Carruthers, King, and Owen (2023)

Carruthers, Bruce, Brayden G. King, and Andrew Owen.  “Do Socially Responsible Firms Pay Taxes? CSR and Effective Tax Rates.”  Working Paper (Northwestern University), 2023.

From the abstract (from an earlier version of the study, sourced here):

“[W]e consider the relationship between CSR and corporate taxes: do firms that are “good citizens” also pay higher taxes? Is it the social responsibility of firms to help pay for public services? Focusing on the percentile rank of effective tax rates, and using random effects panel regression of a data set of publicly-traded U.S. firms that includes measures of CSR and many financial variables, we find that the relationship between CSR and taxation is a complicated one that warrants further investigation. However, strong corporate governance, a typical component of CSR, is associated with lower tax rates, suggesting that responsibility to shareholders conflicts with broader social responsibilities.”

lk notes from presentation by Brayden King at PRI in Person Academic Network Conference (Tokyo), 2023.

 “The answer to this question is no, not really.”

 There used to be a consensus that corporations should pay taxes. President Taft argued that it was “a privilege of doing business” in the U.S. This consensus deteriorated… U.S. corporate taxation has been in decline (effective rate has fallen from 50% in the 50s to ca. 20% now).

Illustration - Apple has an extremely complicated structure that helps them lower their taxes.  Move profits to offshore subsidiaries in low tax jurisdictions.  Apple is an aggressive tax minimizer. (Older figures – sourced from US Senate 2013)

What is the relationship between CSR and taxes?

  • Could be no relationship

  • Could be positive if CSR firms also eager to invest in public infrastructure

  • Could be negative if high CSR use it as a way to pay less (or if CSR takes away resources that could be applied to taxes)

  • We suspect that firms that donate more to Democrats pay more in taxes. 

“We basically find that E and S don’t account for anything.  HOWEVER, governance is consistently negatively correlated with taxation.”

 

You have two types of high tax payers:

  1. Conservative, low ES firms – Oshkosh, Wynn Resorts

    Have to pay taxes because heavily regulated and / or dependent on state for revenues (e.g., Oshkosh defense)

  2. Liberal firms with high ES – Symantec, Gap

We think these firms are ok with fiscal responsibility.

 

Xavier Giroud (discussant) comments –

Interesting research question, theoretically ambiguous: Good citizen, substitution, or irrelevant?

Firms with high G scores pay lower taxes, consistent with maximization of shareholder value.

Suggestions for further work:

  • Prior literature – results seem to be all over the place.  Reconcile these findings with prior papers?  Or maybe just no relationship in the data?

  • The paper looks at taxes paid.  But tax accounting is very mechanical, perhaps not much management discretion. 

  • Perhaps consider other outcome variables (fines, etc).

  • Alternative explanations, e.g., debt shields?