Monday, July 21, 2014

The Moral Obligations of Corporate Tax Avoidance

Milton Friedman, the free-market economist whose perspective defined the Chicago School, famously held that managers' absolute ethical obligation is to maximize returns for stockholders. To do otherwise would be tantamount to stealing from them, he argued in an influential 1970 NY Times Magazine piece ("The Social Responsibility of Business is to Increase Its Profits").

Fast forward to 2014. Professor Friedman's ideas have taken hold in boardrooms and policy circles to an extend most academics could never dream of, and they lead to a troubling argument for the current wave of "inversion deals," merging with a smaller foreign firm and moving headquarters abroad to shelter profits from U.S. corporate taxes (among the highest in the world, although with so many loopholes effective rates are often low). Indeed, I heard one analyst remark that it is boards' fiduciary obligation to move a company abroad if it increases shareholder value.

This is an issue not just of business or economics, but of identity, corporate and individual. If a company's future is linked (conceptually and materially) to the collective prosperity of a city, region, or country, then moving operations to avoid taxes would be unwise. But if a company's peer community are other large transnational corporations (and not the people who inhabit a particular place), then share values trump local loyalties.

The trend of inversion deals converges with recent, seemingly serious, debates over the value of public infrastructure in private gain. Here too, short term thinking comes at the expense of long term planning, to all our detriment.

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