Suitable for Framing: Business Deductions in a Net Income Tax System
Walker, David I., William and Mary Law Review
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
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. …