Tax incentives still matter. While “follow the money” is an excellent concept for seeking greater information about “what has happened,” by identifying and following the incentives is far superior for determining what “will” happen.” In economic terms, the differences are substantial. One is a lagging indicator (where we have been) and the other is the leading indicator (where we are going).

The new law states, no deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.
While fiscal purists dislike using the tax code for anything other than revenue raising, the fact is that our tax code has for decades been used as a social behavior “modifier.” From energy incentives that created windmill farms; to investments in affordable housing; to investments in research and extermination, and many others, the tax code is chock full of behavioral incentives.

Currently, the tax code is being used to protect victims of sexual harassment and abuse by forcing businesses to make a choice. The choice is simple while also expensive. The new law states, no deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.

In plain language, this means if a business wants to keep the details of an allegation secret and out of the public view, they are allowed and are able to. The cost of this path is that the payments will no longer be tax deductible. This means that for every $1M in payments, businesses no longer save $300k in average state and federal taxes. This hits the management and shareholders where it counts…in their full pocketbook and in their earnings.

The alternative would be to allow the information about the settlement to be in the public domain. This allows the victims their voice. The public value to this is that it informs and allows other victims to know they aren’t alone and to allow interested trial lawyers more access to historical inappropriate indiscretions. For this openness and transparency, the company should be able to deduct the costs of settlements and save taxes.

These are difficult choices. As they should be. These behaviors are demeaning, damaging, and can cause lifelong challenges for the victims. The perpetrators are far to often, the privileged, the powerful, and the “untouchable” (Dominant Culture). Far too frequently there is a culture of allowable bad behaviors with no accountability. Secrecy only perpetuates the ability of the Dominant Culture to continue their abuse of power and privilege. It is time to stop these behaviors and align incentives where they belong…in the prevention rather than in the forgiveness.

Our society should not subsidize bad behaviors by allowing both secrecy and deductibility in these cases.

Have a question? Contact Daniel Morris.

Your comments are always welcome!