Business Deductions Set a Poor Tone : Taxpayer-Financed Perks Dilute Integrity, Start Ethical Slide

While much has been written about corruption in defense contracting, insider trading and the general decline of ethical standards, one aspect has been overlooked or ignored: the way certain business tax deductions may contribute to the decline at the inevitable expense of the taxpayer.

Where does the mentality come from that condones venality and the dilution of integrity in the defense industry, on Wall Street, in the claims by a former presidential candidate of academic excellence that he never achieved and countless other facets of government and business? Was there one event that triggered the avalanche of failed integrity that we have witnessed so frequently over the past two decades? Was it contrived Vietnam body counts? Was it Watergate? Is Ed Meese the culprit? Was it too many episodes of fast living on “Miami Vice”? Probably not.

Another explanation for this deterioration of ethics, making gray what was really black or white, are the rules set by Congress, the rules that corporate America lives by. (Besides the business community itself, corporate America includes the arts, the movie industry, professional sports, financial services, health services, etc.) These rules contribute to a mindset that says, in effect, “Assets that pass through my hands are mine--that is, they are if I can get away with them!”

Consider, for example, that 30% of the expenses for country club memberships, corporate jets, conventions, “retreats,” “entertainment,”

-salary-plus-bonus-plus-stock-options-plus-stock-grants-plus-severance-pay compensation packages are paid for by the American taxpayer. In fact, when state and local taxes are included, the taxpayer pays 40% to 45% of these expenses. Since these and numerous other perquisites are construed by the Internal Revenue Service as “legitimate business expenses” that corporations deduct from operating profit, these expenses lower pretax profit, in turn lowering taxes. Taxpayers make up for the taxes that corporations don’t pay, or the government’s deficit simply rises and the taxpayer is burdened in a different way.

So when Lee Iacocca is paid $29 million in one year the taxpayer pays almost $12 million, or when a mid-size corporate jet flies executives cross-country for a 6-hour flight (at an average cost of $2,000 per running hour), the firm can deduct $12,000 and pay almost $5,000 less in tax.

Three key points emerge. First, not only do the individuals who benefit, who “earn” these perquisites and compensation, start to believe that these are things that they deserve, but they may lose sight that tax-payers are paying a big chunk of business expenses that are legally but not ethically legitimate. This loss of perspective can create an insensitivity to who really owns the resources (the shareholders) and who is helping defray these costs (the taxpayers). If Chrysler and its shareholders, for example, truly believe that Iacocca is worth 29 big ones, then fine, pay him. But over a “reasonable” limit--say, $1 million or $1 million in total compensation--why should the taxpayer have to help underwrite this compensation? This concealed rip-off of the taxpayer is in its own way as ludicrous as a $1,000 toilet seat for an Air Force bomber or a jet aircraft with a 100% cost overrun.

Second, the direct loss of revenues is not insignificant. Assuming, conservatively, that there are 8,000 people who earn at least $2 million and that there are 2,000 planes flying for corporate America (average cost $500,000 to $2 million, operating costs $1,000 to $2,000 per hour), the tax coffers could be losing up to $4 billion in tax revenue per year. This doesn’t even include the other perks and pleasures referred to earlier, amounting to another $1 billion to $2 billion in lost tax revenue.

Third, the proliferation of perks tends to create more points of distinction than of unity. Those who receive the jet rides, club memberships and excessive compensation become separated from those who do not. This impairs the teamwork needed by U.S. corporations if they are to compete successfully with the team-oriented Japanese.

Solutions? Get Congress to pass tougher laws that reduce and then eliminate the “rip-off” attitude that prevails among corporate and not-so-corporate people (doctors, lawyers, movie moguls); laws that allow deduction of bona-fide business expenses up to a reasonable point but not beyond. Admittedly, one’s imagination and optimism must be stretched to see our current Congress play the role of an ethics or rules taskmaster. Since Congress has exempted itself from such rules as those pertaining to minimum wages and equal employment opportunity, and since some members benefit from occasional plane rides and country-club golf offered by their corporate buddies, it may be a while before it toughens the rules that it sets for others.

At least we can urge and hope that this deliberative body might behave better in the future and improve its ability to toughen the rules on what is reasonable and what is not reasonable to deduct on corporate (and not-so-corporate) America’s profit-and-loss statements. It is hoped that taxpayers will become enraged and demand congressional accountability. If they don’t, the ethical slide that we have seen will accelerate while the taxpayer is taken for an even longer ride.