Paige Powers, The Case for A Global Excess Profits Tax: A Response to Dr. Tarcísio Diniz Magalhães & Professor Allison Christians (2022)
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A student note by Paige Powers, titled The Case for A Global Excess Profits Tax: A Response to Dr. Tarcísio Diniz Magalhães & Professor Allison Christians, published in the Indiana Journal of Global Legal Studies, Volume 29, Issue 2, Article 8 (Summer 2022). It discusses the proposal by Christians and Magalhães for a global excess profits tax, taxing companies whose profits are fueled by high tech and unique intangibles in response to the fiscal crisis from the COVID-19 pandemic. The note argues that the proposal improves on historical excess profits taxes by using tools developed by the OECD, but that its uniform, flat percentage for determining excess profits remains largely inaccurate.
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“Paige Powers, The Case for A Global Excess Profits Tax: A Response to Dr. Tarcísio Diniz Magalhães & Professor Allison Christians (2022).”
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Indiana Journal of Global Legal
Studies
Volume 29 Issue 2 Article 8
Summer 8-1-2022
The Case for A Global Excess Profits Tax: A Response to Dr.
Tarcísio Diniz Magalhães & Professor Allison Christians
Paige Powers
Indiana University Maurer School of Law, papowers@iu.edu
Follow this and additional works at: https://www.repository.law.indiana.edu/ijgls
Part of the Comparative and Foreign Law Commons
Recommended Citation
Powers, Paige (2022) "The Case for A Global Excess Profits Tax: A Response to Dr. Tarcísio Diniz
Magalhães & Professor Allison Christians," Indiana Journal of Global Legal Studies: Vol. 29: Iss. 2, Article
8.
Available at: https://www.repository.law.indiana.edu/ijgls/vol29/iss2/8
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The Case for A Global Excess Profits Tax: A
Response to Dr. Tarcisio Diniz Magalhaes
Professor Allison Christians
PAIGE MCHUGH
I. INTRODUCTION
In striving to slow the spread of the COVID-19 pandemic,
governments across the globe acted quickly to implement various "stay-
at-home" orders and bans on all "non-essential activities."1 While these
actions were likely effective in slowing the spread of the virus,2 the
economic impacts were felt almost immediately. The US deficit rose to
$3.1 trillion following massive spending to aid individuals and small
businesses.3 Internationally, governments have been increasing their
debt loads to combat both the health and financial impacts of the
pandemic. Indeed, by the end of 2020, the international debt load
increased to a record-breaking $281 trillion. 4 Almost as quickly, various
proposals have been offered regarding how to mitigate this pandemic-
fueled deficit. One solution offered is the return of a historical tax
scheme-an excess profits tax. 5 Excess profits taxes have historically
1. See Policy Reponses to COVID-19, INT'L MONETARY FUND,
https://www.imf.org/en/Topics/imf-and-covidl9/Policy-Responses-to-COVID-19 (July 2,
2021).
2. See Mary Van Beusekom, Stay-at-Home Orders Likely Slowed COVID-19 Spread,
Study Finds, CTR. FOR INFECTIOUS DISEASE RSCH. & POL'Y (May 26, 2020),
https://www.cidrap.umn.edu/news-perspective/2020/05/stay-home-orders-likely-slowed-
covid-19-spread-study-finds.
3. Jim Zarroli, $3.1 Trillion: Pandemic Spending Drives the FederalBudget Deficit to
a Record, NAT'L PUB. RADIO (Oct. 16, 2020), https://www.npr.org/sections/coronavirus-live-
updates/2020/10/16/924582156/-3-1-trillion-pandemic-spending-drives-the-federal-budget-
deficit-to-a-record.
4. See Sydney Maki, World's $281 Trillion Debt Pile is Set to Rise Again in 2021,
BLOOMBERG (February 17, 2020), https://www.bloomberg.com/news/articles/2021-02-
17/global-debt-hits-all-time-high-as-pandemic-boosts-spending-need.
5. See, e.g., Reuven S. Avi-Yonah, Taxes in the Time of Coronocirus: Is It Time to
Reivie the Excess Profits Tax? 4 (U. of Mich. L. Sch., L. & Econ. Working Papers, Paper
No. 170, 2020),
http s://repository.law.umich. edu/cgi/viewcontent.cgi?article=1282&context=laweconcurr
Indiana Journal of Global Legal Studies Vol. 29 #2 (Spring 2022)
©Indiana University Maurer School of Law
231
&
232 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 29:2
been applied both domestically and internationally during times of war.
Although there are variations in how an excess profits tax is calculated,
traditionally, an excess profits tax is applied to those companies who
earn returns in excess of a set "normal" rate of return. 6
Despite variations in how excess has been calculated under the
historical versions of excess profits taxes, all have been implemented on
a purely temporary basis to raise revenue for a particular crisis. One
recent COVID-19 excess profits tax proposal, however, suggests taking a
different approach. Professor Allison Christians and Dr. Tarcisio Diniz
Magalhaes propose the implementation of a global excess profits (GEP)
tax which aims to immediately address the fiscal crisis resulting from
the COVID-19 pandemic by taxing those companies whose profits are
especially fueled by "high tech and unique intangibles" 7 and redistribute
such wealth to developing countries.8 Professor Christians and Dr.
Magalhaes assert that, unlike with historical excess profits taxes, new
tools made available by leveraging technology and increased
globalization will make a modern-day excess profits tax more successful
on a global scale. Indeed, Professor Christians and Dr. Magalhaes
propose implementing a GEP tax to effectively address the challenges
brought on by an increasingly digital global economy.
This note argues that, while Professor Christians and Dr.
Magalhaes's GEP tax proposal improves upon some of the weaknesses of
the historical excess profits taxes by leveraging new tools developed by
the Organisation for Economic Co-operation and Development (OECD),
their proposal, which utilizes a uniform, flat percentage for determining
excess profits, remains largely inaccurate and thus will have inequitable
ent (arguing that an excess profits tax should be implemented to address "some
corporations . . . profit[ing] from the current crisis while everyone else suffers");
Emmanuel Saez & Gabriel Zucman, Jobs Aren't Being Destroyed This Fast Elsewhere.
Why Is That?, N.Y. TIMES, Mar. 30, 2020,
https://www.nytimes.com/2020/03/30/opinion/coronavirus-economy-saez-zucman.html
(arguing that an excess profits tax should be revived like in times of war, "making sure
that no one could benefit outrageously from a situation in which the masses suffered");
Alex Hemingway, Excess Profits Tax Needed to Prevent ProfiteeringAmid COVID-19, THE
TORONTO STAR, Apr. 23, 2020,
https://www.thestar.com/opinion/contributors/2020/04/23/excess-profits-tax-needed-to-
prevent-profiteering-amid-covid-19.html (arguing that a "wartime-style excess profits tax
would help prevent profiteering amid COVID-19").
6. Hemingway, supra note 5; see Avi-Yonah, supra note 5, at 1.
7. Allison Christians & Tarcisio Diniz Magalhaes, It's Time for Pillar 3: A Global
Excess Profits Tax for COVID-19 and Beyond, 98 TAx NOTE INT'L 507, 507 (2020).
8. Cf. Pillar3 for the OECD: A Global Excess Profits Tax, FORBES (May 18, 2020, 1:18
PM), https://www.forbes.com/sites/taxnotes/2020/05/18/pillar-3-for-the-oed-a-global-
excess-profits-tax/?sh=13867cb536ac (discussing the redistribution of residual funds
through the "OECD digitalization project").
THE CASE FOR A GLOBAL EXCESS PROFITS TAX 233
results. Indeed, this note argues that Professor Christians and Dr.
Magalhaes's GEP tax proposal does not go far enough in leveraging the
new tools made available by the OECD's digitalization project in order
to create both an equitable and effective GEP tax.
Part II of this note will provide a historical overview of the
experiences with various versions of excess profits taxes both
domestically and internationally. Part III describes the modern context,
which calls for the return of the excess profits tax. More specifically, it
describes the rising profits of digital multinational corporations and the
challenges of effectively taxing those profits, especially in light of the
global economic strain resulting from the pandemic. Considering these
issues, Part IV summarizes and highlights the key aspects of Professor
Christians and Dr. Magalhaes's proposal for implementing a GEP tax.
Part V evaluates their proposal considering the lessons learned from the
historical experiences with excess profits taxation. It evaluates their
proposal, as well as historical excess profits taxes, on several accepted
principles of sound tax policy, including accuracy, administrability,
transparency, and the extent to which their proposal minimizes tax
avoidance. 9 Finally, Part VI proposes that the GEP tax proposal be
revised to leverage even further the new tools and data that were
unavailable during historical applications of excess profits taxes. This
note argues that international taxing authorities now have access to the
data necessary to calculate nuanced rates of return at the firm level,
making the tax significantly more equitable across firms and industries
and limiting opportunities for avoiding the tax.
