Opinion

Chrystia Freeland

Business, taxes and responsibility

By Chrystia Freeland
May 3, 2013

In recent months, people and their politicians around the world have been astonished to learn that big companies and billionaires will go to extraordinary lengths to pay lower taxes.

Thanks to the work of the International Consortium of Investigative Journalists, based in Washington, we have discovered that some of the most prominent public figures in the world have banked their fortunes in international tax havens, beyond the scrutiny of their national treasuries.

Meanwhile, Tom Bergin, my Reuters colleague, has become the scourge of the top U.S. multinationals by revealing their low effective tax rate in Britain. Mr. Bergin has found that between 1998 and 2012, Starbucks paid less than 9 million pounds, or about $14 million, in British taxes while registering sales of more than 3 billion pounds. According to statutory filings, Google made $18 billion in revenue in Britain from 2006 to 2011, and paid just $16 million in taxes.

Open the door to the top executives’ suite and you will hear howls of rage over the backlash these revelations have provoked. There is, from the corporate point of view, something a little disingenuous happening here. After all, countries, states and cities have spent the past several decades openly competing to set the lowest corporate tax rates in an effort to attract business. The fact that multinationals would respond to these incentives and turbocharge them with some international tax arbitrage is about as shocking as the discovery of gambling in Casablanca.

After all, as Lord Clyde observed, in a 1929 British tax case: “No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores.”

This principle – that you should seek to make the most money you can, provided you do not break the law – is the operating software of modern capitalism. As Milton Friedman put it: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

In the hypercompetitive 21st century, where every Apple is only one algorithm away from becoming a BlackBerry, paying the lowest possible taxes is not the exceptional policy of one particularly greedy chief executive – it is what every executive seeks to do to keep his job. That was what Andrew Kassoy, a former private equity investor, explained at a recent panel discussion at the Stern School of Business at New York University (Disclosure alert: I was the moderator).

Kassoy, who now leads a nongovernmental organization working to transform corporate behavior, argued that current publicly traded U.S. companies were “actually obliged to maximize their externalities” – economist-speak for behavior that harms the wider community – if that would increase their bottom line. Kassoy does not think that is a good thing, and, increasingly, neither do a lot of other people – the grim title of the session was “Can American Capitalism be Saved?”

He’s not the only one who is worried. In a recent interview, I asked Mark Carney, the governor of the Bank of Canada, about the ability of rich people and big companies to avoid taxes in a world of global capital flows.

“It is demonstrably a problem,” said Carney, who will take over as the governor of the Bank of England on July 1. “If there’s an ability to fundamentally, whether on a personal or a corporate level, persistently avoid tax, the consequence of that is that the burden of fiscal adjustments that are happening in virtually every advanced economy falls more heavily on those who pay their fair share. And they end up paying more than their fair share as a consequence.”

Closing the tax loopholes or tightening the lax tax enforcement that have deprived European treasuries of so much multinational corporate tax revenue is politically difficult and technically complicated. But what is even harder is figuring out how to better align the behaviors of the business titans with the greater good of the community as a whole.

After all, the companies that have been minimizing their European tax bills are ones we are accustomed to thinking of as the good guys. These are not the bailed-out fat cats of Wall Street or the crony capitalists of the emerging markets. These are the inventive entrepreneurs of the West Coast, who brought cappuccinos and search capabilities to the global masses. Starbucks energetically associates its brand with all manner of ethical causes, and Google’s motto is “Don’t be evil.”

In a new book, a University of Michigan business professor, Mark S. Mizruchi, contends that the forsaking of responsibility for the wider community is a big shift in the behavior of U.S. business and a central reason for the country’s political and economic malaise.

“The current American corporate elite seems to be leading us toward the fate of the earlier Roman, Dutch and Hapsburg Spanish empires, starving the treasury and accumulating vast resources for itself,” Mizruchi writes. He concludes his book with the hope that the corporate elite will rediscover “enlightened self-interest” and reform themselves.

Speaking at the New York University conference, Clay Christensen, one of the leading thinkers about the disruptive impact of the technology revolution, suggested that belief in a God who holds us accountable in the afterlife would make captains of industry more civically responsible today.

Christensen is right that to change behaviors we need to change incentives. Hellfire and damnation is one option; another is rewriting the rules of engagement between companies, countries and shareholders.

Comments
17 comments so far | RSS Comments RSS

Chrystia is it safe to assume you’ve never run a business? I own two little mom and pop shops with a total of 10 employees. Both reasonably profitable, both over 40 years old with current combined yearly revenues around $6 million. Rarely have we ever paid more than a few thousand dollars in federal corporate income tax.

How is that possible you say? Well, it’s because every intelligent business person reviews sales and pre-tax profits periodically and makes logical provision to spend them down in wages, equipment, and bonuses.

