Tax Evasion and Avoidance: An Opportunity for Education and Market Reaction

Corporate Social Responsibility and Tax Evasion and Avoidance

Tax Evasion and Avoidance: An Opportunity for Education and Market Reaction

Peter Bakke

March 25, 2014

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Introduction

Recent estimates indicate that corporations are evading

taxes each year at a rate of $345 billion a year in the United

States1 and 40 billion pounds in the United Kingdom.2 The total

amount of money that is shielded from taxation in foreign tax

havens across the world is estimated to be between $5 trillion

and $32 trillion.3 In an age where Corporate Social

Responsibility (CSR) is becoming more visible, the question

arises whether these actions are ethical for corporations to make

when these actions have direct effects upon addressing societal

problems. One can argue that corporations have a responsibility

to help support the many governmental and societal structures and

institutions that make corporate existence possible.

Additionally, it can be argued that the United States government

has the right and obligation to demand that corporations pay

1 Sikka, P. Smoke and mirrors: Corporate social responsibility and tax avoidance Accounting Forum, 2013.

2 ?. Ibid., 154. 3 ?. Preuss, L. Responsibility in Paradise? The Adoption of

CSR Tools by Companies Domiciled in Tax Havens. Journal of Business Ethics, 2012 and Sikka, P. Smoke and mirrors.

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their democratically determined share of taxes to help maintain

the societal functions that support the existence of

corporations.

The business infrastructure and stability of the US

government and economy enables corporations, large and small, to

function at full capacity and produce as much profit as possible

for shareholders. This being the case, it follows that all

democratically enacted corporate taxes need to be determined,

gathered, and used to maintain and improve the supporting US

infrastructure and stability rather than being systematically and

purposefully hidden in tax havens, also known as Offshore

Financial Companies (OFCs).

Senator Carl Levin’s Stop Tax Haven Abuse Act4 was introduced in

the U.S. Congress in 2013 and is a start to this end, but the

bill has been mired in committee in the United States Senate for

nearly a year. I suggest an additional action: a clear and

visible educational public policy whereby a yearly ‘scorecard’ is

4 ?. Levin, Carl. Summary of the Levin-Whitehouse-Begich-Shaheen Stop Tax Haven Abuse Act, 2013. https://www.govtrack.us/congress/bills/113/hr1554/text .

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https://www.govtrack.us/congress/bills/113/hr1554/text


presented to the public in which aggressive tax avoidant and tax

evasive corporations are uniformly scored based on their

contribution, or lack thereof, to the U.S. tax base. Given this

information, the public, corporations, and government agencies

can use the market to shame and even economically punish those

corporations identified by the scorecard.

The size and percentage of corporate tax avoidances and

evasions should be readily made available for examination by the

U.S. public via this scorecard and should be listed on government

Websites and generally disseminated to the public. The corporate

Effective Tax Rate (ETR) can be used as a measurement for the

purpose of evaluating each corporation tax burden compared to

other corporations and a fixed standard. This new policy action

would not only educate the U.S. public as to the identity,

activities, and magnitude of non-compliant corporations, but

would begin a systematic process of shaming and punishing non-

compliant corporate tax evaders. This new scorecard system could

have marketplace consequences for the tax evaders. Brands are

susceptible to negative publicity and the ETR scorecard could act

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as an influential input to brand perception with the public.

Conversely, the scorecard could reflect positively on brands and

corporations that perform well by paying their fair share of

taxes.

Armed with this information, the public, other corporations,

and US government agencies would have the market choice to

discontinue trading with corporations that have been identified

as purposefully evading payment of their fair share of taxes.

Society could be educated that the non-payment of taxes

negatively affects important societal functions such as

“education, healthcare, (local and national) security, pensions,

clean water . . . (and could be used to help) eradicate poverty,

and provide a peaceful and equitable society.”5

For comparison purposes, the U.S. public, when educated, has

in the past boycotted various businesses based on the companies’

stance on societal issues such as LGBT rights, environmental

activities, reproductive rights, and use of forced labor. The

concept behind this new proposed public policy is to educate the

5 ?. Oxfam, 2000 quoted in Preuss, L. Responsibility in Paradise? The Adoption of CSR Tools by Companies Domiciled in Tax Havens, 2012.

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public and government agencies about corporate tax evaders in

order to let the market react to the information in order to

correct tax evasion behaviors.

Corporate Tax Evasion and ‘Personhood’

Tax evasion is the willful and illegal evasion of paying

taxes to a government. Corporations are likely attracted to tax

evasion schemes by the profit motive and individual incentives

for executives to meet financial targets. Additionally,

governments may under-fund, or de-fund, various arms of

government that are responsible for tax collection and oversight.

