On Tax Codes, Corporate Malfeasance, and the Unintended Consequences of Celebrating Amorality in the Free Market
Nearly two decades ago the company I worked for was in crisis.
The specifics of our business model are neither germane to this conversation nor appropriate for public disclosure, but suffice to say that we controlled client-owned funds whose liquidity were backed by the net assets of said clients. The company, which was based in Illinois, had operations in multiple states including my home state of Oregon; each state office managed its own state-based funds. And as I stated above, there came a time when it became obvious that the entire operation was in jeopardy.
As each week passed, news filtered in to our branch that the funds of the other states’ funds were not, as had been previously and continually reported, “right as rain.” Rather, they were all completely upside down. In addition to being alarming, it was — for me, anyway — utterly shocking. As I had understood things, the kind of rapid financial collapse that was happening was virtually impossible under any scenario I had ever attempted to dream up — and believe you me, I had spent a lot of time trying to anticipate scenarios as part of my job as the office’s marketer. The only funds that seemed immune were those in Oregon. Home Office told us to not worry about what was going on and given strict orders to mind our own business, but how could we? And so, without permission or approval, we began digging and nosing around to find out what it was that was happening to our sister offices.
Looking back, of course, the answer should have been my first guess. But that point in my career, I was simply too young and naïve for it to even have it occured to me. The issue, as it turned out, was one of complete and total fiduciary failure on the part of my company’s upper management.
Two years prior, the funds the company was managing were doing so well that the principals went to the boards of each trust and asked for a raise, which every group granted. Because my company’s compensation was contractually dictated, this meant new contracts had to be signed that stipulated the elevated fee structure. However, unbeknown to most of us working for the company and to our clients, there were other things throughout the contract that were also changed. A small word replaced here, a definitive and decisive statement made fuzzier there. And thus when each board signed the new contracts to provide an increased fee structure, they also unwittingly gave permission for the company’s executive staff to legally plunder the funds for their own reasons at their own discretion.
Years later, what we would eventually piece together was this: At first the owner merely plundered the company’s biggest and most profitable trust, assuming no one would ever be able to tell. However, due to some unexpected and unlikely liabilities being realized, there became a need to take funds from other funds to prop up the first. Eventually, this tripped off a cascade of ass-covering Peter-to-Paul money movements, which, in addition to the new personal cash demands of senior management, led to an inevitable domino effect toward business oblivion. When it became obvious the funds probably wouldn’t survive, upper management decided to make out like bandits and score their own personal fortunes with the remaining monies. After all, they were contractually entitled to take pretty much whatever they wanted.
The only reason Oregon’s funds were untouched, it turned out, was that ours were still too new and too small to be anywhere but last in line for pilfering. But they would have been plundered as well had a team of six of us — one in Illinois and five in Oregon — not conspired to illegally move the funds and break every contract our clients and we had signed by hiring independent council for each fund’s board, dispersing the monies to hidden accounts where our home office could not find them, and then contacting the Oregon state regulators to let them know what we had done.
In the end, it was a happy ending for Oregon — even if clients in the other states where we had operations suffered mightily. Most those clients lost huge amounts of liquid assets, and I’m betting at least half were forced to close their doors during a particularly knotty economic time that featured high-unemployment. And all for that most wretched, tacky, and clichéd of reasons: The owner of my company was nearing upper-middle age, and was desperate to find a way to fund the opulent lifestyles of the various 20-something swimsuit models he was “keeping” in Florida. The Oregon funds, however, went on and thrived; save one, all of them continue to this day.
There is much I took away from that experience. Indeed, it stands as the single defining and formative moment of my entire career. But of all the things I learned during that year, the one that still haunts to this day is this: Everything my employer did was entirely legal and contractually justified. At the same time, everything my team did was either entirely illegal, in breach of contract, or both.
And I bring this story up today as a kind of introduction to a sort-of rebuttal to Vikram’s post on tax codes. In it, Vikram says directly of tax codes (and indirectly of corporations) what almost everyone I know says of them: That they are by definition amoral; that in a healthy, robust free-market economy they have no responsibility to act with moral agency; and, further, that we as citizens have no business being “moralizing scolds” when corporations act with amoral intent.
Because here is what I learned nearly two decades ago, and what remains my singular response each time I hear someone tell me that corporation and the laws that are set up around them — be they oversight or tax codes — are inherently amoral and need remain that way:
Last month, drugstore behemoth Walgreen Co. announced that it would look to merge with Alliance Boots GmbH, a relatively small European drugstore chain to which Walgreens is part owner. The reason for this merger is simple: legalized tax evasion management.
