By Chrystia Freeland
NEW YORK (Reuters) - In recent months, people and their politicians around the world have been astonished to learn that big companies and billionaires will go to extraordinary lengths to pay lower taxes.
Thanks to the work of the International Consortium of Investigative Journalists, based in Washington, we have discovered that some of the most prominent public figures in the world have banked their fortunes in international tax havens, beyond the scrutiny of their national treasuries.
Meanwhile, Tom Bergin, my Reuters colleague, has become the scourge of the top U.S. multinationals by revealing their low effective tax rate in Britain. Mr. Bergin has found that between 1998 and 2012, Starbucks paid less than 9 million pounds, or about $14 million, in British taxes while registering sales of more than 3 billion pounds. According to statutory filings, Google made $18 billion in revenue in Britain from 2006 to 2011, and paid just $16 million in taxes.
Open the door to the top executives' suite and you will hear howls of rage over the backlash these revelations have provoked. There is, from the corporate point of view, something a little disingenuous happening here. After all, countries, states and cities have spent the past several decades openly competing to set the lowest corporate tax rates in an effort to attract business. The fact that multinationals would respond to these incentives and turbocharge them with some international tax arbitrage is about as shocking as the discovery of gambling in Casablanca.
After all, as Lord Clyde observed, in a 1929 British tax case: "No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores."
This principle — that you should seek to make the most money you can, provided you do not break the law — is the operating software of modern capitalism. As Milton Friedman put it: "There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."
In the hypercompetitive 21st century, where every Apple is only one algorithm away from becoming a BlackBerry, paying the lowest possible taxes is not the exceptional policy of one particularly greedy chief executive — it is what every executive seeks to do to keep his job. That was what Andrew Kassoy, a former private equity investor, explained at a recent panel discussion at the Stern School of Business at New York University (Disclosure alert: I was the moderator).
Kassoy, who now leads a nongovernmental organization working to transform corporate behavior, argued that current publicly traded U.S. companies were "actually obliged to maximize their externalities" — economist-speak for behavior that harms the wider community — if that would increase their bottom line. Kassoy does not think that is a good thing, and, increasingly, neither do a lot of other people — the grim title of the session was "Can American Capitalism be Saved?"
He's not the only one who is worried. In a recent interview, I asked Mark Carney, the governor of the Bank of Canada, about the ability of rich people and big companies to avoid taxes in a world of global capital flows.
"It is demonstrably a problem," said Carney, who will take over as the governor of the Bank of England on July 1. "If there's an ability to fundamentally, whether on a personal or a corporate level, persistently avoid tax, the consequence of that is that the burden of fiscal adjustments that are happening in virtually every advanced economy falls more heavily on those who pay their fair share. And they end up paying more than their fair share as a consequence."
Closing the tax loopholes or tightening the lax tax enforcement that have deprived European treasuries of so much multinational corporate tax revenue is politically difficult and technically complicated. But what is even harder is figuring out how to better align the behaviors of the business titans with the greater good of the community as a whole.
After all, the companies that have been minimizing their European tax bills are ones we are accustomed to thinking of as the good guys. These are not the bailed-out fat cats of Wall Street or the crony capitalists of the emerging markets. These are the inventive entrepreneurs of the West Coast, who brought cappuccinos and search capabilities to the global masses. Starbucks energetically associates its brand with all manner of ethical causes, and Google's motto is "Don't be evil."
In a new book, a University of Michigan business professor, Mark S. Mizruchi, contends that the forsaking of responsibility for the wider community is a big shift in the behavior of U.S. business and a central reason for the country's political and economic malaise.
"The current American corporate elite seems to be leading us toward the fate of the earlier Roman, Dutch and Hapsburg Spanish empires, starving the treasury and accumulating vast resources for itself," Mizruchi writes. He concludes his book with the hope that the corporate elite will rediscover "enlightened self-interest" and reform themselves.
Speaking at the New York University conference, Clay Christensen, one of the leading thinkers about the disruptive impact of the technology revolution, suggested that belief in a God who holds us accountable in the afterlife would make captains of industry more civically responsible today.
Christensen is right that to change behaviors we need to change incentives. Hellfire and damnation is one option; another is rewriting the rules of engagement between companies, countries and shareholders.
(Chrystia Freeland is the managing director and editor, Consumer News at Thomson Reuters. Prior, she was U.S. managing editor of the Financial Times. Before that, Freeland was deputy editor of the Financial Times, in London, editor of the FT's Weekend edition, editor of FT.com, UK News editor, Moscow bureau chief and Eastern Europe correspondent. From 1999 to 2001, Freeland served as deputy editor of The Globe and Mail, Canada's national newspaper. Freeland began her career working as a stringer in Ukraine, writing for the FT, The Washington Post and The Economist.
She is the author of two books: "Plutocrats: The Rise of the New Global Super-rich and the Fall of Everyone Else," published by Penguin in 2012 and "Sale of the Century: The Inside Story of the Second Russian Revolution," published by Crown Publishing books in 2000.)
(Chrystia Freeland is a Reuters columnist. Any opinions expressed are her own.)
(Editing by Jonathan Oatis)