On tax, we should stop expecting companies to act like people

Don't be Evil

In response to the Google and Amazon tax scandals, there’s been a lot of talk from UK politicians about how tax is a “moral issue”. This is a conclusion with which it’s difficult to disagree. These companies are going to the extreme ends of the law to ensure that as little money as possible goes to support a country in which they do a lot of business. Morally, it seems like an open and shut case.

And, if we frame the debate in this way, it is. If we think of some companies making a choice to avoid taxes and others not, then clearly the companies doing the avoiding are in the wrong. But I think the mistake here is thinking of companies who don’t avoid as taking a moral decision – essentially thinking that they’ve sat down with their books and said “Sure we could save a few million by pretending our sales go through the British Virgin Islands, but dammit Jim, that just doesn’t sit right with me”.  If the multiverse theory is correct, and there are indeed infinite possible worlds, then I’ll grant that maybe you could find a company where this conversation had happened. However this doesn’t seem like a solid foundation on which to base social policy.

Publicly traded corporations like Google and Amazon, exist to make money for their shareholders. Private companies can have other ambitions, but as soon as they go public, shareholder enrichment becomes (legally) their sole reason for being. That means that when they decide on their “tax management” (read “avoidance”) strategy, they are making a very simple calculation: A) how much money will we save by taking legal tax avoidance measures vs. B) how much money are we likely to lose by pissing people off (i.e. through ‘damage to the brand’). The ‘good’ companies that have made the ‘moral’ decision not to avoid tax have really just arrived at the conclusion that B will be bigger than A. Either because the nature or size of their business means that they can’t really save much through avoidance, or because they’ve calculated that their losses due to brand damage would be high. This is exactly the same calculation they make when it comes to other social responsibility issues like charity work – is it likely to make more money in brand enhancement than it costs to do? This is even clear in Google’s famous “Don’t be Evil” mission statement, included in the prospectus for their 2004 IPO. This section claims that “…in the long term, we will be better served—as shareholders and in all other ways—by a company that does good things for the world even if we forgo some short term gains”. Notice that this doesn’t say that they will always do good, even if it costs money. Translated into business-speak, what it actually says is “A brand image emphasising social responsibility will give better returns to shareholders in the long-term”.

In one way, the politicians are right and the businessmen are wrong. Tax is a moral issue. Fundamentally, taxation is about the amount we think it is fair to take from companies and individuals to help support the society they live/do business in – and the question of what’s fair is clearly a moral one. Deciding to avoid tax is also a moral issue in that avoidance is less moral than non-avoidance. Our mistake is to think that companies will ever behave like moral entities; like people. By their legal nature and structure, corporations are amoral. Unlike (most) people, they make their calculations in money, not in human concepts like harm or friendship or fairness. This is why they need to be regulated by governments, rather than being left to their own devices to make the ‘right’ decisions.

This leaves us, as a society living with corporations, with two basic options. The first, is to pile on the shame. To increase the cost of brand damage until avoidance becomes unattractive. The second is to change the law so avoidance doesn’t save so much money. Close loopholes, crack down on tax havens (starting with British dependencies like the Virgin Islands) and so on.

The first option is a perfectly legitimate one. Organisations like UK Uncut have done a really good job of bringing the tax fairness issue to the forefront, substantially raising the reputational damage for companies caught avoiding. However, what puzzles me is when politicians use the same strategy – issuing statements decrying the immoral companies, and calling CEOs into parliamentary hearings to hector them about their tax policies. Surely, unlike regular members of the public, ministers (especially coalition ministers) don’t have to resort to the name and shame approach. Have they forgotten that, unlike UK Uncut, they actually have the power to change the law; to close loopholes and so on? This must be what Google boss Eric Schmidt means when he says his is “perplexed” by the political outcry. “Why are they calling me a jerk for not paying my taxes” he must be thinking “but not trying to change the law to make me pay them?”.

Except I don’t think that Mr Schmidt is really perplexed. I think he knows as well as anyone that it’s much easier for politicians to fulminate and moralise than to it is for them to legislate. Especially if they would be legislating against big companies with deep pockets and long employment rolls. Much easier to just ride the wave of public anger while conveniently ignoring the fact that there’s something you could do about it.

About Robert de Vries

I'm an Early Career Research Fellow in the Sociology department at the University of Oxford. I'm mainly interested in how people are affected by concerns about their social status; how it colours the way they think, feel, and behave. I try and contribute here regularly, but my addiction to writing excessively long posts keeps getting in the way.
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7 Responses to On tax, we should stop expecting companies to act like people

  1. “Publicly traded corporations like Google and Amazon, exist to make money for their shareholders.” Well, kinda. Publicly traded organizations are neither public nor private – they are creations of the state, which grants them a bundle of rights and protections in exchange for acting in the public interest *by* making money for their shareholders. The making money is in service to the larger goal. For a nice attempt to think through the messiness of all this, I recommend Ciepley’s recent APSR piece Beyond Public and Private: Toward a Political Theory of the Corporation. Overall, I think it’s a mistake to too quickly cede the moral argument on the grounds that we have interpreted the mandate of corporations in a narrow sense in recent years, because in doing so we forget that corporations are creatures of the state, created to serve public interests.

    • Robert de Vries says:

      Very good point (and I’ll read the Ciepley article with interest). However, given the long reign of the narrow interpretation (shareholder return as public interest), wouldn’t a change to a wider public interest mandate need to be backed by a change in the law?

    • Brian S says:

      Wow, that’s an interesting article. Thanks!

  2. LJAR says:

    Its also worth noting where the actual incidence of corporation tax is, or rather – who actually pays it.

    It can only really be paid by 3 groups of people, Owners of the corporation (lower profits and dividends), Employees (lower wages, and fewer jobs overall) and customers (higher prices, fewer products to purchase)

    In a world of very mobile capital and open countries, the incidence of capital falls ever more on the employees and the customers and less on the capital.

    If we want to tax the richest (and I think we do since that’s where the money is) then there are probably better ways of doing it than corporation tax. We could for example abolish corporation taxes and instead tax the dividends paid to shareholders like any other income (instead of at the current discounted rate) This would ensure that we tax high income shareholders and not poorer ones.

    This would have advantages in terms of reducing the distortions from corporation tax as well that lead to fewer companies being formed and therefore less competition for labour and so lower wages overall and less innovation in the marketplace.

    • Robert de Vries says:

      Thanks LJAR. I’ve heard this argument quite a bit – essentially that taxing corporations is a bit silly when basically we want to be taxing rich people. It definitely seems plausible, but I’m not completely sure what I think about it yet. I was planning on sitting down and doing some reading then writing a post about it. Do you have any particular references (pro and anti) you would recommend?

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