Ethics of Tax Avoidance Utilitarianism and Deontology PDF

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Ethics of Tax Avoidance: Utilitarianism and Deontology...

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Introduction In the famous case ‘Helvering vs. Gregory’ of 1934, judge Learned Hand stated that ‘any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes’. Regardless of the strong ruling, the opinion prevailing the Helvering vs Gregory case in the Supreme Court was diverse and laid the foundations for the debate concerning tax avoidance in the United States and other countries. While courts, jurists and legislators have been defining the nature and limits of tax avoidance, not without considerable disagreement, one point surfaces without too much disagreement: the understanding that tax avoidance is a legal kind of arrangement and that it does not violate the law. In this essay, the main focal point reflects the issue of ethics of tax avoidance and, rather than performing an assessment from a legal perspective, arguments will be presented from a moral view.

Utilitarianism: Consequentialism (Teleological ethics): (Jeremy Bentham & John Stuart Mill). Consequentialism is the field of normative ethics in which the normative properties depend on the consequence of the act. Thus within consequentialism the outcome of an action is the core from which the action will be valued. As a corollary, the means employed to achieve the end result is disregarded. Furthermore, consequentialism, also known as teleological ethics, encompasses several theories including utilitarianism, hedonism, egoism asceticism and others. Arguably the most developed, however, is utilitarianism. Utilitarianism, or utilitarian ethics, considers the result of a specific behaviour, and was founded by Jeremy Bentham in his 1980s work ‘Introduction to the Principles of Morals and legislation’, but the most important contributor was arguable John Stuart Mill with his 1863 work ‘Utilitarianism’. Bentham, having developed his theory primarily centred in the UK criminal system in the eighteenthcentury, argued that an action ought to be right if the resulting feelings of pleasure outweigh the feelings of pain, referring to pain and pleasure as mankind’s ‘sovereign masters’ in his work. Furthermore, Bentham also incorporated the wider community in his argument, stating that it is important to not only consider the interest of the individual but that behaviour must be evaluated by taking the happiness and harms of all members of society into consideration. Economist and philosopher John Stuart Mill was a follower and admirer of Bentham, but this did not necessarily minimise his disagreements with some of the aspects proposed by Bentham, ultimately leading to a modification of Bentham’s work. Unlike Bentham, however, Mill argued that the nature of pleasure is also relevant in measuring its utility, not simply the intensity or its duration. He believed that pleasure has a qualitative nature and identified intellectual and moral pleasures which he classified as higher pleasures, and subsequently physical pleasures which he classified as lower pleasures. Deontology (Immanuel Kant) Deontology, also referred to as deontological ethics or duty-based ethics or duty-based ethics is a category of normative ethics in which, unlike in consequentialism and utilitarianism, the ethical analysis of an act does not depend on its consequence, but rather on a moral law.

As the essential figurehead for deontology, Kant argued that morality is a derivative of reason and logic, and developed his ethical philosophy accordingly, by voicing his view that only reason and logic can determine whether some act is moral or immoral. Furthermore, his work states that moral law ought to have ‘categorical imperatives’, which act as fundamental principle from which all duties and obligations have their grounds. The focus lies on pure reasoning instead of intuition. Building on the notion of categorical reasoning, Kant’s theory can be labelled as a monistic, ruledeontological theory, meaning that Kant does not subject incidental actions, but rather types of actions such as lying or keeping promises, to moral judgement, and traces all moral rules to what he called ‘the categorical imperative’.

First appearing in Kant’s work ‘The Groundwork for the Metaphysics of Morals’, the categorical imperatives most known for their first formulation: ‘Act only according to that maxim whereby you can, at the same time, will that it should become universal law’ The word ‘maxim’ is important here as it is morally neutral. In essence, a maxim is a rule that categorises an action into a group of actions. The fact that every action is driven by a maxim is the crucial difference between behaviour and action. Beings that are not able to act are not able to develop guidelines for their actions and cannot be judged in moral terms, applicable to animals and the mentally disabled, for instance. Therefore, if the maxim represents a rational behaviour, it denotes a moral action, but if the maxim foes not represent a rational behaviour, then the action is not moral. Thus, according to Deontology and Kant, the morality or immorality of an action depends on its rationality, and only what is rational is moral.

Main argument: Is tax avoidance ethical? Utilitarian view As depicted by Bentham, the utilitarian view looks at a specific action through the difference between the pleasure and the pain generated by that action, in other words, the maximisation of utility of the action. In this part of the analysis, the means by which tax avoidance is attained is disregarded, and motivations and concerns of companies are ignored. The only element that is evaluated is the result that a tax avoidance scheme would produce. By using a preliminary approach, we can thus find out if tax avoidance is ethical or unethical by discovering the amount of utility or disutility it brings to the company, the state or society. For hypothetical purposes, let us assume that the company will be the winner, and the state, representing the society, is the loser resulting from tax avoidance. The first step is to analyse the gain or loss of utility for a company undertaking the tax avoidance scheme. The assumption will be made that, for the company, less tax is always desirable, creating an inverse relationship for a company between the corporation tax liability and its perceived utility.

That being said, and no other consequences, a company’s utility grows considerably through tax avoidance compared with its former situation, making the tax avoidance arrangement an ethical action for the company according to utilitarianism. It is now imperative to establish whether tax avoidance will also increase the utilities of the state and society. We will view the state results as society results as tax collected by the states is assumed to be used for the benefit of the entire society. As previously concluded, tax avoidance schemes reduce corporation tax for companies and thus reduce state revenue. States, however, are expected to utilise such revenue to pay their current obligations, as well as to invest in infrastructure and provide better lives to its citizens. There is a caveat, however, that is often overlooked. There is no guarantee that the amount of revenue collected by the state will indeed be used in a desired way for society, making the quality of public administration and state politics the keys of the utility measure. This creates a complication since it is not possible to fully argue that tax avoidance will create more or less utility without being able to evaluate if the state’s supplementary revenue will be used well or not. However, even if it is not possible to determine how governments would use the proportion of tax avoided, it can be argued that reduction of state revenue did ultimately lead to a reduction in societal utility as even a small amount of the supplementary money can bring some marginal benefit to society. To form a conclusive answer, the benefit created by tax avoidance for the company has to be weighed against the loss it brings to society. And the answer is that it depends on the state’s use of the tax revenue. If the state tends to perform well with the tax revenue, then tax avoidance is wrong because the revenue will bring more utility to society even if the company will lose some utility. On the other hand, if the state manages tax in an undesirable way, then the utility created for the company will overcome the little disutility generated to the society, and would thus be considered ethical....