II. THE HISTORY OF DEFINING AND TAXING EXCESS PROFITS
The most basic concept of "profits" is "the financial benefit realized
when revenue generated from a business activity exceeds the expenses,
costs, and taxes involved in sustaining the activity in question." 1 0
Accountants also traditionally calculate the profitability of a firm by
assessing "economic profits relative to the amount of investment."l
Investors must choose whether they want to invest in a particular
9. See ASS'N OF INT'L CERTIFIED PRO. ACCTS., GUIDING PRINCIPLES OF GOOD TAX
POLICY: A FRAMEWORK FOR EVALUATING TAx PROPOSALS 2-3 (2017). See generally The
Principles of Sound Tax Policy, TAx FOUND. (Mar. 15, 2012),
https://files.taxfoundation.org/20200723152458/PrinciplesOfSoundTP.pdf (describing the
principles of the Tax Foundation's sound tax policy).
10. Will Kenton, "Profit Definition," INVESTOPEDIA (July 21, 2020),
https://www.investopedia.com/terms/p/profit.asp.
11. JAMES M. WAHLEN ET AL., FINANCIAL REPORTING, FINANCIAL STATEMENT ANALYSIS,
AND VALUATION 201 (9th ed. 2018).
234 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 29:2
company or invest elsewhere in the market. The rate of return they
receive on their invested capital must adequately compensate them for
the opportunity cost and risk. 12 Common measures for computing the
required rate of return is the Weighted Average Cost of Capital' and
the Capital Asset Pricing Model.14 These measures determine "the
minimum return that a company must earn on an existing asset base to
satisfy its creditors, owners, and other providers of capital, or else they
will choose to invest elsewhere." 15
Economists divide a firm's profits into those that are "normal" and
those that are "excess." 16 Normal profit is "the opportunity cost of the
business" or the "amount of profit just sufficient to keep the firm in
business." 17 According to international transfer pricing guidelines,
normal or "routine" profit is evaluated through comparable data
between similar firms or competitors. 18 Residual profit, on the other
hand, is the product of market power or a unique innovation that allows
the company to be more profitable than its competitors.19 While
seemingly simple in definition, these divisions are complex in
application; accurate measurement requires understanding the firm's
strategy, as well as the industry where it operates, as many factors can
cause vast differences in the rate of return and profitability of firms.
Some of these factors may include a firm's product life cycle, choices
regarding operating leverage, business strategy, and the cyclicality of its
sales. Properly defining what range of profitability is normal or
routine for a firm or industry and then assessing the position of a
particular firm as above or below that threshold requires careful, and at
times subjective, analysis; this has long been the goal of economists,
investors, and tax professionals alike.
Whether profits are derived intentionally or are simply the result of
12. See id. at 209.
13. Id. at 739 (describing WACC as the discount rate that reflects "the weighted-
average required rate of return that encompasses the debt, preferred, and common equity
capital used to finance the net operating assets of the firm").
14. Id. at 730 (hypothesizing that "in equilibrium, investors should expect to earn a
rate of return on a firm's common equity capital that equals the rate of return the market
requires to hold that firm's stock in a diversified portfolio of assets").
15. Alex Cobham et al., Global Inequalities in Taxing Rights: An Early Evaluation of
the OECD Tax Reform Proposals 9 (Oct. 2019) (unpublished manuscript),
https://osf.io/preprints/socarxiv/j 3p48/.
16. Letter from PricewaterhouseCoopers to Working Party 6, OECD 1, 12 (2010)
(discussing the transfer pricing aspects of intangibles).
17. Id.
18. Id. at 13.
19. See Cobham et al., supra note 15.
20. See JAMES M. WHALEN ET AL., FINANCIAL REPORTING, FINANCIAL STATEMENT
ANALYSIS AND VALUATION 220 (9th ed. 2018).
THE CASE FOR A GLOBAL EXCESS PROFITS TAX 235
favorable market conditions, governments have engineered complex
schemes to tax profits deemed excessive.2 1 Although exact structures
vary, a classic excess profits tax is one "imposed on corporate earnings
in excess of earnings during a base period, plus an allowance for new
investment."2 Put simply, the implementation of an excess profits tax
requires determination of some base amount by which profits in excess
can be determined. Indeed, "[p]rofits may be said to be [in] 'excess' only
in relation to a concept of 'normal' profits." 2 3
The US has had a tumultuous affair with excess profits taxation. An
excess profits tax was first implemented in response to World War I
with the Revenue Act of 1918,24 which focused on principles of "shared
sacrifice" by attempting to tax those corporations that had made "war
profits."25 The 1918 Act gave corporate taxpayers two alternative tests
for determining excessiveness of profits. 26 The average profits approach
compared profits in the 1918 taxable year with those in a pre-war period
from 1911-1913 (in other words, the "normal" profit base) and imposed
a tax of 80 percent on the excess.27 Alternatively, the invested capital
approach imposed a tax "on income in excess of a flat 8% return on
invested capital for the taxable year." 28 For the purposes of the Act,
invested capital was defined as "the capital actually paid into the
21. See, e.g., Douglas M. Robinson, The Misnamed Tax: The Crude Oil Windfall Profits
Tax of 1980, 84 DICK. L. REV. 589, 591-92 (1979) (stating that President Carter imposed
an excise tax on domestic crude oil production in the 1980s). See generally Lucy Chennells,
The Windfall Tax, 18 FISCAL STUD. 279, 282-83 (1997) (analyzing the windfall tax on
privatized utilities that was implemented in the UK in the late 1990s).
22. Robinson, supra note 21, at 590 n.7 (quoting STAFF OF THE JOINT COMM. ON TAX'N,
93D CONG, ENERGY TAXATION: ALTS.' FOR THE TAXATION OF INCREASED DOMESTIC OIL AND
GAS PROFITS, 3 (1974)).
23. Clifford J. Hynning, The Excess-Profits Tax of 1940 A Critique, 8 U. CHI. L. REV.
441, 447 (1941).
24. There were two iterations of the excess profits tax that were implemented before
the Revenue Act of 1918 and then quickly repealed. Introduced in March of 1917,
Congress passed a law levying an 8% tax "upon the profits of corporations and
partnerships in excess of $5,000, plus 8% of the capital actually invested." This Act was
quickly replaced by the revised Act of October 3, 1917. This version applied an invested
capital standard to determine excess profits, but applied progressive tax rates, with the
highest being a 60% rate "applied to profits in excess of a 33% return on invested capital."
Like its predecessor, this Act was also widely criticized for being "so unfair in its scope and
so uneven in its application," as well as so difficult to administer, that it was repealed only
a year later. COMM. ON POSTWAR TAX POL'Y, FINANCING DEFENSE: IS AN EXCESS PROFITS
TAX THE SOLUTION? 8 (Comm. Print 1950).
25. See Carl C. Plehn, War Profits and Excess Profits Taxes, 10 AM. ECON. REV. 283,
285 (1920).
26. See Anita Wells, Legislative History of Excess Profits Taxation in the United States
in World Wars I and II, 4 NAT'L TAX J. 237, 239-40 (1951).
27. See Plehn, supra note 25, at 289-90.
28. Wells, supra note 26, at 240.
236 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 29:2
business, including paid-in or earned surplus and undivided profits." 2 9
Borrowed capital, however, was specifically excluded. The Act limited
the "value of tangible property . . to the par value of the stock issued
for it" and included intangible property, such as patents and copyrights,
in the calculation "up to a limit of 25% of the par value of stock
outstanding at the beginning of the taxable year."30
The 1918 Act, met widely with criticism, was repealed only a year
later. 31 The business community loathed the tax for its "intricacy and
capricious inequalities." 32 Administrators resented it for "clogging the
administrative machinery," 33 observing that "[t]he inadequacy of books
and records made administrative findings of fact with respect to
invested capital and prewar earnings extremely difficult." 34 One of the
factors driving this administrative burden was the statute's use of a
corporation's originally invested capital to determine the normal
return. 35 Indeed, an accurate determination required a corporate
taxpayer to do a complete revaluation of plant assets and inventories
used many years ago, "even though they . . are not part of the capital
with which the taxpayer corporation is now operating." 36 Difficulties
also arose in applying the average profits method, as an accurate
calculation of average profits in the base period required adjustments of
the income reported on tax returns for items classified as "abnormal." 37
Corporate taxpayers, however, were not maintaining their books in
anticipation of complying with a future excess profits tax, and
extracting "the amounts representing the abnormal expenses or losses
[was difficult or] impossible to [determine] . . with exactness." 38
Despite its wide disfavor, the US revived the excess profits tax
roughly twenty years later at the onset of World War II to raise revenue
for the war effort and again to ensure that "few [did] not gain from the
sacrifices of many." 39 Like its predecessor, the Revenue Act of 1940
29. Id. at 239.
30. Id. at 239-40.
31. COMM. ON POSTWAR TAX POL'Y, FINANCING DEFENSE: IS AN EXCESS PROFITS TAX
THE SOLUTION? 8 (Comm. Print 1950).
