Yesterday at the colloquium, Lillian Mills presented
the above article (coauthored with Kelvin Law), finding that among publicly
traded companies, those whose CEOs have prior military experience engage in
less aggressive tax planning – e.g., involving less use of tax havens and
leading them to have smaller reserves for uncertain tax benefits (most likely
due to differences in tax planning, not in willingness to reserve for
uncertainty). Due to this difference,
companies with former-military CEOs pay higher effective tax rates than peer
companies that otherwise are similar but don’t have former-military CEOs.
If correlation is causation running from the CEO’s
background to the company, this would mean that the former-military CEOs are inducing
over-payment of tax – relative to that what they could actually get away with,
even if it reflects super-aggressive transactions – of an estimated $1M to $2M
per year. However, there appear to be offsetting
benefits to the companies, relating to what may well be behaviorally-linked
less aggressive behavior in other realms.
For example, the companies with former-military CEOs are less likely to
face class action lawsuits, announce financial restatements, and backdate their
stock options.
The paper’s current form invites one to speculate
about military culture or personality types as causal factors. For example, does military training make one
more ethical about reporting matters?
More risk-averse? Or are people
with these attributes more likely to serve in the military, even going back to
the era of the U.S. military draft? Of
note, the great majority of the former-military CEOs whose tenures contributed
to the data set were not, say, lifers who retired as generals and then went to
high-level private sector jobs (a la Alexander Haig ending up at United
Technologies), but rather people who served for a few years in their 20s,
including during wartime via the draft, and then started private-sector careers
that culminated in their making CEO decades later.
Here are a few of the main thoughts that I had with
respect to the paper:
1) While causal questions are important and
interesting for their own sake, they don’t necessarily matter much to many of the
main conclusions that one would draw from the study. Thus, consider the choice between treatment
and selection to explain former-military CEOs having different values, if these
are viewed as explaining the finding. In
other words, did the military change them, or did certain types of people find
the military? (This could have happened
even during the draft era, given that it wasn’t wholly unavoidable and that
people who enlisted voluntarily as officers may have been the chief future-CEO
pool.) Likewise, suppose we are choosing
between the scenario where the CEO is the true cause, and that where Board of
Directors are more likely to choose former-military CEOs when they favor the
strategy (merely to be implemented by the CEO) of being less aggressive across
the spectrum.
While all this is worth knowing, if one can figure it
out, it might not matter enormously either for the tax policy payoff, or for what
it tells about the strategic setting in which companies (whether via the Board
or the CEO) might be deciding about aggressiveness across the board.
2) Again, the paper finds that companies with former-military
CEOs pay higher effective tax rates (ETRs), all else equal. The ETR is a fraction. The numerator is taxes paid worldwide (using
two alternative measures: cash taxes and GAAP taxes). The denominator is worldwide reported
earnings. Thus, companies with
former-military CEOs would not need to pay more tax than other companies in
order to have higher ETRs. Having lower
reported earnings due to lesser accounting aggressiveness, while doing the same
tax planning, would have this effect as well.
The finding that these companies make less use of tax
havens supports concluding that the numerator is at least part of the
story. I also agree that, in context,
their having lower accounting reserves for aggressive tax positions probably
reflects lesser tax aggressiveness, rather than greater accounting aggressiveness
in determining what is a sufficiently uncertain position to require a
reserve. But the issue of the
denominator might lower the estimated tax cost associated with former-military
CEOs.
3) There is prior work finding both “technological”
and “cultural” explanations for correlation between aggressive tax planning and
other bad stuff, such as accounting treatment that blows up or looting of the
company by rogue executives. An example
of a technological explanation is the view that, once you can use tax planning
as the excuse for creating a byzantine corporate structure with multiple “special
purpose entities” that no one but the insiders understands, looting becomes
easier. While the evidence in this paper
for a cultural explanation does not rule out the simultaneous importance of technological
factors, it adds to the case for concluding that those factors can’t do the job
all by themselves. A great example, from
an earlier paper by other authors that this one mentions, is evidence that, in
Russia, companies whose executives paid bribes to avoid traffic tickets suffered
from greater looting by insiders than randomly selected Russian companies.
4) Presumably, an across-the-board cultural trait of
lesser aggressiveness, and hence greater trustworthiness where CEO or company
behavior cannot be perfectly observed, might have greater value in some types
of industries than others. One thing
that seems clear, from anecdotal evidence that the paper mentions, that selling
to consumers isn’t the key factor. If it
were, then companies like Apple might be a lot more reluctant than they actually
are to be seen as engaged in aggressive tax planning. Suppose that Apple’s international tax
machinations caused people to think: “Wow, they’re so sneaky that I bet the
iPhone 6 has undisclosed defects.” But
that evidently is not the case.
5) One obvious policy implication is that government
regulatory agencies – and not just the IRS – should look more broadly for
evidence of aggressive behavior in deciding whom to audit or monitor the
most. Perhaps a company that cheats on
OSHA is more likely to need a tax audit, and one with aggressive tax shelters
is more likely to cheat on OSHA. I
suppose the IRS might also incorporate former-military CEOs into its thinking
about where to target its marginal auditing efforts, but subject (obviously) to
the concern that companies would pick former-military CEOs for this reason when
they were planning to get more aggressive.
The paper has no direct or first-order bearing on the question
of what we should think about the social effects or the moral defensibility of more
aggressive versus less aggressive tax planning.
The point, rather, is that aggressive tax planning may be associated in
practice with other types of aggressiveness that may have downsides for the
companies engaging in them, in particular by reason of agency costs.
But here is a small, second-order point. Suppose a company is choosing at the margin
between Strategy A (greater aggressiveness that reduces tax liability but
imposes other costs) and Strategy B (lesser aggressiveness that results in tax “over-payment”
relative to the maximally aggressive scenario, but that has collateral
benefits). Socially speaking, we may
want to push companies towards Strategy B.
After all, taxes paid are socially a transfer between pockets, but other
aggressiveness may involve broader social costs. This might marginally induce one to favor
more intensive auditing of aggressive companies than would have been optimal
(given that auditing is costly) in the absence of collateral effects on other
aggressiveness.
No comments:
Post a Comment