TAX NEWS - June 2010

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U.S. Tax: Those Dastardly Deductions

Here's some boilerplate language from the IRS that Americans and their elected representatives need to discuss: "To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary."

As anyone in business knows, this means that virtually every penny spent on advertising, marketing, and public relations is fully deductible. Every TV commercial. All the newspaper and radio and Web ads. The salaries of marketing staff. And all the money spent on public relations to repair your damaged brand after, say, history's most massive oil spill - including a $50 million "apology" ad campaign.

This is as true for a local clothing shop running small ads in a weekly paper to The Gap spending $100 million to promote the latest back-to-school fashions. Taxpayers provide a subsidy to both businesses by allowing them to fully deduct these expenses from their total revenue, reducing their tax bill.

Incredibly, the tax code also allows companies to write off any punitive damages a court of law orders them to pay. This was true for the $500 million Exxon paid after the Valdez disaster, and will be true for any fines BP will pay for the Gulf spill. The logic is plain: It is considered an "ordinary and necessary" cost of doing business to violate the law and despoil the environment. That's equal parts bizarre and insane.

It's long past time for us to reconsider what's deductible, fully or partially, as a business expense, and everything should be on the table. In particular, we must reconsider whether enormous global corporations and wealthy chain stores should be permitted to deduct 100 percent of the billions they spend to promote their brands and products - often undermining the survival of small, local businesses.

This huge tax break for business, which is an incentive to create ever-larger enterprises, has also led to a society so steeped in marketing messages, so blanketed by advertising, and so overwhelmed with commercial speech that our view of ourselves and the world has been distorted. By design, today's sophisticated marketing messages mold our tastes and desires. They target our core notions of self, body image, social status, and happiness. Ubiquitous commercial messaging stokes our insecurities and creates phony "needs" that can be "satisfied" with a purchase.

While a society drowning in these ads is bad enough, the amount of tax revenue lost to this effort is enormous. Yet even in the midst of today's fiscal challenges, there is no discussion of this issue. Why? In part because what's left of American print and electronic journalism is largely funded by commercial advertising - a dangerous model for an industry charged with holding "the powers that be" accountable.

Do taxes on the increased profits that result from massive amounts of advertising equal or exceed the revenue lost from the advertising deduction? It's impossible to know, but it seems unlikely. Indeed, the largest corporations - the ones who can afford to spend hundreds of millions of dollars on saturation marketing - also spend handsomely on tax advice to avoid paying taxes. And the cost of that tax advice is fully deductible, too.

As part of a broader strategy to take back our society from the far-reaching and damaging tentacles of large commercial interests, we need a new model for what's considered "ordinary and reasonable" in business. Because it shouldn't be ordinary - and, in fact, it's entirely unreasonable - to subsidize the commercialization of every corner of our society just to help big companies "move product."

The next time you see a TV advertisement that aims to make you feel all warm and fuzzy about a multinational corporation, or uses the latest video effects to excite you about a new car or mobile phone, ask yourself: Is the tax revenue lost to this massively expensive, taxpayer-subsidized exercise in commercial speech better spent on something else?
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