If business leaders are serious about doing good, they can start by paying their taxes

January 30th, 2020

By Natasha Sarin and Lawrence H. Summers

Over the past year, the concept that corporations owe a responsibility to the broader society beyond their responsibility to their shareholders has flourished. The Business Roundtable renounced its earlier view that companies exist to serve stockholders and endorsed stakeholder capitalism last summer. BlackRock chief executive Larry Fink, whose firm controls $7 trillion in investable funds, expects a “fundamental reshaping of finance” and has vowed to vote against corporate directors insufficiently committed to serving interests beyond those of stockholders.

This year’s Davos meeting was centered on business’s responsibility to protect the environment. And there has been much celebration of recent corporate commitments, such as Microsoft’s promise to invest $1 billion to end or offset all of its greenhouse-gas emissions, present and past.

The most important stakeholder of U.S. corporations is the United States itself. Before any obligation to voluntarily reduce emissions, start charter schools or pay above-market wages should come an obligation to pay a reasonable share of income in taxes. Many of our most successful corporations have used accounting tricks, especially those involving sales of intellectual property to low tax jurisdictions, to avoid paying federal taxes.

A stunning story recently published jointly by Fortune and ProPublica credibly alleges that Microsoft avoided tens of billions in corporate tax liability by locating its profits in Puerto Rico on the advice of KPMG, and then waged all-out war against IRS efforts to hire strong counsel and gather information from key witnesses. (In a comment for the story, Microsoft said that it “follows the law and has always fully paid the taxes it owes”; the IRS’s audit efforts are ongoing.) Facebook is being investigated for its profit-shifting behavior, and in a number of years Amazon has paid no taxes. Companies such as Google, Netflix, Delta and General Motors pay a much lower share of their taxes in profits than the vast majority of successful small businesses.

As is so often the case, there is a major question here of whether the scandal is illegal things companies do, or the things that are legal. No doubt that much of the problem involves badly written tax laws that permit large-scale reduction in taxes below common-sense levels. But this goes only so far as a defense for companies that have lobbied and used campaign contributions to shape tax law. And apart from shaping the law, corporations that wish to be seen as good corporate citizens should refrain from pushing the envelope as they file their returns.

The issue here goes beyond corporate hypocrisy and even the significant revenue that could be collected from better tax laws and enforcement. With confidence in government and big business at a nadir, and global cooperation seen as harming ordinary Americans, a serious effort at restoring taxation would represent a substantial, economically rational response to populist and nationalist pressures. It is a legitimate source of outrage that a former senior Treasury official can assert — without apparent criticism from the corporate, tax bar or accounting communities — that the S in IRS stands for the “service” that the IRS should first and foremost provide to business taxpayers.

What should be done?

First, the tax code needs to be reformed. The United States should enthusiastically join the European-led effort to ensure that digital companies are taxed at reasonable rates, as long as the effort is expanded to cover other sectors where corporations from other countries dominate. And current approaches to the allocation of income across jurisdictions should be reviewed. For instance, ways to support Puerto Rico can be found without tax breaks for multinationals that exacerbate the federal deficit and do more for highly profitable but lightly taxed major corporations than they do for Puerto Rico.

Second, tax enforcement should be beefed up. It is a scandal that the share of large corporations that face corporate audits has fallen by half in the past decade. And the audits that remain are less aggressive, with the IRS almost 90 percent less likely to challenge companies’ tax liabilities than they were a decade ago.

Third, as in antitrust, Congress should make clear that it expects the IRS to hire and fully compensate top-flight legal and financial experts when bringing actions in tax matters. It is indefensible that star private litigators are only rarely used in tax matters and that it appears Microsoft was able to successfully challenge private counsel’s right to question their employees. Similarly, to improve effectiveness in enforcement, statutes of limitation should be extended and disclosure requirements increased.

Fourth, no matter how much enforcement is enhanced and the tax code reformed, there will still be efforts to play the audit lottery and take unreasonable positions. Strong actions including treble damages, removal of privileges for attorneys and accountants to practice before the IRS and direct financial penalties on executives should be considered as means to discourage efforts to push the envelope. The case for taxpayer privacy is far less compelling with respect to public corporations than it is for individuals. Some sunlight on how companies allocate income across jurisdictions could also be an effective disinfectant.

Fifth, anyone who is concerned with business being seen as constructive — such as the Roundtable, large institutional investors or presidents and their treasury secretaries — should work to change the law to eliminate the most egregious shelters and make clear that they are prepared to name and shame companies that don’t meet their obligations.

Justice Oliver Wendell Holmes famously said, “Taxes are what we pay for a civilized society.” Any company that wishes to be thought of as a good citizen needs to join the effort to combat corporate tax avoidance. No issue is more important to restoring the legitimacy of our economic system.

Lawrence H. Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama from 2009 through 2010.

Natasha Sarin is an assistant professor of law at the University of Pennsylvania Law School and an assistant professor of finance at the Wharton School.

www.larrysummers.com