The tax instrument being utilized is called “Corporate Inversion” (CI), and it is as simple as it is legal — provided, of course, that your company is both publicly traded and well-stocked with attorneys and lobbyists.
Under the CI strategy, a US corporation purchases a share of a significantly smaller, foreign company in a country with a lighter tax rate. The subsidiary then legally “merges” with the parent corporation in name, but not operations. In this case, for example, it is expected that all of Walgreen operations will still be based inside the United States. So too will the vast preponderance of its customer base, stockholder income, produced revenue, and associated investment income. Indeed, the percentage of Walgreen that is owned by US investors (as opposed to European investors) will be about 80%, and an as-of-yet unknown percentage of those “European” investors will in fact be other operations that are US operations in all but name.
Walgreens will continue to rely on local, county, state and federal government agencies in the US to provide it with necessary infrastructure, police and fire protection, armed service protection, basic services for almost all of its employees, and essentially everything else that every other US corporation gets for it’s tax dollar. Except that instead of most of its taxes going to bolster the vast benefits of being a US corporation, Walgreens will instead by paying its taxes to Switzerland — because Switzerland is offering them a reduced tax rate which it can well afford to offer. After all, Switzerland won’t have the various infrastructural costs of governing a behemoth corporation with a quarter-billion employees and 8,000 locations, because almost all of each will remain in the United States. From Switzerland’s point of view, any tax rate will be money for nothing flowing into their treasury.
And although Walgreen Co. is set to become the biggest US corporation to go IC, it is hardly the first. Mylan, Inc. is a Pennsylvania publicly traded pharmaceutical manufacturer that now pays taxes and fealty to the Netherlands, despite having operations, sales and investors almost exclusively in the United States.
Older readers will remember Mylan from news stories back in 2000. In 1998, the company had successfully lobbied the FDA to have exclusive licensing rights for lorazepam and clorazepate, patented compounds which show up in a surprising large number of generic drugs. The company had pitched that their manufacturing processes could deflate costs for both lorazepam and clorazepate and therefore benefit the nation as a whole. Upon being granted the right to exclusivity, Mylan immediately increased the cost by 2,600% and 3,200% respectively. The profits reaped by this move were estimated to have been billions annually; when the FTC finally put a stop to it, they fined the Mylan a mere $147 million, essentially rewarding the pharmaceutical company for illegal price fixing.
Since then, Mylan has continued using a “lobby-first, R&D second” business model to its shareholders’ delight. The daughter of Joe Manchin, the one-time Governor and now Senator of West Virginia, now heads the company; in part because of her connections, Myaln receives a shocking amount in specialty tax credits. In fact, even though they publically complain about the “prohibitive 35% tax rate” here in the US, in truth their lobbying efforts have reduced Mylan’s rate to 16.2% annually. In addition, Mylan has an exclusive contract for certain generic drugs with the Department of Veterans Affairs, which nets almost $1 billion in revenue annually.
The defense of all of this, of course, is the truism that corporations and tax codes are by definition amoral — and that somehow, the head of Mylan has a responsibility to its shareholders to act amorally. Mylan, therefore, has a responsibly to force local communities to pay for their own infrastructure without chipping in themselves, or use price-fixing to gouge the sick and infirm, or ignore their own system’s warnings about potentially dangerous manufacturing snafus.
In his own post, Vikram notes,
Corporate tax code is an amoral rulebook, and it is the job of corporations to abide by those rules. It is not their job to decide whether it would be sportsmanlike to make some particular deduction. There is no such concept in corporate tax. GE cannot go into court and defend its tax bill with “well, this felt like the amount we should pay.” The only acceptable defense is “this is what the tax code says we should pay.”
If you don’t want companies to drop weight, you need to write rules preventing it. If you don’t want them to change the numbers on the scale, write that in. Outlaw jetpacks too while you’re at it. Allowing creativity is the same thing as encouraging creativity when there is no other moral guidance provided…
If you want companies to behave in different ways, don’t be a moralizing scold; change the rules.
This is largely what we have all been trained to think, but there are essentially two problems with this mindset.
