Companies Should Pay And Report Their Taxes: A Bipartisan Proposal

Thanks to a vast arsenal of legal tax dodges and opaque tax reporting, large U.S. multinational companies pay about half the statutory tax rate of 21 percent. Small and medium-sized enterprises pay…

Companies Should Pay And Report Their Taxes: A Bipartisan Proposal

Three recent articles have given me an idea which I think the most extreme on the left and the most extreme on the right could agree on. Companies should pay the statutory tax rate and clearly report on taxes paid by jurisdiction. With apologies to both camps, I have to admit this is an ESG issue even if neither group wants to call it such. As the ESG Culture Wars rage on—and are sure to intensify with House Hearings next year—it is hopefully ameliorative to the political atmosphere in America to find a topic on which both sides could agree. I will lay the groundwork for this assertion by summarizing these three articles.

Extreme politics and radical political views or extremism as far left and right ideology as a social ... [+] risk and society danger with 3D illustration elements.getty The first two articles are recent posts on by Professor Shivaram Rajgopal, an accounting professor at the Columbia Business School. The first is 'Why Investors Need Better Corporate Tax Disclosures—Part I' and the second is 'Why Investors Need Better Corporate Tax Disclosures—Part II.' In each of his articles he uses Ford as a case study to make his more general points. The third article is by Laura Davison and Bloomberg and published in Fortune: 'House Republicans target U.S. Chamber of Commerce as GOP battle against ‘woke capitalism' revs up.' Let's start with Professor Rajgopal's contributions. I read each one four times. The first time through I got the basic idea but couldn't follow most of the technical accounting and tax details. The second time I got (I think) a few of them. The third time I got a headache. I decided to not read them a fourth time lest I induce my first migraine in 71 years 🤕. Don't get me wrong. This isn't a critique of Rajgopal's expository skills. After all, he is a professor 👨🏼‍🎓! Rather, the mental stress I suffered is an indication of just how profoundly complicated the issue is and the many clever and devious ways companies have to not pay taxes, wrapped in a disclosure system designed to obfuscate rather than communicate. So, for those of you who aren't deeply skilled in the arcane art of tax accounting, let me summarize each piece in five bullet points. And FYI I checked with the Professor to make sure this poor student didn't get it completely wrong.

· Investors need to be able to estimate a company's sustainable tax rate since this affects future cash flows which are at the foundation of company valuation for investment decisions

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· The complexity of the tax laws and the opacity of reporting make this virtually impossible to do

· A company's effective tax rate can vary dramatically and be far away from the current statutory tax rate of 21 percent (for Ford it was 113.1 percent, -14.3 percent, and -0.7 percent in the years 2019, 2020, and 2021), respectively · This variation is a result of both permanent (items that are never taxed or are deductible) and temporary (deferred tax assets and deferred tax liabilities) differences

· Investors who care about the relevance of ESG to value creation should be paying more attention to the taxes paid (or not) by companies Professor Shivaram Rajgopal,Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing; ... [+] Accounting Division ChairProfessor Shivaram Rajgopal

Part II:

· The corporate world is rife with all kinds of machinations and manipulations through tax havens, transfer prices, debt and earnings stripping, and other magical spells that enable companies to reduce their income tax

· It is virtually impossible to figure this out from the tax footnote in the company's 10-K, but has come to light in Congressional hearings in 1999, 2003, 2005, and 2019

· One simple fix is for Congress to mandate that public companies simply publish their tax filings since tax accounting and financial accounting are very different beasts 🦍

· A compromise given the strong political opposition to publish public company tax returns is to build on the Global Reporting Initiative's global standard for tax transparency, GRI 207: Tax 2019, for country level tax reporting which I about when it first came out

· The European Union has established new rules that are going to force some greater tax transparency on large U.S. multinationals with operations there

The Fortune article was a much easier read and can also be summarized in five bullet points by simply quoting from the article and adding one comment of mine to each quote.

· 'Republicans and their longtime corporate allies are going through a messy breakup as companies' equality and climate goals run headlong into a GOP movement exploiting social and cultural issues to fire up conservatives.' While the ire of the now anti-elite GOP has so far been on asset managers , it looks like companies are next up in the firing line. I've helpfully suggested that NextEra would be a good example to call on the House Hearings Carpet.

· 'The issue, this person [a lobbyist for a business association] said, is the incoming freshman class has deep-rooted opinions and little experience with trade policy, the debt limit or the policies surrounding ESG.' Nothing like having deep-rooted opinions for basing policy stances on issues you know nothing about.

· 'Interviews with lawmakers, lobbyists and former congressional aides highlighted the growing tensions with a new crop of Republicans more focused on social and cultural issues than business priorities.' Seems like every time I turn around there's another madcap GOP initiative, such as this Orwellian video from the State Financial Officers Foundation that I've written about. All of them bad mouth ESG as a pernicious strategy of progressives when what it's really about is value creation through the management of material risk factors. Not that I've been able change any minds—yet. I'm an optimist, so I'll keep trying 🤗.WASHINGTON, DC - JULY 01: U.S. House Minority Leader Rep. Kevin McCarthy (R-CA) speaks during a ... [+] weekly news conference at the U.S. Capitol July 01, 2021 in Washington, DC. McCarthy held a weekly news conference to answer questions from members of the press. (Photo by Alex Wong/Getty Images)Getty Images

· 'Most directly in the GOP cross-hairs is the US Chamber of Commerce, which is under pressure from likely House Speaker Kevin McCarthy to replace its leadership [the President and CEO of the Chamber is Suzanne P. Clark] after the nation's biggest business lobby backed some Democratic candidates.' God forbid the Chamber have its own opinions 😱 in a democracy where there are two major parties to choose from and not follow in lock step with just one of them. I think the Chamber can also take comfort in the fact McCarthy's enemies from within will keep him pretty busy on other things.

· 'A more conservative alternative to the Chamber, the American Free Enterprise Chamber of Commerce, is rushing to fill the void with its focus on deregulation and lower taxes.' Gotta admit it kind of takes my breath away to think of a business association more conservative than the Chamber. Ah, life in America these days!

But in my new bipartisan spirit, let me go with the Free Enterprise Chamber folks on the issue of 'lower taxes,' but with a slight twist. The Free Enterprise Chamber 'REPRESENTING ENTREPRENEURS, INNOVATORS, AND CREATORS' is 'FIGHTING FOR FREE, FAIR, OPEN MARKETS.' Here's the twist. Since in 2017 their hero Donald Trump reduced the corporate rate from 35 to 21 percent starting in 2018, how about having companies of all sizes pay that rate?

The Institute of Taxation and Economic Policy (ITEP) studied the taxes paid by 379 large U.S. countries for 2018. The effective tax rate for this group was 11.2 percent; 91 companies (including, Chevron,