Global de-regulation of finance since the 1980’s may be an

additional factor contributing to tax evasion.

In the Levin Bill, tax evasion is called money laundering.

The academic literature does not use this term. The huge industry

that has sprung up around the creation of tax avoidance and tax

evasion schemes euphemistically refers to “tax-related behavior”

and “tax planning.” These packages are aggressively marketing to

corporations. The industry has gotten a boost with corporations

now referring their accounting departments as “profit centers.”

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Thirty-four nations have been identified by the IRS as tax

havens.6 The definition of a tax haven is a nation that imposes

no or nominal taxes, exhibits a lack of exchange of information,

provides no transparency, and is a nation where no substantial

corporate activities are required in order to be registered in

said country.7 There is a utilitarian advantage to the host tax

haven nation. The financial fees collected by the tax haven

government can be considerable, but this revenue is put at risk

as countries ban together to shut down the easy methods and

sources of the tax evasion industry.

Former Governor Mitt Romney stated during the 2012

presidential election that “. . . corporations are people.”8

From a legal viewpoint, he was correct. The Supreme Court has

ruled since the late 19th century that corporations do indeed

have equal protection under the law. For example, the recent

Citizen’s United 9case upheld the free speech of corporations

6 ?. Preuss, L. Tax avoidance and corporate social responsibility: you can’t do both, or can you? Corporate Governance, 2010.7 ?. Ibid. 8 ?. White, J. Mitt Romney: “Corporations Are People” - Is He Right? The LegalBackground. 20019 ?. Cornell Law School, Citizen’s United, 2013.

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regarding their contributions to the elections of U.S. officials.

This court decision is a manifestation of the legal person status

of corporations. The personhood of corporations has serious

consequences from a philosophical viewpoint discussed below.

Corporations have taken advantage of their long march to

become a legal person in the US justice system. Regardless of

corporate ideology to the contrary, there is ample philosophical

support for such ‘persons’ to be obliged and dutiful towards the

host nation’s society and its government. The concept of a

corporation as a person raises the issue of the social contract

as described by Rousseau, Hume and others. Because corporations

have succeeded in becoming a legal ‘person’ in order to best

execute their mission for their shareholders, they are also

subject to public scrutiny of their actions. Corporations, like

people in a civil society, have duties and obligations. This

realization is the focal point for holding tax evaders

responsible for their actions. The level of morality and virtue

of corporations is not necessary for this discussion. However,

corporate duties and obligations to society are vital aspects of

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any discussion concerning tax evasion.

Corporations depend upon the stability of their host

government and society for their existence and success. This

implies a social contract between the corporations, society, and

government. As President Obama stated during the 2012 election,

businesses do not succeed in a vacuum. They require a stable

business environment that is provided solely by government and

society. Corporations require an educated workforce plus a

complex infrastructure including communications and

transportation in order to compete successfully in the global

marketplace. At the local and global levels, corporations require

stable and effective institutions that are in large part created,

maintained, and funded by government taxation.

Given the symbiotic relationship between corporations and

society, it is reasonable to expect corporations to pay their

fair share of taxes to support society, infrastructure, and

government operations. Taxes can be perceived as an investment in

societal needs that in turn support the corporation and its

stakeholders within a secure worldwide marketplace.

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Bakan’s definition of a corporation states that it is an

institution which has a legal imperative to “pursue, relentlessly

and without exception, its own self-interest, regardless of the

often harmful consequences it might cause to others.”10 This

definition seems rather Hobbesian and Machiavellian in nature,

but rings true for multi-national corporations in particular. The

economist Milton Friedman insisted that the sole social

responsibility that corporate executives have is to their

shareholders. That is, the responsibility of a corporation is to

make as much money as possible for its shareholders and that any

other activates by its officers unrelated to money making are

immoral. Additionally, Friedman stated that Corporate Social

Responsibility (CSR) could be pursued, but only if it was

‘insincere.’11 This type of ideology sets the stage for tax

evasion rationalization.

An argument could be made that paying a democratically

approved and appropriate share of taxes should be part of CSR and

10 ?. Bakan, J. The Corporation: The Pathological Pursuit of Profit and Power, 2005.11 ?. Ibid., 34.

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that CSR has valid economic components. The underlying question

is whether hiding hundreds of billions of dollars in taxable

income from the U.S. government, and therefore the U.S. taxpayer,

is the correct behavior for corporations.

