Postwar Taxation and Economic Progress

By Harold M. Groves | Go to book overview

VI. PROBLEMS OF THE BUSINESS INCOME-TAX BASE

BUSINESS LOSSES1

General Considerations as to Business Losses
THE treatment of business losses is an important aspect of federal tax policy. The following considerations are especially relevant:
1. Fear of possible losses is often as important in business decisions involving large uncertainties as the hope of profits. "Businessmen are willing to continue operation of their enterprises at times when prospect of profit is small, providing they do not, by so doing, incur too great a risk of loss.''2 During the First World War a prominent critic3 went so far as to suggest postwar government absorption of business losses in order to encourage the continuation of production at wartime levels. Business men and economists who have studied the subject agree that the importance of losses in the business calculus has been and is likely to be much underemphasized.
2. A business income tax paid on current income before the accumulated deficits of previous years have been absorbed is really paid out of capital rather than out of income.
3. Small businesses are less profitable as a group than large and established concerns, and the range of profitability and loss is much wider.4 It is true that apparent conclusions
____________________
1
The quantitative material in this section is largely the work of Oscar Litterer.
2
David Friday, "Maintaining Productive Output," Journal of Political Economy, Vol. XXVII ( January, 1919), pp. 117-126.
3
Ibid.
4
William Leonard Crum, Corporate Size and Earning Power, Harvard University Press, Cambridge, Mass., 1939; National Industrial Conference Board, Effects of Taxes upon Corporate Policy, 1943, p. 19.

-130-

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