When Taxes Attack

By Kevin D. Williamson

Tuesday, September 29, 2020

 

In 2009, British actor David Prowse — the guy in the Darth Vader suit in the original Star Wars trilogy — briefly focused the reading world’s attention on the practice of “Hollywood accounting” when he revealed that he had never received a residual payment for Return of the Jedi because the film had never, on paper, turned a profit. The film cost $32 million to make, and it grossed $475 million, but — thanks to the magic of Hollywood accounting — it had never shown a net profit.

 

It’s a common story: The novelist Winston Groom never received a profit distribution from the very successful film of his novel Forrest Gump because it never officially made a dime, some of the Harry Potter movies were on paper money-losing propositions, etc.

 

The go-to Hollywood-accounting move is tacking heavy expenses onto a film’s account in order to keep money in the pockets of studios, executives, and investors rather than paying them out to actors and others who accept a percentage of net profits in lieu of greater cash compensation. For instance, Michael Moore’s Fahrenheit 9/11 — brought to you by Harvey Weinstein and brother Bob — ended up putting some $20 million into the pocket of working-class hero Moore (the favorite son of Flint, Mich., who never actually lived in Flint, Mich.), but Moore sued, claiming he had been underpaid by millions. During the litigation, certain expenses came under scrutiny, among them the “costs of hiring a private jet to carry a single passenger to Europe,” according to the Hollywood Reporter. These are the people who like to lecture the rest of us about “inequality.”

 

Private jet service — for one — to Europe: nice, nice, nice.

 

Because we have a very, very stupid tax code and social norms that accept relatively high levels of petty personal corruption, owning a business can be a good way to finance a pretty high mode of living while simultaneously reducing your tax liabilities. There are a great many businesses, especially privately held ones, whose owners and executives use them as a kind of slush fund. It isn’t hard to do. If you decide you want to take a vacation in Gstaad, you can schedule a board meeting or corporate retreat there and then treat your travel costs as a business expense. This is much more attractive to smaller private businesses than to large public ones, because publicly traded corporations are subject to oversight not only from the SEC etc. but also from their shareholders, who might not like to see their money wasted on champagne and Gulfstream hires. But if you are a business that has, say, $100 million a year in revenue, with family members on the board and no publicly traded stock, then you are not spending anybody else’s money on your — I hate this word — lifestyle. You are spending your own money, but spending it pre-tax. What that means is that a $1,000-a-night hotel effectively costs you about $600. The kind of people who pay the top tax rate are also the kind of people who travel a lot, who spend a lot of money on restaurants and wine, who stay in nice hotels, etc. Being able to treat some considerable share of those outlays as business expenses can really add up.

 

This isn’t illegal. It isn’t even necessarily unethical.

 

Modern work, especially among the highly paid and highly skilled, isn’t very much like 20th-century industrial work. There aren’t whistles announcing the end of the shift; most of the workers in the upper half of incomes — i.e., the ones who pay federal income tax — don’t punch timecards or sit at a desk from 9 a.m. to 5 p.m. There are many people working in technology, finance, media, and other high-paying fields who really cannot draw a sharp distinction between working time and private time or say with any degree of specificity when their workday begins and when it ends. In such situations, it is natural and nearly inevitable that some blending of professional life and private life will occur.

 

If Joe Businessman from Muleshoe, Texas, has to go to Bozeman, Mont., on Monday for a series of meetings that ends on Thursday but decides to fly back on the following Monday instead and spend the weekend fly fishing, then the cost of the flights is going to be the same — it might even be less. The business expense of the airfare might be the same, but in the latter case the businessman will some additional personal benefit from it. Has he somehow cheated someone? Not really. Or think of the case in which an American business owner has to travel to Europe for a half-dozen meetings scheduled over the course of a month. Say she does some sightseeing and personal entertainment on the days when she doesn’t have a meeting scheduled. Even with the business paying for meals and lodging on non-meeting days, it probably makes more sense from a legitimate business point of view to keep her there for the whole month rather than fly her back and forth. Maybe she’s a new mother and the business pays to send her child and husband with her. If she normally flies private, then including the family doesn’t add much to the expense. From one point of view, this is a family taking an extended European vacation and getting a tax advantage from it; from another point of view, this is how work gets done in 2020.

