Like a doctor who takes the Hippocratic oath always to put his patients’ best interests first, so, too, a director of a company, especially a large or publicly traded one, has, under the law, a fiduciary duty always to serve the best interests of its shareholders. Profits always have been an important measure of the health of a company, and it is an accepted norm that shareholders are better off when profits are higher than when they are lower.
As a result, there is a high correlation between rising profits and rising stock prices. So, why, I ask, is there now a movement to vilify boards of directors and managements if they opt legally to minimize corporate taxes? Isn’t that in the best interests of the shareholders (i.e. higher profits)? In fact, why would anyone (corporate or individual) pay more taxes than they have to?
The movement to demonize legal corporate tax avoidance exists on both sides of the Atlantic. One manifestation is the vilification for holding cash in low tax countries. Another is for paying out dividends in 2012 to avoid the inevitably higher dividend tax rates on shareholders beginning Jan. 1.
The Wall Street Journal ran an article featuring the huge cash hordes of major U.S. corporations held offshore (“Top U.S. Firms Are Cash-Rich Abroad, Cash-Poor at Home,” Linebaugh), including household names such as Apple, GE, Johnson & Johnson, Microsoft, Oracle and Staples.
•On Dec. 4, the New York Times (“British Lawmakers Accuse Multinationals of Avoiding Taxes”) reported that “the British government announced plans … to crack down on tax dodgers (emphasis added) as a parliamentary report criticized United States companies for what it described as tax avoidance (emphasis added).”
Margaret Hodge, chair of the Public Accounts Committee of Parliament wrote: “Global companies with huge operations in the U.K., generating significant amounts of income are getting away with (emphasis added) paying little or no corporation tax here. This is outrageous (emphasis added) and an insult to British businesses and individuals who pay their fair share (emphasis added).” (Note the tone of the emphasized words!) Companies named by Hodge include Amazon, Google and Starbucks, which legally use lower tax jurisdictions within Europe (Ireland, Luxembourg and Switzerland) to record much of their revenues.
Let’s first examine the large cash hordes held offshore, both for the U.S. and the U.K. The cost of bringing that cash back must be examined in the context of the cost of pursuing other avenues of access to cash. In the U.S., for example, it would cost those large corporations, in taxes, 35 percent of the cash repatriated, while borrowing costs can be had for interest rates in the very low single digits. If the political class in the U.S. really desires to have the cash repatriated to spur economic growth, perhaps it should consider, at least temporarily, a lowering of the 35 percent cash repatriation tax. Getting 3 percent in repatriation taxes is better than nothing; and, oh, by the way, we might even see some job growth as a result of that cash being deployed domestically!
For Hodge of Great Britain, the answer is the same. Who has control of the tax policy that drives the cash offshore? It is you, Madam Hodge, and your fellow pols. No board or management of a privately held corporation is going to pay more than it must. It is its duty legally to avoid such payments! Just think what any rational person would think of AT&T if he or she complained that those other, smaller telecom companies were undercutting AT&T’s pricing, and that it was unfair or unethical. Yet, this is the argument that Hodge is making. What’s wrong, U.K.? Can’t compete anymore?
The very concept that legally avoiding such taxes is unfair is a direct attack on capitalism and free markets. The tone of the language used by Hodge, and also present here in the U.S. (“tax dodgers,” “tax avoidance,” “getting away with,” “outrageous,” “fair share,” “shared sacrifice”) all imply that the behaviors of the corporations, their managements and the boards of directors somehow are immoral or unethical. The “profit motive,” Adam Smith’s “invisible hand” (i.e. free markets), and economic opportunity and self-interest propelled the U.S. and the western industrialized societies to the highest living standards in history in the 20th century. With “profit” now a dirty word and legal use of competitive jurisdictions with lower tax rates now under frontal attack by overspending and uncourageous governments, it isn’t any wonder that living standards in these societies are now plunging.
Investors should be encouraged that the multinational corporate sector displays such behavior. The appropriate response by government should be to figure out how to become more competitive internationally. On the other hand, investors should be wary of investing in countries where they see governments restrict the free flow of capital in order to confiscate taxes, as this is always an act of desperation by politicians who have no idea about how economies work or the unintended consequences of their actions.
Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee. Barone or the professionals at UVA (Joshua Barone, Andrea Knapp, Matt Marcewicz and Marvin Grulli) are available to discuss client investment needs. Call them at 775-284-7778. Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.
