Those Silly Tax Laws…

Wait, don’t run away!!! I won’t talk too much about the intricacies of tax in this blog. Rather, the discussion will be more about the reaction, likely an irrational one, by the public.

I learned through my international taxation class that Google paid about 2.4% on its corporate income in 2009. Given that the statutory corporate rate was 35% at that time, this represents a significant loss for the US government. (NOTE: the rule is that these profits will be taxed when the profits are returned from the foreign subsidiary to the U.S. parent company, so taxes on these profits are being deferred, not avoided.)

The fun part about MBA coursework is getting to apply lessons across classes. The very first lesson that we learned from finance class, among others, is that a firm’s purpose is to maximize the wealth of its shareholders, or those who own its stock. So in this regard, Google is doing its best to avoid unnecessary costs, or in this case, taxes that can be paid later.

Contrast that viewpoint to some of the rhetoric found in the above link, or that rhetoric which was seen in the last Presidential election regarding Mitt Romney’s work with Bain Capital, as well as his lower-than-normal personal tax rates. People are criticizing Google and Mitt Romney, among others, for not participating in their civic duty enough.

In deciding how to best navigate this conundrum, we turn to our organizational behavior class which, among others, taught us this lesson from business: incentives matter. So, when companies like Google or investors like Mitt Romney follow the laws put forth by the federal governments of the jurisdictions in which they operate in a way that causes them to pay lower taxes, there is a public backlash.

The backlash itself is not the irrational public behavior. Rather, the focal point of the behavior is that which I believe is misguided. Basic survival instinct says that a person will act in his or her best interest in order to gain an advantage. This is not any different for corporations. But the online rhetoric shows that many people get overly angry at the company or the person, when the heart of the issue is with the rules and regulations themselves. If the tax code is written and enforced in a way that allows companies to avoid taxes in some circumstances, then the tax code is the true cause of the problem. After all, if one company decides to do the “right thing” and not exploit these opportunities to cut costs, there will be another 3 or 4 ready to take said company’s place – and the accompanying customer base.