 

Incidentally, this is not exclusively a rich-and-famous gambit, or a new one. My mother was a secretary and her husband was a janitor at a high school, and together they did not make very much money, but, in the merciless ravenous wicked capitalist economy of the 1980s, they managed to come into possession of a rental property. It put enough money into their pockets to make the payment on the house we lived in, but — for tax purposes — that rental property always, always, always lost money. There are many like it around the country.

 

As long as we tax businesses on their profit — meaning, roughly, revenue minus expenses — then we will have to use some discretion about what counts as a legitimate business expense, and that is going to be, given the realities of modern work, a matter of judgment and personal sensibility. That creates some real benefits for business owners and executives, but it also exposes them to risks: If the IRS decides to go after you on your expenses, the lack of hard-and-fast rules operates to the taxpayer’s disadvantage, not his advantage. Being a politically unpopular person with some questionable expenses is a good way to go to prison.

 

From time to time, politicians try to stop businesses from making business decisions the politicians do not like by threatening to eliminate the deductibility of any associated expenses. You may remember a few years ago a big fight about businesses’ allegedly exploiting a tax loophole to get a subsidy for offshoring. That was, mostly, nonsense. It wasn’t a loophole or a technicality, although another term for “loopholes” and “technicalities” is “the law.” If a business decides to set up shop abroad, then there are going to be expenses related to that — acquiring property, building a facility, paying lawyers to figure out the tax and labor rules in the new jurisdiction, etc. — and these are ordinary business expenses that can be deducted. The politicians generally run up against reality on these things: It is pretty difficult to have a tax code that allows money paid for legal advice to be treated as a regular business expense unless the lawyer facilitates a course of action that Elizabeth Warren wishes he wouldn’t.

 

There are alternatives, but they have problems, too. We could avoid the question of deducting expenses entirely by taxing gross revenue, but that might seem unfair to the grocer who has $100 million in revenue but $1 million in profit, who would pay the same tax as the law firm that has $100 million in revenue and $98 million in profit. My own preferred approach would be to eliminate corporate taxes entirely, taxing the money as individual income when it hits somebody’s pocket, but that wouldn’t solve the problem of how we treat expenses — we would still have to decide which are legitimate and which are improper or fraudulent.

 

This leads us, inevitably, to the case of Potemkin billionaire Donald J. Trump, who refused to release his personal income-tax information but couldn’t keep the New York Times from getting into it and merrily writing it up. The story the Times tells comports with my longstanding impression of Trump, who, as I have been arguing since he first got into the 2016 presidential race, was much more successful as a reality-television grotesque than as a real-estate developer. As one critic acidly put it: “He thinks he’s Conrad Hilton, but he’s Paris Hilton.” But it is worth keeping in mind that the tax provision under which Trump was able to carry back (as opposed to carry forward) some extraordinary losses and thus claim a huge tax refund was not some arcane tax scheme — it was part of the Obama administration’s stimulus package.

 

Does anybody remember who was in charge of that? Take your time — I’ll wait.

 

From NPR: “Joe Biden was instrumental in getting the 2009 recovery act through Congress, then supervised the stimulus for the Obama administration.” Call it a handout to the rich if you like — because it surely was that — but maybe take a little note of whose hand was doing the handing out.

 

One of the truly irritating aspects of our politics is politicians’ writing certain benefits and incentives into the tax code and then b****ing and moaning when those tax provisions . . . work. Trump’s using the carryback provisions to get a big tax refund isn’t a perversion of the Obama policy — it is what the policy was created to do. You can’t write a tax law that says, “We’re going to give a big refund to people who lost a lot of money — unless we happen to think they’re jerks.”

 

Starbucks got into this a few years ago: In addition to being a fast-food chain, Starbucks also is a manufacturer of packaged goods, and, as such, it benefitted from tax credits for manufacturers. The shrieking and wailing were obscene — and they came from the very people who wrote the damned law in the first place. As though the law said, “Manufacturing credits — but not for you, Starbucks, you hateful and ubiquitous icon of yuppie consumerism!” If you don’t want people to use tax credits to avoid taxes, then don’t create tax credits that enable people to avoid taxes.

 

The other takeaway from the Times’ deep dive into Trump’s finances is — yikes! Given what he actually has, what he actually owes, and the money he’s been losing, he looks set to end up in bankruptcy court again. Call the movie: Trump Bankruptcy V: This Time, It’s Personal.