Tax Cheating: Illegal--But is it Immoral?
***Silver Award Winner*** 2012 ForeWord Book of the Year in the Political Science Category
***Category Finalist*** 2013 Eric Hoffer Book Awards, presented by Hopewell Publications
All royalties will be donated to Tax Analysts, a 501(c)(3) nonprofit publisher promoting tax policy debate and transparency in tax policymaking.
Recently released by the same author: Taxation in Utopia: Required Sacrifice and the General Welfare, SUNY Press, Sept. 2020
In Cheating the Government, Frank Cowell refers to tax cheating as "an intrinsically interesting economic problem with profound implications for the fiscal relationship between government and the citizen."
"Our revenue laws as a body might well be entitled, 'Acts to promote the corruption of public officials, to suppress honesty and encourage fraud, to set a premium upon perjury and the subornation of perjury, and to divorce the idea of law from the idea of justice.'"
Henry George, Progress and Poverty (1879)
Pointing the Finger
Clarifying what activities are encompassed by tax cheating requires looking at the income tax system as a whole and evaluating the respective roles played by taxpayers, the IRS, the Internal Revenue Code, Congress, the courts, the economic and political ideologies that influence congressional thinking, and those who are paid to influence the legislative process. Understanding the moral quality of tax cheating requires an understanding of the contribution each of these elements makes to the system. A first step in addressing the problems of our current Tax Code involves understanding that the moral quality of cheating is determined by the moral quality of the rules being cheated. To the extent the current Code lacks any moral foundation, cheating its rules—while certainly illegal—cannot be immoral.
Will Rogers said that the income tax has made more liars out of the American people than golf has.
In The Origins of Political Order, Francis Fukuyama writes, “Political order is based on legitimacy and the authority that arises from legitimate domination. Legitimacy means that the people who make up the society recognize the fundamental justice of the system as a whole and are willing to abide by its rules.” One index of people's beliefs about the legitimacy of its government is the extent to which they feel its tax system is legitimate. People vote on the legitimacy of the tax system by the level of their voluntary compliance; the more cheating, the less legitimate the system appears, and in turn the less compliance it commands. This book examines the legitimacy of the current income tax system in the U.S.
In a recent U.S. Tax Court Case the taxpayer, accused of failing to report all of his income, was quoted as saying that "it's like running a red light or going over the speed limit. You do things you shouldn't while you can." Perry W. Browning v. Commissioner, TC Memo 2011-261.
Complexity in the tax code "The tax code is a 'fantastic labyrinth' whose words 'merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception ...that offer no handle to seize hold of ...[that] leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract....'” Judge Learned Hand
“Any tax is bad, which can be easily evaded by fraud or falsehood, and is therefore paid only by the honest and truthful. . . . Any tax is bad, which corrupts the morals of the people or which necessarily brings into existence a class [e.g. lobbyists] which finds its profit in promoting wastefulness and extravagance in public affairs.” Thomas Gaskell Shearman (1834-1900)
Former IRS Commissioner Egger asked,“Can we afford any longer a tax system whose very unfairness and complexity invite tax cheating?” The book is aimed at a growing audience who believe that our tax system is in need of drastic revision. While polls show that 95 percent of Americans believe they have a civic duty to pay income taxes, more than 20 percent of the taxes due the treasury go unreported or unpaid annually.
Since there will never be agreement on what is the fairest form of taxation, the first question for Congress should be which form of taxation is the most difficult to cheat and the least likely to be corrupted by well-placed political contributions, ideological extremes and the advantages of political power.
Those who benefit most from tax cheating are those fighting the hardest against tax reform.
The book explores the nature and extent of tax cheating through an examination of the meaning of tax cheating and of the moral problem caused by the so-called voluntary tax system. Whether tax cheating is associated with Al Capone, UBS and Swiss bank accounts, or overvaluing the clothing you gave to charity, both the boundaries and moral status of tax cheating remain hazy.
