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![handle is hein.taxfoundation/iretcgadv0047 and id is 1 raw text is: IRETK
August 24, 1995 No. 49
SHOULD THE TAX CODE PUNISH
CIGARETTE ADVERTISERS?
President Clinton was asked during an Oval
Office interview on MTV whether he favored
ending the tax deductibility of
cigarette advertising costs.
The suggestion delighted the Cigarette adve
President and he replied remain tax
enthusiastically, I'll look into they are
it. It's an interesting idea. expenses incu
Nobody ever even raised it to income.
me before. Maybe you [the
MTV interviewer] should be
here making public policy.
That's great. The idea the President endorsed is a
back-handed way of preempting cigarette companies
from marketing their products.
Leaving aside the question of whether MTV
interviewers would be an improvement over current
White House policymakers, nondeductibility is a
terrible idea because it would
violate a fundamental income
tax principle: it would [Mlany believt
deliberately mismeasure devil's device,
income. Income is not gross contravene ba
receipts; income is gross or;de to penal
receipts minus the costs
incurred in generating the
receipts. Unless business-
related expenses are
deductible, the tax base will exceed actual income,
perhaps substantially.
Among the costs that businesses incur in
generating income are the costs of the services they
purchase in marketing their products. One of those
services is advertising. As such, the tax deduction
that businesses can now claim for the marketing
services they purchase, which includes advertising,
is entirely proper.
Although the President was asked about
cigarette advertising, the issue is much bigger than
cigarettes. Many proposals have been made over
the years to limit or disallow the write off of
advertising costs. If cigarette advertisements
become nondeductible, those seeking to restrict the
advertising deduction would likely move on to other
products, citing
Washington, one
rtising costs should
deductible because
egitimate business
rred in generating
that
but t~
sic ta.
ize th~
cigarettes as a precedent. In
prohibition or disallowance often
leads to another. Ultimately,
the deductibility of all business
marketing expenses could be at
risk.
More basically, many
believe that smoking is the
devil's device, but they should
not contravene basic tax
principles in order to penalize
those with whom they disagree. It is a threat to
fairness, liberty, and economic growth if those in
power decide that the operative rule of tax policy
ought to be that the end justifies the means.
Depriving businesses of the ability to deduct
advertising costs would be a large, hidden income
tax increase. Suppose, for
example, that a cigarette
smoking is the producer buys a $10,000 ad.
riey should not Because of that expense, it has
x principles in $10,000 less income. Under
)se with whom current law, it can claim a tax
deduction accurately reflecting
that reduction in income. If,
however, the government
refused to allow the deduction
because it involves cigarette advertising, the
business's tax bill would rise by $3,500 (35 percent
Institute for
Research on the
Economics of
Taxation
IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the
public about policies that will promote economic growth and efficient operation of the free market economy.
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