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Corporate Citizenship: A Tax in Disguise

Mises Daily: Thursday, July 24, 2003 by

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Corporate Social Responsibility is the new field that has united a variety of campaigning groups, including environmentalists, poverty campaigners, third world charities, and unions in a collective call for business to support their agenda. More unusual, it even has prominent supporters within the business community.

Charitable giving by business has a long history, although in the case of large corporations with a diffuse shareholding it carries the moral hazard of executives buying social respectability (in England, even knighthoods) with their shareholders' money. The morally, and socially, superior position would be for shareholders to receive their full dividends and themselves support charitable action.

However Corporate Social Responsibility is said to be about more than this; linked to the concept of "Corporate Citizenship," it calls for a company's whole actions to be carried out with an eye to their social impact; on the environment, employees, and "communities" at home and globally.

"Corporate Citizenship" is of course a false concept; a company is a legal entity not a natural person, and cannot have the beliefs or morals to make it a citizen in any meaningful sense. Instead these reside in real people; the company's shareholders, employees, customers and, most influentially, senior management. Corporate Citizenship therefore carries the same moral hazards as corporate charitable giving; that it is a process by which a company's directors impose their morals on others.

In contradiction, a new argument has been raised to support Corporate Social Responsibility, which accounts for much of its support in the business sector. As companies compete to raise capital, attract and retain staff, and sell products, those who are seen to support the beliefs and objectives of investors, workers and consumers will gain a commercial advantage.

Some of this has been seen already (Ben & Jerry's in the U.S.A., the Body Shop [a cosmetics chain that marketed itself as environmentally-friendly] in the U.K.), but the proponents of Corporate Social Responsibility claim that the increased public awareness of environmental and social issues will bring this niche practice into the mainstream.

As a good whig and supporter of enlightened self-interest, I can support Corporate Social Responsibility on this basis. I can even accept that there is a role for pressure groups to help provide the enlightenment (provided company executives do not forget their obligations to satisfy themselves that the demand really exists).

However, the campaigners, backed by governments (particularly in Europe), go further than this. If companies are not seen to act in a sufficiently enlightened manner, then they will be forced to (what a colleague, the late Bill Maugham, used to call the "co-operate or else" school of government).

This force may come from "hard" law (legislation or legally binding regulation) or soft law (such as voluntary codes of conduct), but even soft law is usually only adopted under the threat of legislation. The effect is the same; companies are forced to take actions that they do not believe to be commercially justified.

It is often said by supporters of Corporate Social Responsibility that it is merely a 21st century version of opposition to slavery or the pollution of waterways supposedly beloved of 19th century capitalism. This is incorrect, as all of these would be (and were) stopped by enlightened self-interest operating within a basic rule of law with protection for property rights (i.e. within a free market as properly defined).

The persons and property of others have been protected fully from harm since at least the middle of the nineteenth century (in England the case of Rylands v. Fletcher  in 1866 stands out).

Even slavery was denounced by Adam Smith on rational economic grounds, and (although this may be more of an issue in the U.S.A.), in England slavery was declared to be invalid in the eighteenth century because it did not meet the common law conditions for a contract.

The denial of fundamental liberties, or the causing of provable harm, is therefore prevented by rules that have long been accepted as underpinning the free market. (The specific issue of companies operating in countries without a rule of law or protection of fundamental property rights is a separate issue that I intend to address in a later article.)

Economic inefficiency

The first problem with enforced Corporate Social Responsibility is that it is economically inefficient. In a free market, companies maximize profit by moving resources from a low to a high value; providing what consumers want. In contrast, if action has to be forced by regulation then governments mandate that resources be spent on services that the public does not value, or does not value highly enough to voluntarily pay the full cost.

Resources are therefore diverted into lower-value outputs, leading to a reduction in overall welfare. This is done for the benefit of politicians, bureaucrats or their supporting pressure groups.

But this is about more than economics; there is a fundamental democratic principle at stake.

The market is essentially a fully participatory direct democracy, in the true Athenian sense. Almost all citizens are involved in the market, and their choices and preferences influence the products offered. If the public really wants the supposed benefits offered in the Corporate Social Responsibility agenda, in the sense of being prepared to pay for them, then the market will, before too long, provide.

By contrast, modern governments are at best representative democracies, open to undue influence from special interest groups, and their participation rates are derisory (in a recent article in the London Salisbury Review I showed that, in the last UK general election, abstainers were the largest group in nearly 80% of constituencies).

The choice is therefore between a market-based approach that provides what the people want, and a government directive under which the beliefs of a minority are imposed on the general public. Even worse, many of the issues that surface in the Corporate Social Responsibility debate, particularly the environmental points, are ones where a relatively wealthy and influential middle class imposes the high costs of its agenda on a working class that does not want and cannot afford it.

Stealth tax?

The political landscape has recently been characterized by a beneficial unwillingness of electorates to accept increases in taxation. However, politicians obviously still seek to increase their power and influence, and this needs money, so recent tax raising has been by way of hidden methods, whether the introduction of new targeted sales taxes or technical changes to tax law.

The socialist Blair government in the U.K. has been particularly skilled at this, and its efforts have been attacked by the conservative opposition as "stealth taxes" (presumably like the stealth bomber they do not show up on the electorate's "radar").

The danger is that the Corporate Social Responsibility agenda, if it moves away from the voluntary 'enlightened self interest' model, becomes another form of tax.

Governments can achieve their objectives (and satisfy their clients) by raising taxes and paying for the changes that they desire, or alternatively they can achieve the same result by regulation. If there is resistance to increased taxation, then politicians are likely to turn to the latter approach.

This raises further economic arguments as to the correct, and most efficient, places for this burden to fall, but that will have to be the subject of a further article.

Conclusion

Business, and the society within which it operates, faces a choice. It can follow the market principle of enlightened self-interest within the rule of law, which best ensures that the real objectives of the populous (i.e. those that they want enough to be prepared to pay for) are met. Alternatively it can be forced down the regulation route, whereby politicians and the loudest special interest groups impose their views on others.

No matter how learned and disinterested those special interest groups may be, I know which society I would prefer to live in.

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Richard Teather is Senior Lecturer in Tax Law at Bournemouth University, U.K., and is currently co-authoring a book on Corporate Governance for the publisher Pearson. He can be contacted at  rteather@bournemouth.ac.uk