A progressive tax specifically on profits should be levied on businesses with total revenues that exceed $1,000,000 per year, and whose profits exceed 1% of total revenues. To calculate this tax, each qualifying business would need to multiply its rate of profitability (total revenue minus all expenses, including taxes) with the actual amount of profit.
Profit Tax Example
To see how such a tax would affect profits, let’s use the example of a business which earned a total revenue of $2 million, $1.8 million of which went to pay all business expenses and the remaining $200,000 being profits. Since this profit amount is equal to 10% of its total revenue, then 10% of this $200,000, or $20,000, would be required to be paid to fulfill the profit tax. If instead of $200,000 this business had only a $20,000 profit or less, it would fall below the 1% profit threshold for this tax, thus no profit tax would be owed. On the other hand, if this business had a $1 million profit, this would equate to a 50% profit. Therefore, 50% of this profit, or $500,000, would be owed to fulfill the profit tax.
Purpose For This Profit Tax
The reason for such a tax is that extraordinarily large profits for one or a few companies indicate an imbalance in the market, namely not enough competition. When one company can consistently earn large profits as a percentage of its revenue, that means that its price for the product or service offered is too high. Such a tax as this would further encourage other companies to enter the market and operate successfully at lower profit margins. It is not the government’s place, nor would it be fair for it to set absolute targets or limits on any business’ profitability, however, a general structure of discouraging super large profits could and should be created. This type of system would also help discourage price gouging and would help make the economic environment a little less favorable to giant, super-profitable businesses, increasing the economic space for smaller, mom-and-pop businesses.