On July 14th, the IRS held a public hearing for the debt-equity rule (section 385 of the IRS code) that the Treasury Department proposed last April. The hearing, which had as many as 16 speakers from various industries,...
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Blaming a Tax "Loophole" Doesn't Make a Tax on Obesity More Palatable
In early May Senators Tom Harkin (D-IA) and Richard Blumenthal (D-CT) introduced a bill called the, "Stop Subsidizing Childhood Obesity Act of 2014." The bill targets business by eliminating the income tax deduction for advertising and marketing expenses for companies that market unhealthy foods to children. The bill uses the tax increase on these businesses to help fund the Department of Agriculture's Fresh Fruit and Vegetable Program.
Administering the tax first requires creating a legal definition of unhealthy food. The difficulty of this task and associated tax complexity has already been demonstrated by taxes on candy and soda at the state level. In this case the federal government will contract with the Institute of Medicine to develop a strategy to properly identify “food of poor nutritional quality” and “brands that are primarily associated with food of poor nutritional quality.”
Regardless of the bill's administrative costs or its policy merits, the bill singles out individual industries and mischaracterizes the current tax code by mislabeling true business costs. To disguise the tax increase the bill characterizes the current adjustment for marketing and advertising as a "nonsensical tax loophole," not an ordinary and necessary business expense.
Fully accounting for the costs associated with earning revenue in order to define business income is good tax policy, not a so called "loophole." Business taxes are levied on profits, meaning revenue minus the costs of earning that revenue. Typically, advertising and marketing are included in these costs, and sound tax policy requires they should be.
If policymakers believe that select businesses should bear the costs of childhood obesity then they should consider proposals on that basis. However, declaring that there is a current tax loophole that rewards businesses that advertise to innocent children obscures the actual debate. A loophole implies that there are extra dollars escaping the tax base, but advertising deductions are well within the federal tax base's current definition and should be.
Therefore, instead of simply closing a loophole and making the tax code “fairer”, as this tax change has been presented, this policy is would increase costs to business, make the tax code less neutral, and add unneeded complexity.
Since the implementation of Obamacare government has an increasing stake in rising healthcare costs. Therefore, policies designed to reduce obesity have become increasingly popular and contentious. If these policies become the norm, it is important that that they are designed according sound tax principles. For example, if senators intend to boost funding for the Fresh Fruit and Vegetable program, then they should do so in a neutral fashion, not by punishing businesses or the tax code.
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