Tax Avoidance or Social Responsibility? The Moral Dilemma
Exploring the Conflict Between Financial Gain and Ethical Obligation in Modern Society
Ah yes - tax. The one thing that makes sure that despite our hard work we stay middle-class.
At least it applies to everybody. But maybe it isn’t. You see, the huge MNCs that the nation is supposed to run off of, almost NEVER pay their taxes. And it isn’t even illegal.
Surely, that can’t be true. What of tax evasion then?
Well ‘tax evasion’ is illegal, but there are multitudes of ways in which these large corporations can escape paying taxes and add a few extra billions to their paycheck, while my Software Engineer father slaves away only to get 40% of his income taken.
These procedures are known as tax avoidance, and this article aims to explore the very ethics of the measures that these large corporations use to get richer, avoiding their ‘social responsibility’.
What it entails
Before we delve into the ethics of the issue, we need to understand what it constitutes.
As mentioned before, tax avoidance isn’t illegal, so what is it? Generally, it can be termed as any set of legal measures taken by corporations/individuals to lower the total amount of tax liability.
Tax evasion, on the other hand, constitutes any measures taken by these actors to avoid paying taxes, utilizing means outside the sphere of legality to do so.
Tax evasion is punishable by law.
A popular example of tax avoidance is the Double Irish scheme, used by many corporations to date which minimizes the amount of tax that they need to pay, by manipulating loopholes in both the US and Ireland, with Apple being its most famous propagator.
Essentially, tax avoidance can be classified into three sub-categories: State-induced Avoidance, Strategic Avoidance and Toxic Avoidance.
State-induced avoidance essentially encapsulates any avoidance measures that are both issued and welcomed by legislation. For example, if a company switches from coal-powered electricity to solar-powered electricity, they may be able to avoid paying a certain amount of tax through some energy scheme that their nation has introduced. This is arguably the most socially favourable method of tax avoidance.
Strategic avoidance follows from one of the most common ethical arguments favouring avoidance - the essence of good business strategy. Strategic avoidance may be practised through any set of business decisions which reduce tax liabilities for a company, even if this is against the intention of the legislation.
Toxic avoidance is easily the most socially irresponsible and repugnant variation of tax avoidance. It constitutes any measures, usually found by extracting loopholes in legislation, whose sole aim is to reduce the tax paid, demonstrating a lack of transparency, creating artificial corporate structures and contradicting the intentions of the legislator.
Soon, we shall deliberate over the ethical arguments for and against each of these adaptations, to determine whether any of these are truly ‘good’ as per societal standards and if anything must be done to stop these corporations.
An ethical overview
There are several ethical arguments supporting either side here, with most arguments sprouting in ancient times.
We begin with the deontological argument, famously adapted by thinkers such as John Rawls and Immanuel Kant. Essentially, it emphasizes that ethics are based on a certain adherence to rules, regulations, laws and norms, postulating that as long as individuals/corporations adhere to the law, they have done no wrong.
Another common argument presented here is that corporations conduct tax avoidance measures as a means to provide for their stakeholders - the managers of the corporation have a fiduciary duty towards their stakeholders - to maximize profits by all legal means.
A famous argument, often supported by deontological followers, in favour of this viewpoint can be demonstrated by scholars like Lord Houghton, who argues - “While we all have a public duty to comply with the law . . . this does not extend to complying with the ‘spirit’ of the law, still less with the supposed ‘intentions of Parliament.’”
He concludes with - “Taxation has no morals, it may not even claim to be fair. The law is what the Act says or, in case of doubt, what the Courts construe its words to mean.”
Essentially, he contends that it is not the individual who is responsible for the ‘abuses’ and ‘loopholes’ in the law but that the problem “is a problem of legislative draftsmanship, nothing more and nothing less.”
Also, if a perception exists that significant tax revenue is being wasted and/or misused by the government, due to mismanagement, corruption or inefficiency, taxpayers may feel justified in undertaking whatever legal means possible to minimize their tax liability, in support of the deontological argument.
Supporters of the deontological argument generally stand in favour of tax avoidance, or at least are not completely against it, and truly believe that what is permitted by law is an ethical action, thus presenting themselves as the defendants of tax avoidance in this article.
An important side-note constitutes the libertarian argument.
This calls for the liberty of the individual and minimal intervention by the government. Extreme libertarians would therefore call for no taxes, not just defend tax avoidance, stating that taxation infringes on their right to liberty.
They also contend that entrepreneurs should not be penalized by high taxes when they are creating employment and boosting economic activity.
Meanwhile, utilitarian philosophers such as John Stuart Mill and Jeremy Bentham put forward an argument that considers the majority. Indeed, under this system, behaviours are ethical if the outcome is beneficial to the greatest number of people, even if it comes at a cost - an accurate representation of anti-avoidance protestors around the globe.
Utilitarians thus emphasize the importance of the opportunity cost of tax avoidance - the schools, hospitals and roads that could have been built with that money. The cost of one corporation individual avoiding taxes affects everyone else negatively, especially if that corporation/individual is particularly wealthy, leaving utilitarians with a generally unfavourable view on tax avoidance.
Utilitarians may also believe that tax avoidance practices benefit the wealthiest members of society, both high-net-worth individuals and highly profitable MNCs.
Tax avoidance is unfair to wage and salary earners and a majority of taxpayers because such schemes require the inventive genius of expensive lawyers and accountants studying the fine print of tax legislation to find loopholes, which the common man may not be able to afford, thus putting him at a considerable disadvantage.
Another important consideration is the effect of tax avoidance measures, which if orchestrated and portrayed in a favourable light by influential organizations, could invoke mass tax avoidance, perhaps even venturing into outright evasion.
These very MNCs may pose another threat, this time about indigenous businesses, which rings especially true for less developed economies in third/second world nations.
Essentially, the ability of an MNC to hold funds in multiple locations, thus utilizing methods such as the Double Irish scheme (as mentioned previously) as a means to gain an ‘unfair’ advantage over smaller, local businesses, that do not possesses this ability - a follow up to the rich get richer dialogue.
Our third outlook on the issue is derived from the teachings of ancient Greece itself, an homage to philosophers like Aristotle.
A third perspective comes in the shape of what is called the virtue ethical foundation that is associated with Aristotle and other Greek philosophers. Their theories suggest that what is right is defined by an individual/corporation’s pursuit of moral excellence - anything that gets them closer to the perfect version of themselves.
Concerning tax avoidance, this forms an intermediate perspective.
An individual who adopts the virtue perspective might evaluate tax avoidance strategies in the context of their virtuous behaviours.
If the money that is saved in avoiding taxes goes towards, say cancer research, that is morally justifiable by the virtue principle. However, if that person employs tax avoidance strategies in the absence of any other virtuous behaviours, then the act is likely to be viewed as unethical.
What do we do about it?
At the end of the day, the actions taken by governments to restrict tax avoidance really come down to their inherent preferences - whether they think imposing strict anti-taxation legislation is truly beneficial for their economy or not.
The question of ethics here, at least from the traditional perspective, is more or less irrelevant to these actors, whose decisions are ultimately based on economic goals.
So why did you spend your time reading this?
Well, for us, as citizens, it is imperative that we understand the philosophical aspects, to implore our governments to act based on what is right, and not what makes who rich, especially in a time where supposedly ‘millionaire’ influencers on YouTube insist that you must do everything in your power to avoid paying what is your moral duty.