Wall Street's Food Stamps

IF Americans support any type of government social spending, it's nutrition assistance. Few politicians to the left of Jesse Helms think the government should allow people to starve.

Although nutrition subsidies are important, there is one that ought to be eliminated. Those who get upset over Reaganesque tales of free-loaders buying steaks with food stamps should be infuriated by the program that allows rich investment bankers to dine on filet mignon at the taxpayers' expense.

That program is the corporate tax deduction for business entertainment, which subsidizes the fabled "threemartini lunches." Although it isn't ordinarily considered a welfare program, the travel and entertainment ("T and E") deduction works exactly like one. Corporations can deduct 80 percent of the cost of their executives' expense account lunches (and other entertainment expenses) from their taxable income.

JUST like a welfare program, this deduction represents a cost to the government that the rest of us pay for through higher taxes. Unlike welfare programs, however, the benefits of this handout go to people who don't need them.

And the cost is huge. A 1985 study estimates that corporations bought 12 percent of the alcohol sold at retail in that year. The cost to the government of deducting all those martinis was approximately $5 billion. Compare that to the $5.6 billion that former President Ronald W. Reagan proposed for child nutrition and food programs in 1986, and you get a sense of the magnitude of the waste and unfairness in the T and E deduction.

Every time an investment banker sits down with a client for Lobster Savannah and Dom Perignon at the Locke-Ober, you and I have to pick up about $73 dollars of their tab.

CORPORATE executives who ordinarily trumpet the glories of the free market have few qualms about defending this massive subsidy and distortion of the free market. They say that business deals wouldn't happen if companies couldn't stick the taxpayers with part of the cost of their power lunches.

Come now, do you really think that corporate America would grind to a halt without the T and E deduction? Either business deals would be struck in the office where they belong, or business people would continue to dine out, but pay their own way.

If they did pay their own way, eating out would be cheaper for all of us. Just like any other subsidy, favorable tax treatment artificially stimulates demand for a product and increases the price of that product. Were it not for the T and E deduction, restaurants would be cheaper for everyone, including those of us who don't enjoy generous expense accounts.

As one tax partner at the investment firm Touche Ross said, "Any time the after-tax consequences are greater, management looks harder at expenses." In other words, if Maison Robert's corporate customers couldn't deduct their $16 desserts, Maison Robert would have to lower its prices. That's what the free market is all about.

DEFENDERS of T and E have another argument though, one that appeals to the worst excesses of supply-side theory. You see, the entertainment industry is one of the nation's largest employers of unskilled labor. If we took away the subsidy for shrimp cocktails, think of all the poor waiters who would be out of work.

The problem with this argument is that if corporations didn't spend their money on food, they would spend it elsewhere--by buying more products, employing more workers or, better yet, investing in new productive capacity.

Any government subsidy, be it a tax break or a direct expenditure, produces jobs. The best subsidies increase production of something of value to society that otherwise would be underproduced.

Three-martini lunches do not produce any such "public good." In fact, because alcohol impairs judgment and decreases productivity, its consumption is really a "public bad." Surely the government should not subsidize a business practice that makes business less productive and efficient.

But corporate America just can't break its addiction to taxpayer-financed perks, whether they contribute to good business or not. I will believe that American corporations are serious about their free-market rhetoric on the same day they refuse to take their market distorting T and E deductions.

AT one time, companies could deduct T and E expenses for any occasion "conducive to a business discussion," whether or not any such discussion took place.

After the regulations were changed to require that entertainment be "directly related" to business activity, the national tax practice director for Touche Ross advised executives that "it may be necessary to schedule significant business meetings before or after [an event] to meet these requirements."

"What?" the bond traders moan, "We have to discuss business at a business lunch? The injustice of it all!"

Eliminating T and E deductions ought to be the perfect issue for Democrats. It reflects their professed support for the common people against the greedy. Former president John F. Kennedy '40 used the issue to his advantage. So did former president Jimmy Carter, who campaigned against the injustice of bankers deducting expensive lunches when a "truck driver cannot deduct his $1.50 sandwich."

DESPITE the obvious populist appeal of the issue, both Kennedy and Carter encountered little enthusiasm among congressional Democrats for limiting the deduction. And when former Senator Gary Hart (D-Col.) proposed cutting the deduction by 30 percent and using the savings to restore Reagan's cuts in the school-lunch program, he found only 30 votes in the Senate.

In the 1986 tax reform bill, a measure that eliminated dozens of cherished tax breaks altogether, Congress limited T and E deductions to 80 percent of their cost. That is a step in the right direction, but it isn't nearly enough. Wealthy investment bankers do not deserve any government handout at all.

Democrats should jump on this potent issue before the Republicans claim it. Under Reagan, both the Treasury Department and the Office of Management and Budget proposed limiting T and E deductions. If Democrats are serious about favoring the working class and opposing corporate free-loaders, they should eliminate the T and E deduction entirely.

This is the third in an eight-part occasional series on the taxpayer-financed perks enjoyed by middle- and upper-class Americans.