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How Much Should Socially Responsible Firms Pay in Taxes?

Write-Off: The Tax Blog

Milton Friedman famously defended the position that “the social responsibility of business is to increase its profits”. Let’s assume that Friedman was wrong, and that the social responsibility of business is not merely to increase its profits, and that it needs to consider the many stakeholders involved in business outcomes. Under the Friedman framework, with regards to taxes, firms should seek to maximize profits, which may involve paying as little in taxes as is legally possible (subject to the other costs of tax avoidance, and assuming the law is clear). Simple enough. But what about under the anti-Friedman framework? How Much Should Socially Responsible Firms Pay in Taxes?

Under the anti-Friedman framework, businesses need to consider a lot more than just profits when thinking about taxes. Taxes take from all the other stakeholders firms must consider under the anti-Friedman framework. For example, every dollar paid to the tax authority is a dollar the firm no longer has to pay employees. Firms should affirmatively choose to pay less in taxes, so they can redirect that cash to employees. Likewise, firms have a social responsibility to customers, so, should legally avoid as much tax as possible to reroute that saved cash towards investments that will produce better products to please customers. Similarly, firms can use cash to reverse the damage done by global warming, decrease plastic waste in the oceans, etc., and, should tax plan to the fullest extent possible by the law to preserve cash to fund saving the planet. It’s really the least we can ask of them.

Finally, and, most importantly, firms must recognize the immense harm that governments can sometimes do, from running corrupt dictatorships that oppress the weak and vulnerable, to fighting unjust and perpetual war, destroying the environment, to employing biased and discriminatory police forces. Recognizing that all of this nefarious activity is only enabled by funding from willing taxpayers, corporations should do everything in their power to contribute as little to such activities, and, underpay their taxes to the fullest amount legally possible.

Under this framework, firms can very reasonably view paying more taxes than is absolutely legally required as taking from their employees and customers, destroying the environment, and, contributing to a less peaceful society (especially as they operate in countries where governments are more likely to do more harm than good, which in some people’s opinion, might be all governments). Socially responsible firms should do the responsible thing, and, legally avoid as much in tax as possible.

Not the result you expected for a socially responsible firm’s tax obligation? Don’t be surprised. Requiring firms to be socially responsible and to serve multiple stakeholders at the same time means that they have to choose between stakeholders. There is really no objective answer to the question of which stakeholder should have supremacy, and, it would be perfectly reasonable for the leaders at a firm to conclude that employees, customers, and the environment should be considered before the government as a stakeholder. This is not at all to say that firms should not be socially responsible. Only that, if they are, there is a great deal of subjectivity involved, and, not everyone will agree on the subjective choices firms make.

UPDATE: I recently saw this amazing quote on The Simpsons, which summarizes the entire issue pretty well: “They’re giant polluters. But… the CEO is a woman. It’s very vexing.” – Lisa Simpson

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