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Hello Experts,

Sometimes companies move their corporate headquarters out of their home countries to countries with more favorable tax treatment.

Which duty do you believe is higher, the duty of corporations to pay tax to government or the duty of corporations to pay dividends to shareholders?
Should the concerns of stakeholders other than shareholders be taken into account by corporations?
Why are taxes often more of an issue with corporations than with other business entities?

Thanks a lot!

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Kelleb Mloyi
Kelleb MloyiLv2
28 Sep 2019

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Related questions

1) There exists a universally agreed definition of Corporate Governance:

T

F

2) The two primary competing views of corporate governance are:

Shareholder vs Agent

Principle vs Agent

Shareholder vs Stakeholder

3) European companies tend to adopt the stakeholder view of governance, while Anglo-American companies tend to focus on the shareholder view

T

F

4) Shareholders appoint the management board

T

F

5) Corporate governance is best understood as a set of fiduciary and managerial responsibilities

T

F

6) Shareholders elect ______________, who appoint ______________, to run corporations

Directors, Mangers

Managers, Directors

Agents, Principles

Chairman, CEO’s

7) The principle/agent problem involves aligning management interests with those of the shareholders

T

F

8) Shareholders get their return on investment from the residual (profits) only after all other stakeholders have been paid:

T

F

9) Large shareholders (those owning more shares) have more influence over a company than smaller ones

T

F

10) The term “institutional investor” includes:

Banks, trust funds, pension funds

Employee representatives, government representatives, unions

Company management and employees that own shares

11) According to the text, auditors, bankers, credit rating agencies and analysts are often referred to as:

Consultants

Gatekeepers

Advisors

None of the above

12) Agency theory:

Explains the relationship between management and employees

Explains the relationship between principles and agents

Explains how sports stars make huge amounts of money

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A “two-tier” governance/board structure

A “single-tier” governance/board structure

A combined board consisting of management, shareholder representatives and other stakeholders

None of the above

14) In a two tiered board structure:

The management board appoints the supervisory board

The supervisory board appoints the management board

The CEO reports to shareholders

The Chairperson reports to the CEO

15) Japanese board structures are unique in that:

The boards consist of a large number of “insiders” such as management

Banks often have representatives sit on the boards of their customers

Both A and B

 
After reading the article, post substantive comments on the economic impact of the Tax Cuts and Jobs Act of 2017.
 
THE ECONOMIC IMPACT OF THE TRUMP TAX CUTS
April 25, 2018
The Economic Impact of the Trump Tax Cuts
By Hilary Schmidt, International Banker
 
On December 22, US President Donald Trump signed into law the Tax Cuts and Jobs Act of 2017. The legislation is one of the most radical changes to fiscal policy the United States has undertaken in decades, with sweeping amendments implemented across the entire breadth of the tax code. Indeed, in his State of the Union Address, Trump called it the biggest tax cuts and reforms in American history. As such, its impact is likely to be felt throughout the economy for quite some time to come.
 
It is arguably the cut in a corporate tax that forms the centrepiece of this new legislation, with the rate being cut from 35 to 21 per cent. That puts the new rate broadly in line with the worldwide average, which as measured by the Tax Foundation across 202 jurisdictions currently stands at 22.96 per cent or 29.41 per cent when weighted by gross domestic product (GDP). Corporations will also stop having to pay corporate tax on any income earned from foreign operations, while such money that is brought back home will be taxed between 8 and 15.5 per cent, significantly lower than the 35-per cent tax they are currently paying.
 
Republicans believe such substantial cuts will spur a massive influx of business investment that will eventually lead to higher average wages for Americans. For example, Texas Congressman Mike Conaway stated, It's in all of our best interest to have these tax cuts for corporations so that they will have more money to invest in their business and pay their workers. But much of the research conducted thus far suggests otherwise; the Center on Budget and Policy Priorities, for instance, recently concluded that workers would receive a maximum of only a quarter of the benefits from tax cuts; and even then, it is most likely to be the higher earners that would be the biggest beneficiaries.
 
Another piece of evidence to which analysts are pointing is data from S&P Dow Jones Indices, which shows that non-financial companies in the S&P 500 are already flush with cash at the moment, having between them an estimated $1.63 trillion. And despite this vast sum of cash, an investment boom has not transpired. Indeed, some top companies have made it explicitly clear that any tax relief they receive from the reforms will be primarily used to increase dividends and buy back stock to boost share prices. Amgen CEO Robert Bradway, for example, said We've been actively returning capital in the form of growing dividend and buyback, and expect us to continue that. And in terms of what businesses planned to do with any profit returned from abroad, a Bank of America Merrill Lynch survey of more than 300 CEOs found that paying down debt and stock buybacks were by far and away from the biggest priorities for businesses.
 