Over the past century, corporations have attained the legal

status of ‘personhood’ in the United States. Corporations have

obtained property rights and some argue they may have human

rights. Recently the Citizens United 12 case put before the US

Supreme Court enshrined recognition of corporate free speech. In

that case, the court ruled that corporations, associations, and

unions could not be restricted by the government from giving

unlimited money to election campaigns as freely as a person can

give. The concept of an organization having the rights of a

natural person is not a unique proposition. The concept was first

suggested by Thomas Hobbes with reference to the British

Commonwealth.13

From a Kantian viewpoint, paying a fair share of corporate

12 ?. Cornell Law School, 2014.13 ?. Strauss, L., & Cropsey, J. History of Political Philosophy, 2012

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taxes may be a categorical imperative. When faced with the

decision to pay taxes, the preferred universal action is to pay

one’s full share of taxes as written in US tax law. One can

question whether corporate leadership is passive towards tax

evasion or whether corporate leaders actively seek out tax

evasion measures. Compensation plans for corporate leaders and

directors are often related directly to financial performance. It

is therefore not surprising that powerful incentives exist for

corporate leaders to focus upon the bottom line that may in turn

spur creative tax evasion techniques within the culture of the

corporation.

There is ample commentary about the negative aspects of tax

evasion. Pruess has stated that tax evasion may violate the

social contract between society and corporations and that tax

evasion is not only a violation of corporate obligations but is a

threat to the corporation’s own survival.14 Sikka has argued that

such behavior is indifferent to humanity, morally repugnant, and

14 ?. Preuss, L. Responsibility in Paradise? The Adoption of CSR Tools by Companies Domiciled in Tax Havens. Journal of Business Ethics, 2012.

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predatory.15 Additionally, academics have taken to task the

accounting and other financial firms that act as ‘enablers’ and

the ‘financial mafia.’

The tax avoidance industry has grown at such a rate that

governments are alarmed. The industry develops and instills a

culture that is not public spirited and does not serve the state

or society.16 While governments attempt to curtail the growth and

influence of this industry, firms are fighting back by

influencing government officials and by ‘colonizing’ the

government apparatus of small and developing nations.

Political Philosophy Foundations for Action

The foundation of corporate responsibility, duty, and

obligation lies upon the historical and inexorable necessity of

the corporation to become a legal ‘person’ in the eyes of the

law. Using this basis, issues of morality and virtue surrounding

tax evasion can be discarded. Instead examining corporate tax

evasion from a philosophical vantage point that focuses upon the

15 ?. Sikka, P. Smoke and mirrors: Corporate social responsibility and tax avoidance. Accounting Forum, 2010.16 ?. Ibid

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duties and obligations of the individual (corporation) to society

can be pursued. John Milton indicated that the safeguard of

society’s interest is not in its institutions, but in the

character of men. In this discussion, Milton’s meaning could be

interpreted as society’s reliance upon the character of

corporations, which are made up of imperfect men17.

The transformation of ‘man’ to corporation within a

philosophical context will be used in this discussion. It is not

a trick to equate man and corporation strictly for this

discussion because corporations have insisted for over a century

to be equated with legal personhood. As we have seen,

corporations have been given equal protection under the law.

Corporations, by their own actions, can therefore be held to

philosophical standards similar to that of men. The concept of

the marketplace as a ‘state of nature’ (extreme competition,

including life and death of the corporation) will also be used in

this discussion. In essence, a new meaning is suggested for the

reading of philosopher’s works and interpretations in which

17 ?. Strauss and Cropsey, History of Political Philosophy, 2012.

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‘corporation’ can be substituted in most cases for ‘man,’ and

‘marketplace’ substituted for ‘state of nature.’

That a government has the right to tax and for citizens to

pay those taxes is supported by the writings of several

philosophers. Luther and Calvin quoted the Bible to indicate the

necessity for government and that citizens should not resist the

authority of ‘higher powers.18 Hume indicated that government was

needed to provide order and peace. He stated that government

serves man (including the corporation) and this relationship can

be interpreted in a way that government can expect payment of

taxes in return for its services. It should be noted that Hobbes

also makes a strong case for government. Obligations, such as the

payment of taxes, require contracts and contracts require trust,

hence a government is needed to coerce parties to honor contracts

since trust is absent from the state of nature (the competitive

marketplace).

Descartes indicated that there is a general law that

mandates men (corporations) should seek the good of society.

18 ?. Ibid.

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Additionally, Cicero stated that laws should be valid for all

persons and that all persons have an obligation to obey the laws.

