Social Responsibility and Taxes

Social Responsibility and Taxes

Socially responsible companies would be less inclined to avoid paying taxes, right? According to new research findings by Lundquist College faculty members, they might not be the case. Their work caught the eye of editors at a leading accounting journal, as well as The Economist.

In “Do Socially Responsible Firms Pay More Taxes?" appearing in the January/February issue of The Accounting Review, associate professor of accounting and Jack O. Rickli Distinguished Research Scholar Angela Davis and her coauthors Scharpf Professor of Accounting David Guenther, associate professor and Oregon Alumni Distinguished Research Scholar Linda Krull, and Brian M. Williams of Indiana University assert that a higher rating in corporate social responsibility—which takes in such matters as community commitment, diversity, employee relations, environment, and product safety and quality—is associated with lower taxes paid.

More specifically, in a large sample of U.S. firms in which the effective tax rate averaged 26 percent, those ranked in the top fifth in corporate social responsibility (CSR) paid an average of 1.7 percentage points below what the remainder paid. In short, about 6 percent less after controlling for other differences that have been found to affect tax rates.

In addition, high-CSR firms were considerably more likely than others to engage in tax lobbying. According to the study, “firms in the highest quintile of CSR Index have approximately a 158 percent higher probability of lobbying for taxes than other firms."

“Our findings are inconsistent with the notion that the U.S. corporate sector generally views paying the minimum in taxes as compromising integrity or good ethics," said Guenther, who heads up the Lundquist College's Department of Accounting. “With countries competing in lowering corporate tax rates (the global average fell by almost 15 percent from 2006 to 2014), it would be imprudent to view a firm like pharmaceutical giant Pfizer's move to a low-tax country as an anomaly. Perhaps some awareness of this explains the relatively mild response of U.S. policy-makers to this strategy—why they have tended to call for international tax reform as distinct from harsh or restrictive measures."

At the same time, the study takes note of an episode not long ago in the United Kingdom where a prominent member of parliament chastised multinationals for, in her words, “using the letter of tax laws…to immorally minimize their tax obligations." Following that statement, Starbucks promised to pay approximately 10 million pounds in each of the following two years regardless of whether the company was profitable. This led the new study's authors to wonder whether “public pressure may mitigate the impact of tax rules on corporate investment decisions, at least for a subset of firms."

The researchers draw no conclusion as to exactly what motivates the negative CSR-taxpaying relationship they uncovered. One possibility is simply that “socially responsible firms may not consider the payment of corporate taxes to be the best means by which to accomplish their social-responsibility goals" and even believe that “paying taxes detracts from social welfare."

A more cynical interpretation, the authors acknowledge, is that firms “engage in CSR to create 'moral capital' to reduce the consequences of their involvement in negative events or publicity."

As indicated, the professors find a significant negative relationship between firms" CSR ratings and taxes paid, with the relationship driven by companies with high ratings. Firms in the lowest CSR quintile, in contrast, neither significantly exceed nor lag the rest of the sample in their tax rates.

Read Economist Article Read the Study