The first is that even under the best of circumstances you can’t write rules that provide the flexibility required to govern a nation of 300+ million citizens and that can’t be circumvented by a team of highly paid attorneys, marketers, and lobbyists who approach wracking up potentially devastating public costs in the pursuit of temporary profits with a completely “amoral” decision-making process. In 1986, my own home-state Senator scored a victory for the little guy with “real fundamental tax reform.” One of the loopholes it looked to close was the then-common practice of having people with extremely high incomes getting Senators and House Reps to tack on addendums to legislation that excused those high earners from income, property and capital gains taxes in exchange for donations, nepotistic corporate hiring, and other perks. Bob Packwood’s tax reform was widely hailed as having “succeeded at the fundamental purpose of reform.” This country has never seen such sweeping tax reform before or since. And it took those amoral enough not to care about the spirit of that reform all of about five minutes to find ways to circumvent it.
But the second problem of the “amoral” defense is the semantic trickery of it. When we excuse certain behaviors by corporations on the basis of amorality, what we are communicating between the lines is that their actions are neither moral nor immoral. But here’s the thing: Although the motivations behind corporate policies might well be amoral, the actual real-life actions taken by corporations in pursuit of those polices can be actually very, very immoral.
I would argue that CI is fundamentally immoral, especially since those who lobby for it tend to be the same folks that lobby for the elimination of safety nets for the people on whose backs they leave the responsibility of paying for its own US infrastructure. And of course, CI is just the tip of the malfeasance iceberg. It gets much, much worse.
Consider this short and laughably incomplete list:
- For the past decade and a half, General Motors knowingly and willing put its customers at unnecessary risk (hundreds of whom died as a result) with their faulty ignition switches — and yet still went to the US government to ask for a tax-payer funded bailout in 2008.
- The pharmaceutical company Roche discovered in 1998 that its shoddy facilities allowed some drugs to be contaminated with potentially deadly substances from other drugs, and rather than pay to fix the problem decided to simply “hide and deny” for almost a decade until they were caught in 2007.
- Throughout the early 1980s, Union Carbide ignored reports from it’s own technicians that one of its pesticide plants was dangerously close to multiple safety failures. The potential failures were ignored due to a cost analysis basis — Union Carbide knew a failure was likely, but the plant in question was in Bhopal, India, and the treaty the corporation had with India made it unlikely that should damages occur that they could be collected upon. In December of 1984, safety protocols did indeed fail and over 3,000 citizens living in or around Bhopal were immediately poisoned to death; an additional 15,00 were critically injured. The plant was abandoned, but the chemicals left continue to pollute the region to this day. The total estimated death over time attributed to the contamination is now somewhere around 8,000.
- When the US corporation United Fruits decided the sale of bananas might be somewhat more profitable with a regime change in Guatemala, it successfully used US resources to start and fund what would become a thirty-six year civil war that took the lives of almost a quarter million people.
And if you’re as young and naïve as I was two decades ago, you would be forgiven for wondering how the system punished the people behind any of these “amoral” moves made with a nod toward “responsibility toward investors.” Because the answer, of course, is that in fact each person was lucratively rewarded for each of these actions — as were those ubiquitous shareholders whose interests we appear to have collectively deemed to be paramount over even human life.
Also, there is this to consider: The recent decisions made by the Supreme Court now state that corporations can hide behind the shield of not only freedom of speech, but also — in certain cases (at least for the moment) — freedom of religiously held beliefs as well. Those trying to think a few chess moves ahead should be asking themselves, what exactly do you get when you allow a corporation to get out of its legally required obligations to society for “religious” reasons, while still allowing them the ability to ravage some segment of that same society on the basis that because they are a corporation they should be encouraged to be amoral?
Now obviously, I have no doubt that Vikram (and everyone else who tows the “amoral is good” corporate line) in no way defends the grossly immoral actions of those same corporations. But my question to them is, why? If we agree that corporations should be amoral in pursuit of the highest possible profits for their shareholders, and we agree that we should celebrate their creative use of “tax management” at the expense of a fair and functioning society, why shouldn’t we also celebrate their putting customers’ lives at risk, or saving a few bucks to prevent the killing of 8,000 people in a third-world country, or starting a seemingly un-ending war to bring those margins down just a twinge?
The answer, of course, is that the very notion that amorality should be encouraged and celebrated only escapes being perverse at a very small level of malfeasance. But the problem with this is, when you are truly amoral you have no reason to stop at that small level. When you are truly amoral, the sky (or the gutter) is the limit. Corporations wanting to answer to shareholders prove this time and time again.
The problem we have in the United States isn’t that we err too much as moral scolds when it comes to corporate amorality; it’s that we aren’t morally outraged enough.
 Readers might also remember Mylan being in the news in 2009, when it was reported that they regularly overrode computer-generated warnings in their plants.