The First Neoliberal Tax Legislation Was the Revenue Act of 1942.

Understanding how corporations got so many tax loopholes might seem like an impossible task, but really it’s just a matter of checking the public record and the events of history.  Major General Smedley Butler (1881-1940) complained loudly about WWI profits in his pamphlet War Is a Racket.  He wrote that 21,000 new billionaires and millionaires got their wealth from the Great War while ordinary soldiers bought Liberty Bonds to help pay for the huge costs.  And Major General Smedley Butler’s complaints didn’t fall on deaf ears.  Many Americans wanted to reign in war profits during WWII.  During WWII, as most American corporations contributed to the war effort, there was an “excess profits tax” that was meant to reduce war profiteering.

But the Revenue Act of 1942, starting as a tax on corporate profits during the war, changed into a tax haven after the war.  It had carry-forward and carry-back provisions that averaged out losses and gains so that many corporations were able to get huge tax rebates from the U.S. Treasury after WWII.  It allowed corporations to escape taxation for post war profits on the one hand and on the other hand the Revenue Act of 1942 taxed individual Americans more than ever before.  Instead of four million Americans paying income taxes, forty million, or ten times more, paid income taxes after the war.

The Revenue Act of 1942 was also an example of a lengthy and complex law that was so cumbersome that most of the politicians who signed it into existence couldn’t fully understand it.  The bill filled 320 pages.  Lawyers and accountants that were hired by corporations discussed the bill favorably and they wanted those tax savings.  And like other neoliberal tax bills, The Revenue Act of 1942 provided a corporate tax subsidy and taxed the public more heavily in order to compensate.  The bill saved corporations about half the taxes they would have paid and it doubled the taxes on individuals.

The Revenue Act of 1945, a later iteration, cancelled the excess profits tax but extended the carry-back tax provision for another year.  It turned out that “The carryback of net operating losses continued indefinitely”.  There was a 15% reduction in corporation taxes paid to the federal government in the late twentieth century from carry-back and carry-forward provisions in the tax code.  WWII left this legacy to help corporations evade income taxes in peacetime, while income taxes on individuals have remained higher ever since the war.

Sources:  Brigadier General Smedley Butler, War Is a Racket, (Port Townsend, WA, Feral Publishing, 2003.)

Mark Wilson, “The Advantages of Obscurity: World War II Tax Carryback Provisions and the Normalization of Corporate Welfare,” Kim Phillips-Fein and Julian Zelizer, eds., What’s Good for Business: Business and American Politics Since World War II, (Oxford University Press, New York,  2012), 16-44.

Thank you to Danielle Kaschmitter for making me aware of the Revenue Act of 1942 in a speech she gave at the Spokane Falls Toastmasters Club.

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This text is copyrighted to Mel Scanlan Stahl and is protected by fair use standards.  If you use any part of it please acknowledge me as the source.  If you would like to leave a comment, I would enjoy hearing from you.

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