If you haven’t read The Cheating Culture by David Callahan, I recommend it. It’s disturbing, and I don’t think I absorbed all of its implications, but it’s an important book. I bring it up because it catalogued many examples of corporate cheating — cheating their customers, cheating their stockholders, and cheating the government.
Let me say first of all that I believe the U.S. corporate tax rate is too high, and acts as an incentive for companies to move out of the U.S. to friendlier places. Unfortunately, I don’t see any signs of it coming down under the current Administration and current Congress, because the loudest voices in the public sector seem to cry out in favor of punishing private sector success instead of making more success possible. I fear for the long-term effects.
That said, I don’t believe elevated tax rates justify the kinds of corporate cheating that Callahan wrote about. And one of the potential cheating tactics that seems possible to confront is the practice of reporting earnings on tax returns that differ from earnings reported in annual reports to stockholders.
Until the recent economic and financial turmoil, many companies posted profits every quarter even if it took some creative accounting to record those profits. Some of those companies got caught cooking the books, but usually not until they had collapsed or were close to collapse. They got into this habit in order to satisfy public perception and stockholders’ expectations, because no one wanted to mention the Emperor’s nakedness in terms of how unrealistic those expectations were. I understand that some of those companies that reported near-constant growth and profits in their annual reports, however, somehow produced lower earnings or even losses when it came to filing their taxes.
It doesn’t seem right for companies to tell their stockholders something different than they tell the government, especially if they’re telling their stockholders they made a profit in order to boost their share price, and then telling the government they took a loss in order to avoid paying taxes. Some might argue that this practice is only the difference between preliminary and final numbers, i.e., that it’s just a matter of “corrections” — I understand about honest mistakes, but it seems to me that either their accounting is good at the time it’s done, or it’s not good at all. If there are questions, resolve them before you issue the report with your name on it.
How can this influence tax policy? Let companies file their annual report as their tax return. Or, if that puts too much onus on the IRS to figure out any tax liability, let them submit the annual report along with their tax documents and show that the two match. If they don’t agree, or they differ more than some small allowance, assess a penalty based on the difference. (This would be irrespective of the company’s actual performance, and only related to what the company reported.)
In other words, split the difference between the return and the report, since we apparently can’t have complete faith in either one.
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For those who are interested, The Cheating Culture has its own website at http://www.cheatingculture.com/.
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