American businesses often emphasize the importance of a “level” playing field, and international agreements such as those reached under the auspices of the World Trade Organization can help make sure that businesses are not disadvantaged by unfair sources of foreign competition; for example, there are many rules that are designed to restrict governments from pursuing “beggar thy neighbor” trade policies in the form of export subsidies or unfair trade barriers. Continued negotiations with trading partners in the World Trade Organization and in smaller regional forums can help governments avoid harmful policy competition while giving companies access to the global marketplace. Chapters 5 and 9 discuss how our trade agreements can be modernized, but fundamentally, the United States should stay open and engaged with the world economy.
Pillar 2: Fair Regulations
Without doubt, regulations are needed to address health and safety issues that the market would not handle well on its own. Food and drug safety, workplace safety, environmental regulations, and building regulations are all necessary for a safe and productive economy. That does not mean that regulations should not be continuously reviewed and streamlined to be as efficient as possible. We can learn from previous successes in such efforts, such as Reinventing Government.
When possible, reliance on price-based mechanisms should be increased in lieu of regulation. By taxing environmental harms, for example, revenue can be raised to help fund civilized society, while at the same time making the environment cleaner and safer. This provides a powerful and efficient way to address environmental costs in a non-intrusive manner that businesses can easily understand and adjust to.
Reinventing Government
In 1993, the Clinton administration launched an interagency task force to streamline the workings of the federal government. The National Partnership for Reinventing Government, or ReGo, was active during both of Clinton’s terms and overseen by Vice President Al Gore. ReGo was a serious reform: it saw the shrinking of the federal workforce by 426,000 employees between 1993 and 2000, the cutting of about 640,000 pages of internal agency rules, and the elimination of 2,000 field offices and 250 programs and agencies. Legislation required agencies to articulate strategic plans, and to create new performance plans each year describing their progress. This process drew on insights from government workers; the best ideas earned “hammer awards” (so named for over-priced Pentagon hammers).
ReGo consisted of more than simple cost reduction. A focus on performance, customer satisfaction, and innovation began a process of modernization that was continued by future administrations. The Bush Administration introduced the Program Assessment Rating Tool (PART), which was used to evaluate more than a thousand programs. Agencies were compelled to conduct surveys on service quality and satisfaction. A 2011 executive order signed by President Obama called on agencies to reformulate their customer service plans, in part by incorporating technology. In the end, ReGo showed that trimming government excess can be both popular and pragmatic.
British Columbia’s Carbon Tax
The success of British Columbia’s carbon tax is a model of what can be achieved with price-based environmental regulations. The carbon tax, introduced to the province in 2008 by Canada’s right-leaning Liberal Party, increased from C$10 to C$30 ($8 to $23 in US dollars) per metric ton from 2008 to 2012, without negative effects on the province’s economy. Within five years of its introduction, British Columbia’s per-capita emission rate fell by 12.9 percent, more than three times as quickly as the rest of Canada’s reduction, while the province’s GDP growth outpaced the growth of other provinces. Citizens are warming to the tax. Despite its increasing rate, they support the idea in higher percentages now than at the time of its adoption. Next, Canada intends to begin a national carbon tax in 2018, starting at C$10 per metric ton, and increasing to C$50 per metric ton by 2022.
Pillar 3: A Simple, Fair Tax Code and More Tax Transparency
Relative to 2017 and prior law, for some businesses, the tax policy changes suggested in Chapter 10 would raise their effective tax rates; for others, effective tax rates would go down. Still, an ideal tax reform would tax all forms of business income alike. Such a system would dramatically reduce the resources devoted to tax planning, reducing tax compliance costs and tax administration costs. In parallel, it would reduce the opportunities for tax avoidance, buttressing the tax base. Relative to prior law, such changes would allow room for revenue-neutral tax rate reductions, or some combination of increased revenues and lower rates.
Unfortunately, the tax law changes passed in late 2017 make these compromises more difficult. The Tax Cuts and Jobs Act (TCJA) cut business taxes so dramatically that the winners and losers of Chapter 10’s tax reform are no longer likely to be balanced. While these recent changes in the law make tax reform more difficult, budgetary pressures will still provide a powerful impetus for future tax reform.2
Beyond tax law changes, I also suggest that every US resident company be required to submit to the public an annual “sunshine tax report” on their global operations, listing every country in which they operate, simple aggregate data on the scale of their operations (sales, employment, and physical assets), and importantly, their tax payments and income earned in each country. They should also include detailed data on US state operations and US state tax payments.
