high-profits principle

The "high-profits principle" in economics refers to a method of determining an excess-profits tax. This principle establishes that profits are considered "excess" when they exceed a specific statutory rate of return on the capital invested by a business.1

In broader economic terms, profit is generally understood as the surplus of total revenue over total costs within a given period. However, economists distinguish between business profit and pure economic profit. While businesses may consider various returns as profit, economists often view these as implicit costs, such as wages for owner-managers, rent for owned land, or interest on invested capital. In a perfectly competitive market, pure profit would theoretically not exist because competition would drive returns to factors of production to their limits, eliminating any surplus.2

Real-world profits can arise from innovation, changes in consumer demand (windfall profits), or market power that allows firms to restrict output and maintain prices above costs (monopoly profits). Profits are a significant incentive for production and risk-taking, and they provide funds for investment.23