By Chrystia Freeland
NEW YORK May 2 In recent months, people and
their politicians around the world have been astonished to learn
that big companies and billionaires will go to extraordinary
lengths to pay lower taxes.
Thanks to the work of the International Consortium of
Investigative Journalists, based in Washington, we have
discovered that some of the most prominent public figures in the
world have banked their fortunes in international tax havens,
beyond the scrutiny of their national treasuries.
Meanwhile, Tom Bergin, my Reuters colleague, has become the
scourge of the top U.S. multinationals by revealing their low
effective tax rate in Britain. Mr. Bergin has found that between
1998 and 2012, Starbucks paid less than 9 million
pounds, or about $14 million, in British taxes while registering
sales of more than 3 billion pounds. According to statutory
filings, Google made $18 billion in revenue in Britain
from 2006 to 2011, and paid just $16 million in taxes.
Open the door to the top executives' suite and you will hear
howls of rage over the backlash these revelations have provoked.
There is, from the corporate point of view, something a little
disingenuous happening here. After all, countries, states and
cities have spent the past several decades openly competing to
set the lowest corporate tax rates in an effort to attract
business. The fact that multinationals would respond to these
incentives and turbocharge them with some international tax
arbitrage is about as shocking as the discovery of gambling in
After all, as Lord Clyde observed, in a 1929 British tax
case: "No man in the country is under the smallest obligation,
moral or other, so to arrange his legal relations to his
business or property as to enable the Inland Revenue to put the
largest possible shovel in his stores."
This principle - that you should seek to make the most money
you can, provided you do not break the law - is the operating
software of modern capitalism. As Milton Friedman put it: "There
is one and only one social responsibility of business - to use
its resources and engage in activities designed to increase its
profits so long as it stays within the rules of the game, which
is to say, engages in open and free competition without
deception or fraud."
In the hypercompetitive 21st century, where every Apple is
only one algorithm away from becoming a BlackBerry, paying the
lowest possible taxes is not the exceptional policy of one
particularly greedy chief executive - it is what every executive
seeks to do to keep his job. That was what Andrew Kassoy, a
former private equity investor, explained at a recent panel
discussion at the Stern School of Business at New York
University (Disclosure alert: I was the moderator).
Kassoy, who now leads a nongovernmental organization working
to transform corporate behavior, argued that current publicly
traded U.S. companies were "actually obliged to maximize their
externalities" - economist-speak for behavior that harms the
wider community - if that would increase their bottom line.
Kassoy does not think that is a good thing, and, increasingly,
neither do a lot of other people - the grim title of the session
was "Can American Capitalism be Saved?"
He's not the only one who is worried. In a recent interview,
I asked Mark Carney, the governor of the Bank of Canada, about
the ability of rich people and big companies to avoid taxes in a
world of global capital flows.
"It is demonstrably a problem," said Carney, who will take
over as the governor of the Bank of England on July 1. "If
there's an ability to fundamentally, whether on a personal or a
corporate level, persistently avoid tax, the consequence of that
is that the burden of fiscal adjustments that are happening in
virtually every advanced economy falls more heavily on those who
pay their fair share. And they end up paying more than their
fair share as a consequence."
Closing the tax loopholes or tightening the lax tax
enforcement that have deprived European treasuries of so much
multinational corporate tax revenue is politically difficult and
technically complicated. But what is even harder is figuring out
how to better align the behaviors of the business titans with
the greater good of the community as a whole.
After all, the companies that have been minimizing their
European tax bills are ones we are accustomed to thinking of as
the good guys. These are not the bailed-out fat cats of Wall
Street or the crony capitalists of the emerging markets. These
are the inventive entrepreneurs of the West Coast, who brought
cappuccinos and search capabilities to the global masses.
Starbucks energetically associates its brand with all manner of
ethical causes, and Google's motto is "Don't be evil."
In a new book, a University of Michigan business professor,
Mark S. Mizruchi, contends that the forsaking of responsibility
for the wider community is a big shift in the behavior of U.S.
business and a central reason for the country's political and
"The current American corporate elite seems to be leading us
toward the fate of the earlier Roman, Dutch and Hapsburg Spanish
empires, starving the treasury and accumulating vast resources
for itself," Mizruchi writes. He concludes his book with the
hope that the corporate elite will rediscover "enlightened
self-interest" and reform themselves.
Speaking at the New York University conference, Clay
Christensen, one of the leading thinkers about the disruptive
impact of the technology revolution, suggested that belief in a
God who holds us accountable in the afterlife would make
captains of industry more civically responsible today.
Christensen is right that to change behaviors we need to
change incentives. Hellfire and damnation is one option; another
is rewriting the rules of engagement between companies,
countries and shareholders.
(Chrystia Freeland is the managing director and editor,
Consumer News at Thomson Reuters. Prior, she was U.S. managing
editor of the Financial Times. Before that, Freeland was deputy
editor of the Financial Times, in London, editor of the FT's
Weekend edition, editor of FT.com, UK News editor, Moscow bureau
chief and Eastern Europe correspondent. From 1999 to 2001,
Freeland served as deputy editor of The Globe and Mail, Canada's
national newspaper. Freeland began her career working as a
stringer in Ukraine, writing for the FT, The Washington Post and
She is the author of two books: "Plutocrats: The Rise of the
New Global Super-rich and the Fall of Everyone Else," published
by Penguin in 2012 and "Sale of the Century: The Inside Story of
the Second Russian Revolution," published by Crown Publishing
books in 2000.)