Companies will argue that such a report would give away too many of their business secrets, but such arguments are self-serving and implausible. If there is really something so special about a company’s Irish or Cayman operations, such that revealing income booked in such jurisdictions (and the associated low tax payments!) is revealing a company secret, then perhaps that itself is a problem. In short, firms should stand by their global operations and their financial reporting. If it is embarrassing to report 90 percent of global profits in island jurisdictions, then don’t.3
Under the tax proposals of Chapters 7 and 10, there would be far less of an incentive to move profits offshore artificially. However, even if such reforms are desirable, they may not come to pass. In the meantime, shining sunlight on companies’ global operations can provide valuable benefits through several mechanisms.
First, corporate social responsibility motives will be important. Companies care about their reputations, in part because both customers and investors care about company behavior. The sunshine tax report will incentivize companies to avoid taking particularly aggressive tax positions, better aligning their economic interests with those of the societies in which they operate.
GE, Dodgeball Champion
The closest playground equivalent to corporate taxation is dodgeball, and its savvy champion is General Electric. The industrial behemoth deftly avoided all United States income taxes between 2008 and 2015, according to the Institute on Taxation and Economic Policy, relying on tax havens to achieve an effective tax rate of negative 3.4 percent. By shifting profits to havens, US-based GE booked large foreign profits while keeping the company’s multibillion dollar earnings away from the reach of the United States Treasury.
While GE might be playing by the rules, its behavior hasn’t escaped the notice of the public. The Reputation Institute, a firm that studies corporations’ reputations, gave GE a middling ranking of 199 on its annual RepTrak list, and the bad publicity surrounding GE’s tax avoidance was a key factor in the score. Tax avoidance also factors into others’ assessments of corporate responsibility. MSCI, an investment company that offers index funds of screened, responsible corporations, has indicated that a corporation’s tax practices will soon affect its decisions about which companies to include.
Second, country by country reporting (see box) helps governments resolve cross-border tax disputes, avoid the pressures of harmful tax competition, and enforce the tax laws that are on the books.
Finally, more tax transparency can be useful in changing social norms regarding taxation among the corporate community. While companies have an understandable focus on the bottom line, not all cultures celebrat
e tax avoidance as a good thing. Taxpayer morale, and societal attitudes about tax compliance and tax avoidance, vary a great deal across countries.4 While culture can be difficult to change, a sunshine tax report is a useful step that would encourage companies to value paying tax in their home jurisdictions.
Pillar 4: More Transparency and Support for Labor
Much like the annual “sunshine tax report,” I also recommend an annual “sunshine labor report.” Within the report, firms would be required to release data on a set of benchmarks on pay structure and labor inclusion. This could include data on top management salaries, data on median worker salaries, and some broad information on the distribution of pay throughout the company. Companies could also report indicators of worker inclusion, such as worker-shareholders, indicators of labor representation in corporate decision making, and measures of worker satisfaction.
Show Us the Money
The OECD and G20 countries (the largest economies of the world) have been collaborating on the BEPS (Base Erosion and Profit Shifting) project. The BEPS project combats the tax-avoidance strategies of multinational corporations that artificially shift corporate profits toward tax havens. One key recommendation of the BEPS action plan is “country-by-country reporting.” With country-by-country reporting, companies are required to annually disclose to national tax authorities where their income is booked, and where their taxes are paid, on a per-country basis. Absent this reporting, companies frequently obfuscate their financial arrangements in stupefying layers of complexity, often resulting in dramatically reduced tax payments.
Country-by-country reporting provides tax authorities with a complete view of the financial operations of their multinational company taxpayers, allowing for cooperation on enforcement and clarity in tax administration. Governments could also require that a simplified version of these reports be made public, providing much needed transparency to the debate over corporate tax policy. While companies would resist the scrutiny that such disclosure would generate, tax transparency is a big step toward a more honest tax culture.
Companies should also bear some reporting responsibility for their outsourcing decisions, both domestically and offshore. As companies have focused on their core competencies, more and more business activities have been outsourced or subcontracted to other companies: activities like janitorial services, payroll processing, accounting, and human resources services. These outsourced labor markets are typically fiercely competitive, and this “fissuring” of the workplace makes sellers of products less responsible for the workers involved in bringing goods to market. Still, companies have the ability to monitor and enforce quality standards with their subcontractors, and it is feasible for them to also monitor the labor practices of their suppliers.5 Thus, transparency on labor practices might usefully go beyond the company’s employees to consider the suppliers of business services.
The aim of these measures is to encourage companies to treat the empowerment and satisfaction of their workers as another objective of their business. This is only a reporting requirement, not a regulation that would, for example, limit CEO pay or require particular changes in labor representation. The aim is to harness a company’s own profit motive to guide it toward valuable social ends. Since customers, investors, potential new hires, and the media would pay attention, these annual “sunshine” reports would create an incentive for companies to consider these factors in their management decisions.
