Giving a speech on tax reform whilst stumping for president in what is now seemingly a woebegone era of politics, Mitt Romney quipped this now seemingly famous sound bite personifying the greed of purported capitalism. According to US tax law, unfortunately he is right. Corporations are ‘treated’ like people.
Since this is how we live, when it comes to writing tax laws it seems a reasonable expectation that corporations behave as moral agents of society just like the rest of us. After all, they have their own decision structures and choices to make between rightness and wrongness, goodness and badness that are justified with reasons just like us.
Many people feel that the tax code and upcoming tax reform should not be a foray into social engineering. Unfortunately, there are few better tools congress can wield than the ubiquitous Internal Revenue Code in these regards. Wield they will!
Many further believe morality cannot be legislated either, as moral behavior needs to come from within the heart set and mindset of individuals and corporate leaders to do what is just in balancing the needs of our many constituencies with the needs of society in general. What we can do though is choose to be transparent in our thinking and reporting for income tax purposes with the expectation that eventually morality will prevail.
There is more to taxation than simply the financial cost of turning hard earned money over to the governing authorities. Paying taxes is an investment in our society. Paying taxes entails making moral choices. Acting in a morally appropriate way regardless if you are an individual or a corporation is often a matter of balancing competing principles, values and ideals in an effort to achieve the ubiquitous triple bottom line. No doubt, it is hard.
Responsible corporations should be willing to pay a fair share of tax reflective of the moral quality of their tax planning practices rooted in profits reported to investors. Towards that end, there should be full transparency when communicating with shareholders, employees, customers, taxing authorities and society in general alike. Paying little tax in countries where multinational corporations operate and make use of public goods and services is not fair. Face it most multinational corporations are freeloading off society for the benefit of the privileged shareholder whilst hiding behind confidentiality claims in the process.
Fortunately, tax ‘planning’ techniques used by large multinational corporations including Amazon, Starbucks and Google have gained particular focus as nongovernmental organizations have published critical reports on aggressive tax planning methods used to minimize taxes. Even run of the mill taxpayers are disgusted by the amount of taxes NOT paid by very large multinational corporations as a ‘result’ of ‘aggressive’ tax planning. Hardcore libertarians and republicans alike believe this is unfair.
Countless millionaires have arisen through leadership roles in these corporations. At what cost to society though? They steal our identities one e-mail or blog post at a time to profile us and target us like lemmings. All the while using transfer pricing techniques and tax shelter schemes to pay next to no income taxes relative to earnings, unlike those of us down in the trenches fighting every day to do good and feed our families.
Without holding corporations accountable for paying their fair share of taxes relative to their income, society in general suffers while corporations pursue a wealth narrative solely for the benefit of shareholders financially endowed. Tax reform needs to focus on corporations paying their fair share of income tax relative to income reported to investors. This starts by making income reporting for tax purposes fully transparent.
In order to gain public trust when it comes to paying their fair share of taxes, corporations have a responsibility to be accountable to not only the communities they pollute in pursuit of their profit motive but to society in general by paying taxes proportional to their income just as individuals and small business owners alike. To change the situation, corporations and their ‘leaders’ need to change their mind-set and start viewing taxation as an element of doing well for society in general. Responsible corporate citizens need to stop thinking about the distinction between ‘legal’ avoidance and illegal tax evasion and start thinking about reputation enhancement in paying their fair share of taxes.
This is hard as it forces morality into play. Morality addresses not only the question as to how we ought to live as individuals or corporations, but also how corporations interact with individuals to make a vibrant society. The means towards legislating in these regards start with transparency. We not only deserve to see our president’s tax returns we deserve to see the income tax returns of every corporation in the S&P 500.
Perhaps, the questions legislators should ask when it comes to tax reform are:
- How should multinational corporations treat others and take into account societal interests – not only our own interests?
- What is good corporate behavior towards others?
- What is a ‘good’ society to which we should aspire? and,
- How can corporations be more transparent in the income tax reporting?
Solidarity, responsibility, reciprocity and again transparency are general principles corporations should aspire to achieve. In an international tax context for multinational corporations, other principles that come to mind are the level playing field, and fairness to individuals that goes far beyond the employee, the customer, or the shareholder. In this context, tax-related questions include:
- How does a corporation’s minimal, but legal, compliance affect others in society? and,
- What impact might this kind of minimalist compliance have on the provision of public goods such as infrastructure, education and health care?
Again, the best way to move in this direction is through transparency. Good tax governance should exude transparency in all actions taken and claims made, as aggressive tax planning when addressed in moral terms requires ethical reflection regardless if you are an individual or a corporation. If we are free to choose, what is stopping us from choosing transparency?
Being a part of society includes obligations to contribute to society and enjoy the fruits of mutual contributions to society. Corporations that do not fulfill these tax payment obligations because of sophisticated gimmickry enjoy all kinds of public goods at a real cost to other members of our society; they are free loaders, bums, parasites. At the very least, they can be transparent about it.
In a worthwhile debate about what exactly is ethical, corporations should openly communicate their tax practices for discussion purposes to pave the way towards a better understanding of tax morale. The concepts of “aggressive tax planning”, “tax evasion” and “tax avoidance” express different relationships between law and morality that require a certain level of openness. The time is now that we legislate that level of openness.
Notwithstanding moral character, taxes are a cost for us all, corporations and individuals alike. As such, we all have a right to structure our affairs to achieve a favorable tax treatment within certain limits. We should balance this right with the duty of fair play towards society and impose restraints on ourselves in taking advantage of the inevitable imperfections of our legal system. Social responsibility must be a priority for us all to survive.
In all due fairness, not all tax planning is morally unacceptable. Businesses may have a low effective tax rate because they make use of tax incentives such as for research and development. Tax incentives to achieve economic, social and cultural policy goals and can be good. Social engineering via the Internal Revenue Code can be good. Fostering innovation by funding research and development, encouraging investment, promoting economic growth, boosting worker productivity and stimulating the efficient use of scarce resources is the job of our government after all. All these policy goals receive funding through taxes paid by those members of society that actually pay their share of taxes.
Good tax governance requires intrinsic motivation of US citizens and multinational corporate leaders alike to be transparent, which goes beyond a mere cost-benefit analysis, concern for reputation or market valuation. As an Enrolled Agent licensed by the US Treasury to represent both individual and corporate taxpayers before the IRS, tax shelters and transfer pricing schemes used by corporations to obtain significant tax benefits never intended by the tax code can be a wheelhouse for many. The egregiousness of it all brings physical illness at times.
Profiteering via tax avoidance is akin to masturbation. It accomplishes nothing long term for society and very little immediately for the purveyors of the icky-ness. Corporations engaged in aggressive tax avoidance need to grow up and focus their vast resources on what matters most, contributing to advancements in society and preserving the planet we ALL inhabit for future generations to come. The next step towards this end requires legislating transparency in our upcoming tax reform efforts.
Questions? Contact John Dundon