Suitable for Framing: Business Deductions in a Net Income Tax System

By Walker, David I. | William and Mary Law Review, March 2011 | Go to article overview

Suitable for Framing: Business Deductions in a Net Income Tax System


Walker, David I., William and Mary Law Review


ABSTRACT

The federal tax code includes numerous provisions disallowing or curtailing income tax deductions related to such disparate activities as business lobbying and providing non-performance-based compensation to senior corporate executives. The primary claim of this Article is that a tendency to mentally frame business deductions as subsidies, often reinforced by rhetoric explicitly framing deductions as subsidies, helps explain these provisions. The traditional "public policy" disallowances directed at lobbying, fines and penalties paid by businesses, and antitrust treble damages respond to an appearance of a taxpayer subsidy that would follow from deduction, despite the fact that it is far from clear that these deductions, if allowed, would create an exception to taxation of net income. Disallowances directed at executive pay and other corporate governance matters also take advantage of an appearance of subsidy. In these cases, structuring an economic disincentive as a disallowed deduction (versus economically equivalent direct regulation) and explicitly framing the intervention as the elimination or curtailment of a subsidy create an illusion of lesser regulatory intervention that helps overcome opposition to the legislation. The normative implications of mental and rhetorical framing of deduction as subsidy are troubling. It is becoming increasing clear that disallowed deductions generally are a poor means of implementing economic policy, and the power of subsidy framing and rhetoric provides another reason to be skeptical of corporate governance and similar business regulation incorporated in the tax code.

TABLE OF CONTENTS

INTRODUCTION
 I. OVERVIEW AND BACKGROUND ON
    DISALLOWED DEDUCTIONS
    A. Examples of Disallowances
    B. The Literature on Disallowances
    C. Tax-Like Disincentives Outside the Tax Code
 II. MENTAL AND RHETORICAL FRAMING OF
    DEDUCTION AS SUBSIDY
    A. Mental Framing
       1. Choice of Baseline--In General
       2. Inherent Ambiguity
       3. Choice of Baseline--False Equality of
          Those Not Similarly Situated
    B. Rhetorical Framing
    C. Experimental Evidence on Mental and
       Rhetorical Framing
III. THE CONSEQUENCES OF FRAMING
    DEDUCTION AS SUBSIDY
    A. Judicial Framing
       1. Tank Truck and Common Law
          Disallowance of Deductions on
          Public Policy Grounds
          a. The (Missing)Analysis of
             Tank Truck
             i. Optimal Deterrence Model
             ii. Complete Deterrence Model
          b. The Impact of Baseline Selection in
             Tank Truck
       2. Nonsubsidy Framing in Sullivan
       3. Rhetorical Versus Mental Framing in
          Case Law
    B. Political Framing
       1. Mental Framing and Codification of
          Public Policy Disallowances
       2. Subsidy Appearance and Response to
          Public Outrage
       3. Mental and Rhetorical Framing and the
          Choice To Structure Regulation as
          Tax Disallowance
          a. Regulatory Options and Considerations
          b. Overcoming Resistance to Interference with
             Private Contracting
          c. Regulatory Illusion of Deduction
             Disallowance Compared with
             Economically Equivalent Nontax
             Disincentives
          d. Does Framing Impact Structure?
          e. Regulatory Illusion Versus
             Fiscal Illusion
 IV. IMPLICATIONS OF MENTAL AND RHETORICAL
    FRAMING OF DEDUCTION AS SUBSIDY
    A. Mental Framing
    B. Rhetorical Framing
    C. Structural Choice or Framing
CONCLUSION
APPENDIX

INTRODUCTION

The federal tax code includes numerous provisions that discourage particular nontax behaviors. "Sin taxes" and other excise taxes do so, of course, but often disincentives take the form of curtailed or disallowed business tax deductions. Consider Internal Revenue Code (Code) section 162(f), which disallows deductions for fines or penalties paid to the government for violations of law, (1) or section 162(m), which limits the corporate tax deduction for nonperformance-based compensation paid to certain senior executives. …

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