Costco’s Success and Sanity
Costco and Walmart have similar businesses, but they provide a stark contrast in modern labor practices. In 2014, the average Costco employee made $21 an hour; these wages are about 75 percent higher than typical Walmart wages ($12). Around 82 percent of Costco employees are covered by health insurance (and they pay only 8 percent of their premiums), while less than half of Walmart workers have coverage. Yet better pay and benefits haven’t hindered Costco’s profits: Costco’s stock price has soared by 150 percent over the previous ten years, while Walmart’s stock price has increased 78 percent over the same period.
How do profits stay high despite generous labor policies? An average Costco employee nets far more revenue than their Walmart counterpart, and low turnover keeps Costco’s “employee churn” costs low. While part of Costco’s success is likely due to other factors, its market dominance also depends on the well-paid workers that sell its bulk provisions.
These proposals are far less intrusive than regulations that would require companies to limit executive pay, or regulations that might prevent companies from laying off workers. Companies should make such decisions based on economic factors. At the same time, company labor practices should still be exposed to the sunshine of public scrutiny. Such scrutiny gives managers “cover” from shareholders when they want to raise worker wages or provide a more balanced work life for their employees. There would be a natural incentive to put a higher weight on reputational factors when making such decisions, since reputation affects consumer marketing, share prices, and employee recruitment.
While the press often provides sensational stories about particular companies, momentarily riveting the public’s attention on the instances in the spotlight, these sunshine reports will provide more even, timely, and systematic information about the entire corporate community, easily available online to any interested consumer, advocate, worker, or investor.
These tax and labor sunshine reports are a market-friendly nudge toward rethinking social norms. With more information, people can use their power as citizens, consumers, employees and investors to help build a more inclusive economy, moving capital and customers toward companies that are responsible corporate citizens. Workers looking for jobs will have information at their fingertips regarding companies’ labor practices and pay structure, helping inclusive companies attract talented workers. While the effectiveness of these measures should not be oversold, they are an important step toward changing social norms. And social norms help to determine labor outcomes. For example, in Germany, excellent labor market outcomes are often attributed to the fact that labor stakeholders are more involved in business decision-making.6
Finally, there are several useful ways to modernize labor laws for today’s economy that warrant consideration. As one example, labor laws likely need updating to account for the fact that many workers work independently in the “gig economy” (for example, for online intermediaries like Lyft or Uber).7
Flying the Friendly Skies?
Recently, American Airlines announced a plan for pay raises for their pilots and flight attendants, in part due to competitive pressures associated with higher wages at Delta and United. In response, stock market analysts wrote disapproving commentary about how shareholders would be harmed by this undue generosity toward labor, and American Airlines’ stock price fell 5 percent in one day. Other airline stocks also declined on the news, presumably due to fears of higher wages in the industry as a whole. A J.P. Morgan analyst wrote that he was “troubled by AAL’s wealth transfer of nearly $1 billion to its labor groups.”1 Investors provide pressure on managers to hold down costs and raise profits, due to fears of lower stock prices. Yet arguably these pressures reduce wages and consumer spending in the economy as a whole, holding down the profits of other companies. As Chapter 2 discussed, social norms and bargaining power are important causal factors behind the declining labor share of income.
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1. Associated Press, “American Airlines Announces Pay Raises, and Investors Balk,” Los Angeles Times, April 27, 2017. For an incisive analysis, see Matthew Yglesias, “American Airlines Gave Its Workers a Raise. Wall Street Freaked Out,” Vox, April 29, 2017.
Pillar 5: More Robust Antitrust Laws
As Chapter 7 demonstrates, the world’s largest companies are becoming both more powerful and more profitable. Corporate profits and the capital share of income are rising, and the top 10 percent of the world’s public companies earn 80 percent of the profits.8 These large, profitable
firms do amazing things. Many of us have benefitted immensely from the creativity and innovation of Apple, Google (Alphabet), Amazon, Starbucks, and other global giants.
Yet, in this increasingly concentrated global environment, it is important that modern antitrust laws are used to preserve competition. As recognized since Adam Smith, market competition is vital for ensuring that market outcomes are consistent with the public interest. When companies become too large or powerful, this can hurt both consumers and the future path of innovation.
Government regulation of monopoly power can be tricky, and there are legitimate disagreements about the threat monopolies pose to consumers. Some famous monopolies, such as AT&T, have been leaders in innovation; Bell Laboratories (the associated research company) was responsible for important innovations such as the laser and the transistor, and eight Nobel prizes have been awarded for work at Bell Labs. Yet too much power in the hands of too few firms can harm consumers and competition. And supersized companies exert undue influence on the political process.
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