These statements support the general concept that tax evasion is

harmful to society since it removes resources from society and

circumvents the letter of rightfully law.

To counter these concepts that move a corporation towards

compliance, a Hobbesian argument could be made that paying a

corporation’s fair share of taxes may cause the demise of the

corporation and the loss of jobs, products, etc., resulting in

the payment of zero taxes and negatively affecting other

corporations such as suppliers. Using this argument, tax evasion

could be justified. According to Hobbes (and economist Milton

Friedman), self-preservation is the only legitimate obligation

for an individual (coporation) and anything not under one’s

control is a threat to self-preservation. In this situation,

avoiding taxes would be permissible because in a state of nature

(the free and competitive marketplace), all actions are

permissible. This line of reasoning has a Machiavellian flavor

whereby expediency rules regardless of duty or obligation to

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society.

Marxists might well agree with Hobbes that men (the

corporation) owe little or nothing to society, but for different

reasons. Marx saw society as a workforce to be used by the

producers and each is duty-free from the other save one. The only

duty that producers have to labor is wages. Society was seen by

Marx to be exploited by the producers and was expendable and

replacable. The mechanization of labor has confiemed this Marxist

viewpoint. Machines have replaced labor (society) and this has

been observed for the past two hundred years from

industrialization to modern robotics. Marx claimed that

technological change affected society in the spread of poverty

and unemployment. One of Marx’s most prescient predictions was

the rise and importance of the corporation. Marx’s view of duty

and obligation of the corporation (producers) to society appears

to be insignificant.

Conclusion

Tax evasion in the US and across the world is an ongoing and

growing problem. Developing countries and nations in economic

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distress such as Greece have a particularly keen interest in

resolving this pervasive problem. In an indication of the

severity of corporate tax evasion, the largest economic power on

the planet, the United States, is looking to address tax evasion

via the Levin Bill in the U.S. Senate because billions’ of

dollars in uncollected taxes could help societal problems,

including an estimated 40 million people in poverty. Estimates of

up to $32 trillion in wealth may be hidden from governments and

therefore by proxy withheld from use by their societies. Each

year, there may be as much as $345 billion hidden from the United

States government by corporations and wealthy citizens. The

democratically assessed taxes levied upon this wealth could help

assuage societal problems that include, by are not limited to:

healthcare for the uninsured, local, and national security, an

aging and crumbling infrastructure, burdened legal systems,

crumbling infrastructure, substandard education, and the

alleviation of poverty.

The purpose of taxation is to support a functioning society.

This provides a stable base upon which corporations thrive.

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However, there seems to be an opposing systemic corporate

ideology that abhors government and sees taxation as a transfer

of wealth to the state instead of to the society that makes

corporate existence possible. This ideology should be confronted,

challenged, and changed.

My recommendation is that a tax avoidance/evasion

‘scorecard’ should be developed by the US government on a yearly

basis which identifies and classifies corporations that do not

pay their fair share of taxes to support societal needs.

Corporations’ Effect Tax Rate could be used as the foundation of

this document, especially serial offenders. Because businesses

and brands are sensitive to criticism, particularly in this age

of social media and worldwide communications, such a shaming

technique might be a helpful tool to alleviate tax evasion if

implemented properly. Companies do pay attention to

externalities19 and if a corporation is tagged as a tax evader,

its reputation can be damaged.20

19 ?. Preuss, L. Tax avoidance and corporate social responsibility: you can’t do both, or can you? Corporate Governance, 2010.20 ?. Richardson, Grant A., and Roman Lanis. " Corporate social responsibility and tax aggressiveness," 2011

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Tax evasion by corporations in a fundamental problem which

has been identified by governments around the world. While the

Levin Stop Tax Haven Abuse Act bill languishes in the U.S. Senate,

another method such as the recommended ETR scorecard could be

developed without the need for congressional approval.

Undoubtedly, corporations, business groups, and lobbyists would

vigorously fight the introduction of such a tool. Their primary

objection could be that comparing invidual corporate ETRs to

other corporations or to a standard ETR would be more art than

science. What they may fail to realize is the wisdom of the crowd

and the ability of the public to see through shams.

While such a tool as the ETR scorecard may be imperfect,

society could be well-served by such a mechanism. It could help

enforce the duty of corporations to pay taxes. Adam Smith

indicated that duty is the ‘universal spectator,’ meaning perhaps

that, in Kantian terms, acting to create an ETR scorecard for

duty’s sake could be seen as a categorical imperative.

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Tax Evasion and Avoidance: An Opportunity for Education and Market Reaction

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