-called ‘K-shaped recovery’ has granted outsized profits to businesses in certain sectors such as housing and online retailing, and staggering losses to others such as hotels and travel businesses. Covid-19 has also highlighted the inequality rampant long before the illness broke out. Front-line workers on low wages who cannot work from home must show up for jobs where they are likely to become infected. These have disproportionately become ill. Similarly, low-waged workers are most frequently sharing high-density, multi-generational homes where the disease spreads quickly.

The application of a tax policy that tries to address not just the issue of revenue-raising, but also that of fairness, is an idea deserving of consideration.


The century-old tax that could help pay for the pandemic (ft.com)
 
Yes, sounds like something that would merit closer investigation. Make those sectors of the economy which are favoured by circumstance shoulder a larger share of the common burden from the crisis (because they can) to relieve some of the pressure on those which are not (and cannot).

Certainly, the question of distorted competition would have to be addressed though, meaning one would have to look carefully at the characteristics of the industries involved. As with any proposed solution to a complex problem, it won't fix everything all by itself, but perhaps it could contribute by helping to curb the accumulation of debt.
 

Similar threads

Back
Top Bottom