Corporate Social Responsibility and Strategic Tax Behavior
Should corporations pay tax?
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Corporate Social Responsibility and Strategic Tax Behavior Reuven S. Avi-Yonah*
The imposition of taxes and the expenditure of tax proceeds are governmental functions … The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This justification disappears when the corporate executive imposes taxes and spends the proceeds for “social” purposes. Milton Friedman1
1. Introduction Should corporations pay tax? The usual understanding of this question relates to the debate on whether there should be a corporate tax. Many observers have recently criticized the corporate tax, and some have defended it, but that is not the focus of this article.2 Instead, I will assume that the state wants to tax corporations, for whatever reason (a safe assumption, at least in the short to medium run). Given this assumption, I will address two questions. First, from the perspective of the corporation, should the corporation cooperate and pay the corporate tax, or should it engage in “strategic” tax behavior designed to minimize or eliminate its corporate tax burden? Second, from the perspective of the state, should the state use the corporate tax just to raise revenue, or should it also try to use it as a regulatory tool to steer corporate behavior in directions that it deems beneficial to society? Both of these questions are related to the voluminous debate around corporate social responsibility (CSR).3 From the perspective of the corporation, if engaging in 1*
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The author would like to thank David Hasen, Bob Kuttner, Sagit Leviner, Wolfgang Schön, Dganit Sivan, Pekka Timmonen, and participants in workshops at Georgetown Law Center, the Interdisciplinary Center, Herzelya, and the Max Planck Institute for Intellectual Property, Competition and Tax Law. FRIEDMAN, The Social Responsibility of Business Is To Increase Its Profits, NY Times SM17 (Sept. 13, 1970). For my view on this debate, as well as a review of the extensive literature, see AVI-YONAH, Corporations, Society and the State: A Defense of the Corporate Tax, 90 Va. L. Rev. 1193 (2004). For a review of this debate see AVI-YONAH, The Cyclical Transformations of the Corporate Form: A Historical Perspective on Corporate Social Responsibility, 30 Del. J. Corp. L. 767 (2005), and for previous literature see, e.g., JENSEN, Value Maximization, Stakeholder Theory, and the Corporate Objective Function, 12 Bus. Ethics Q. 235 (2002); see also JENSEN/ MECKLING, The Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, 3 J. Fin. Econ. 305 (1976). For different perspectives on CSR in general see also PHILIPS, Reappraising the Real Entity Theory of the Corporation, 21 Fla. St. U. L. Rev. 1061 (1994)
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Reuven S. Avi-Yonah
CSR is a legitimate corporate function, then corporations can also be expected to pay taxes to bolster society as part of their assumption of CSR. If, on the other hand, CSR is illegitimate, there is a question whether co
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