When a defendant corporation is hit with punitive damages in a jury verdict, that means that in addition to causing the plaintiff’s injuries or damages, the corporation also was guilty of wrongdoing. Punitive damages are large amounts of money that the losing defendant must pay over and above compensatory damages, in order to make it too expensive for the company to keep doing what caused the original problem. This is one of the virtues of the civil justice system. Thanks to punitive damages, a lawsuit by a single injured party can result in a sufficiently painful financial penalty that the corporation has a significant incentive to reform.
So why do the tax laws allow companies to use punitive damages as tax deductions, since it 1) lowers tax revenues and 2) makes the damages less expensive, less painful, and less of an incentive to correct unsafe, dangerous or dishonest practices? Good question. Probably because the companies that get hit with the most punitive damages have contributed lots of money to elected officials so their negligence and corrupt practices don’t cost so much when they get someone crippled or killed.
Huge, scary budget deficits have a silver lining, however, and one is that completely unethical tax deductions will usually be the first to go when the government gets serious about revenues. Sure enough, it appears that the U.S. Senate is finally ready to ditch the federal tax deduction for companies that have to pay punitive damages.
Voting 60-37, it approved an amendment to the American Jobs and Closing Tax Loopholes Act of 2010 that ends the deduction. The bill is now pending final approval in the Senate after passage by the House of Representatives last month.
The bill should have passed unanimously. Allowing companies to deduct punitive damages is backward ethics, rewarding misconduct. It is like allowing deductions for criminal fines and traffic tickets. The Republicans who voted against repealing the loophole should be asked by their constituencies why they think the nation should subsidize conduct that juries have determined is reprehensible. That isn’t supporting private enterprise; it’s supporting private enterprise acting badly.
Ethics Alarms 
Maybe. But it’s also leaving corporations vulnerable to radical political organizations (usually in the guise of “civic minded groups”) filing lawsuits over everything under the sun until they find a sympathetic judge and jury. And if that group also has a sitting government behind it (or if that government is the up front initiator for less than honorable reasons)… that’s where Senator Barton’s “shakedown” fears begin. To deprive companies of this tax break leaves them more vulnerable than ever to targetted destruction by active socialists. The Republicans realized this, having seen first hand Obama’s “tendancies” in this area. They (and I) fear the subversion of the free enterprise system by a “death of a thousand cuts”. Note that smaller businesses will be even more vulnerable, lacking the legal resources of the major ones. And the big ones are so cowed by the government and its policies that they often capitulate without a fight, preferring political “contributions” that are little more than bribes to keep themselves free and running for a little longer.
But the system really doesn’t work that way, Steven. The vast, vast majority of punitive damage awards are richly deserved, and a litigant can’t keep bringing a suit until he or she gets a sympathetic jury…when you lose, you lose, and those corporate lawyers are pretty cagey too. If Congress doesn’t like the system, change the system, but making contradictory, take away with one hand, give back half with the other policies is lazy, cowardly, and unfair.
Jack, why stop here?? Much of the overall tax code could be called unethical following this line of thinking.
The tax law is incredibly unethical, absolutely. “When Congress passed unethical tax legislation, that’s not news. When Congress passes ETHICAL tax legislation, now THAT’s news!”
The tax laws are a labyrinth worthy of the Minotaur. So are corporate regulations. Think of how many manhours and how many funds corporations must invest in often massive legal departments, even for business as usual, as a result of this. And this, naturally, gets passed on to the consumers and stockholders. Only the lawyers and the politicians gain.