32. Thomas S. Adams, Should the Excess Profits Tax be Repealed, 35 Q. J. ECON. 363,
369 (1921).
33. Id. at 371.
34. Wells, supra note 26, at 240.
35. Walter A. Cooper, Accounting Problems Under the Excess Profits Tax, 10 L.
CONTEMP. PROBS. 103, 104 (1943).
36. Id. at 104-05.
37. Id. at 106.
38. Id.
39. Alex Hemingway, Excess Profits Tax Needed to Prevent Profiteering amid COVID-
19, POL'Y NOTE (Apr. 9, 2020),
.&
THE CASE FOR A GLOBAL EXCESS PROFITS TAX 237
provided taxpayers with two alternatives for calculating excess profits
subject to the tax: (1) "95 [percent] of the average earnings in the base
period years 1936-1939 or [(2)] a percentage of invested capital ranging
from 8 [percent] on the first $5 million of capital down to 5 [percent] on
invested capital above $10 million." 40 Congress implemented several
changes, however, in response to the negative reaction to the first excess
profits tax. In addition to expanding the definition of invested capital to
include 50 percent of borrowed capital, the changes largely focused on
providing specific relief for taxpayers, through a series of exemptions
and qualifications, to meet particular, hard cases and to allow
adjustments for certain abnormalities in income and capital. 4 1
The choice of whether to use the average earnings method or
invested capital method depended largely on where the corporate
taxpayer fell in its business life cycle. The average earnings method
tended to favor the "well-established corporation with a steady income"
in comparison to a "smaller competitor whose income has been rapidly
increasing in the base years and in 1940."42 In calculating excess profits
via the invested capital method, the Revenue Act of 1940, like its
predecessor, avoided a "current valuation of the assets actually in use in
the business and measure [d] instead the money and other property paid
into the corporation [originally], plus earnings and profits accumulated
subsequently." 43 Again, while simple in theory, this approach proved
quite difficult in application because "the invested capital of a
corporation depends upon the time and circumstances of its legal birth,
upon the tone of its financial policy, [and] on the character of its
bookkeeping." 44
Like its predecessor, the 1940 tax became difficult both to
administer and to comply with. 45 In response to frequently raised
demands for relief provisions during the First World War, the Revenue
Act of 1940 gave the IRS the authority to make exceptions for certain
https://www.policynote.ca/profitstax/#:-:text=Roosevelt%20put%20it%20in%201940,%E2%
80%9Cnormal%E2%80%9D%20rate% (Can.).
40. COMM. ON POSTWAR TAX POL'Y, FINANCING DEFENSE: IS AN EXCESS PROFITS TAX
THE SOLUTION? 9 (Comm. Print 1950) (stating that the taxpayer has the option which
method to employ, consequently, "a corporation making a high rate of return on its
invested capital, as defined in the act, will be drawn toward the average income method,
[whereas] a corporation with a record of low earnings in the past 4 years may be impelled
toward the invested capital method").
41. Roswell Magill, Relief from Excess Profits Tax, 89 U. PENN. L. REV. 843, 845-46
(1941).
42. Id. at 845.
43. Carl Shoup, The Concept of Excess Profits Under the Revenue Acts of 1940-42, 10 L.
& CONTEMP. PROBS. 28, 36 (1943).
44. Adams, supra note 32, at 377.
45. See Hynning, supra note 23, at 442.
238 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 29:2
classes of "abnormalities" in the taxpayer's income in the current or
base period. 46 Yet whether a particular taxpayer qualified for relief was
determined case-by-case, requiring administrative discretion "of a very
considerable magnitude with very little or no statutory guidance."
Additionally, only the most vocal complaints were heard and thus
subsequently implemented in the Revenue Act of 1940, leaving many
unrecognized "injustices" that could not be appropriately granted relief
under the Act. 47 Indeed, opposition to the tax grew as the end of the war
neared because "the appetite for fiscal sacrifice was waning" and "[t]he
excess profits tax . . . [was] considered [a] serious threat to the
economy's postwar recovery." 48 Thus, like its predecessor, the World
War II excess profits tax was also repealed with the Revenue Act of
1945.49
It is of note that, although they were notoriously unpopular with the
business community, the excess profits taxes of World War I and World
War II were productive in term of revenues. In 1918 alone, the World
War I excess profits tax provided over $2.5 billion to fund the war effort,
but receipts from the tax declined significantly over the next three years
until it was repealed in 1921.5 The World War II excess profits tax
likewise provided significant revenues-a total of $16.19 billion from
1941 to 1944-before it was repealed in 1945.51 While the excess profits
taxes, for the most part, were "cheerfully paid during the war" and
"evasion and avoidance tended to be limited by the desire to help the
government win the war with patriotic spirit,"52 compliance with the tax
significantly waned at war's end and taxpayers seemed increasingly
unwilling to tolerate "their high rates, inequalities in burdens, and
46. See id. at 448-49.
47. Id. at 449.
48. Steven A. Bank, The Rise and Fall of Post-World War II Corporate Tax Reform, 73
L. & CONTEMP. PROBS. 207, 209 (2010).
49. COMM. ON POSTWAR TAX POL'Y, FINANCING DEFENSE: IS AN EXCESS PROFITS TAX
THE SOLUTION? 8, 9 (Comm. Print 1950) (quoting Secretary Vinson, "the excess profits tax
... has been an erratic and in many instances an inequitable tax. The difficulty is that
calling profits excessive does not make them excessive. Calling profits normal does not
make them normal. Normal profits and excessive profits look alike. There is no chemical
regent to distinguish them. The excess-profits tax, to be sure, has a formula-a very
complicated formula in its entirety-for distinguishing normal and excessive profits. But
that formula is seriously defective.").
50. See Alfred G. Buehler, The Taxation of CorporateExcess Profits in Peace and War
Times, 7 L. & CONTEMP. PROBS. 291, 293 (1940).
51. B. U. Ratchford, The Federal Excess Profits Tax. Part One: Development and
Present Status, 12 S. ECON. J. 1, 2 (1945); see also COMM. ON POSTWAR POL'Y, supra note
49, at 9.
52. Buehler, supra note 50, at 294.
THE CASE FOR A GLOBAL EXCESS PROFITS TAX 239
administrative complications."53
In 1950, the US again implemented an excess profits tax in order to
"curb[] profits attributable to the war defense program resulting from
the emergency following the Korean hostilities."5 4 The US implemented
the excess profits tax despite testimonies from businessmen, tax
attorneys, and tradesmen who claimed the proposed tax to be
"conceptually untenable and administratively unworkable because of
the inherent difficulty of establishing a rational standard by which
excess . . . profits could be disentangled from [war] profits."5 5 A surtax of
thirty percent was applied to "adjusted excess profits net income," 56
representing a combined "rate of 77 percent [together with the regular
corporate normal rate] when fully effective."5 7 As was the case in the
previous world wars, the Excess Profits Tax of 1950 gave the taxpayer
the choice of whether to use an average earnings method or an invested
capital method in determining the portion of income subjected to the
tax. 58
Learning from experience, the Excess Profits Tax of 1950 strived to
provide even more relief to taxpayers who found themselves in
particularly inequitable or harsh cases. Indeed, Congress passed
multiple revisions of the 1950 Act, resulting in "23 technical and
structural changes" that established additional special relief provisions
"for companies that had been able to convince the tax-writing
Congressional committees of [their] particular injustices." 59 The end
result, however, was not a broad excess profits tax applicable to all
corporate taxpayers, but rather a bill that provided "a series of
individual excess profits tax provisions for specific industries."60 In
November 1962, the Tax Foundation observed: "[s]ince every month
brings to light more and more inequities, the law seems destined to
become a hodge-podge of special provisions." 6 1 Indeed, the difficulty of
its administration and the extensive research necessary to settle tax
53. Id.
54. Alan L. Gornick, An Excess Profits Tax? If so, What Kind? 7 ANALYSTS J. 55, 55
(1951). The Excess Profits Tax of 1950 levied a 30% tax on adjusted excess profits, net
income.
