Oskar Frampton III
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Oskar Frampton III in Oskar Frampton III - Media Watcher,

About the S&P Fine, and Tax Breaks

Keeping with my fascination with public response to economic issues (I think I found my niche here if mods don't mind this old man noodling around) I was reading about the fact that Standard & Poor can deduct in their taxes a good amount of the fine they have to pay for (so they say) "misleading the public during the mortgage scandal." They can deduct half of the 1.37 billion dollar fine they have to pay to the government in taxes. Which then, according the NYT, means the public has to foot the bill.

Look at the tone of these comments! This exchange is great:

fmdurbin

chicago, IL 2 hours ago

The idea of punitive damages levied on public corporations as punishing wrongdoing is quite absurd. The only ones hurt by the punitive damages are the shareholders and (if one looks to the income tax effect) the taxpayers.

Corporate wrongdoing is the result of the actions of individuals. Assessing a punitive damage award against the corporation does nothing to deter the wrongdoing by the individuals. At most, it suggests to management that it needs to do better at policing itself.

But the shareholders certainly have nothing to do with the wrong doing. They can't be blamed for the conduct of management because they have no more power to control management by voting for directors than voters had in Nazi Germany or Stalin's Russia. The shareholders can only vote for or against management's slate of directors, but, even if a majority of the shareholders vote against a management nominated director, the nominee is elected anyway.

Only the rare exception of a proxy fight enables some shareholder democracy, but that requires a deep pocketed entity to initiate the fight.

One can justify the hurt to shareholders by saying that the shareholders benefit from the profits of the corporation and so should bear the costs of the corporate wronging as an inseparable part of the corporate profit making. But that is just the sort of rationale which explains the income tax deduction.

So the realistic way to look at punitive damages is as a sort of damage bonus for plaintiffs.

31 minutes ago

Well, the first premise is wrong. The corporation uses income to grow, develop, and maintain itself. Profits to share holders come after after those things are taken care of. Clearly, punitive damages affect the corporation directly, and the share holders are only affect by association through the corporation. Although share holders may not make direct decisions, management will change its policy, or the corporation will fail to succeed.

The shareholders had nothing to do with the wrong doing, and no one is blaming them, so it's not clear why this is mentioned. Is the point that share holders should be shielded from the failures of management? That makes no sense. Share holders voluntarily invest in the corporation. If you make a poor investment decision, you have no right to be shielded from that.