I've seen few stories that examplify the terrible state of the U.S. tax code than one in yesterday's New York Times (Sept. 10, 2011) detailing how our tax code bestows millions of dollars in tax breaks on the video gaming industry. For example, Electronic Arts, the billion dollar maker of the best selling zombie killing game "Deep Space 2," receives all sorts of benefits from deferred to revenue to executive stock option exemptions to tax credits for software development. Video gamaing is now larger than the music industry. Despite record sales and blockbuster games, Electronic Arts has figured out how to lose money on paper to avoid tax liabilities!
It's a tax game, and the company with the most saavy accounting department wins. As The New York Times reports:
"But it’s a lot easier to create a tax break than to eliminate it. That leaves a generous assortment of tax incentives available to all types of companies, like Electronic Arts, with skilled accounting departments.
"Electronic Arts has also lobbied successfully for more tax assistance. The architect of the company’s strategies in recent years was Glen A. Kohl, a tax lawyer colorful enough to publicly compare himself to Bruce Springsteen and to joke in the pages of The Wall Street Journal that his dog, Rubin, shared the name of the Treasury secretary under whom he served (Robert E. Rubin).
"After working in the Treasury Department during the Clinton administration, Mr. Kohl entered the private sector and became head of E.A.’s tax department in 2004, leading the company as it aggressively lobbied for a federal tax break on domestic production and set up a matrix of offshore subsidiaries, many in low-tax countries.
"As a result, the company with the defiant sales slogan, “Your Mom Hates Dead Space 2,” in effect gets financial help from moms and other United States taxpayers to reduce its federal tax bill.
"Company officials say they have no qualms about taking all the tax breaks legally available to them. To do otherwise would be like a consumer “insisting on paying full price during a store sale,” wrote Jeff Brown, a company spokesman. Even E.A.’s competitors acknowledge that its tax strategies aren’t particularly aggressive compared with others in the industry."
And there you have it. Work for the government's treasury department, learn the ins and outs of the game, then go work for a private company who will pay your really big bucks to game it. It's all perfectly rational.
This is the reason why we need a flat tax that applies equally to people and businesses. Targeted business incentives do little more than provide a way for businesses to fleece the public and put money in the pockets of those that know how to game it.
So, in one sense, we shouldn't be surprised that the video gaming industry is learning how to play the game. They are probably learning from it. Perhaps the next game will be: "Deep Tax Fleece."