55. James E. Dugan & Reuben A. Zubrow, The Influence of the Excess Profits Tax on
Business Decisions to Inuest, 7 NAT'L TAX J. 242, 242 (1954).
56. Schroeder Boulton, The Excess Profits Tax of 1950, 7 ANALYSTS J. 153, 153 (1951).
57. S. REP. NO. 81-2679, at 3 (1950).
58. Id. at 5.
59. THE TAX FOUND., IMPACT OF THE EXCESS PROFITS TAX OF 1950 II (1952).
60. Id.
61. Id.
240 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 29:2
liabilities in certain cases led to the repeal of the tax in 1953.62
An excess profits tax has not since been implemented in the US.
Although it has been included in the proposals of some more recent
political campaigns, 63 certainly the administrative difficulties, as well
as the increasingly tepid US attitude toward shared wartime sacrifice
and dwindling trust of political leaders, may also contribute to the
relative disinterest in implementing an excess profits tax again. 64
The US is not unique both in its experimentation with excess profits
taxation and in receiving mixed results. Similar to the US, seeing a
need to raise revenue to fund World War I, Great Britain levied an
"excess profits duty" of "80 [percent] of the amount by which the profits
of the taxable year exceeded the 'pre-war standard of profits,"'
determined through an average profits approach or invested capital
approach. 6 5 The British excess profits tax implemented in both world
wars was accepted with overwhelming patriotism, 66 for it generated
high revenue and appeared to impose much less of an administrative
burden than its US counterpart. 67 Observers noted that the successful
British experience with excess profits taxation may have been due
largely to the "broadness and flexibility in their statutes as well as in
their administration."68 They developed a system of administration
where local assessments at the individual-taxpayer level were made by
highly skilled and business-minded civil servants who were allowed
considerable discretion, injecting the broader system of taxation with a
62. THE TAX FOUND., supra note 59, at II; see also George E. Lent, The Excess-Profits
Tax and Business Expenditures, 11 NAT'L TAx J. 254, 256 (1958) (stating that at its
highest point, the Excess Profits Tax of 1950 resulted in $2.5 billion paid by 40,746
corporations in 1951. In 1952 and 1953, only "31,000 companies paid excess-profits taxes
of $1.6 billion").
63. See, e.g., Josh Barro, What Does Obama Mean When He Says "Windfall Profits
Tax"?, TAX FOUND. (Aug. 11, 2008), https://taxfoundation.org/what-does-obama-mean-
when-he-says-windfall-profits-tax/ (describing President Barack Obama's campaign trail
proposal to tax excess profits of oil companies).
64. See Ajay K. Mehrotra, The Price of Conflict: War, Taxes, and the Politics of Fiscal
Citizenship, 108 MICH. L. REV. 1053, 1077 (2010) ("Although ... there has undeniably
been a strong tradition of exacting shared sacrifices during wartime[,] [r]ecent and current
tax policy seems to deny the significance of this tradition.").
65. Plehn, supra note 25, at 287.
66. See Alex Dunnagan, Wars, Taxes, and Excess Profits, TAX WATCH (May 1, 2020),
https://www.taxwatchuk.org/excess profits/#:-:text=In%20the%20First%20World%20War,
80%20per%20cent%20in%201917.
67. See RICHARD WHITING, THE LABOUR PARTY AND TAXATION: PARTY IDENTITY AND
POLITICAL PURPOSE IN TWENTIETH-CENTURY BRITAIN 17 (2001).
68. Robert Murray Haig, British Experience with Excess Profits Taxation, 10 AM. ECON.
REV. 1, 11 (1920).
THE CASE FOR A GLOBAL EXCESS PROFITS TAX 241
high degree of certainty and confidence. 69 Indeed, academics analyzing
the British experience with excess profits taxation in relation to excess
profits taxation in the US have "emphasized the extent to which
administrative discretion is responsible for the superiority of the British
law and [its] administration." 70
Dominions of Great Britain, however, experienced lesser degrees of
success with excess profits taxation. In response to both economic and
patriotic demands, New Zealand implemented an excess profits tax in
1915, which was modeled after the British tax. Unlike the British
model, however, the tax made no provision to adjust the capital
percentage to reflect the economic reality of a particular business and
also allowed very few exemptions. 7 1 Consequently, while the British
excess profits tax remained for several years after the First World War,
New Zealand repealed its tax only a year later, largely due to the lack of
flexibility and discretion in its application.7 2 Canada implemented the
Excess Profits Tax Act in 1940 to raise revenue for the Second World
War. The Canadian tax, however, abandoned any attempt to measure
returns on capital and instead imposed a tax of 30 percent on those
profits in excess of "standard" pre-war profits. 73 The Canadians even
implemented a "Board of Referees" to evaluate "various business risks"
of the taxpayers and appropriately set the standard for profits used in
evaluating the part in excess. 74 While perhaps theoretically sound, one
Canadian observer noted in 1941 that, "[i]n actual application the Act
must inevitably become complicated . . . [because] [t]he fundamental
principles must be adapted to meet the tremendous variations in the
forms of business."7 5
Despite their variations both historically and internationally, excess
profits taxes generally have had two aims: "(1) [t]he [m]oral [a]im of
[t]axing [e]xcess [b]usiness [p]rofits" and (2) the fiscal aim of
"[s]ecur[ing] [r]evenue from [b]usiness [p]rofits to [f]inance" a particular
purpose-most typically, a war.76 The varying degrees of effectiveness
69. Id. at 10 (The civil servants ensured that "every taxpayer need not be an expert in
income and profits tax procedure in order to be assured of having his interests properly
cared for.").
70. Adams, supra note 32, at 386.
71. Rob Vosslamber, Tax Failure: New Zealand's Short-Lined First World War Excess
Profits Tax, 29 ACCT. HIST. REV. 79, 88 (2019).
72. Id. at 89.
73. James R. Withrow, Jr., The Control of War Profits in the United States and
Canada, 91 U. PA. L. REV. 194, 230 (1942).
74. J. Ross Tolmie & Campbell W. Leach, Excess Profits Taxation, 7 CAN. J. ECON.
POL. SCI. 350, 353 (1941).
75. Id. at 362.
76. Id. at 350.
&
242 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 29:2
and efficiency with which the excess profits tax achieves these goals,
however, have been highly criticized. The main difficulty has been that
"[c]alling profits normal does not make them normal . . [n]ormal profits
and excessive profits look alike." 77 Indeed, there exists a formula for
distinguishing normal and excessive profits-"a very complicated
formula in its entirety"-and it has, thus far, been implemented in a
manner that is "seriously defective," proving to be an "erratic and in
many instances[,] an inequitable tax." 78
Even a brief analysis of the historical attempts at taxing excess
profits reveals that "[a]n exceedingly [complex] law is essential to cover
the many conditions to which it must apply[, but] much has to be left,
even then, to administrative procedure." 79 Of the various methods for
calculating excess profits, however, the invested capital method has
likely been the best devised. 80 Only the British have had any success in
varying the "percentage of invested capital . . . to meet the peculiar
conditions in each line of business," largely by leveraging a
decentralized approach to administrative discretion.8 1 Yet in terms of
the US's ability to implement the tax with similar success, some have
opined that perhaps "[w]ide administrative discretion is [simply] not
suited to the American habit and tradition in matters of taxation."2
A French economist once defined the art of successful taxation as
choosing the technique that plucks the most geese while causing the
least squawk. With this view, "the excess profits tax is most inartistic,
for certainly no tax measure has ever produced as much squawking.
Possibly the reason is that no tax measure has tried to pluck so many
feathers from each goose."8 3 Despite the squawking, in the context of the
ongoing COVID-19 pandemic, calls are again being heard in the US and
around the world for the implementation of an excess profits tax. 84
77. Scott A. Hodge, The History of Excess Profits Taxes Not as Effective or Harmless as
Today's Advocates Portray, TAx FOUND. (July 22, 2020), https://taxfoundation.org/excess-
profits-tax-pandemic-profits-tax/.
78. Id. (quoting Secretary Vinson arguing against the excess profits tax in the 1947
hearings).
79. Harold M. Groves, An Appraisal of the Excess Profits Tax from a Fiscal Standpoint,
10 L. & CONTEMP. PROBS. 133, 137 (1943).
80. Id.
81. See Adams, supra note 32, at 389.
82. Id. at 387.
83. Tolmie & Leach, supra note 74, at 362.
84. See, e.g., Avi-Yonah, supra note 5, at 4; Saez & Zucman, supra note 5; Hemingway,
supra note 5.
