Amid mounting outrage at corporate malfeasance, industry giants—from BP to Hyundai—are from time to time slapped with symbolic fines for the harm they inflict on people and the environment.
However, the payment of these damages is often subsidized by U.S. taxpayers, thanks to a tax loophole that has saved companies billions of dollars.
Patricia Cohen reported on this phenomenon in The New York Times on Tuesday. "Although the tax law forbids deductions for criminal fines and penalties owed to the government," she explains, "other kinds of payments — to compensate victims or correct damages — are eligible for a tax deduction."
Cohen notes that the question of which payments are deductible "is often a mystery to the public." That's because the "overwhelming majority of cases, whether with a government agency or private individuals, are settled, enabling companies to hide just how much of the agreement’s sticker price is eligible for a write-off."
Cohen's observations are not new. In January 2013, U.S. PIRG released a report entitled Subsidizing Bad Behavior, which tracks the process by which regulators systematically settle with "reckless" corporations out of court.
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"Doing so allows both the company and the government to avoid going to trial and the agency gets to appear as if it is teaching the company a lesson for its misdeeds," the report states. "However, very often the corporations deduct the costs of the settlement on their taxes as an ordinary business expense, shifting a significant portion of the burden onto ordinary taxpayers to pick up the tab."
Since the report, corporate savings on the public's dime have continued to pile up, as attempts to reform the tax loophole system have faltered.
Hyundai, ordered last year to pay $73 million to the families of two children killed by a steering defect in their cars, is likely to have its penalty substantially lightened by taxpayer dollars.
JPMorgan—whose fraudulent mortgage claims helped take down the economy in 2008—wrote off a large chunk of its much-touted $13 billion fine. The same principle is likely to apply to Bank of America’s record $16.65 settlement in August.