Why is the private sector more efficient in utilizing resources in comparison to the government?
McGee supports an alternative view that the private sector is more efficient in utilizing resources in comparison to the government. Porter and Kramer also supported this theory, arguing that when a business applies its expertise to problems that it has a stake in, it can have a greater social impact than other organizations. This shows managers or influential stakeholders do not necessarily view corporate taxes to be the best way to achieve their social responsibility goals. With this view in mind, paying fewer taxes may result in greater social benefits.
Disparity arises between evidence of the relation between CSR activities and Tax avoidance. Research supporting a positive relationship, argues that companies engage in CSR activities to offset negative perceptions of tax avoidance (forum). Conversely, Friedman argues that firms dedicate resources to CSR activities only when such activities maximize shareholder wealth. As a result of this, tax avoidance and CSR activities are independent of one another. Therefore, under this view, there would be no relationship between CSR and corporate tax payments.
Focusing on US corporations, Davis et al. examine Five-year cash effective tax rates (ETRs) alongside data on the MSCI annual dataset of environmental, social and governance ratings (ESG) of the corresponding companies. The US is the focus of the investigation, as the way managers and stakeholders view taxes about CSR differ between countries. The results indicate that CSR is negatively related to five-year cash ETRs. Similar results were found using a subset of categories in the CSR index that relate to ‘community,’ such as charitable giving. Davis et al. conclude that for the case of US corporations, CSR activities and corporate tax are substitutes. To add value to the investigation, Davis et al. examined the relationship between CSR and tax lobbying, finding they are positively related and corroborating the other findings.
The results are valuable to research in CSR and taxes in two key ways. Firstly, the results show how managers and stakeholders view types of activities to be socially responsible. On average, stakeholders and managers of socially responsible firms do not consider corporate tax payments to compliment CSR activities. The trade-off between corporate tax and other economic activities that promote social welfare is highlighted by the results. High corporate tax enables Government’s to delegate revenue on social welfare. However, this takes away from firms being able to increase social welfare. The United Nations believes that corporate tax payments contribute to social welfare in communities, however, Davis et al. suggest the payment of more tax, on average, is not considered an important complement to CSR.