THE CASE FOR A GLOBAL EXCESS PROFITS TAX 243
III. THE COVID-19 PANDEMIC AND RISING PROFITS OF DIGITAL FIRMS
As the COVID-19 pandemic swept the world, governments
responded with various emergency mandates and recommendations,
including "stay-at-home" orders and bans on all "non-essential
activities," in order to contain the virus.8 5 In an effort to quell the
economic impact of these containment measures, governments passed
fiscal relief measures and stimulus packages to aid citizens and,
particularly, owners of small businesses who were most negatively
impacted by the virus. 86 These measures, however, came at a high price.
In the US alone, the federal deficit has been pushed to $3.1 trillion-
nearly 15 percent of the US economy.87
While many worldwide have suffered because of the pandemic,
including 20.5 million Americans unemployed as of May 2020, some
industries and firms have profited immensely.8 8 With products viewed
as essential to surviving life in lockdown, companies like Amazon,
Facebook, Google, Apple, and Microsoft are able to "play offense in the
middle of a pandemic," effectively creating two Americas that are
experiencing the pandemic in drastically different ways.8 9 Indeed,
"[t]here is Big Tech and there is everyone else." 90 According to company
filing data compiled by Statista, nearly all of "the world's most
prominent tech companies . . . [earned] double-digit revenue growth" in
the second quarter of 2020, "raking in a combined $33.9 billion in profit"
in the three-month period alone. 91
Even before the COVID-19 pandemic, large, technology based
multinationals have been criticized for making extraordinary profits
85. See Policy Reponses to COVID-19, supra note 1 (details the responses to COVID-19
internationally).
86. See id.
87. Andrew Taylor, COVID-19 Relief Pushes U.S. Budget Deficit to a Record $3.1T,
ASSOCIATED PRESS NEWS (Oct. 8, 2020), https://apnews.com/article/virus-outbreak-
business-economy-2bcc6fc65429d957b7f8275b2203f76d.
88. Rakesh Kochhar, Unemployment Rose Higher in Three Months of COVID-19 than It
Did in Two Years of the Great Recession, PEW RSCH. CTR. (June 11, 2020),
https://www.pewresearch.org/fact-tank/2020/06/ 11/unemployment-rose-higher-in-three-
months-of-covid-19-than-it-did-in-two-years-of-the-great-recession/.
89. Elizabeth Dwoskin, Tech Giants are Profiting - and Getting More Powerful - Even
as The Global Economy Tanks, WASH. POST (Apr. 27, 2020),
http s://www.washingtonpost. com/technology/2020/04/27/big-tech-coronavirus-winners/.
90. Id.
91. Felix Richter, Tech Giants Shrug off COVID-19 Crisis, NEWS ABODE (Aug. 1, 2020),
https://newsabode.com/tech-giants-shrug-off-covid-19-crisis/; see also Steve Kovach, Big
Tech's Earnings Prote It's Immune to the Coronatirus, CNBC (May 4, 2020, 12:42 PM),
https://www.cnbc.com/2020/05/04/big-techs-earnings-prove-its-immune-to-the-
coronavirus.html.
244 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 29:2
while simultaneously avoiding paying taxes on those profits.9 2 Their
business models depend largely on their unique "ability to reproduce
digital offerings instantly and at low or zero marginal cost," allowing
them to achieve large returns to scale. 93 Simultaneously, taxing these
technology companies has continuously confounded policy makers,
largely because "technological advances have enabled business
enterprises to be heavily involved in the economic life of a jurisdiction
without a significant physical presence." 94 Indeed, "[e]stimates of the
global revenue losses due to the tax abuses of multinational companies"
rise to the level of hundreds of billions annually. 95 This is particularly
unfortunate given that "[l]ow income countries . . . are especially
[vulnerable] to profit shifting and tax competition, and have limited
alternatives for raising revenue." 96 While many global policymaking
bodies have simultaneously observed the rising phenomena of global
digitalization and "the need to mobilize revenue in developing countries
in order to meet targets for sustainable and inclusive growth and
development," 97 finding a way to effectively reconcile these problems
and opportunities with an international taxing scheme has posed a
challenge.
IV. A GLOBAL EXCESS PROFITS TAX IN THE WAKE OF THE COVID- 19
PANDEMIC
Two recent articles by Professor Allison Christians and Dr. Tarcio
Diniz Magalhues 98 propose the implementation of a global excess profits
92. See The Tech Giants Won't Like It, but a Digital Tax Must Become a Reality, THE
GUARDIAN (Feb. 3, 2019, 2:00 EST)
https://www.theguardian.com/business/2019/feb/03/tech-giants-facebook-oecd-digital-tax-
must-become-reality.
93. Karim Foda & Nirav Patel, Competition Challenges in the Digital Economy,
BROOKINGS (Jun. 28, 2018), https://www.brookings.edu/blog/up-
front/2018/06/28/competition-challenges-in-the-digital-economy/.
94. Iva Gyurova & Ralf Heussner, Transfer Pricing in FinancialServices: The Outlook
for 2020 and Beyond, INT'L TAx REV. (Apr. 29, 2020),
http s://www. internationaltaxreview.com/article/b 110fxkmywyOkj /transfer-pricing-in-
financial-services-the-outlook-for-2020-and-beyond.
95. Cobham et al., supra note 15, at 2.
96. Id.
97. Allison Christians & Tarcisio Diniz Magalhaes, A New Global Tax Deal for the
DigitalAge, 67 CAN. TAx J. 1153, 1176 (2019).
98. See generally Tarcisio Diniz Magalhaes & Allison Christians, Rethinking Tax for
the Digital Economy After COVID-19, 11 HARV. BUS. L. REV. ONLINE 1 (2021) (arguing for
the implementation of a global excess profits tax instead of a windfall tax); Christians
Magalhaes, supra note 7 (arguing for the use of a global excess profits tax and
&
THE CASE FOR A GLOBAL EXCESS PROFITS TAX 245
(GEP) tax which aims to immediately address the fiscal crisis resulting
from the COVID-19 pandemic by clawing back some of the enormous
gains accrued by companies whose profits are especially fueled by "high
tech and unique intangibles." 99 In the long term, their proposal aims to
capitalize on the excessive profits of large, digital multinationals and
redistribute such wealth to developing countries, fostering sustainable
and inclusive growth and development. 100 In the short term, like the
excess profits taxes of old, their GEP tax proposal has two goals: (1) to
fairly address the challenges of the digital economy and the structural
abnormalities of market conditions leading to excess profits and (2) to
raise revenue needed to combat the global crisis resulting from the
COVID-19 pandemic. 101
In order to meet its fundamentally redistributive goal of effectively
taxing the global profits being earned by large multinational companies,
Professor Christians and Dr. Magalhaes' GEP tax proposal leverages
several tools recently developed by the Organisation for Economic Co-
operation and Development (OECD). In its digitalization project, the
OECD aims to create "a single set of consensus-based international tax
rules" to combat base erosion and profit shifting (BEPS) by
multinational corporations.l12 In an effort to provide greater
transparency in the global operations of multinational companies in
each jurisdiction, the OECD has developed country-by-country reporting
requirements (CbCR) that mandate that these enterprises report
certain financial information on a country-by-country basis.103 Professor
Christians and Dr. Magalhaes assert that unlike with historical excess
profits taxes, the new CbCR data collected provides the ideal
"consider[ing] proposals to rebuild revenue coffers using excess profits taxes during the
COVID-19 pandemic").
99. Christians & Magalhaes, It's Time for Pillar 3: A Global Excess Profits Tax for
COVID-19 and Beyond, supra note 7.
100. See generally Pillar 3 For The OECD: A Global Excess Profits Tax, supra note 8
(transcribing an interview with Allison Christians about the global excess profits tax).
101. See Magalhaes & Christians, Rethinking Tax for the DigitalEconomy After COVID-
19, supra note 97, at 12-13; see also Christians & Magalhaes, It's Time for Pillar 3: A
Global Excess Profits Tax for COVID-19 and Beyond, supra note 7. Note that the first goal
of fairness is due to the tax's roots in concepts of restoring justice.
102. OECD, TAX CHALLENGES ARISING FROM DIGITALISATION - REPORT ON PILLAR ONE
BLUEPRINT (2020) (quoting the summary on the back of the report).
