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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Corporate Social Responsibility and Tax Evasion and Avoidance
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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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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Corporate Social Responsibility and Tax Evasion and Avoidance
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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Corporate Social Responsibility and Tax Evasion and Avoidance
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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Corporate Social Responsibility and Tax Evasion and Avoidance
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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Corporate Social Responsibility and Tax Evasion and Avoidance
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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