Social and Ethical Obligations of US Multinational Companies
Globally-Dictated Policies by US Multinationals Threaten Economic Development in the US
This is the second of a two-part blog on corporate social responsibilities (CSR). In the first blog I looked at the definition and various perspectives on just what it means to say a corporation has social responsibilities and new regulations passed by Congress to rein in corporate misbehavior. In this blog I look at US companies that make decisions designed to minimize global taxes from the perspective of social responsibility and the ethics of such actions.
We are all aware that US corporations outsource jobs to countries such as India and the Philippines to lower costs. There can be no question that profit maximization is the incentive for such practices. Critics argue that outsourcing leads to job losses in the US at a time when unemployment is at historically high levels. US companies would say that their goal is to maximize global profits and outsourcing contributes to that goal. The important question from a social responsibility perspective is whether a US company has an obligation to create jobs in the US and not ship them overseas. On one hand, the US economy is hurt whenever jobs go abroad especially when they can be done just as well using US workers in the US who then spend part of their income to stimulate the US economy. On the other hand, business is globalized these days and corporations tend to look at their policy decisions on a global basis seeking out the lowest costs of production. Corporations can't (and shouldn't) be forced to hire US workers although I do believe it is socially irresponsible to shut down an entire US plant and move it to another country simply to cut costs. The lost jobs and revenue can be devastating to a community.
In ethics we sometimes use the Rights Theory to evaluate actions and decisions. We could apply the universality perspective to outsourcing by asking: "Would I want other companies to shut down their US plants and move them overseas in similar situations for similar reasons?" In other words, if one corporation moves its plant overseas for cost savings, would I be comfortable if all corporations did the same? Taken to its logical conclusion this would mean a potentially catastrophic exodus of jobs from the US with all the related damages to our economy. Moreover, from a utilitarian perspective an argument could be made that outsourcing causes more harm through lost jobs and economic stagnation in the US compared to any utilitarian benefits that, after all, accrue mostly outside the US.
I have previously blogged about transfer pricing techniques that enable US companies to shift profits overseas to lower tax rate countries by shipping merchandise to overseas subsidiaries for sale locally rather than selling the same item in the US. The result is a loss of jobs, a lack of economic stimulation in the US, and the US Treasury is "cheated" out of tax revenue thereby increasing the federal deficit. It has been estimated that transfer pricing techniques may be costing the US Treasury $100 billion or more each year.
A related issue is that profits earned abroad are not taxed by the US Treasury until they are repatriated back to the US. In other words a US company can indefinitely defer paying taxes to the US government on profits earned outside the US by keeping the profits in their overseas operation. The result is a US company may wind up stimulating the economy of the foreign host country by hiring locals to do jobs and investing in those countries. Recently it was reported that US companies such as General Electric and Microsoft are using cash parked overseas to buy up foreign companies at more than double last year's pace.
US companies claim that if corporate tax rates were lowered in the US from 35% to say 10-15%, then the companies would repatriate profits making huge amounts of cash available for investment in jobs, expansion of US plants, and distributions to US shareholders. My concern is that a balance must be found between over-taxing US companies when compared to their foreign counterparts thereby harming global competitiveness and allowing these companies to dictate when and under what circumstances they will reinvest in America and create jobs in the US. Sometimes I think US companies act as if they have the government "over a barrel" with respect to what they will and will not do.
Is it socially responsible for a US company to take deliberate actions to avoid paying taxes in the US and then spending their money to stimulate foreign economies? It's hard to argue in the affirmative. Of course, virtually all US multinationals rationalize their actions using a global perspective -- the maximization of global profits. Moreover, they already pay income taxes to the foreign government and claim it would be double taxation if the US government taxed such income as well. This is a misleading argument because a foreign tax credit would be given for taxes paid overseas.
I know many will disagree with me but if corporations don't start to act as engines of economic development in the US, I believe our economy may completely fall off the cliff within the next ten years.
Blog posted by Steven Mintz, aka Ethics Sage, on August 26, 2011