Archive for the ‘taxation’ Category

Curbing Illicit Flows of Money

The development goals of many underdeveloped nations are seriously hampered by illicit flows of money. The money sent into those countries in the form of aid and foreign direct investment is, in many cases, dwarfed by the money that flows out as a result of money laundering, bribery, and dodgy transfer pricing. Some estimates put that outflow as high as a trillion dollars. And a lot of that money flows through, between, or within corporations.

I recently took part in a panel discussion on this topic, part of a larger event put on by a group called Academics Standing Against Poverty (ASAP).

Here are a few of what I take to be the key points, not necessarily in order of presentation, from my discussion of the topic:

Corporations have two different categories of responsibilities when it comes to curbing illicit financial flows. First, they are of course responsible for their own behaviour. Under this heading, corporations have three key obligations. First is not to game the system to avoid taxes. Minimizing taxes — even going to significant lengths to avoid taxes — may seem to be part and parcel of a manager’s obligation to maximize profits. But there is no general obligation to maximize profits, and certainly no such obligation to do so ‘at all costs.’ Even the weaker duty to ‘put shareholders first’ is a vague enough concept to be consistent with a principled stance against aggressive tax avoidance, even where taxes can be avoided legally.

A second direct obligation has to do with transparency about transfer pricing. When goods or services are being sold between branches of a multinational, the prices charged should be fair and should be rooted in a clear methodology. And total taxes paid internationally should be reported in a company’s audited annual reports. Even when gaming the system is legal, it is dishonourable.

Third, companies should have zero tolerance for bribery. Besides being corrosive to local economies, bribery is often just a lousy competitive strategy: it involves payments that cannot be guaranteed to work, and when they don’t work there is of course no recourse to the courts. Businesses generally know this, but sometimes see bribery as a necessary evil; they need to work to make it less necessary.

In addition to these direct obligations regarding their own behaviour, big companies arguably have some responsibility for the indirect effects of their operations. Major corporations support entire ecosystems of smaller businesses — suppliers, subcontractors, agents, and so on. And activities within that ecosystem can be a major source of illicit transfers. Corporations should assume some responsibility for illegal and unethical activities in their shadow. This should at least mean setting clear standards for the behaviour of the companies with which they interact, and sharing best practices. Companies are starting to do this with regard to bribery, but they should consider extending that to other areas.

Next, a point with regard to how businesses interact with governments. The least controversial, over-arching norm for business is to play by the rules of the game. Normally, governments set rules and as long as businesses play within those rules, they are at least coming close to meeting their obligations. But not all governments are equally capable of setting and enforcing the requisite rules. And the absence of clear rules doesn’t imply an absence of obligations. So, for example, the fact that the government of a small developing nation hasn’t passed regulations (as Canada and the US have done) that set standards for fairness in transfer pricing doesn’t mean that a company can be complacent.

Finally — and this bit of advice is aimed at development advocates — it is important to avoid thinking of transnational corporations as the enemy. My sense is that a significant subset of folks who are concerned with development are focused on the negative side-effects of corporate involvement in developing nations. What we need to do, though, is to harness the power of corporations rather than regretting it. Business corporations, in addition to being potent organizations, have a vested interest in reducing poverty worldwide. Anyone living on $1.25 a day makes a lousy customer and a lousy employee. Of course, corporations face a collective action problem when considering how to reduce poverty. No one corporation can do much on its own, and it’s a challenge to find ways to get long-term interests in poverty reduction to override short-term interests in profits. But still, the development community needs to see corporations as important partners. We can’t let a culture war over capitalism get in the way of helping the world’s poor.

The video of our panel discussion is now available, here:

Did GE Really Pay No Taxes in 2010?

A few months back, the NY Times shocked a lot of people by reporting that General Electric — an enormous, multi-billion-dollar company — had paid zero taxes to the US government in 2010, despite the fact that more than a third of the $14.1 billion that company earned that year had come from its US operations. The reason? GE has a truly enormous tax department that works non-stop to look for deductions and loopholes.

Scandalous, right?

Not so quick. As I’ve argued before, what we commonly call “loopholes” are in most cases the result of some decision by government to encourage or discourage a particular behaviour. That is, most of the things GE (or any other company) does in order to avoid taxes are thing the government is trying, however ham-fistedly, to encourage companies to do. Still, we might reasonably look askance at a company that works so assiduously to squeeze every last dollar out of the tax system. The millions spent to save millions in taxes could in principle be spent to develop products that would boost the overal value proposition of the company.