The other major pillar of the reform is the cuts that have been enacted for individual income earners, with middle-class taxpayers earning between $19,050 and $77,400 per year receiving a cut in tax from 15 to 12 per cent. Higher-bracket earners, meanwhile, will see their tax rates go from 25 to 22 percent (for incomes between $77,400 and $165,000); 33 to 24 percent ($165,000 to $315,000); and 39.6 to 35 percent ($400,000 to $600,000). And as far as analysis from the Tax Center is concerned, after-tax income will increase by an average of 2.2 per cent across all groups. However, all of this changes after a few years, due to official budget rules that limit the cost of the bill to $1.5 trillion in total which therefore means that to make the corporate tax cuts permanent, the individual tax relief will expire by 2025. As such, a tax increase will likely result by 2027, which, according to projections by the Tax Policy Center, will impact 53 per cent of Americans.
 
Whether the overall impact will be a net positive or negative for the US economy remains to be seen at this stage, therefore. While most analysis produced to date agrees that economic growth will receive a boost in the short-term, the predictions that have so far come in have been decidedly more mixed and less sure for longer time horizons. The non-partisan Joint Committee on Taxation of the US Congress expects the gross domestic product to be 0.8 per cent higher on average each year during the next 10 years than baseline forecasts, thanks mainly to an expected increase in labour supply and business investment. According to the independent non-profit research organisation the Tax Foundation, meanwhile, the plan will primarily reduce marginal tax rates and the cost of capital. In turn, this will lead to a 1.7-per cent rise in GDP over the long-term, a 1.5-per cent increase in wages and a further 339,000 full-time equivalent jobs. This year, moreover, will see GDP growth being posted at 2.45 per cent, compared to baseline growth of 2.01 per cent.
 
But most analysts see the economic benefits tapering off much sooner than the 10 years asserted by the Joint Committee on Taxation. Goldman Sachs, for example, believes the tax cuts will only slightly boost growth in the short-term before fading quickly. Alec Phillips and Blake Taylor, analysts on Goldman's US economic-analysis team, stated in December that the bank's estimate of the growth effects of the legislation in 2018 and 2019 would be 0.3 per cent per year, before dropping off. Indeed, Phillips and Taylor warn that the legislation may end up damaging the economy in the long run: We note that the effect in 2020 and beyond looks minimal and could be slightly negative.
 
Some also point to the fact that the cuts will drastically deepen the national debt, with Maya MacGuineas of the Committee for a Responsible Federal Budget estimating an additional $1.5 trillion will be added to the $10 trillion already forecast for the next decade. As she explained, Instead of trickling down economic growth, the House plan will unleash a tidal wave of debt that will ultimately slow wage growth and hurt the economy. She seems to have a point the debt today is 77 per cent of GDP, much higher than the 31 per cent in place when the 2001 Bush tax cuts were passed, and the highest it has ever been save for the period just after World War II. What's more, given that interest rates could well rise faster than expected as a result of the likely ballooning of the debt, it may well dampen the expected boost to business-capital expenditure, consumer spending and wage growth.
 
Indeed, the arbiter of monetary policy itself, the Federal Reserve, has indicated that it remains somewhat unsure of the overall impact of the tax cuts. According to the released minutes of the central bank's December meeting, growth will only modestly be boosted, with members of the Fed's board and presidents of its member regional banks saying they expect real GDP growth of just 2.2-2.6 per cent and a median expectation of 2.5 per cent growth for this year. The comparatively tempered projections are reflective of the debate within the Fed over just how much of a boost business investment and consumer spending will receive from the tax cuts.
 
According to the minutes, Many participants judged that the proposed changes in business taxes, if enacted, would likely provide a modest boost to capital spending, although the magnitude of the effects was uncertain. While they are highly likely to have a positive effect on economic growth, the Fed also warned that much of the extra cash that is generated is more likely to be utilised for mergers and acquisitions or debt reduction and stock buybacks. Moreover, the boost to consumer spending may have already occurred in part on the back of realised future tax-cut expectations.
 
Ultimately, it may be too soon to make any firm conclusions about how impactful the tax cuts will eventually be; but given that the US economy is already experiencing strong economic growth, and given that virtually all the signs point to an economy operating at full employment and therefore, at full capacity such sweeping reforms that have been at least partly designed as an economic stimulus could well be dangerous. The impact on inflation and debt may well force the Fed to hike rates more than the three times that back in December it had projected for 2018. Time will tell.

