Using the Tax system to create Shared Value

Last week, I shared examples of the successful application of Shared Value principles in productive companies and the benefits of leadership that empowers its employees. But just because the principles have been proven in particular instances, their wider adoptions has many hurdles, most notably, the pervasive belief that profit and social value are mutually exclusive. I believe that there are two approaches that could encourage people in leadership positions to pursue means of leadership that benefit employees, shareholders, stakeholders and the environment.

The first step it to broadcast a different message. The reason that we hold the common belief that there is an impossible divide between the 1% and the 99% (and I mean in the sense of fundamental beliefs and relationship to society, not just vast differences in wealth) is that we are constantly exposed stories of the exploitation of common resources for the benefit of individuals or corporations. While these stories provide an important role as watchdog pieces that expose harmful practices, they also create the perception that injustice is more pervasive than community minded behavior. In “Nudge”, the importance of the bandwagon effect was emphasized in shaping perceptions and consequently behavior. Just as cooking the books has been shown to be infectious, it is possible that exposing stories of successful implementation of shared value principles would encourage more people to pursue them. If it becomes clear that the societal norm is providing service to a community through commerce, more people will choose to follow the perceived societal norm. I do not claim to know definitively whether businesses more often act in interest of their customers and community, but I think that a more balanced coverage of those actions could easily facilitate greater acceptance and imitation.

The second, and arguably more difficult, suggestion is to reconsider the tax structure to promotes social responsibility. I will admit that I am not a tax expert, but I believe that the basic principles are still relevant. If we view the tax system as a means of incentivizing or discouraging certain behaviors, there seems to be an opportunity to leverage that power to change the economic incentives for profit. The capitol gains tax is seen as a way of providing stimulus to the economy through investment by providing favorable rates of taxation. Which is to say, the government views investment as more valuable than employment. What if the capitol gains tax were reconsidered in a way that promoted longer-term goals, and by default, sustainability?

If the capitol gains tax were restructured to reflect longer holding periods, sustainability could become integral to the thought process. Considering long term planning as anything greater than one year does a huge disservice to any efforts at building the health of communities and the environment. Were the rates changed to reflect beneficial reductions at say 5 and 10 years of holding, people’s outlooks would certainly shift toward whether a company’s practices meant that they would continue to be profitable over that duration. Environmental recklessness and community exploitation are more likely to be noticed over those timeframes and consequently reduce value. Economic cycles are more likely to play out over those timeframes, and shareholders would be more likely to endure beyond the tenure of a single CEO. The cost and risk of short-term profitability could be adequately adjusted for, the societal benefit of longer term dedication could be rewarded. What if short-term meant 5 years and continued to be taxed at ordinary rates, mid-term meant 5-10 years and was taxed stepped rates of 15-20% based on income and long-term holdings of 10 years or more were taxed at rates of only 5-10%. It seems that the incentive would be to steer investments, and therefore support, toward businesses whose outlook reflected an enduring benefit to society. Shared value might seem like the obvious choice, rather than a sacrifice.

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