How Big Corporations Benefit From “Punitive Damages”


Tax Breaks for Abusing Consumers?

Corporations fined for harming Americans can get tax breaks for having done so. Tax breaks started as ways to stimulate economic activity, like deductions of interest on home mortgages or reasonable costs of doing business. But for lying about mortgage ratings and ignoring steering defects? 

What kind of business did Congress have in mind when it rigged the US Tax Code to allow corporations that harm consumers to first pay a hefty fine and then deduct a large portion as “a cost of doing business”?

Last week Standard & Poor’s settlement made news. It will pay $1.3 billion for having over-rated mortgage packages, a practice that helped ignite the financial meltdown of 2008 and impacted millions of consumers’ retirement packages. But what did not make enough news was that $245 million of that fine would be deductible. *

Hyundai agreed to pay $73 million in “punitive damages” for ignoring reports of steering defects that that led to deadly car crashes. “Punitive damages” rides again to a huge deduction.

Consumerist Questions: How did the US Tax Code get modified to allow a deduction for a “cost of doing business” that damages consumers? Who thought that up? Who voted for it? When confronted by it, politicians of both parties say the punitive damage dodge should be out of the US Tax Code. So what’s holding up getting that out of the tax code?

Senator Patrick Leahy has introduced a bill to “outlaw”* the punitive damage clause. So here’s a new kind of Takeaway:

Consumerist Takeaway Assignment: I am writing my senators to ask each one whether they will vote for Leahy’s exclusion of the “punitive damages” tax dodge. Write or email your senators and ask if they will support the Leahy bill. I’ll let you know what mine say and urge you to let me know what yours say. Stay tuned.

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* For more on tax breaks for punitive damages, see Patricia Cohen’s “When Company Is Fined, Taxpayers Often Share Bill,” New York Times Business Day, page B1, February 4, 2015. See page B9 for details of the S&P $245M deduction.

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