C Gopinath

We need smart bailouts for corporations

C Gopinath | Updated on April 28, 2020

Covid relief packages, sought in the guise of easing employees’ burden, shouldn’t become an avenue to evade corporate responsibility

Richard Branson, founder of the Virgin Group of companies in the UK, has appealed to the government to help him with funds to save his companies. Most of his businesses are tied to travel and tourism, a sector that is among the worst hit in these times. Obviously, he is not doing it for personal benefit (since he must be wealthy) but for the benefit of the employees who may have to be laid off if the companies close.

Corporations often run to the government for relief when they are in trouble raising questions of moral hazard. This arises when companies and its investors seem to enjoy (or privatise) the profits but socialise the losses by taking public funds when they are in trouble. With a businessperson in the White House, and the people’s representatives always eyeing the next election, US corporations knew they would have a sympathetic ear in Washington.

There is nothing wrong with corporations seeking governmental assistance, provided they are run by responsible citizens who pay their taxes. But data suggests that companies routinely avoid payment of taxes with various avoidance strategies. They support an entire profession of tax planners for this purpose.

P Sikka of the University of Essex, in a paper published in 2010, says that about 66 per cent of domestic US corporations did not pay any federal taxes during the 1988-2005 period. In the UK, about 31 per cent of the largest corporations paid no taxes during 2005-2006. Sikka’s and other studies show that while companies talk the good talk about their social responsibility actions, they are often indulging in tax avoidance practices at the same time. Smart or hypocritical?

In the approximately $2-trillion relief approved in the recent US Cares Act, $500 billion is for loans to large corporations, including airlines, which have been particularly hit. It reportedly includes an intriguing provision that companies that lost money in 2018 or 2019 for whatever reason can use those losses to offset profits they earned in any of the previous five years. This allows them to file for tax refunds. Normally, companies can carry losses forward to reduce their taxes. But by letting them carry losses backward, many companies who are not struggling or particularly hit by the virus are going to get enlarged benefits. Well, it seems in addition to doing tax planning, corporations also have their lobbyists who write relevant provisions of the law.

Branson, who proudly claimed to be in a UK ‘tax exile’ when he moved to his own island, says he is not sitting on piles of cash and his wealth is invested in his companies. You may take umbrage at this hint of criticism. After all, even if he does not pay taxes, he created businesses that employ a lot of people and meet consumers’ needs; so, instead of criticising him, we should look upon him as a company spokesperson and examine the merits of his request.

Corporations compensate their senior executives with stock or options to ensure that they perform well enough to cause a rise in company stock and then benefit from it. Companies are resorting to that now as they cut salaries. The US government tried a bit of business savvy when it gave GM loans after the 2008 financial crisis and then converted some of it to stock. But by 2013, when it closed accounts, the government was found to have made a loss of over $10 billion on sale of the stock!

One might say corporations are using their employees to blackmail the government for assistance. In the US, where there is a revolving door between corporations and the government, is there anyone available who can devise smart bailouts?

The writer is a professor at Suffolk University, Boston

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on April 27, 2020
This article is closed for comments.
Please Email the Editor