The Tax Cuts and Jobs Act: Welcome to the Republic of Shareholder Primacy

I am a corporate lawyer and I love corporations, but I can’t in good conscience support the tax bill percolating in Congress. For the last 33 years, I have made my living in Silicon Valley representing approximately two dozen public and several hundred private corporations as outside general counsel. Under the prevailing corporate law of Delaware, the corporation has but one legitimate purpose: to maximize stockholder welfare. This doctrine, known as shareholder primacy, has led to the widespread belief that the corporation exists solely to maximize profit for shareholders. Corporations may be great at making money for their shareholders but are lousy citizens in a democracy.

The tax bill currently circulating in the Senate must be defeated. It is bad enough that it is a massive upward re-distribution of wealth disguised as tax reform whose benefits primarily flow to corporations and the wealthy. This, however, is not the real issue. The real issue is that this tax bill represents a real and present danger to our democracy and our democratic institutions because it subverts the federal government to the doctrine of shareholder primacy.

As much as I love them, corporations do not share the values embedded in the Constitution. The core values at the heart of every corporation, especially our publicly traded ones, are the beliefs that it exists to maximize profit for shareholders and that it is morally acceptable to externalize as many as possible of the negative costs of corporate behavior onto society and the environment.

Corporations will not put America First. It is naïve to think that by giving corporations permanent tax cuts, they will bring jobs back to America and invest in this country. Corporations, under prevailing corporate law, must put themselves first. They are self-centered, amoral creatures of statute. No corporate code in the country requires corporations to be patriotic and put America First. Past experience with corporate tax cuts indicates that public corporations will spend approximately 75% of their tax savings on dividends and stock buybacks, not on jobs, research and development and capital investments. To the extent that corporations do invest in the latter, they will continue to feel compelled under the doctrine of shareholder primacy to engage in international arbitrage and invest their capital in foreign jurisdictions with the lowest labor, environmental and tax costs to maximize their profit.

Let’s be honest. The Tax Cuts and Jobs Act is a fake. A more accurate title would be the Corporation and Oligarch Welfare Act of 2017. This Act does not put America First nor directly create any new jobs. Most of the tax cuts for ordinary citizens are temporary while those for corporations, pass-through entities and those receiving large inheritances are mostly permanent. This Act clearly puts corporations and the wealthy ahead of Us the People. The real agenda behind this bill is not tax reform or tax cuts but the establishment of a permanent corporate oligarchy. Drafted largely behind closed doors, the Republican majority is pushing this disingenuous legislation through Congress without the kind of real debate that such an important piece of legislation deserves in a democracy. Our Senate is selling its soul to the corporation. Our government may soon exist solely for corporations to maximize their shareholders’ welfare. With the Tax Cuts and Jobs Act, America risks becoming the Republic of Shareholder Primacy.

Multinational corporations such as Apple and Pfizer have transcended the nation state. Their parent entities may be incorporated in a US state but these corporations are transnational and owe fealty or allegiance to no sovereign, including America. They seek tax havens and tax treaties and employ every conceivable strategy to maximize their profits. These corporations operate in a global market while nation states still tax on a territorial basis. These corporations don’t need a tax cut to be competitive: their effective overall tax rate is already close to the proposed corporate rate.

If Congress were serious about corporate tax reform, it should work with the G20 to design a global corporate tax system that recognizes the reality of a global marketplace, creates a universal global corporate tax rate and eliminates tax havens and other tax avoidance gimmicks.  If Congress were serious about creating a permanent corporate oligarchy in America, it should at least redesign the corporation so that it has a social and environmental conscience, such as that contained in the benefit corporation, which would legally allow corporations to put America First and act as responsible corporate citizens.

May there still be some courageous and patriotic Republican Senators who will do the right thing and vote against this bill. Our democracy is at risk.

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