Leaving On a Jet Plane

As part of the debt ceiling debate charade, one of the topics that came up was the closing of tax loopholes and/or subsidies for the well-heeled. Of these, the one that got a lot of play in the mainstream media has to do with the loophole concerning the use of corporate jets for private purposes. Like most Americans, the closure of such a loophole sounded like a good idea, though few of us had any idea what the specific loophole is in the first place.

As it just so happens, I recently read about this very loophole in David Cay Johnson's superb book, Free Lunch. It turns out that this particular loophole/subsidy is even worse than what I had imagined!

When a corporate executive uses the company jet for personal flights, he does not pay anything. Instead the value of the trip is treated as a taxable fringe benefit, just like the personal use of a company car. But the way Congress values that trip means the executive pays only pennies of the real cost and then in the form of higher income taxes.

Wouldn't you like a deal like this? Wouldn't you like it if, the next time you wanted to visit a friend or relative, you could fly for free and simply add the cost of the flight as part of your adjusted gross income at tax time?

Taxpayers pick up one-third of the real cost because buying and operating a corporate jet is a tax-deductible business expense. Shareholders of publicly traded companies pick up the other two-thirds. That means ordinary folks who have put their retirement money into companies are dinged twice for this executive perk, once as taxpayers and a second time as investors.

In calculating the value of the fringe benefit that executives get, Congress leaves out huge portions of the real cost. First, the value is limited to what are called incremental costs, which excludes the basic costs of buying the plane, staffing it, and insuring it, but does cover fuel and landing fees. Then the government excludes the cost of "positioning" flights.

When any of us peons purchases an airline ticket, the cost of that ticket reflects the associated costs of purchasing the plane, staffing it, insuring it and a nice profit on top of that. I bet ticket prices would be a heck of a lot lower if those first three costs were removed!

For example, the head of one New York investment bank took the company plane to China on business, then sent it back to Chicago to pick up his son and fly him to a ski vacation in Colorado, and then had the plane return to Asia to pick him up. Only the two-hour flight from Chicago to Colorado was counted as a fringe benefit.

Here is where a simple change in the tax code would make this loophole slightly more fair. The flights to and from Asia, when said executive is NOT on the plane, should be include in the fringe benefit calculation. Those flights had nothing to do with a business expense!

Many companies reimburse executives for the taxes they must pay on the fringe benefit of making personal use of such planes. Some even pay the taxes on the taxes, making the trips free rides in every sense of that word.

And where do such companies come up with this money? From you and me, of course! They jack up their prices for the products and services they peddle. Consequently, as you can see, the American public ends up picking up the entire tab.

No wonder conservatives didn't want this precious loophole closed!

I'll be sharing a few more tidbits from Johnson's book in the coming days. The way the wealthy have set up our system to be gamed truly is astounding.