Business Tax Deductions

Wolf argues that tax deductions for excessive executive salaries and perks cost the Treasury billions, and set a poor ethical tone for the country. His revenue analysis was based on a faulty understanding of tax law, but his sociological conclusion is close to the mark.

Wolf argues that when Iacocca is paid $29 million, federal and state treasuries lose $12 million. He’s wrong. Iacocca pays personal income taxes on his high salary. For the most part enormous executive salaries do not reduce tax revenue.

Wolf also argues that many corporate perks go beyond what it is “ordinary and necessary” to conduct business and he implies Congress has ignored the issue. What he fails to mention is that in 1986 Congress recognized that so-called “business” travel and entertainment is often excessive in terms both of quantity and luxury. The 1986 law provides that even when a business shows that travel and entertainment is “necessary,” only 80% of the amount spent is tax deductible. There are also additional restrictions on certain luxury items like extravagant football boxes, overseas conventions, etc. Of course, more should be done: Perhaps the 80% should be reduced to 60%, and specific limits imposed on the amount spent for each night’s lodging or each meal.

While Wolf is not much of a tax expert, he is a keen social observer. Tax rip-offs have undermined the ethical climate. The best examples are not certain tax law provisions with which Wolf and I may differ, but rather the widespread tax fraud. As a tax lawyer, people I meet on social occasions often want to talk to me about their taxes. Total strangers (not clients) gleefully boast of tax fraud. From waitresses who under report tip income to businessmen who make unreported cash sales, “everyone” assumes that “everyone’s doing it.”

When I was a child, Dick Tracy taught me that crime did not pay. Unfortunately, with audit rates down below 1% and the IRS almost never engaging in the sting operations necessary to find unreported income, tax crime does pay. It has been estimated that more effective enforcement of tax laws would generate $40 billion in federal revenues. It would also generate greater respect for ethical and legal behavior.

BRAD J. SHERMAN

Los Angeles