Tax Reform in an Age of Sexual Harassment

Tax reform is, in many ways, a product of its time. So I guess it shouldn’t surprise anybody that the late-2017 tax reform effort would somehow intersect with the post-Weinstein revelations of rampant sexual harassment and assault by powerful men.

And yesterday it happened: Senator Ken Buck introduced an amendment to H.R. 1. Under his proposed amendment, businesses would no longer be permitted to deduct payments for legal settlements, costs, fines, and fees associated with sexual harassment or sexual assault. 

A couple thoughts on this: first, it’s nakedly political. Buck, a Republican, lays the onus of sexual harassment and assault squarely at the feet of Hollywood. And, given the revelations about behavior from Weinstein, Spacey, Louis C.K., and oh so many others. But laying it at the feet of Hollywood ignores the conservative Bill O’Reilly and Roger Ailes, the ultra-conservative Roy Moore, the libertarian-ish Silicon Valley, and even the bipartisan halls of Congress itself.

But ignoring the nakedly partisan nature of its introduction, could this be a good thing?

Legal settlements and judgments against businesses are generally deductible as business expenses. They aren’t always, though: Congress decided to disallow deductions for fines and other penalties paid to a government for the violation of a law. This disallowance comes from the frustration-of-public-policy doctrine; Congress decided to disallow (certain) deductions for costs that frustrated public policy.

Sexual assault and harassment clearly frustrate public policy, so disallowing deductions associated with them wouldn’t be out of line.

And what would the result be? Settlements for sexual harassment would become more expensive for employers. For example, Fox News has paid at least $45 million in settlements for Roger Ailes’s sexual harassment. Because Fox pays taxes at a 35-percent marginal rate, and because those settlements were deductible, though, the after-tax cost to Fox was $29.45 million. That’s not nothing, but it is significantly lower.

If Fox (and other employers of potential harassers and assaulters) had to bear the full cost, perhaps it would do a better job training, screening, overseeing, and firing its employees, rather than turning a blind eye.

Of course, maybe it wouldn’t: maybe employers would refuse to bear the full costs of enormous settlements. Even that, though, could be a good result: if employers are unwilling to settle, cases would presumably go to court. I suspect that courts are more likely to ignore the tax cost to defendants than the defendants, and going to court means that the payout and details of abuse and harassment are less likely to be buried by a nondisclosure agreement.

So is Buck’s proposed amendment a good idea? Well, like I said, it’s nakedly partisan. And it’s clearly a product of today’s news cycle. But it’s not necessarily a bad idea.