Market Analysis Market Participants Market participants act as if they are rational, self-interested, and forward-looking. For example, financial managers try to maximize the present value of profits for their particular companies, rather than ignore future values. Companies pursue many goals, but it is a financial mistake for managers to pursue any goal that conflicts with the primary goal of maximizing their firm's profits. Decentralized decision making by individual market participants is more economically efficient that centralized decision making by government policymakers. For example, it is more economically efficient to have financial managers obtain financing for their particular companies than to have government obtain it. A high degree of competition among market participants is the most economically efficient disciplining mechanism. For example, highly competitive financial markets discipline financial managers to pay fair market interest rates on the debt securities issued by their particular companies. The market system of prices is the most economically efficient allocative mechanism. For example, it is more economically efficient to distribute a firm's corporate stock to those buyers who are willing and able to pay the market price of the stock than to have the government distribute the stock. It is economically efficient for market participants to buy low and sell high globally. For example, it is economically efficient for U.S. firms to sell their financial securities to the highest bidders, no matter where they live in the world economy. Market imperfections can create considerable risk to market participants. For example, because of market imperfections, firms operating in the international financial markets encounter foreign exchange rate risk, political risk, interest rate risk, and default risk. Consumer Sovereignty The principle of consumer sovereignty tells us that by making their dollar votes, consumers indirectly determine the quantity and quality of products that firms will produce. For example, it is not economically efficient for financial managers to obtain more financing for their particular firms than is needed for their firms to produce the profit-maximizing level of output demanded by consumers. Market Economy A highly competitive market economy is largely self-regulating, in the absence of substantial market imperfections, in that economic conditions cannot be substantially improved by government regulation or other types of government intervention beyond laissez-faire policies. For example, if a firm's corporate stock is overvalued by a market economy, market forces will tend to drive down the value of the stock to a market price at which it is neither overvalued nor undervalued. As if by an invisible hand, highly competitive market forces will tend to create a harmony of interests among individual market participants, in the absence of substantial market imperfections. Consequently, the interests of shareholders and other stakeholders are compatible. For example, in trying to maximize profits, firms produce employment, income, consumer products, and wealth for households, as well as tax revenue for government, which helps maximize consumer utility and maximize social welfare. In a market economy, resources, products, and assets flow to their highest valued uses among alternative uses. For example, the shares of firms' corporate stocks will be acquired by those market participants who most highly value them, as indicated by the fact that they are willing to pay the most to acquire them. The efficient economic role of government is limited to Laissez-Faire ("hands off") policies, which create very little intervention in a market economy. For example, government regulations of banking and securities industries to maintain healthy, reasonably profitable, consumer-oriented financial markets would not be needed in a highly competitive market economy in the absence of substantial market imperfections. In a market economy, it is economically efficient for each market participant to specialize according to comparative advantage in producing what they can produce relatively better than other market participants, rather than produce all the outputs they can produce absolutely better than others. For example, it is economically efficient for people who are relatively better at being financial managers than others, to specialize in financial management even if they are absolutely better than others in doing many other types of work. If all labor were allocated to its comparative advantage, then no possible reallocation of labor would exist that could increase the rate of return to labor (i.e., the wage). There is no such thing as a free lunch, because all resources, products, and assets in a market economy are scarce. For example, current federal government budget deficits are not free to current market participants in that the deficits must be financed by future tax increases and/or future decreases in government spending and/or future inflation. For additional information on the Market Economy click here. Marks, R. E. (2006, December). There Is No Such Thing As Free Lunch. Australian Journal of Management. 31(2). 1-7. Financial Decisions An efficient financial decision, practice, transaction, or condition is one that is optimal -- meaning best; it cannot be improved, from society's perspective. If there is some profitable way to improve some business practice that would benefit society, that practice is somewhat inefficient. Any change in a financial decision, practice, transaction, or condition that improves society is an efficiency improvement. For example, it is an efficiency improvement for a business to cut production costs by reducing waste (e.g., by reducing spending on unprofitable activity. A financial decision, practice, transaction, or condition is fair-- meaning just or equitable, if the financial benefits are distributed to those involved in proportion to how much they each voluntarily contributed to produce those benefits. For example, a financial practice that discriminates against some people on the basis of race, age, gender, nationality, or religion is unfair. For example, an unethical business practice is unfair. For additional information relating to Market Analysis and fair financial decisions, click on the following: Teaching Ethical Economic Practices to Business Managers. Johnston, C. (2009, October). The Proceedings of the Annual Conference of The International Academy of Business and Economics. Fairness is a necessary condition, but not a sufficient condition, for efficiency. All efficient financial practices are fair, but some fair practices may still fail to be efficient. For example, embezzling company funds is an unfair and inefficient, criminal financial activity. As another example, an ethical business practice that could be improved is fair but not efficient. Opportunity Cost Principle Opportunity cost principle: The efficient measure of the cost of any allocation of resources, products, money income, wealth, or time is its opportunity cost -- the value of the next best use. The opportunity cost of how one uses his or her resources is the value of the highest valued alternative use. The opportunity cost of one investment is the expected return on the next best investment available to the firm. For example, the opportunity cost of a firm using some of its profits to pay dividends to its stockholders would be the present value of future income those profits could have earned if invested in the firm's highest valued investment project.

Discussion Questions These questions stem from the Class Discussion Questions you will be anwering in the Discussion Board. Think about the questions and how they relate to the financial management principles above.

2. Applications: State the financial management principle that appears to be violated in each of the following cases and explain how it is violated:

(a) A corporation is maximizing sales growth and the price of its corporate stock is falling.

(b) A highly paid financial manager in the auto industry quit his job to set up his own small auto repair shop, which is expected to incur a loss for the first three years then earn normal profits.

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