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Markkula Center for Applied Ethics

Ethical Tax Systems in a Global Economy

Margaret Steen

The idea of companies locating abroad, usually by merging with a foreign company, when done primarily to take advantage of tax rates in other countries raises a host of ethical questions. In a panel titled, "Ethical Tax Systems in a Global Economy," at a recent meeting of the Business and Organizational Ethics Partnership at Santa Clara University's Markkula Center for Applied Ethics, two speakers explored these issues.

The panel was moderated by Kirk O. Hanson, executive director of the Markkula Center for Applied Ethics and John Courtney Murray S.J. University Professor of Social Ethics at Santa Clara University. The panelists were Ron Saake, partner in international tax at Deloitte; and Tim Seitz, senior vice president of Flextronics' Financial Supply Chain Design Group.

An inversion, as the act of moving a company abroad for tax purposes is called, raises questions of tax policy, fairness, and economic patriotism when done primarily for tax purposes. The U.S. Treasury Department recently made it more difficult for companies to achieve this with a merger.

Seitz explained how corporate tax issues can be difficult for multinational companies. Flextronics has operations in many countries, and "every country thinks all this income should be in their country. We have 15 countries all wanting 60 percent of the taxes," Seitz said.
What is a fair solution to this? If 30 percent of a company's workers are in a particular country, should 30 percent of the profits be taxed in that country? What if the 30% are warehouse workers and 70% of the R&D and manufacturing is done in a second ? What if all the capital is coming from a third country?

Saake said that although that idea has been proposed, it's a "very simplistic" solution. "The companies' goal is to maximize shareholder value."
This led to questions about corporate tax rates and who ultimately pays them. Seitz called corporate taxes "a veiled sales tax, a veiled wage tax or a veiled income tax" and argued that it would be "more efficient and more transparent" to have no corporate income tax at all but look at other ways, such as consumption tax, employment tax or a income tax on high earners, to raise revenue. Because of this, the corporate tax itself could be viewed as unethical and companies seeking to reduce it may be viewed as doing the ethically and morally correct thing.

A related issue is what Seitz called a "perverse incentive" for companies to park money offshore for foreign investment and expansion instead of bringing it to the United States where it would be immediately taxed. Saake called the issue "the bane of our tax system now" and said that following other countries' lead in exempting foreign income from domestic tax would reduce the incentives for inversions.

An audience member said that the current debate about income inequality is "obscured by the corporate tax debate" and suggested that even for progressives, the case for eliminating the corporate income tax is "totally persuasive." He asked whether, if there were no corporate income tax, corporations would stay in the United States and not invert.

"The U.S. wins hands down on the people, technology, and culture front," Seitz said. "Every single country that we go to, every one of them wants to create a Silicon Valley. If it was zero and we thought it was going to stay zero, I think a lot of companies would incorporate here."

Saake said that he works with management at companies that are doing inversions. "American companies do not like that, but what I hear is, 'Our competitors are doing it, we have an opportunity to do it, I guess we have to or we're not going to be competitive," Saake said.

Margaret Steen is a freelance author.

Nov 1, 2014
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