Is it good to have an excess profit tax?
Do unexpected monopolistic profit serve any useful function in the market economy?
This is an interesting question - the first one touches more on policy than economics, but I'll give it a go.
In regards to an "excess profit tax," there is an economic case to be made for it usually only in one situation, that of negative externalities. That is, if a company is creating a negative externality that is allowing it to make supernormal profits but not internalize the "social" costs of that externality, a tax might be justified to help the company internalize those costs. However, setting the amount of the tax is very difficult and ...
Is it good to have an excess profit tax? Do unexpected monopolistic profit serve any useful function in the market economy? We look at the implications of this policy and of monopolies.
Mauer Construction: Compute Profit or Loss, Percentage of Completion
Completed-Contract Method - Mauer Construction Company, Inc., entered into a firm fixed-price contract with Trillini Clinic on July 1, 2005, to construct a four-story office building. At that time, Mauer estimated that it would take between 2 and 3 years to complete the project. The total contract price for construction of the building is $4,500,000. Mauer appropriately accounts for this contract under the completed-contract method in its financial statements and for income tax reporting. The building was deemed substantially completed on December 31, 2007. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to the Trillini Clinic under the contract are shown below.
At December 31, 2005 At December 31, 2006 At December 31, 2007
Percentage of completion 30% 65% 100%
Contract costs incurred $1,140,000 $3,055,000 $4,800,000
Estimated costs to complete contract/$2,660,000 $1,645,000 -0-
Billings to Trillini Clinic $1,500,000 $2,500,000 $4,300,000
Prepare schedules to compute the amount to be shown as "Cost of uncompleted contract in excess of related billings" or "Billings on uncompleted contract in excess of related costs" at December 31, 2005, 2006, and 2007. Ignore income taxes. Show supporting computations in good form.
Prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2005, 2006, and 2007. Ignore income taxes. Show supporting computations in good form.