Corporate Tax Planning and Public Perception

Information has recently come out that Apple, despite at least $74 billion in profit over the past four years, has not paid any corporate tax.  Tim Cook is being grilled by the Senate on this topic and it seems to be reopening the issue of the morality of corporate tax planning.

First, what is corporate tax?  In the U.S. there is no value-added tax as there is in many other countries.  There is, however, a corporate tax that is consistently one of the highest in the entire world.  Corporate tax is simply a tax that corporations pay on profits made in the United States (the situation is more complicated when profits are made in other countries).  When these earnings are returned to shareholders as dividends, they are taxed again at the dividend rate.  This double-taxation is confusing and is why prominent wealthy citizens that generate the majority of their income through the stock market are often seen as paying extremely low tax rates, since the corporate taxation and dividend taxation occur separately.

So what is the "fair" amount of corporate tax for a corporation to pay?  If a corporation wants to maximize profits returned to its shareholders or reinvested into the company, shouldn't all companies strive to pay as little corporate tax as legally allowable?  This question is extremely tricky and raises a number of issues:

1. The morality of paying taxes to the government.  There is a definite split, at least in the U.S., on whether government tax revenue is beneficial to society as a whole.  Let's take the extreme views of each side.  One side believes that companies that use accounting trickery to avoid paying taxes are devious opportunists that are extracting all value from society without giving anything back, to the detriment of the working men and women.  The other side believes that, when these corporations obey the law, they are simply generating the maximum after-tax profits that they can and then using these profits in a more efficient way to produce growth than a wasteful government could anyway.
2. The use of net operating losses (NOLs).  When a company incurs a net loss in a given year, it is often able to use these losses to offset profits in subsequent years.  In this way, a company could make an exorbitant profit one year and pay no tax.  Not only is this prudent for companies to do, it is the intentional result of NOL carryover policy.
3. The public image of taxation.  It is no secret that paying very low taxes on very high profits can result in negative media coverage, even when these effective tax rates are the result of NOLs.  In fact, Starbucks recently paid a voluntary tax in the UK, presumably entirely to improve a brand that had been hurt in media coverage of their low tax bill.  In this way, paying taxes could be seen as an expense for the marketing department.  Reconciling this with shareholders exerting pressure for higher profits is a fine line that companies engaging in this practice must walk.

As with most complicated questions, there are a valid arguments on both sides.  In general, I personally believe companies are right to try and minimize their tax bill within reason, particularly publicly-traded companies that have to release this information in earnings reports.  I believe that a simplified tax code that lowers rates and eliminates loopholes generates a more level playing field between small and large companies.  Of course, what is "within reason" for one person may not be for the next, and virtually everyone (except accountants and tax attorneys) is, at least ostensibly, in favor of a more simplified tax code.  One thing is for sure: if Apple is trying to make the argument that it reduces its tax liability in order to have more money available for growth, it is certainly not helping its case by sitting on $145 billion.

The Anachronism of the Compassionless Executive

There has been a lot of discussion lately about the CEO of Abercrombie & Fitch, Mike Jeffries.  For those unfamiliar, he is under fire recently for the company's refusal to stock larger sizes of clothing, the idea being that he does not want the brand diluted by overweight people in the clothes.  This led to some old quotes of his going viral, including this gem: "Candidly, we go after the cool kids. We go after the attractive all-American kid with a great attitude and a lot of friends. A lot of people don’t belong [in our clothes], and they can’t belong. Are we exclusionary? Absolutely."

Now, what's wrong with this?  Abercrombie & Fitch is well-known as designing clothing that is expensive and seen as a status symbol among kids; not just of wealth, but of popularity.  It is undoubtedly marketed this way intentionally, and almost everyone already knew that.  What Jeffries is doing here is stating the truth about his strategy, however indelicate his phrasing and self-serving his motives for pursuing it.

But this raises a larger issue.  Mike Jeffries is not the only executive today that seems to have very little compassion for customers or people in general.  This is certainly not a new phenomenon; in fact, executives being primarily profit-driven capitalists with little concern for the common man was such a prevalent phenomenon in the 80s that it was almost seen as heroic.  This mentality was caricatured as Gordon Gekko in Wall Street (1987).  The ultimate opportunist, Gordon was all business; a profit-seeking machine that viewed life as a zero-sum game and was perfectly comfortable with that.

What other executives have run companies that appear to show a flagrant disregard for compassion?

• In 2010, BP was responsible for the Deepwater Horizon oil spill, which claimed 11 lives and resulted in oil flowing into the ocean for 87 days.  During proceedings on the matter, Tony Hayward (BP CEO) described the environmental impact as "very, very modest" and said "There's no one who wants this over more than I do. I would like my life back."
• About a year ago, Spirit Airlines refused a refund on a flight for a military veteran who was terminally ill.  After the CEO went on record supporting the decision, the airline received enough bad publicity to fill a 747.  Hastily, the CEO reversed the decision and donated to the man's favorite charity, Wounded Warriors.
• During violent protests against the government in Egypt, Kenneth Cole tweeted: "Millions are in uproar in #Cairo. Rumor is they heard our new spring collection is now available online at http://bit.ly/KCairo -KC"  A hasty apology was issued, also on Twitter.

So what changed?  Why do we expect our executives to be more compassionate today than we did in the past?  I think there are several reasons:

1. The Financial Crisis of 2008.  While it is debatable what the causes of the Financial Crisis were, I think the average citizen believes that unbridled greed was one of the primary drivers.  This was a major departure from previously accepted wisdom that greed is good: in the new world, a company's greed can not only hurt their customers but extend to society as a whole.  When a lack of compassion is perceived as being capable of bringing the country to the brink of financial chaos, we need to be more careful about the motives of our executives.  We no longer have the luxury of finding out motivations after the fact.
2. The rise of social media.  There has been much written on the increased scrutiny on individuals due to social media, and executives are not immune.  With this increased scrutiny, there are bound to be mistakes; moments of indiscretion being broadcast for the whole world or simple deafness to tone causing public relations nightmares.  These incidents have eroded our confidence in both elected officials and individuals in corporate America.  With the potential for any mistake to go viral within minutes, the public (and investors) expect executives to build a reputation of genuine concern for employees, customers, and other stakeholders.
3. Demographic and cultural shifts.  In general, the Millennial generation is much less tolerant of any behavior that stigmatizes certain groups or is not compassionate to those in need.  Offending various groups, whether it is a specific race or even the plus-size high school student, is not accepted.  Beyond being compassionate, we now almost expect corporations to have in-house charitable arms, giving back to the communities in which they reside.

The fact is that showing a lack of compassion is simply not good business.  With the heightened scrutiny, this lack of compassion, if evident in the individual, will manifest in a public forum eventually.  Businesses certainly need to spend time focused on ensuring there are appropriate checks and preparing for damage control of mistakes, but this is only half of the equation.  Boards of Directors need to take a much deeper look at character when forming succession plans.  Long term profitability will be better achieved through executives with a genuine customer focus and a greater sense of purpose.  Those that view customers as a necessary evil to the business of making money will ultimately fail.