Tuesday, April 1, 2014

Avoidance, Evasion, and Taxpayer Morality

In light of the current sacrificing of Caterpillar on the altar of political posturing by lawmakers who are ultimately responsible for designing a global system that ensures US multinationals a world of tax-favorable opportunities, my latest SSRN post, Avoidance, Evasion and Taxpayer Morality appears à propos. It explores the difficult terrain we traverse when, confronted with the parade of household names apparently paying little or no taxes anywhere, we start talking about ethics and morality instead of law. Abstract:
In popular discourse, tax evasion by wealthy individuals is conflated with tax avoidance by multinational corporations to tell a single story about tax dodging and its negative impact on society. But conflating avoidance and evasion muddies the tax policy waters in important ways by turning legal obligations into moral ones. This Essay, prepared in connection with the Washington University School of Law colloquium on “Conceptualizing a New Institutional Framework for International Taxation,” makes the case for caution in using morality as a stop-gap measure to avoid drawing a regulated line between tax evasion and tax avoidance, while still meting out punishment within the undefined space between these two poles. It acknowledges the political gains derived from the rhetoric of morality but argues that the alternate view — that taxpayer behavior must ultimately be managed by law rather than social sanction — has the best chance of driving tax policy toward greater coherence in the long run because it makes the best case for more transparency in both lawmaking and the consequences of legislative decisions.
As always I welcome comments.


  1. I think at a big picture level the real issue is the US has a much more populistic political culture that the rest of world and is increasingly trying to export its own model of political discourse to other countries. This goes well beyond Caterpillar or FATCA into areas such as Dodd Frank etc. The real question is their anything to be gained or learned from this more populist model of democracy. I personally have my doubts. As a Finance and Economics Major it is very difficult see on a numerical or quantitative basis what a country like Canada has to learn from the US. By almost any statistical measure of wellness and livelihood Canada is way ahead of the US. It is only in qualitative metrics where one can argue as to the superiority of the US political and economic system.

    What is most interesting is proximity to the Canadian border has really nothing to do as where one sits on the political spectrum as a matter of populist ideology. Carl Levin represents Michigan a border state while the likes of Bernie Sanders, Peter Shumlin, and Peter Welch represent Vermont. I personally forgot more about Canadian and Quebec politics in five minutes than Bernie Sanders has learned in his lifetime.

  2. Here is a link below to Reuven Avi Yohan written testimony:


    I have take issue strongly with one of Reuven's statements:

    The obvious response to all attempts by US multinationals to shift profits out of the US is to abolish deferral. If US-based multinationals were taxed currently on all of their foreign source income, whether earned directly or through subsidiaries, Congress could lower the corporate tax rate dramatically and still achieve revenue neutrality. Moreover, because the OECD is currently considering ways to combat Base Erosion and Profit Shifting (BEPS), such a unilateral move by the US is likely to be followed by similar moves by other OECD countries, WHICH NEED THE REVENUES MORE THAN WE DO, and the resulting race to the top would alleviate any concerns about putting US-based multinationals at a competitive disadvantage.

    Was Reuven watching Jim Flaherty's last budget speech in February when Flaherty promised a surplus next year? How exactly does Canada NEED the money more than the US which is running budget deficits as far as the eye can see. Additionally Reuven is contradicting his past work which cited the fact that because Canada has a value added tax it will ALWAYS be able to be collect more revenue than the US. Unfortionately Reuven lacked the courage to suggest GST/HST/TVQ as a revenue raising method to Carl Levin's committee.

  3. I've been meaning to comment for a while but never found the time. I'm writing from the perspective of a UK tax professional, who is also a Committee member of a national Trade Union. So I have found I tend to approach this sort of question in a state of mild schizophrenia (or if we're being fancy 'cognitive dissonance').
    I fully accept the concept that you cannot divorce morality and adopt a purely instrumental or technical approach to tax, so that if something is 'legal' then that's somehow acceptable and not challengeable. Many of my colleagues spend their working lives doing exactly that but I don't think they do it by adopting some sort of moral position. They do so because their skills and experience lead them to doubt the validity of the transaction or claimed application of the law to a transaction. They are the first to object to external bodies claiming that they should operate in any subjective way, as if the tests to be applied are moral ones. They know and accept that ultimately it is the legal process that decides if something fails or succeeds.
    As a Trade Unionist I am less convinced that there can be no application of moral sentiments. I think there is something in the concept of the spirit of the law, of it being objectionable that skilled professionals seek loopholes through which to avoid or reduce tax liabilities. And there are signs that businesses are becoming more sensitive to the impact of their tax strategies. Although I would agree that many loopholes arise through bad drafting or conflicting policy goals.
    We have been trying to address this sort of thing by seeing if we can build a public awareness on the issues so that we do not get frankly embarrassing events such as Parliamentary committees conflating measures of turnover with taxes on profits, or asserting businesses should pay a "fair" share (especially when these businesses may be using laws passed by the same Parliamentarians). We hope to refocus the landscape so that questions of morality are not deemed to be relevant only when tax authorities are examining accounts, but that they are properly considered when policies are developed before being legislated. Such a landscape would also require a greater measure of transparency by businesses and professional advisers (maybe in proportion to the size of the business, a bit like CSR), better scrutiny by legislatures (more professional advisory staff), and so on.