President Barack Obama used the recent G8 meeting to organize a community of governments to minimize companies' legal use of foreign tax laws. Recently Brussels hosted a summit for the leaders of the European Union (EU) states. The talks also included a discussion of tax loopholes. The consensus among EU nations is that the estimated one trillion euros worth of yearly losses through legal forms of tax evasion must be stopped. Meanwhile, Tim Cook, Apple's chief executive defended the company's use of tax loopholes at his appearance before US senators to answer questions on Apple's Irish tax arrangements. Apple has more than $100 billion in profits stranded abroad because the company is unwilling to pay the 35 percent corporation tax that the U.S. government would impose were the cash to be brought home.
Referred to as tax optimization, major companies -- including, but certainly not limited to, Apple, Google, and Starbucks -- have avoided paying income taxes on foreign subsidiaries, allowing billions of dollars of sales and production to go untaxed.
As multinationals whose financial actions reach across international borders grow in reach and size, the challenge is only increasing.
How can optimization be bad? Presently tax optimizing means optimizing profit -- which can result in the type of loss the US and EU is experiencing. What if companies optimized on something else? It seems to me that optimizing taxes could become a great value generator.
What if companies were optimizing the effectiveness of your tax dollars instead? At the end of the day most companies expect to pay their collected taxes within a relatively narrow given range. What if companies accepted that certain tax burden as a given and instead focused their energy on getting maximum bang for the buck for tax payers?
Getting bang for the buck is certainly not a new concept for companies -- not even for philanthropists.
Effective altruism is a philosophy and social movement which tries to work out the most effective ways to improve the world. Effective altruists -- conform to old-school utilitarian principles -- consider all causes and actions, and then act in the way that they believe brings about the greatest positive impact. Effective altruism can involve taking actions that seem intuitively and emotionally paradoxical. I don't think fellow Dane, Bjørn Lomborg, could be lumped in the effective altruist company category along with Peter Singer, Matthew Bishop and other proponents. However, Copenhagen Consensus, initiated by Lomborg does apply that systematic scrutiny to a range of intuitively worthy philanthropic causes selected by the "court of public opinion." The project considers possible solutions to a wide range of problems, presented by experts in each field. These are evaluated and ranked by a panel of leading economists. The project seeks to establish priorities for advancing global welfare using methodologies based on the theory of welfare economics. The emphasis is on rational prioritization by economic analysis, justified as a corrective to standard practice in international development.
What if the multinationals, in the same way and by the same principles, had evaluated how much value states give back to their citizens, contribute to the welfare of the planet, and advance global welfare, and optimized taxes based on that?
An acquaintance of mine newly immigrated to New York in the U.S. complained, "When you add up the city, state and federal taxes you pay as much as in Copenhagen and what do you get? An expired trip to the moon, and a bunch of wars." The validity of these types of sensibilities could be examined, displayed and ranked according to principles of effective altruism. Multinationals could then optimize their taxes according to these rankings that would depend on the effectiveness of the local taxes.
The transparency needed is not fully in place yet, but is generally speaking under way. And it obviously takes a global perspective not akin to the interests of national states, but why would multinationals have only national interests at heart? The figures this type of tax optimization potentially could channel to effective policy implementation are massive. Now imagine the policy impact this could spur. This type of optimization could potentially create real, positive pressure on politicians.