But the situation with regard to GE is even more complex than that. To get a taste, check out the comments section under the discussion of this story on the always-useful economics blog, Marginal Revolution. There, it is pointed out that the $14.1 billion in profits attributed to GE by the NYT was calculated according to GAAP, which is entirely different from how the IRS calculates taxable income. In other words, we’re looking at apples and oranges here. The entire discussion thread at MR is worth reading. But if you’re not well-versed in the niceties of tax rules, or corporate finance more generally, you’ll quickly find yourself in over your head.

But that in itself raises an important issue. As the sophistication of the debate in the MR comments section demonstrates, the fairness of GE’s tax burden (or lack thereof!) is something that most of us simply are not qualified to comment upon. And that’s a worry. It’s hard for companies to be held accountable if the general public doesn’t understand the factual basis for evaluating them. It seems to me that this is an additional reason for tax reform: the subtlety of the various policy objectives being sought through taxation of corporations needs to be balanced against the need for the concerned public to be able understand it.

Critical Thinking in Business Ethics, Part 2: Argument Analysis

This is the 2nd in a series of postings on the role of critical thinking in business ethics.

(Coincidentally, a story has been in the news recently about how poorly most US college students do at acquiring critical thinking skills during their post-secondary years. See: Study: Students slog through college, but don’t gain much critical thinking.)

One of the absolutely fundamental skills of critical thinking is argument analysis, or the interpretation of argument structure. And the fundamental elements of argument structure are argument premises and conclusions.

In everyday language, the word “argument” means a heated debate. When 2 people are “having an argument,” they’re disagreeing with each other. But the other meaning of the word “argument,” the one with which critical thinking is especially concerned, is this: an “argument” is a series of statements, in which some of those statements (called “premises”) are offereds as support for or reasons to believe another of the statements (called the “conclusion.”) It takes 2 to tango, but it takes just 1 to put forward an argument.

Understanding the structure of an argument is a very good step towards understanding its strengths and weaknesses. Knowing, for example, that a given argument has 3 distinct premises rather than just 1, is clearly pretty fundamental to looking for its weaknesses: the more premises it has, for example, the more possible points of critique. But more fundamental than that, even, is the idea that we simply gain a better appreciation of someone’s point if we can picture — even in a simplified graphical way — the shape of their argument.

Look, for example, at this argument:

The definition of “sustainability” is unclear. Also, sustainability is just one of many important ethical values. So, we should not judge a business entirely by its sustainability ranking.

We can represent this argument graphically, by means of a diagram, as follows:

The arrows in this diagram represent the author’s intended logical “flow” — they can be read as representing the word “therefore.” This argument has 2 premises, each of which lends at least some support to the conclusion. (The fact that there are 2 arrows indicates that there are 2 separate chains of logic here; each premise gives some reason to believe the conclusion.) At this stage all we are doing is sketching the shape of the argument; we are not yet engaging in a critique. But from a critical perspective, this means that if you find fault with one of the premises, the conclusion is still supported — at least to some extent — by the other.

Next, compare that one to this argument:

A tax on dividends means that corporate profits are taxed twice. And taxing the same money twice is unfair. So, a tax on corporate dividends is unfair.

That argument can be diagrammed as follows:

This argument also has 2 premises. But notice that (as implied by the line joining them, and the single arrow flowing from that line to the argument’s conclusion) these 2 premises are working together. They need each other in order to lend support to the argument’s conclusion. This means that a convincing criticism of either one of those premises robs the argument of all of its force. That’s not to say that the conclusion is false; it’s just to say that this argument can’t support the conclusion, if even one of its premises is in doubt.

Now, those are very very simple arguments, and the style of analysis suggested here is not exactly profound. But the simple act of sketching out the shape of an argument — your own or someone else’s — is useful in making clear just how much support the argument does or doesn’t have, and where its critical weak points may be. And agreeing on that is a crucial part of getting debates over business ethics beyond the foot-stomping stage.

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The diagramming method used here is adapted from Lewis Vaughn and Chris MacDonald, The Power of Critical Thinking, 2nd Canadian Edition, Oxford University Press, 2010.

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