Tax Analysts Blog

Taxation & Morality: Odd Bedfellows

Posted on Mar 8, 2013

There is a public opinion poll for just about everything these days. I recently stumbled across a U.K. poll on corporate taxes and morality. Here we have two subjects that don't necessarily seem connected ... or are they?

In the survey 66% of respondents said tax avoidance was immoral. The poll was conducted by ComRes and commissioned by the advocacy group Christian Aid. You can read more detail about the poll here. British accountant and economist Richard Murphy further discusses the poll here.The results imply that a majority of Britons now consider lawful tax planning, aimed at minimizing a firm's effective tax rate, as crossing a moral boundary. Note that we're speaking here of (legal) tax avoidance rather than (illegal) tax evasion. Presumably the percentage of respondents who consider tax evasion immoral would be much closer to 100%.

I doubt that U.K. Prime Minister David Cameron was among those surveyed by ComRes, but we already know his views on the matter. Cameron recently said multinationals that conduct a lot of business in a country, but don't pay a lot of tax there, are lacking "moral scruples."

Ouch. That's some harsh language from the PM, but he seems to be connecting with what's on voters minds.

Let's cut to the chase. Is income shifting immoral? Is checking-the-box immoral? Is a cost-sharing agreement with your tax haven affiliate immoral? These are fair questions to ask.

Personally, I've always taken the view that if you're going to start drawing judgmental lines in the sand, the resulting distinctions should be based on legality. That appeals to my sensibility because illegal conduct is, in theory, objectively identifiable and thus avoidable. Morality not so much. If I drive my automobile 25 m.p.h. above the posted speed limit, we can all agree that I've violated the law and should be punished accordingly. But reasonable minds may differ as to whether such conduct is immoral. (Students of jurisprudence will call to mind the distinction between Malum Prohibitum and Malum In Se.) Should not the same be true of taxation?

The notion of corporate social responsibility is not without merit, but it strikes me as inherently subjective. How much tax (beyond that which is due under the law) should a company pay to the state? How does one even attempt to answer such a question? I'm all in favor of taxpayers contributing their "fair share," but we lack a reliable means of determining what exactly that means. In the absence of such a moral yardstick, the best guidepost should be what the law dictates.

The come back is obvious: Okay, but the tax law is a total disaster. Fair enough. I concede that the code and regs are a terrible mess — and often influenced by special interests. But I'm still hesitant to play the morality card. Why is that? Look no further than the dicta of Judge Learned Hand (1872-1961), as follows:

                Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands." Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934), aff'd, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935)

But who am I to bicker? Many will observe that case law from 1934 is not the same thing as public opinion in 2013. So let's accept the poll results, such as they are. To whom should the people of Great Britain assign blame: their corporate sector or their parliamentarians?

Moreover, do Americans share the same views on taxation and morality? What say you?

Read Comments (1)

vivian darkbloomMar 9, 2013

"Moreover, do Americans share the same views on taxation and morality? What say
you?"

Let me assume you are asking the same question of Americans that the poll asked
of the British, that is, is tax avoidance immoral? (not entirely clear the way
you set it up):

Do (most) Americans view tax avoidance as immoral?

I think the answer is that it is viewed as immoral, but only if someone else
is doing it, much like taxing the guy behind the tree. This applies especially
to corporations because, after all, "they are not people".

Having said that, if a poll were to ask the British or American populace "'is
tax avoidance immoral" a much greater percentage than 66 percent would not even
know what you would be talking about.

"That appeals to my sensibility because illegal conduct is, in theory,
objectively identifiable and thus avoidable."

I'm glad you threw in that "in theory" qualifier.

As far as "checking-the-box" is concerned, I remember well the days of the old
four-factor Kintner rules (following the five-factor Morrisey rules). The IRS
came in and created the check-the-box election to simplify their lives and
those of taxpayers and practitioners. Also, I doubt they would admit it, but
they also did so in order that US corporations could more effectively legally
avoid foreign tax and, in the process, Subpart F.

Legally using a check-the-box election created by regulation is probably not
any more immoral than electing to file a joint tax return. If done properly
and wisely, both entail "avoiding tax".

And, whether or not a "cost sharing arrangement" with a foreign affiliate is
designed to reduce one's overall tax liability, regulations basically require
them as well as other written substantiation in transactions with "related
persons". Economists and others that write transfer pricing and economic
studies to support them are often immoral (or is it unethical?) because they
are often written with an objectively (and subjectively) biased slant. There
may be a case here for more bright-line rules.

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