The Morality of Tax Avoidance

• Publication year: 2022

43 Creighton L. Rev. 693. THE MORALITY OF TAX AVOIDANCE

THE MORALITY OF TAX AVOIDANCE

ZOE PREBBLE(fn*) AND JOHN PREBBLE(fn**)

TABLE OF CONTENTS

I. INTRODUCTION....................................................................................................695

A. Tax Avoidance, Tax Planning, and Estate Planning....................................... 695

B. Estate Duty and Tax............................................................................................... 697

C. Jurisdictions With, and Jurisdictions Without, General Anti-Avoidance Rules...... 697

D. Exogenous and Endogenous Tax Avoidance ... 698

E. Tax Avoidance in the Context of Estate Planning Not Special.......................... 700

F. Framework of Analysis of the Morality of Avoidance...................................... 700

G. Philosophical Standpoint...................... 701

II. TAX EVASION AND TAX AVOIDANCE............. 702

A. The Distinction................................ 702

B. General Anti-Avoidance Rules................ 703

C. Contrasting Tax Avoidance and Tax Mitigation...................................... 705

D. Conflating Avoidance and Mitigation......... 706

E. Boundary Uncertainty......................... 708

F. Income-Splitting Schemes: Mangin v. Commissioner of Inland Revenue.............. 709

G. Schemes for Deducting Inflated Expenses: Cecil Bros. Proprietary Ltd. v. Federal Commissioner of Taxation..................... 710

H. Income Reducing Schemes: Jones v. Garnett(Inspector of Taxes)........................... 710

I. Duke of Westminster's Case................... 711

J. Secrecy and the Line Between Tax Avoidance and Tax Evasion.................... 711

K. Is Tax Avoidance Robustly or Only Contingently Legal?........................... 712

L. The Strict Construction of Tax Statutes..... 713

M. Motive Is Not a Relevant Legal Consideration.................................. 713

N. Assumptions about the Morality of Tax Avoidance...................................... 714

O. Is the moral line the same as the legal Line?........................................... 715

P. A Logical Error: The Split from Legal to Moral Language............................... 716

Q. The Alleged Morality of Tax Avoidance Requires Justification......................... 716

R. The Placement of the Moral Line: Two Alternatives................................... 717

S. The Spectrum of Tax Minimization Behaviour: Gaars and Equivalent Doctrines .. 717

T. The Four Assumptions Behind the View that Tax Avoidance Is Moral.................. 718

III. THE FIRST ASSUMPTION BEHIND THE VIEW THAT TAX AVOIDANCE IS MORAL: THAT THERE IS A MORAL ENTITLEMENT TO PRE-TAX INCOME................................. 719

A. Nagel's and Murphy's Response to the Assumption..................................... 719

B. The Philosophical Underpinnings of the Assumption..................................... 720

C. The Logical Incoherence of the Assumption .. 720

D. Consequences of Rejecting the Assumption ... 721

IV. THE SECOND ASSUMPTION BEHIND THE VIEW THAT TAX AVOIDANCE IS MORAL: THAT TAX AVOIDANCE AND TAX EVASION ARE NOT HARMFUL .............................. 722

A. Culpability as a Moral Justification for Criminalizing Conduct......................... 722

B. Harmfulness as a Moral Justification for Criminalizing Conduct......................... 723

C. Diffuse Harms and Harms that are Difficult to Identify .......................... 723

D. The Harmfulness of Tax Avoidance ........... 725

E. Kantian Categorical Imperatives.............. 726

F. Wrongfulness as a Moral Justification for Criminalizing Conduct......................... 727

V. THE THIRD ASSUMPTION BEHIND THE VIEW THAT TAX AVOIDANCE IS MORAL: THAT TAX EVASION IS MALUM PROHIBITUM............... 727

A. Mala Prohibita and Mala in Se................ 728

B. Mala Prohibita and Mala in Se: Mutually Exclusive Concepts............................ 728

C. The "Arbitrariness" of Tax Law................ 730

D. Is It True that Tax Evasion is Only Malum Prohibitum? A Third Category of Wrongfulness.................................. 730

