Firms have to stop dodging taxes

Firms have to stop dodging taxes
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Corporations dodge nearly $200 billion in federal taxes each year. Firms engaging in tax avoidance activities, which go against the spirit of the law despite being legal, make the role of the government more difficult. This harms stakeholders who count on tax dollars. It must stop.

It is ironic that some of these tax avoiders are firms represented by the Business Roundtable, which in a statement committed to delivering value to all stakeholders of firms. These include workers, suppliers, customers, communities, and shareholders. Each of these stakeholders count on the government, in good times and bad times, which has become abundantly clear during the pandemic. Commitments to invest in their workers while paying no federal taxes at all ring hollow, especially when the government is sending out stimulus checks to these very same workers.

Instances of the reliance of these stakeholders on government abound. One of the coronavirus vaccines was developed with $1 billion in federal research funding. The distribution of vaccines would not have occurred without state and local government actions. The latest $2 trillion stimulus package went toward schools, stimulus checks, coronavirus testing, and grants for various sectors of the economy. In other words, it went toward the stakeholders of corporations, which have deprived the government of the tax revenues it needs to support them more effectively.

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The Group of Twenty and the Organisation for Economic Cooperation and Development tend to focus heavily on tax system coordination, increased transparency, and enforcement to reduce tax avoidance. We now propose putting more efforts into increasing tax morale, or the intrinsic motivation to pay a fair share of taxes. This could be done by focusing on two ideas from research that are known as reciprocity and peer effects.

First, according to research in the Journal of Economic Perspectives, the principle of reciprocity states that the willingness to pay taxes depends in part on the relationship with the government, the true fairness of the tax system, and the measure of public services offered by the government. Other research finds that bolstering the trust of firms and individuals in the government can significantly improve tax compliance.

Despite the role of public officials in any crisis, trust in the government is low, with less than 45 percent of Americans having a great or fair amount of confidence with the executive branch and less than 35 percent having trust with the legislative branch, according to Gallup. There are too many politicians who complain about tax avoidance without realizing that they are one of its causes. If the government wants to increase tax morale and decrease tax avoidance, it must earn the trust of businesses.

Second, research shows there are peer effects in tax morale. This means that people will be more intrinsically motivated to pay their taxes if peer groups are paying their taxes. Coalitions like the United Nations Global Compact show how to use peer effects for the common good.

In the realm of tax avoidance, a global initiative called the B Team has used this logic in launching responsible tax principles. In this compact, firms agree not to use tax havens, to pay taxes on profits where value is created, and to disclose their overall effective tax rates. Companies have signed this compact. We urge others to join such platforms as the more that do so, the greater the leverage of peer effects. We urge the B Team and other coalitions to continue to evolve from important principles to measurable outcomes so companies can be held accountable.

The coronavirus crisis has demonstrated how much each of us counts on tax dollars. Moreover, government funding will continue to play a vital role as we emerge from the pandemic and as we prepare for future disasters. Corporations that engage in tax avoidance create additional obstacles to this important work and will ultimately harm all stakeholders.

Chris Musser is a graduate assistant at the Harvard Kennedy School. Ioana Petrescu is a senior fellow at the Mossavar Rahmani Center for Business at the Harvard Kennedy School. She is a former finance minister of Romania.