103. Country-By-Country-Reporting, IRS, https://www.irs.gov/businesses/international-
businesses/country-by-country-reporting (last visited Oct. 16, 2021); U.S. Multinational
Enterprises, IRS, https://www.irs.gov/businesses/international-businesses/us-
multinational-enterprises (last visited Dec. 15, 2021) (clarifying that these reporting
requirements, facilitated through Internal Revenue Service Form 8975, apply only to
multinational companies earning combined revenues of $850 million or more); see also
Cobham et al., supra note 15.
246 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 29:2
mechanism to tax the profits of large multinationals because it
"provides a base of information to identify [the] average earnings . . in
previous years or to establish a uniform threshold for normal profits,
thus making it possible to calculate how much is to be considered excess
today." 104
Unlike in previous versions of excess profits taxation, however,
Professor Christians and Dr. Magalhaes propose a simplified approach
to reaching the excess profits of large multinationals with their tax. In
Pillar One of its digitalization project, the OECD states that one way of
distinguishing between "routine" and "residual" profits is to agree to a
fixed percentage. 105 The OECD proposes that this fixed percentage
should be 10 percent or 20 percent for routine profits, categorizing 80
percent or 90 percent of a multinational's profits as nonroutine or
"residual."10 6 Professor Christians and Dr. Magalhaes assert that the
OECD's proposal to divide the profits of digital multinationals into
routine and residual profits "already contemplates the value derived
from the unique and valuable assets possessed by the
multinationals." 107 Consequently, they argue that some part of the
residual profits "are simply not attributable to the unique contributions
of firms . . . but are the product of widespread market conditions that
are created, facilitated, or maintained through regulatory actions of the
states." 108 Indeed, they conclude that even before the onset of the
COVID-19 pandemic, "some amount of residual profit . . was already
excessive because it was attributable to . . . quasi-monopolistic
conditions." 109
Professor Christians and Dr. Magalhaes also propose utilizing a
politically agreed-to fixed percentage to isolate the part of residual
profits that is excessive-in this case, 22 percent.110 Reports have
revealed that from 2016 to 2019, "U.S. multinationals earn[ed] on
average a 22% return on fixed assets, 8% of which can be attributed to
routine profits and 14% to nonroutine profits."1 11 Given that due to the
104. See Magalhaes & Christians, Rethinking Tax for the DigitalEconomy After COVID-
19, supra note 98, at 8.
105. See OECD, SECRETARIAT PROPOSAL FOR A "UNIFIED APPROACH" UNDER PILLAR ONE
15 (2019).
106. See Webcast Presentation, OECD, Tax Challenges Arising from the Digitalisation
of the Economy: Update on the Economic Analysis & Impact Assessment 12 (Feb. 13,
2020) (on file with the OECD).
107. Magalhaes & Christians, supra note 98, at 18.
108. Id.
109. Christians & Magalhaes, It's Time for Pillar 3: A Global Excess Profits Tax for
COVID-19 and Beyond, supra note 7.
110. Christians & Magalhaes, supra note 7.
111. Magalhaes & Christians, supra note 98, at 18.
THE CASE FOR A GLOBAL EXCESS PROFITS TAX
impact of the COVID-19 pandemic most firms will not be expected to see
anything like a 22 percent return in 2020, Professor Christians and Dr.
Magalhaes propose that "a firm earning worldwide profits in 2020 that
exceed this 2016-2019 average could reasonably be considered to have
earned an excess profit, and therefore could be subject to additional
taxes in the form of a GEP tax."1 1 2 The authors reason that this is a
conservative, "objective and reasonable starting point for a GEP tax"
because "[o]ne could certainly argue that some amount of residual
profit, even within the pre-crisis global average of 14 percent, is already
excessive because it is attributable to undue market advantages enjoyed
as a result of quasi-monopolistic conditions, some of which have only
been enhanced by the pandemic."1 13
The last part of their proposal discusses how the revenues from the
excess profits tax will be collected and allocated globally. Put simply,
the part of a multinational's residual profits associated with "marketing
intangibles," as determined by the OECD, would be split between all
possible market jurisdictions, likely through a single-factor formula
based on sales or "users."11 4 This piece would include any eventual
excess profits to which a GEP tax could be applied at the country
level. 115 The OECD's Pillar Two Global Anti-Base Erosion framework
would work to ensure that even if one jurisdiction chooses not to tax the
excess profits of a multinational at the GEP tax rate agreed to, the
profits could be taxed by other jurisdictions where the company
operates.1 1 6 At its core, Professor Christians and Dr. Magalhaes's GEP
tax proposal aims to achieve a fair redistribution of the excess profits of
large multinational enterprises as part of a larger effort to disrupt the
structural inequalities in international taxation that had existed long
before, and were only aggravated by, the COVID-19 pandemic.1 1 7
V. EVALUATION OF THE GEP TAX PROPOSAL
Both the recent proposal for a GEP tax as well as historical
instances of excess profits taxes aim to redistribute the excess profits
accumulated by a subset of corporations based on basic principles of
fairness and restorative justice.118 Simultaneously, the taxes aim to be
112. Christians & Magalhaes, supra note 7.
113. Id.
114. Christians & Magalhaes, supra note 97, at 1156.
115. See Magalhaes & Christians, supra note 98, at 20.
116. Id. at 21.
117. See id. at 20; see also Magalhaes & Christians, supra note 8.
118. See Magalhaes & Christians, supra note 98, at 3, 12-13; see also Plehn, supra note
25, at 285.
248 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 29:2
an effective and efficient revenue source, whether the source be to fund
a war effort or to quell the economic impact of a global pandemic.119
More implicitly, however, excess profits taxes-like all taxation
schemes-should aim to be accurate, administratively feasible,
transparent, and structured to minimize gaming or tax avoidance. This
section of the note will evaluate both the historical excess profits taxes
and Professor Christians and Dr. Magalhaes's GEP tax proposal on
these basic merits.
Accuracy and Fairness
The historical versions of excess profits taxes have generally aimed
to be as accurate as possible in measuring whether a corporate taxpayer
had earned excess profits in the taxable year. It is largely agreed that
the invested capital approach, as discussed in Section II, has come the
closest in terms of accurately measuring normal versus excess profits
when compared to its average-earnings counterpart. The invested
capital approach imposes a tax on profits in excess of a predetermined,
"normal" rate of return on invested capital for the taxable year. 120 With
a few variations, invested capital under this method has generally been
defined in terms of the dollars invested in the business originally,
"adjusting the original investment for withdrawals of and additions to
the capital." 12 1 Over time, the excess profits taxes evolved to allow for
an increasing number of adjustments to the invested capital calculation,
in an effort to more accurately determine whether a corporate taxpayer
had actually accumulated excess profits in a taxable year and provide
more relief for particularly difficult cases.1
The historical excess profits taxes nonetheless remained inaccurate
in many ways, resulting in various inequities. Three inequities are of
note. First, as discussed in Section II, the business community lamented
the invested capital method's dependance on originally invested capital
to determine normal returns. The calculation, which required a
cumbersome revaluation of historical assets, clashed with normal
bookkeeping practices. The widely accepted definition of invested capital
used in business management was "the current value of the capital of
the business."123 Using originally invested capital to determine normal
returns meant that corporations-that were identical in every regard
119. See Shoup, supra note 43, at 32-33; Scott A Hodge et al., Tax Policy After
Coronatirus: Clearing the Path for Economic Recovery, TxX FouND. (Apr. 22, 2020),
https://taxfoundation.org/coronavirus-economic-recovery/ (discussing COVID-19
fundraising from a tax policy perspective).
120. See supra Part II.
121. Roy Blough, Measurement Problems of the Excess Profits Tax, 1 NAT'L TAX J. 353,
358 (1948).
122. See supra Part II.
123. Blough, supra note 121, at 358.
THE CASE FOR A GLOBAL EXCESS PROFITS TAX 249
except at the time funds were originally invested-may have had widely
differing capital bases for purposes of calculating excess profits tax
liability. In a dynamic economic environment, it may be difficult to
design a tax system that is fair and equitable in its entirety; however, it
is widely accepted that similarly situated taxpayers should be taxed
similarly to foster a perception of fairness. 124 Using originally invested
capital to calculate normal returns violates this basic principle of sound
tax policy.
Second, the special relief provisions included in the historical excess
profits taxes to address particularly hard or inequitable cases were only
implemented for those companies or industries that were able to
convince Congress in a timely manner of their particular injustice.
Thus, there were likely a great many companies and industries who
should have been afforded relief, but unfortunately, were not under any
instances of the excess profits tax. 12 5 For example, in answering
industry demands, the World War II excess profits tax provided
particular relief for companies in the mining industry, exempting from
the excess profits tax those companies mining or producing tungsten,
quicksilver, manganese, platinum, antimony, chromite, and tin.1 Yet,
despite providing particular industries with relief, the historical
instances of excess profits tax, which depended on determining returns
in excess of a set "normal" rate, disproportionately penalized smaller
and growing companies while simultaneously exempting larger, more
established companies that may have had declining profits. 127
Third, in calculating normal profits, none of the versions of excess
profits tax effectively allowed for differences in risk across industries.