VI. THE DEPENDENCE OF MORALITY ON LAW...... 732

A. The Fourth Assumption: That All Aspects of Political Morality are Determinate and Independent of the Law....................... 732

B. Honore: Some Aspects of Morality Depend on External Definition........................ 734

C. Primitive and Pre-Legal Societies............. 734

D. Modern Legal Societies ....................... 735

E. The Comparison of Primitive to Complex Societies....................................... 736

F. Tax Evasion and the Middle Ground Between Mala in Se and Mala Prohibita: A Legally Constructed Moral Wrong?.......... 736

VII. PUBLIC PERCEPTION OF TAX AVOIDANCE...... 737

A. Introduction.............................................. 737

B. Press Reports..........................................738

C. Politicians.................................................739

D. Defamation...............................................741

E. Tax Litigation.............................................742

VIII. CONCLUSION ..................................... 744

I. INTRODUCTION

A. Tax Avoidance, Tax Planning, and Estate Planning

This article addresses the question of whether tax avoidance is moral. It considers tax avoidance in a number of contexts, but, in deference to the subject of this symposium issue of the Creighton University Law Review, it specially mentions tax avoidance in the context of estate planning. Estate planning ordinarily involves taking precautions to protect one's property from taxation, from creditors, or from spouses and others with family-based claims. These precautions typically entail transactions that transfer assets from one person to other people or to other entities. With such transferred assets goes income that the assets generate. Planning to minimize, or sometimes to avoid, tax on such income is thus frequently a bedfellow of estate planning. Sometimes income tax minimization can overshadow the apparent goal of protecting assets.

For these reasons, while not all estate planning is accompanied by tax planning, the expressions "estate planning" and "tax planning" frequently find themselves together. These expressions are so often concatenated as "estate and tax planning" that it will surprise no reader of this article to hear that an electronic search for ["estate and tax planning" course] returns nearly thirty-thousand entries, with offerings from university law and business faculties, technical institutes, publishers, private training providers, and enterprising individuals all over the world. Princeton University, which, famously, does not have a law school, even posts a page of tax planning advice.(fn1)

The authors address the meaning of "tax avoidance," and attempt to describe it, in Part II of this article. For purposes of this introduction, a working definition is: "Contriving transactions and structures that reduce tax in ways that are contrary to the policy or spirit of the legislation." That is, as used in this article, "tax avoidance" involves more than simply engaging in activities that reduce one's tax. What that "more" amounts to is the subject of most judicial decisions on tax avoidance.

Tax planning does not necessarily amount to tax avoidance, but it is hard to conceive of an activity that one might describe as "tax avoidance" that is not preceded by or accompanied by at least some tax planning. Further, while, as mentioned, not all estate planning is accompanied by tax planning, some of the tax planning that accompanies estate planning crosses the line into tax avoidance. Some schemes that are driven by income tax avoidance involve templates that in basic structure vary little from estate planning patterns. For instance, a scheme to reduce tax on income by splitting the income among several people so that each can make use of personal exemptions and lower-rate tax bands may look very similar to a scheme that transfers assets to a trust or company to look after assets for the next generation and meantime to share income between a number of people. Later, when explaining examples of what amounts to tax avoidance, this article discusses two cases decided in London, England, in the Privy Council and the House of Lords, where taxpayers utilized schemes of broadly this structure.(fn2)

B. ESTATE DUTY AND TAX

This article focuses on the morality of the avoidance of income tax. Before proceeding to a summary of the analytical framework of the article's arguments, the following sections address some of its terminology and categories.

Some jurisdictions use the term "estate duty" to refer to taxes payable at death on the property of the deceased. "Duty" can provide a useful distinction from "tax," which may be more often thought of as referring to income tax, including tax on capital gains. Adopting this framework, for some scholars and practitioners the expression "estate and tax planning" refers to planning to minimize both estate duty and income tax. On the other hand, for those who use the term "estate taxes" for fiscal imposts that apply on death, "estate and tax planning" or "estate tax planning" may refer to planning for death imposts only. The present authors are in the first...