It would be insane to hold large amounts of post-tax profit in a company and pay 35% corporate income tax on it and then later dole them out to employees who would pay another 15-39% in personal income tax as wages or dividends. That’s double taxation and a horrible waste of the effort it took to make the profit in the first place.

I point this out because you and other reporters never do. Corporations pay lots of taxes on wages, equipment, and fuel, just not much in corporate income tax. That’s not gaming the system, that IS the system.

Posted by CaptnCrunch | Report as abusive
 

It’s not just business, as the IRS specifically states that you are not obligated to pay a dollar more than required under the rules Congress defines. Thus, we have an entire industry (and economy) structured around minimizing every persons’ tax liability.

If the author is consumed by the need for every person and every entity to pay their fair share, then go to a flat tax, and eliminating each and every deduction, ensuring that everyone (regardless of their income) pays something for the services the federal government provides.

The concept of completing your tax return on a post card (for corporations as well), thus eliminating all deductions, is the only “fair” way. It would also serve to limit the corruption in Congress, the state capitols and city hall as there will be fewer tax benefits to give anyone.

But just wait for every special interest to scream bloody murder. Acknowledging that K Street, all of the CPA’s, real estate agents, and even “the poor and disadvantaged” have their advocates protecting their interests and espousing why they should be excepted. Each will define “fair” in terms of what is best for them. So, the tax mess we are in will only continue and the author can publish next May another article about what’s fair.

Posted by COindependent | Report as abusive
 

“…rewriting the rules of engagement between companies, countries and shareholders.”

Isn’t that one of the obvious duties of competent government? Oh, I forgot that”competent government” is an oxymoron!

Posted by OneOfTheSheep | Report as abusive
 

The only difference between Greece and the USA on tax policy towards the rich and big corporations is that in the USA its all legally written into the tax code (thanks to monied lobbyists) while in Greece it is actually against the law. Of course the fact that the vast majority of AMericans are ignorant of this inequity is problem the reason most US workers keep paying their taxes. Unfortunately in Greece the attitude of not paying taxes has drifted all the way down to the shop keeper.

The analogy to Roman, Dutch and Hapsburg downfalls is spot on. Add to that Bourbon France where the landed novels paid no taxes and parts of the USA where states have no income or estate tax but a high sales tax.

Posted by Acetracy | Report as abusive
 

It’s called looting. Big business and governments loot in one jurisdiction and stash their loot in another. They used to do it in the developing world, now it can be anywhere. Likewise, business managers loot their companies to pay themselves. Look at the rise of CEO/worker pay ratios. Heads they win, tails they still win. The rest of us lose. Regulators are politicians are captured. Neither voters nor shareholders seem to have any power to stop it. It puts into doubt both political and corporate democracy. Can someone please provide some prescriptions besides just describing the problem?

Posted by logicus | Report as abusive
 

Excellent article.

Life is a jungle, and business is especially a jungle.

Every successful business, from a giant multinational to a small town real estate investment group, is really a group of humans banding together and saying, “It is us against the world.” How could it be otherwise?

In other words every successful business is a conspiracy. How could it be otherwise? Business is a jungle.

The only problem for society is that the mass TV viewing public think that just because a corporation is legally based in America, then it surely must be pro-America or have patriotic notions for America. How utterly mistaken.

Starbucks, Google, Apple, IBM, Exxon, etc., to survive, must have zero patriotic feelings about any country, of course. The incorporation papers of any company anywhere say as much.

It is much more accurate to say that these American-based companies are not out to help America, but rather to PREY on America. It is a jungle, and there is a chain of predators and prey.

America does not prey on corporations. Rather it is the corporations that are preying on America, destroying the American middle class by outsourcing manufacturing jobs to China, selling military arms to foreign countries of every stripe, importing foreign workers in the millions when millions of Americans are out of work. IBM is doing huge deals with China whereby IBM gives to China the most valuable secrets of American technology, in exchange for access to the China market.

If someone asked me, “Who is on America’s side in the American smart phone market, Apple of Samsung?”

I would have to say Samsung is probably less of a threat to America, whereas Apple has its claws deeper into America, slowly sucking its life blood out, killing the American middle class off, job by job. A wolf in sheep’s clothing. The worst kind of predator. It can’t help itself. It manufactures in China, screw the American worker.

Samsung at least hasn’t duped America into thinking they are patriotic for America.

Posted by AdamSmith | Report as abusive
 

@logicus – Supremely well said. Poetic almost.

Posted by AdamSmith | Report as abusive
 

Thank you for acknowledging this massive leak, your vary influential and everyone knows it, and much to risk probably. And thank you ICIJ and the tools used for the gigantic Work, the key is sorting out black hat tax evader fraudsters? They say data dwarfs Wikileaks – like 1.8 TB? Is even possible?

