If You Own the Business, You Can Expense Almost Anything
A new study shows how owners tend to charge more of their personal consumption to the firm.
Not typical fare from the corporate cafeteria.
Photographer: Akio Kon/Bloomberg
Arbitrage is one of the most fundamental principles of economics, and that holds for the tax system as well. People will go to great lengths — buying a home they can barely afford, say, or running up itemized expenses — to minimize their tax liabilities. And as knowledge of the system evolves, they devise new methods for tax arbitrage.
A peculiar problem arises when personal income tax rates are much higher than tax rates on corporate perks and benefits. Assume, for instance, that workers face marginal income tax rates of 50% to 60%. Such tax rates are not unusual in Western Europe, and can also apply to upper-class workers in New York and California. Now imagine that a company paid its workers somewhat lower wages than it would otherwise, instead offering extravagant in-kind benefits.