Companies are subject to numerous industry and "firm-specific risks
that are driven by the nature of the business, competition, supplier
relationships, customers, and overall firm strategy." 12 8 The astute
financial analyst knows that comparing rates of return of firms across
industries is fraught with pitfalls if proper attention is not given to a
firm's chosen capital structure, product life cycle, and cyclicality of
sales. 129 Indeed, a measure of excess profit that depends on a uniform
threshold for excess returns may in some cases allow a greater return
124. See generally AM. INST. OF CERTIFIED PUB. ACCTS., GUIDING PRINCIPLES FOR TAX
EQUITY AND FAIRNESS (2007) (outlining seven dimensions to consider regarding the
fairness and equity of a tax).
125. See THE TAx FOUND., supra note 59, at II.
126. C. Rudolf Peterson, The Statutory Evolution of the Excess Profits Tax, 10 L.
CONTEMP. PROBS. 3, 24 (1943).
127. See THE TAx FOUND., supra note 59, at II; see also Hynning, supra note 23, at 463,
466.
128. See WAHLEN ET AL., supra note 11, at 279.
129. See id. at 216.
&
250 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 29:2
than the risk may warrant and in other cases set too low a ceiling on
profits. New ventures and rapidly growing businesses are particularly
discriminated against with such an approach. 130 The British attempted
to mitigate this issue by augmenting the standard excess profits
calculation with a decentralized and discretionary administrative
process at the firm level, and the excess profits tax was received much
more positively by taxpayers.131 Indeed, one scholar observed that "what
business fears is not heavy taxation, but unjust and discriminatory
taxation, careless taxation, bungling attempts to do the impossible,
inconsistent taxation, [and] the unlike treatment of like business
situations." 132
In a sense, Professor Christians and Dr. Magalhaes's GEP tax
proposal sidesteps these issues by relinquishing any attempt at
accuracy. Indeed, rather than aim to precisely determine whether a
particular taxpayer has accrued excess profits in a taxable year, their
GEP tax proposes using a politically-agreed-to level of excess return-22
percent for 2020.133 The authors base this threshold on reports that
"determined that US multinationals earn on average a 22% return on
fixed assets, 8% of which can be attributed to routine profits and 14% to
nonroutine profits." 134 Using an average percentage as the threshold for
normal profits versus excess, however, "fail[s] to appreciate the very
great possibilities for injustice and unfair competition that are involved
in its application."135 For pharmaceutical and technology-based firms,
for example, return on assets can be particularly misleading. 136 Both
types of firms have significant resources that do not appear on their
respective balance sheets, including highly specialized intellectual
property and highly compensated employees, resulting in a low amount
of recognized assets.137 Additionally, both types of firms invest heavily
in research and development. "U.S. GAAP requires [companies] to
expense [these] costs [entirely] in the year incurred," leading to an
understatement of income initially and an overstatement of income
when revenues are accrued from successful products. 138 Consequently, a
company in either industry may experience an overly inflated or
130. See HARLEY L. LUTZ, NAT'L ASS'N OF MFRS., AN EXCESS PROFITS TAX IS AGAINST
THE PUBLIC INTEREST 1, 3 (revised ed. 1953).
131. See Haig, supra note 68, at 10-11.
132. T.S. Adams, Principles of Excess Profits Taxation, 75 ANNALS AM. ACAD. POL.
SoC. SCI. 147, 155 (1918).
133. See Magalhaes & Christians, supra note 98, at 18.
134. Id.
135. Groves, supra note 79, at 137.
136. See WAHLEN ET AL., supra note 11, at 239.
137. See id.
138. Id.
&
THE CASE FOR A GLOBAL EXCESS PROFITS TAX 251
understated return on assets in a given year depending on the timing of
such accounting recognition. Consequently, a company may be subject to
an excess profits tax in a given year not because it accrued excess profits
in that year, but simply due to the simultaneous occurrence of a variety
of the arbitrary factors aforementioned, undermining the effectiveness
and perceived fairness of the GEP tax.
Administrability
As a basic principle, a tax should be easy for taxpayers to comply
with and for governments to administer and enforce. 139 Indeed, one of
the US Government Accountability Office's criteria for a good tax
system is administrability, "including processing returns, enforcement,
and taxpayer assistance." 140 These costs are also influenced by the
number of revenue officers necessary to administer the tax. If the costs
associated with administering a tax are too high, the revenue goals of
the tax will be undermined. In pursuit of accuracy, the historical excess
profits taxes sacrificed administrability. Indeed, the administrative
burden was one of the reasons the tax was repealed each time in the
US, as well as internationally. 141 Administration of the historical excess
profits taxes was so complex that it required, in some cases, the
implementation of entirely new governmental agencies such as the
Canadian "Board of Referees" to address the various business risks of
the taxpayers and appropriately set the standard for normal profits. 142
Upon repeal of the 1950 excess profits tax in the US, there were 8,973
unsettled cases involving $3.931 billion of contested excess profits tax
liability. Most of these cases assumably dragged on for many years and
required a great force of analytical accounting and legal work. 143
Again, in many ways, Professor Christians and Dr. Magalhaes's
GEP tax proposal is a relief from the administrative burden experienced
139. See Principlesof Sound Tax Policy, supra note 9, at 2.
140. See ASS'N OF INT'L CERTIFIED PRO. ACCTS., GUIDING PRINCIPLES OF GOOD TAX
POLICY: A FRAMEWORK FOR EVALUATING TAX PROPOSALS 2-3 (2017). See generally The
Principles of Sound Tax Policy, TAX FOUND. (Mar. 15, 2012),
https://files.taxfoundation.org/20200723152458/PrinciplesOfSoundTP.pdf (describing the
principles of the Tax Foundation's sound tax policy).
141. See, e.g., Adams, supra note 32, at 374 (commenting that "[i]nvested capital is
chiefly responsible for the administrative burden created by the excess profits tax");
Richard W. Lindholm, The Need for an Excess-Profits Tax Today, 44 NAT'L TAX ASS'N 391,
391 (1951); Buehler, supra note 50, at 294 (stating that in 1936, Treasury officials
admitted that '"great administrative difficulties' are encountered in the endeavor to
enforce an excess profits tax effectively").
142. See supra Part II.
143. LUTz, supra note 130, at 12-13.
252 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 29:2
by previous excess profits taxes. It suggests applying a politically-
agreed-to fixed rate to determine the rate of return that is excessive. It
does not attempt to factor in the various risks or subtleties of each firm
or industry in calculating whether a company has made excess
profits. 144 With this approach, administrative discretion is unnecessary.
If, based on the CbCR reporting data, a corporation earned greater than
twenty-two percent return on invested capital in a taxable year, the
GEP tax would be applied to that portion of profits. While there may be
reason to critique the administrability of the OECD's larger
international tax proposal of which Professor Christians and Dr.
Magalhaes's GEP tax is one part, from an excess profits tax perspective,
the proposed GEP tax is more easily administered than its predecessors.
Transparencyand Simplicity
Taxpayers deserve consistency and predictability in the tax code.
They should "know that a tax exists, and how and when it is imposed on
them and others." 1 45 Additionally, the tax should be as simple as
possible, such that the cost for taxpayers to determine their liability and
file their taxes is minimized. 146 Corporate taxpayers are particularly
harmed by unpredictability and uncertainty in the tax system because
forecasting and planning is essential to both the short- and long-term
viability of a business. 147 Historical excess profits taxes were
exceedingly complex, and thus, it was nearly impossible for businesses
to predict what their tax liability would ultimately be. A scholar
providing advice to those considering investing in a company subjected
to the Excess Profits Tax of 1950 observed that, as an external third
party, determining potential excess profits tax liability would be quite
difficult because even "managements of some companies have not been
able to determine with assurance the [excess profits tax] position of
their own companies," leaving them unable to accurately plan future
expenses.148
While Professor Christians and Dr. Magalhaes's GEP tax proposal is
structured as a permanent addition to the international tax regime, the
proposed threshold of a 22 percent return on assets for normal profits is
based on average returns over just a four-year period from 2016 to
144. See Pillar 3 For The OECD: A Global Excess Profits Tax, supra note 8 (quoting
Allison Christians, "But we understand it's a political compromise. It's a political
statement, not an economic one.").