“Morris gives us a thorough collection of thoughts and quotations about a sensitive subject—how do morals and ethics affect the completion of a tax return? Who is more unethical, Congress in writing the current tax law or the taxpayer in paying ‘too little’ tax? What motivates a citizen to ‘volunteer’ to pay a tax bill? Does Congress really want to close the tax gap? Should a court apply only the letter of the law in a tax case, or should a higher moral principle also apply? By approaching the term ‘cheating’ in a morally neutral manner, Morris removes much of the baggage that restricts the usual talk about taxes—the book allows for a more fruitful review of the economics of the deal between the citizen and the government, that we call taxation. Intriguing, fresh, accessible, up to date.” — William A. Raabe, Senior Lecturer in the Fisher College of Business at The Ohio State University, coauthor of Federal Tax Research, Ninth Edition
This book combines the perspectives of the author’s unique background as a CPA—tax practitioner and professor of accounting (U. of Ill., Springfield) with his training in philosophy (PhD and former instructor of philosophy).
Previous books include Opportunity: Optimizing Life’s Chances (Prometheus Books, 2006) and CCH’s Accounting Desk Book (co-author; annual editions 2005-2016). Morris is a retired Certified Public Accounant and former Certified Fraud Examiner with 30 years of tax experience incluing 10 as owner-manager of his own CPA firm in the Chicago area.
Tax cheating fits Adam Smith’s description of crimes “that do not immediately or directly hurt any particular person; but their remote consequences, it is supposed, do produce, or might produce, either a considerable inconveniency, or a great disorder in the society.” "Ease or convenience" is one of Adam Smith's canons of taxation, by which he means the ease or convenience of the taxpayer, not that of the tax collector. Given the complexity of the Internal Revenue code, however, rather than the convenience of the taxpayer, our system favors the ease or convenience of legislators seeking to shield themselves from opposition launched by powerful constituencies, whether political or financial.
Following Adam Smith’s lead, Henry George posits four characteristics of an ideal tax: (1) “that it bear as lightly as possible upon production;” (2) “that it be easily and cheaply collected, and fall as directly as may be upon the ultimate payer;” (3) “that it be certain—as to give the least opportunity for tyranny or corruption on the part of officials and the least temptation to law-breaking and evasion on the part of taxpayers;” (4) “that it bear equally—so as to give no citizen an advantage or put any at a disadvantage, as compared with others.”
John Locke wrote that laws should “not to be varied in particular cases, but to have one rule for rich and poor, for the favorite at court, and the country man at plough.” The income tax system can be characterized as a series of general rules and principles qualified by myriad exceptions, many tailored to specific classes of taxpayers.
"It is impossible to understand the true impact of a country’s tax system by looking only at the tax base and the tax rates applied to that base. A critical intermediating factor is how the tax law is administered and enforced.” Joel Slemrod
While the top individual tax rate is 35%, Warren Buffett reports that his effective tax rate is 17.4%. This is because the intended operation of the graduated income tax system has been undermined by a series of deductions, credits, exemptions and special rules that benefit taxpayers at the top of the economic spectrum.
"While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks." Warren Buffett
While some tax reformers are calling for a flat tax, the current system can be best described as a lumpy tax. Although characterized as a progressive tax system, with higher tax rates for higher income taxpayers, as Buffet indicates, this design has been emasculated through almost one hundred years of modifications and exceptions. By definition, most tax breaks (exemptions, exclusions, deductions) benefit higher earning taxpayers more than they do average taxpayers. The home mortgage interest deduction, for example, does the average homeowner very little good because only the increment that exceeds the standard deduction produces any effective tax savings. For wealthier individuals with large mortgages, however, it offers significant savings, and especially for those with second homes. What are formally described as incentives to help the middle class often accrue their greatest blessings on upper income taxpayers.
This is not a how-to book. Tax Cheating: Illegal—But is it Immoral? is an ethical investigation of tax cheating in the context of the current U.S. Internal Revenue Code.
The book is a call to examine the Tax Code’s role in fostering the growing problem of tax cheating. It is not a technical tax or economic treatise but a readable ethical examination of tax cheating and its implications for tax policy. It offers an interdisciplinary analysis of our purported ethical obligation to comply with the current income tax system, combining insights from law, psychology, sociology, criminology, economics, and philosophy.
Cheating is overcoming the system’s ability effectively to monitor each taxpayer’s every economic transaction and how it is reported or ignored on a tax return. This framework provides the basis for my claim that tax cheating is illegal but not immoral. When viewed in the light of (1) the adversarial nature of the relationship between the taxpayer and the IRS, (2) the dilemma of self-assessment, requiring taxpayers to seek the locus of their self-interest, and (3) taxpayers’ impotency in judging what is their fair share of the national tax burden—caused by the complexity of the tax system—the current income tax régime’s inability to foster a moral obligation emerges full-blown.
