The Agenda for Progressive Policy: Social Offsetting can make Capitalism more socially responsible

Further Reading:

From Here to Prosperity

From Here to Prosperity
by Thomas J. Burgess

Businesses bring together land, capital and labour to generate profits, so building wealth. Currently after retention for investment and cashflow, this profit is generally allocated to shareholders, but not all the stakeholders. The wealth that we have jointly created could be shared more equitably through encouraging greater corporate responsibility. This can be achieved by changing the way public revenue is raised from business, so that the wealth created can benefit all, not just the few.

A charge on corporate wealth seems entirely justified as it returns benefits to the community and it is the basis behind our current system. However more can be done to minimise greed, and maximise success for the benefit of all. I propose a scheme whereby the tax on company profits becomes a Corporate Social Contribution (CSC) where companies make a contribution to government funds based on their corporate wealth (measured by profits and value) but where social responsibility is encouraged through ‘social offsetting’.

Socially responsible companies will have the opportunity to pay less of their profits/wealth to public revenue. This encourages social responsibility while still respecting the profit motive. It could put an end to low wages, excessively high salaries, and the distorting influence of lobbying and vast political contributions, as well as eradicating tax avoidance and many more ‘anti-social’ corporate activities that have made so many both metaphorically and literally sick. This would encourage business to act in the interests of the wider community not just the shareholders.

The taxes due can be reduced or offset according to a clear code of proven social responsibility compliance undertaken by the company. This would improve the lot of the real wealth-creators, it would also encourage companies to fulfill their responsibilities to society. Their stakeholders include not only investors, lenders, employees, suppliers and customers, but also the community, including government, which makes it possible to do business by supplying infrastructure, maintaining law and order, providing education and health services.

The wealth gap is evidence that the current system is flawed, out of date and fails to meet the needs of a multi-stakeholder society. So I am proposing that companies make a corporate contribution to the public services and infrastructure that is vital for them to thrive. This does not mean taking from a company what rightfully belongs to it, nor does it overlook the need to acknowledge and applaud companies that are already socially responsible but, in essence, the aim is to harness enlightened self-interest: doing well by doing good.

The main method of raising government public revenue from business will continue to be based on profits. The road to profitability can be a long one and there is no point in choking off a company that is slowly building a new market, but once it is making a profit, the next decision is how that profit should be used. It could just go to shareholders; it might be used to build savings or go into research and development, or it might fund new equipment or expansion. All and any of these are perfectly legitimate but it should also be used compensate stakeholders. Short-termism is generally bad; it fosters exploitative employment practices and rewards rapacious speculation, and is directly at odds with the concept of ‘Income for me/ wealth for we’. By cutting payroll tax, introducing a Land Usage Charge, which both acknowledges the social contribution to existing site values and also captures the uplift in site values from new infrastructure improvements, making them self-funding, and using mechanisms such as ‘social offsetting’, we would aim to create the conditions for profitability and corporate social responsibility.

Wherever possible, covering the social and environment costs of doing business should be achieved through financial incentives rather than greater regulation. Some taxes are levied to improve or compensate for carbon emissions or waste and these are linked to mechanisms such as carbon offsetting. Thus we already link tax and corporate social behavior but we could go further using ‘social offsetting’ to help close the wealth gap.

Instead of perpetuating payroll taxes and corporate welfare such as the government topping up poor wages, a charge on company profits could be used to rebalance employment and compensation practices. For example: by linking their contribution to the proportion of employees on below an accepted living wage; the greater the number below the living wage, the higher the tax charged, and vice versa. Since the money would have to be spent one way or the other most employers would opt to increase wages rather than pay more tax. This would alter the perception that restricting earnings to the statutory minimum is somehow sanctioned by the state and society. It would improve the lot of many poorly paid workers, helping to narrow the pay and wealth gaps. At no extra cost this would bring money into the economy helping to fuel commerce. And, importantly, it would reduce calls on welfare and in-work benefits paid for through the tax system. The provision of training, child care and other facilities at work could also be rewarded by lower tax, to reflect the resulting benefits and savings to the community.

Similar mechanisms could also be used to counter corporate behavior that exacerbates the wealth gap, such as making huge bonuses part of general compensation packages or giving institutional shareholders massive dividends while cutting pay. At its crudest, this could be done by mirroring these payments with an impost: matching bonuses or dividends with an equal amount in tax. For every extra million paid to an executive or shareholder a million would go to the community. Shareholder pressure would then be far more likely to curb the excesses of fat cat directors (we are starting to see some kick back here), who are often in control of their own pay and rewards but also remain answerable to general meetings. If these rises and bonuses were paid anyway, the public would benefit from the ‘greed tax’. Deferred equity is often used to avoid paying income tax on golden handshakes, golden handcuffs and other gold-plated arrangements typical of the ‘heads I win, tails you lose’ approach to remuneration that helps concentrate wealth. These shares carry no real risk to the holder because they make no real investment. Shares and options used this way have a face value and would be covered by an asset tax. While any rise in their value would be treated as capital gains, any fall would be an opportunity loss, not a real one.

It should be the aim of us all to encourage corporate social responsibility. Companies will be able to reduce their Corporate Social Contribution through social offsetting if they implement socially responsible practices. These could include:

  • Diversity in pay levels
  • Payment of living wage
  • Company shareholding schemes
  • Active schemes to reward other stakeholders
  • Disproportionate political contributions
  • Flexible working options
  • Positive practices regarding part-time workers
  • Use of renewable energy
  • Staff welfare, pensions, birth leave, compassionate leave
  • Fair dividend levels/shareholder distribution
  • Training plans
  • Childcare facilities/funding
  • Retaining profits in countries where it was created
  • Signing up to an international fair tax agreement

Basically ‘good’ companies will contribute less in public revenue as they are making a social contribution which otherwise the government would have to undertake. These ‘good’ companies are saving the government and taxpayers money by taking on responsibilities themselves and giving their stakeholders, mainly in this case the workforce, more freedom. It would not be too difficult to set these socially responsible standards as there are already many rating companies set up to do just this. This could be the basis for a code for a compassionate and socially responsible capitalist system and provide significant incentives for companies to act in the best interest of stakeholders not just the shareholders.

If you would like more details of exactly how this could be done and how we could all work together to create a sustainable economy with greater social justice then have a read of my new book: From Here to Prosperity

Read the introduction to Tom’s series of blog posts here.

Read Making Wealth Fair, Tom’s first blog post here.

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