Saturday, May 17, 2014

Should corporations avoid taxes?

Reuven S. Avi-Yonah recently posted Just Say No: Corporate Taxation and Corporate Social Responsibility.

He poses the question whether corporations are obligated to engage in strategic transactions solely for the purpose of avoiding taxes.  His conclusion is basically that under any theory of the firm – aggregate, real entity, or artificial entity – corporations have an affirmative obligation not to engage in overly-aggressive tax planning.

His thesis is attractive, though I'm not sure it's entirely convincing.  He basically posits that taxes are the means by which we ensure a peaceful and civilized society, and no matter what theory of the firm one endorses, it is therefore proper for corporations to shoulder that burden.  The argument, however, would seem to encompass any form of strategic behavior - i.e., the argument would apply to all behaviors in which corporations can engage that evade the spirit of various regulations intended for the greater good of society.  If so, then it's not clear that the argument gets us very far in terms of determining the legitimate boundaries of corporate behavior.

Ann Lipton | Permalink


In the "kinder, gentler" universe of "everybody gets a trophy," I am quite certain that the mental gymnastics of the author can be addressed as plausible. Taxes are not the means to ensure a peaceful, civilized society - but peace and civilized society results from the quid pro quo of the exchange between those inhabiting society and their willingness to trade the “benefit for the detriment and the detriment for the benefit” of law, regulation and taxation (including hidden regulatory costs imposed recently estimated at $1.85T last week; Thus, if the burdens are seen as undue, excessive or the paradigm lacking sufficient opportunity, motivated actors will seek to mitigate, migrate or expatriate from laws and taxes. I find this theorizing to be an exercise in “kumbaya” (naïve views of the world and human nature).

Let us boil this down to its essence with publicly traded, multinational conglomerates – the US is the only major country in the world that taxes worldwide income. This argument is not about getting a piece of the pie arising from domestic commerce. It’s about getting a piece “all the revenue generated by a domiciliary from wherever earned in the world.” It is a given that taxes, albeit managed, are going to be paid on domestically earned income.

With or without government and the associated taxation that must necessarily follow that cost of governance, commerce will flourish. Without commerce, governance and taxation are for naught. Make the burdens on commerce punitive or overly taxing and commerce will ultimately seek out a different system or operate outside the legal and tax systems. I proffer Prohibition, the “War on Drugs” and the evolution in Colorado with regards to marijuana for examination and contrast with this previous statement. Taxes are part of the “cost of doing business” within a particular jurisdiction; however, subjugation of commerce, the entity or individual to a particular jurisdiction and the imposition of a “moral imperative” to “give until it hurts” is a fantasy.

Where one tries to distinguish government and taxation from the governed and their drives and motivations, the analysis of the system becomes corrupt. Aggressive tax planning, migration and expatriation – to the degree possible – keeps pressure on government to be efficient (I know, that – too - in reality is fallacy) with regards to tax environment and utilization of resources. It is healthy competition that Texas poaches California commerce because of California inefficiencies and tax excesses. It is healthy competition that Walgreens sends up the “trial balloon” to government that they are looking to escape “worldwide taxation.”

As attorneys or lawyers (which I distinguish, respectively, from a lawyer with a client from one learned in the law), we do wrestle with the legal fictions through which we trade various status for taxes paid (business entities). However, a recent posting on the Business Law Professor Blog highlighted that part of the fiction we promote and accept is that a business entity is distinct from its promoters, owners, officers, managers and agents and their personal interests. We do this with by-laws, operating agreements, and statutes imposing “fiduciary duties,” “shareholder oppression” and doctrines like the “business judgment rule.” However, in the vast majority of entities, it is all-about personal interests and the “legal fiction” that it is to the contrary.

Markets can elicit “corporate social responsibility.” Imposing such a duty is only in the mind of a tax utopian. If shareholders or stakeholders wish to evidence a responsibility to “sit and take it” (taxes), then just as there are “environmentally friendly” companies and stock market composites, then capital holders may choose to invest only in those entities of commerce who decide to make it an express part of their mission statement or express purpose of formation to serve as the “spigot” for a perceived perpetual appetite of government then the stakeholders most certainly can choose to speak – “we don’t care about maximizing return on capital, but we invest to generate more taxes.” The other posting on the blog with regards to B corporations is an example of stakeholder choice. Choice is there. The markets can alter the dynamic. However, we are now back to individual motivations. Watching people invest their capital to make sure government receives more revenues… now that would be another kumbaya moment.

Posted by: Tom N | May 17, 2014 11:02:52 AM

Canada taxes worldwide income of all residents, unless Canada isn't a major country.

Posted by: bob | May 21, 2014 1:44:52 PM

Only two countries tax worldwide income of non-residents who are citizens of their country - Eritrea and the US. A few others tax based on citizenship in limited situations. See gen.,

Posted by: Tom N | May 24, 2014 5:18:29 AM

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