Posted by JohnEss | Report as abusive
 

When legit expenses are denied by the IRS (but are legal)
for example a true expense, the weekly Dumpster Trash pick-up at a rental, or the weekly Gardner cutting the lawn, then we know the IRS is corrupt, not going by IRS Code IRC Section 61, allowed expenses. So why should we not counter such corruption ? No one would stay in business if it was up to the IRS. I really don’t blame anyone in attempting to make up a legitimate loss (expense) in another fashion.
People have absolutely zero idea how corrupt our IRS is.

Posted by DDavid | Report as abusive
 

When legit expenses are denied by the IRS (but are legal)
for example a true expense, the weekly Dumpster Trash pick-up at a rental, or the weekly Gardner cutting the lawn, then we know the IRS is corrupt, not going by IRS Code IRC Section 61, allowed expenses. So why should we not counter such corruption ? No one would stay in business if it was up to the IRS. I really don’t blame anyone in attempting to make up a legitimate loss (expense) in another fashion.
People have absolutely zero idea how corrupt our IRS is.

Posted by DDavid | Report as abusive
 

It has nothing to do with responsibility.
Chrystia, it is all about keeping ones business alive.
You need to go out and familiarize yourself with true live today situations, real Appeal cases, and the crazy things the IRS does. Like 1 RA (revenue agent) thought the man should shop for his business drapes at Macy’s instead of at a commercial drapery maker. Another didn’t know the difference between an Equity and a Bond, hence disallowed legitimate Accrued Interest Expense (which is taxable to the seller, not the buyer.) Headaches such as this makes people put their money out of government reach.

Posted by DDavid | Report as abusive
 

Well the first comment from the small business owner is wrong. There is no double taxation on banking profits and paying taxes on them, and then spending them later on wages. You would get a deduction of the wage amount when you spent last years after tax profits that could be used in the current year, and if it put you into a loss you get a tax refund from what you paid on it originally.
Secondly, the truth is that it’s really not all that difficult to change this stuff. Everyone knows how 99% of it is done (mostly through BS transfer pricing arrangements). It’s more a question of political will. Someone should just make a blog detailing how simple it is so the rules can be changed. Technically speaking people could also be put in jail for a lot of this stuff, it may not be clearly criminal, but it’s close enough that you could put a few people away (the law is grey over the line regarding tax avoidance) and that would scare off the rest very quickly. It’s all basic game theory really.

Posted by JPerly | Report as abusive
 

Well the first comment from the small business owner is wrong. There is no double taxation on banking profits and paying taxes on them, and then spending them later on wages. You would get a deduction of the wage amount when you spent last years after tax profits that could be used in the current year, and if it put you into a loss you get a tax refund from what you paid on it originally.
Secondly, the truth is that it’s really not all that difficult to change this stuff. Everyone knows how 99% of it is done (mostly through BS transfer pricing arrangements). It’s more a question of political will. Someone should just make a blog detailing how simple it is so the rules can be changed. Technically speaking people could also be put in jail for a lot of this stuff, it may not be clearly criminal, but it’s close enough that you could put a few people away (the law is grey over the line regarding tax avoidance) and that would scare off the rest very quickly. It’s all basic game theory really.

Posted by JPerly | Report as abusive
 

Well the first comment from the small business owner is NOT wrong. He is probably speaking from experience, while you are speaking from the code. Double taxation happens all the time, and unless you have $50,000 dollars to pay an attorney to take the case to tax court, you will settle on the $20,000 dollar wrongful ding. What the IRS does, and what the code says are two entirely different things. The IRS will even go to the length of not auditing a particular form, and make a guess, then let you take it to appeal. In the meantime they can collect a usury interest rate. Businesses would become more honest if the IRS were abolished and a flat rate on earnings were enforced. When you hear the rich leaving, they become citizens of flat rate countries, there is less tax corruption in flat rate countries, and for one, the business can plan ahead for the future and grow. While the USA has too many gray areas in the code, and the none gray areas are still at the whim of one single Revenue Agent who acts as god and rides shotgun on how you should run your business, which is outside the scope of the Internal Revenue Code.

Posted by DDavid | Report as abusive
 

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Posted by sunyuxian | Report as abusive
 

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Posted by sunyuxian | Report as abusive
 

AS a retired small business owner, I constantly reviewed the company’s financial position and as a policy I would rather ensure my employees ( in most instances my friends) the benefit of their time and effort rather than pay anything more than was required to a government, whose bureaucrats are paid far more both in salary and benefits than those in the private sector. After all my employees said ‘ thanks’.

Posted by Mexberry | Report as abusive
 

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