Tax Avoidance: Legality versus Ethics
by Terrence Simon, Assistant Professor of Business Administration
I recently viewed a hearing of the United States House Ways and Means Subcommittee on Oversight on C-SPAN 2. The discourse centered on tax avoidance and IRS oversight. While the hearing focused on the president’s tax returns, there were larger lessons to be learned as well.
The tax code has loopholes and grey areas that allow the wealthy to take advantage of the system and to pay less in taxes than a public school teacher or a Burger King employee. The issue is further complicated because the wealthy are less likely to be audited than persons with low-to-moderate incomes: evidence shows the five cities with the largest audits rates have disproportionately large black, Latino, and Native American populations. Therefore, having access to the best tax accountants and lawyers, coupled with the loopholes and grey areas in the tax code, the wealthy find a panacea for tax avoidance.
To better understand the ethics at hand, it would be instructive to evaluate the differences between tax evasion and tax avoidance.
Tax evasion is illegal. It consists of the willful violation or circumvention of relevant tax laws to minimize tax liability. Tax evasion generally involves the deliberate under-reporting or non-reporting of receipts, false claims to deductions, or both. From a legal perspective, this conduct is easily recognized: the taxpayer has breached a relevant law amounting to criminal fraud.
On the other hand, tax avoidance is not illegal. It is simply taking advantage of the legal opportunities and loopholes in the system to minimize one’s tax liability. This requires contriving transactions and structures that reduce tax in ways that are contrary to the policy or spirit of the legislation. The transactions and structures include the use of estate planning, businesses, tax havens, and tax shelters to generate losses that are offset against ordinary income and reduces tax liabilities.
We can all infer from this information that tax avoidance is not illegal. However, we can question whether or not the deductions generated from the losses are genuine. This then begs the question: are these actions ethical? The public expects the wealthy to pay their fair share of taxes. It is the socially responsible thing to do. However, the reality is, the burden of paying taxes falls unfairly on middle- and lower-income taxpayers who play by the rules and pay their fair share. It shows equity and virtue on the part of these taxpayers as opposed to the “immoral” and unethical practices of some that undermine the integrity of our tax code.
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Terrence E. Simon, Ph.D., is an assistant professor of Business in the School of Business, Technology, and Advanced Manufacturing at Goodwin University. He has 25 years of experience in management and administration in various disciplines including the airline (Guyana Airways), petroleum (Guyana Oil Company), insurance (CLICO), financial services (H &R Block), and telecommunication (Sprint, Voicestream) industries that allows him to articulate and implement policies and strategies to positively impact organizations, the society at large, and enhance the lives of individuals. He serves on several not-for-profit boards and lately, he has been spending time helping various organizations develop a vision and approach of their governance risk and compliance processes, aligning the processes with their overall goals and objectives. He is the author of “A Guide to Ethical Practices in the United States Tax Industry” and several articles. He can be reached at tsimon@goodwin.edu.