Suitable for Framing: Business Deductions in a Net Income Tax System

64 Pages Posted: 9 Aug 2010

Date Written: August 9, 2010


The federal income tax code includes numerous provisions disallowing or curtailing income tax deductions related to such disparate activities as providing non-performance based compensation to senior corporate executives and business lobbying. The primary claim of this article is that a tendency to mentally frame business deductions as subsidies, often reinforced by rhetoric explicitly framing deductions as subsidies, helps explain these provisions. The traditional “public policy” disallowances directed at lobbying, fines and penalties paid by businesses, and antitrust treble damages respond to an appearance of a taxpayer subsidy that would follow from deduction, despite the fact that it is far from clear that these deductions, if allowed, would create an exception to taxation of net income. Disallowances directed at executive pay and other corporate governance matters also take advantage of an appearance of subsidy. In these cases, structuring an economic disincentive as a disallowed deduction (versus economically equivalent direct regulation) and explicitly framing the intervention as the elimination or curtailment of a subsidy create an illusion of lesser regulatory intervention that helps overcome opposition to the legislation. The normative implications of mental and rhetorical framing of deduction as subsidy are troubling. It is becoming increasing clear that disallowed deductions generally are a poor means of implementing economic policy, and the power of subsidy framing and rhetoric provides another reason to be skeptical of corporate governance and similar business regulation incorporated in the tax code.

Keywords: tax penalty, tax subsidy, framing effects, fiscal illusion

JEL Classification: H23, H25, K34, L51

Suggested Citation

Walker, David I., Suitable for Framing: Business Deductions in a Net Income Tax System (August 9, 2010). William & Mary Law Review, Forthcoming; Boston Univ. School of Law Working Paper No. 10-22. Available at SSRN:

David I. Walker (Contact Author)

Boston University School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

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