145. See Fiore, supra note 9, at 2-3.
146. Id.
147. See PIPER, supra note 140, at 4.
148. See Boulton, supra note 56, at 157.
THE CASE FOR A GLOBAL EXCESS PROFITS TAX
2019.149 This approach will leave businesses that are potentially
subjected to the tax uncertain whether, in future tax years, the GEP tax
will maintain the 22 percent return on assets threshold, or whether the
excess profits determination will move as the four-year average base
period also changes. Such instability and unpredictability will certainly
have undesirable effects on the business community, as well as on
governments that seek to have both a stable and predictable revenue
stream.
Minimize Tax Avoidance and Gaming
Tax laws "should be structured to minimize noncompliance." 150
When drafting sound tax policy, the US Joint Committee on Taxation
recommends asking whether "some individuals [can] successfully avoid
their legal liabilities" under a given tax.151 The OECD itself states that
prevention of tax avoidance and evasion opportunities is one of the
overarching goals of its digitalization project. 152 Since most of the
historical versions of excess profits taxes were temporary, tax avoidance
wasn't a paramount issue. One scholar noted, however, that while "[t]he
American and British excess profits taxes were cheerfully paid during
the war . . . and evasion and avoidance tended to be limited by the
desire to help the government win the war with patriotic support," once
the end of the war drew near, "the game of beating the government by
tax evasion and avoidance began in earnest on a rather large scale."1 3
Corporate taxpayers in both England and the US engaged in excessive
capitalization in an effort "to spend . . . profits rather than be taxed
upon them." 154 Indeed, it has been observed that if the tax were to be
implemented permanently in times of peace, "abuses and evasion would
increase greatly," 155 and it would encourage imprudent investments
that taxpayers would not make otherwise, including investment in
questionable new products, unnecessary advertising, and plant
expansion, to name a few. 156
Even if the proposed GEP tax can garner enough public acceptance
to be implemented as a permanent measure, the politically-agreed-to
149. See supra Part I, 22-9
150. Fiore, supra note 145.
151. See AsS'N OF INT'L CERTIFIED PRO. ACCTS., supra note 9, at 4.
152. See OECD, OECD WORK ON TAXATION 14-15 (2021),
https://www.oecd.org/tax/centre-for-tax-policy-and-administration-brochure.pdf.
153. Buehler, supra note 50, at 294.
154. Id.
155. B.U. Ratchford, The Excess Profits Tax: Part Two: Some Economic and Political
Aspects, 12 S. ECON. J. 97, 105 (1945).
156. See THE TAX FOUND., supra note 59, at 18.
254 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 29:2
fixed measure of excess profits will likely be ineffective in minimizing
such tax avoidance and gaming. Indeed, there is evidence that when
presented with a threshold-such as a GEP tax applied only if return on
assets exceeds 22 percent-corporate executives will engage in earnings
management practices (by boosting revenues or deferring expenses, for
example) to ensure the firm reports earnings that minimize the negative
consequences associated with such a threshold. 157 It should be noted
that "earnings management, whether pushing earnings forward or back,
are costly activities" that should be considered when implementing the
GEP tax. 158
VI. SUGGESTIONS FOR IMPROVEMENT TO THE GEP TAX PROPOSAL
In many respects, by leveraging the new tools recently developed
by the OECD, Professor Christians and Dr. Magalhaes's GEP tax
proposal has improved upon many weaknesses of the historical excess
profits taxes. Where the historical excess profits taxes were all
eventually repealed largely due to the significant administrative burden
both from an IRS and taxpayer compliance perspective, their GEP tax
proposal is much simpler. Professor Christians and Dr. Magalhaes's
GEP tax proposal leverages new CbCR data collected from large
multinational corporations that will give unprecedented insight into the
financials of a subset of mostly digital companies who indeed are
accruing astronomical profits while simultaneously avoiding paying
taxes on those profits. Despite improvements in administrability,
however, this note has pointed out that their GEP tax proposal remains
inaccurate and thus will have inequitable results. Additionally, by
utilizing a uniform, flat percentage for determining excess profits-
indiscriminate across firm or industry-their GEP tax proposal provides
clear opportunities for corporate taxpayers to avoid liability under the
tax by engagement in effective earnings management practices.
Newly developed CbCR data provides the opportunity for
calculating a more accurate, firm-specific rate of return. Facilitated
through IRS Form 8975, the new reporting requirements apply only to
multinational companies earning combined revenues of $850 million or
more. 159 The data, released in August 2020, "provides aggregated
information on . . . nearly 4,000 multinational enterprise[s] . .
headquartered in [over] 26 jurisdictions and operating in over 100
157. See Franqois Degeorge et al., Earnings Management to Exceed Thresholds, 72 J.
Bus. 1, 2-3 (1999).
158. Id. at 5.
159. See U.S. Multinational Enterprises,supra note 103.
.
THE CASE FOR A GLOBAL EXCESS PROFITS TAX 255
jurisdictions worldwide." 160 Unlike with historical versions of excess
profits taxes, the number of corporations potentially subjected to the tax
is limited-in the case of 2020, to 4,000 multinational corporations.
Additionally, with IRS Form 8975, the taxing authority has access to
the data necessary to calculate nuanced rates of return at the firm level,
making the tax significantly more equitable across firms and industries,
as well as limiting opportunities for avoiding the tax.
As a starting point, the international taxing authorities could begin
by developing an expected return model, such as the Capital Asset
Pricing Model, that would produce a risk-based expected rate of return
for each company after incorporating inputs from the collected CbCR
data, as well as other factors like the size of the corporation. 16 1 This rate
of return could then be multiplied by the book value of common equity,
or the "balance sheet measure of the common equity shareholders' claim
on the net assets of the firm." 162 Again, this financial data should be
ascertainable based on the newly disclosed CbCR data. 163 The result of
this calculation will be any positive excess profits earned by the firm to
which a GEP tax can then be applied. 164
Leveraging other data sources in order to augment the excess profits
calculation has been considered before. Indeed, upon reflection on the
US experience with excess profits taxation during World War II, one
scholar considered the possibility of leveraging the newly required
Securities and Exchange Commission filings from major corporations to
reconcile any discrepancies in calculating excess profits based on
corporate tax returns. 165 He explained in 1941,
There is . . . in Washington a wealth of information
which cannot but greatly offset the conventional
difficulties of administering a tax based on invested
160. New Corporate Tax Statistics Provide Fresh Insights into the Activities of
MultinationalEnterprises, OECD (Aug. 7, 2020), https://www.oecd.org/tax/new-corporate-
tax-statistics-provide-fresh-insights-into-the-activities-of-multinational-enterprises.htm.
161. See WHALEN ET AL., supra note 11, at 317.
162. Id. at 832.
163. See New Corporate Tax Statistics Provide Fresh Insights, supra note 160 ("Under
Country-by-Country Reporting, large MNEs are required to disclose important
information about their profits, tangible assets, employees as well as where they pay their
taxes, in every country in which they operate. Country-by-Country reports (CbCRs)
provide tax authorities with the information needed to analyse MNE behaviour for risk
assessment purposes").
164. See WHALEN ET AL., supra note 11, at 837 ("[R]esidual income [(excess profits)]
indicates an increase in shareholder wealth because the firm generates comprehensive
income greater than the income required to cover the cost of capital.").
165. See Hynning supra note 23, at 466, 470 (SEC filings were only required for
corporations beginning in 1934).
256 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 29:2
capital. To use these new sources efficiently, of course,
requires imagination and ingenuity that may not always
be found in bureaucracy, but that does not imply at all
that the job cannot be done, and done ably. 166
The administrability of the current GEP tax proposal will not be
significantly undermined by making the calculation more nuanced in
this manner. Considering that the IRS processed more than 253 million
federal tax returns in fiscal year 2019,167 determining excess profits for
4,000 multinationals at a more nuanced level is within the realm of
administrative ability. Most stakeholders, including international
taxing authorities, corporate executives, and investors, would be more
likely to consider such a GEP tax to be both an acceptable and equitable
redistribution of wealth from the world's most profitable corporations,
particularly in this current, pandemic-fueled economic crisis. Altering
the GEP tax proposal to leverage even further the data and tools now
available through the OECD's efforts could enable such a GEP tax to
become a permanent part of an effective international tax policy.
166. Id. at 470.
167. Returns Filed, Taxes Collected & Refunds Issued, IRS tbl. 2,
https://www.irs. gov/statistics/returns-filed-taxes-collected-and-refunds-
issued#:-:text=The%20IRS%20processed%20more%20than,)%20XLSX)%20in%20FY%202
019.R (June 24, 2021).
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