Have you, or are you considering setting up your digital business in a tax haven?
Many thousands of businesses have done so without much in the way of second thought – it makes perfect sense to them if they can reduce their tax liabilities somehow. But is there more to it? Is it morally right or wrong that they find ways to pay less?
“Tax-motivated behavior ought to be discouraged …. This is because tax planning produces nothing of value to society. It may benefit the taxpayer whose taxes are reduced, but the social product is not increased.” – Martin J. McMahon Jr
Often, when we discuss the topic of business and taxes, we’re looking at ways to minimise tax obligations, but it’s always interesting to look at the other side of it: should morals play a role?
It’s common, and in fact generally promoted as good business practice, to take advantage of any opportunities to reduce tax obligations. Of course, as long as businesses are operating within the law.
But should we be concerned with this? Do we have a moral obligation to contribute what we can for “societal” purposes? The previous Martin McMahon Jr. quote highlights this idea of “tax planning producing nothing of value to society.”
On the other hand, you’ve got this quote from Learned Hand:
“Anyone 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.”
Or from the late (and very wealthy in his time) Kerry Packer:
“Anybody who does not minimise his tax wants his head read.”
We don’t shy away from potential cans of worms, so let’s take a look at the arguments.
“Your Taxes Benefit Society”
This tends to be the crux of any moral-based argument against minimising taxes: the idea that the money you pay benefits society, a society which you potentially “owe” for benefits it may have given you.
If you’ve had things like free education or healthcare, decent roads to drive on or public recreation areas to enjoy, there’s a good argument to be made that you should be paying your fair share and contributing to these amenities.
“Fair share” is the piece which often becomes arguable. Unless you are actively practising tax evasion (hiding assets to illegally avoid paying taxes on them), it can be argued that anything within the law is your fair share…
… unless the law is unfair. Laws around taxation tend to be complex, no matter which government you are dealing with. This is why we have lawyers and accountants who specialise in taxes and tend to charge sizeable fees for their services in interpreting the law and finding every little nuance or loophole which may give their clients an advantage.
Another piece of the argument centres around whether or not tax laws are equitable for all, as they are generally expected to be in any modern society.
If the laws are so complex that they require paying an expensive professional to help minimize your tax obligation, doesn’t this then put those who are more wealthy at an advantage?
What of the laws themselves? Is it moral for lower-income individuals to be making a greater contribution as a percentage of income just because corporations may have been able to use lobbyists to petition for the passing of laws which suit themselves?
This is a strong argument in America in particular, where lobbyists have been commonplace since the 1970s.
Here’s what a Business Insider piece on politics and corporations within the U.S. had to say:
“The tax code may be the most compelling example of how the increased particularism of business lobbying undermines the interests of business as a community. Most everyone in the business community realizes that the U.S. tax code is, as a whole, bad for the economy. But while there is always talk of a “grand bargain” on taxes, nobody is willing to be the first to put their tax benefits on the table.”
It’s usually difficult to make a moral argument which can be defined in exact shades of black or white, especially when it comes to taxes. Whether the law itself is moral has been argued probably since the beginning of time, but when it comes to lobbying for a better deal, it’s a fact that this is really only an option for those with the resources available to pay for it.
Here’s an opinion from Quora user Jason MacDonald:
“There is nothing immoral about acting within the law to pay the lowest rate of taxation possible. However, most people/organizations/corporations who are in a position to do so also tend to have lobbyists who help produce the loopholes that make tax avoidance easier.
This could be considered a moral grey area, as someone without the same resources, say someone who earns their money through a paycheck, does not have the same ability to influence legislation to lower their taxes. It’s not necessarily immoral, but it is definitely unfair.”
Source: The Guardian
Tensions have run particularly high since the Global Financial Crisis, when many of the “little guys” were left bereft while bailouts of large businesses saw the phrase “too big to fail” coined. The general public tends to be downright suspicious of corporate tax behaviours and there have been especially strong feelings since then.
If you’re a small business owner reading this, you can probably equally argue that you don’t have the resources to influence tax law, or possibly even pay professionals to minimise your tax as much as possible. Should you then feel any kind of moral unease over taking advantage of the tax breaks which you can access, especially when the giants are avoiding paying billions of dollars?
What If I Make Bigger Charitable Contributions?
There is a notion which has been argued by the wealthy for a while too: the idea that they “self tax” through greater philanthropic contributions. This is often positioned as an argument as to why it’s fine if they work to minimise tax obligations.
Foster Friess argues that individuals are far better at managing and distributing money than governments are, therefore it is completely moral for the rich to significantly lower their taxes if they’re making charitable contributions.
Chrystia Freeland, author of Plutocrats: The Rise of The New Global Super-Rich and the Fall Of Everyone Else argues that the idea of the wealthy self-taxing (often with some kind of notion that their self-tax is “superior” to state levied taxes), threatens the credibility of state power to impose taxation on its citizens.
Studies in the U.S. at least, show that it’s not necessarily true that the wealthy give more in the first place. The Chronicle of Philanthropy found that the wealthiest people had actually decreased charitable contributions as a percentage of income, while lower and middle income earners had increased theirs.
What If The Taxes Aren’t “Moral”?
If you can successfully argue that the taxes themselves aren’t moral, does that absolve you of any kind of guilt or feelings of moral obligation over paying taxes?
There is quite a large body of people who share the view that it is a government’s role to protect the interests of its people and that taxes are taking away their personal property, thereby not protecting their interests. This is especially argued because “the people” don’t tend to get a say over how taxes are spent and often feel that too much is spent on things they don’t agree with (wars, high government salaries, etc.).
Here’s a fairly typical answer from people in this group, sourced from Quora:
“Given the compulsory nature of taxation, and the inherent threat of force that stands behind it as it’s primary and majority incentive, one could easily argue that it is not only moral to seek lower incidences of forceful seizure of personal property (in this case, monies) but is, in fact, a moral imperative.
(Especially if such an action is instructive to others on how to do the same.)
In my view, it’s not much different from taking a self-defense course to stop regular muggings, and then teaching those techniques at the local neighborhood center so that others can do the same.
(And, no- It really makes no difference if the mugger is using that money to fill potholes or is distributing it to the people in his housing project.)”
Of course, you can argue about what would happen to the poorer people in society if taxes weren’t compulsory – would those who have more means really step up and look out for them? Would they all have the same opportunities to rise above their circumstances?
What’s Your Answer?
There are very eloquent arguments you can make for either side of this tax debate, whether you have no problem with tax minimisation or whether you find it to be immoral.
Do you owe some kind of debt to society for which you should avoid tax minimisation and pay up?
Are tax-minimising techniques unfair anyway because they disadvantage those less wealthy?
Is it your moral obligation to make philanthropic contributions while you actively minimise your taxes?
Are taxes themselves unfair? Are they an attack on your personal liberty?
Everyone will have a different view, and we’d love to hear your thoughts on it. Leave us a comment below!
“In this world, nothing can be said to be certain, except death and taxes.” – Benjamin Franklin
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.