In the case of tax cheating the moral struggle is between the immediate good for the taxpayer and the more remote good for the society the taxpayer is a member and so an indirect beneficiary of. In Cheating the Government, Frank Cowell tells us, “There will normally be a fundamental conflict between private gain and public duty,” making tax cheating “appear an attractive option to many citizens.” On the one hand taxpayers would like to keep as much of their money as possible and have the freedom to spend it as they choose. On the other hand our ability to keep this money and spend it as we choose depends on the effective operation of government (1) to establish and enforce the laws of the land, (2) to tend to these laws’ fair administration by providing an impartial system of law enforcement and courts, (3) to ensure defense against external forces seeking to destroy our way of life, and (4) to oversee and protect our rights (constitutional, property, privacy, and so on). All this costs money.
“At any given moment the life of any society which lives by rules, legal or not, is likely to consist in a tension between those who, on the one hand, accept and voluntarily co-operate in maintaining the rules, and so see their own and other persons’ behaviour in terms of the rules, and those who, on the other hand, reject the rules and attend to them only from the external point of view as a sign of possible punishment.” H. L. A. Hart
From its flawed self-assessment model to its escalating attempts to focus special provisions on ensuring fairness to narrowly defined constituent groups—the Tax Code has long strayed from its constitutional purpose of raising revenue “to pay the debts and provide for the common defense and general welfare.” The seriousness of this problem will determine what measures are required to bring taxpaying back within the sphere of moral obligation, by allowing taxpayers to understand how and why the amount they are required to pay is their fair share—not their share and part of someone else's.
Over and over, those responsible for trying to close the tax gap have advised that income reporting by third parties, IRS document matching, and withholding taxes on income should be expanded. At the same time, however, the amount of income that is not subject to reporting and matching is growing. The amount of income for which IRS reporting (matching) is not required has doubled in recent years, from 8.7 percent in 1980 to 18.4 percent in 2000. Reporting and matching are thus moving in the wrong direction to solve the problem. The Government Accountability Office (GAO) points out that the “IRS generally does not design its major enforcement programs to specifically pursue components of the tax gap.” The practical advice, “follow the money” is apparently replaced by the IRS with the bureaucratic advice, “follow the matching documents.”
“[W]hat more is necessary to make us a happy and a prosperous people? – A wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.”
—Thomas Jefferson (Inaugural Address, March 4, 1801)
Standing in the way of Jefferson's ideal is the historical fact reported by Edward Gibbion in his The Decline and Fall of the Roman Empire. "The obscure millions of a great empire have much less to dread from the cruelty than from the avarice of their masters; and their humble happiness is principally affected by the grievance of excessive taxes, which, gently pressing on the wealthy, descend with accelerated weight on the meaner and more indigent classes of society."
Edward Gibbon, The Decline and Fall of the Roman Empire in Great Books of the Western World, ed. by Robert Maynard Hutchins and Mortimer Adler, vol. 40 (Chicago: Encyclopaedia Britannica, 1952), vol. 1, chap. 17, 251–252.
“But the most pernicious of all taxes are the arbitrary. They are commonly converted, by their management, into punishments on industry; and also, by their unavoidable inequality, are more grievous, than by the real burden which they impose.” – David Hume (1711-1776)
Yet there is very little in the present Tax Code that is not arbitrary. Why are children subject to both the Alternative Minimum Tax and the Kiddie Tax, while government contractors are not even subject to tax withholding and many report no income or owe back taxes to the IRS?
Why are drug dealers allowed to deduct their cost of goods sold, but not other ordinary and necessary business expenses, while other illegal businesses are not disadvantaged in the same manner? A hired assassin, for example, has a tax advantage over a drug dealer in that the assassin can deduct his business travel costs while the drug dealer may not. If health care and health insurance are important national policy issues, why is the deduction for health insurance only available to one-third of the taxpayers (approximately two-thirds use the standard deduction) and subject to a threshold limitation that began at 5 percent in 1942, was increased to 7 ½ in 1986, and for 2013 has been increased again to 10 of Adjusted Gross Income?
There are, of course, answers to each of these questions; but the answers are not threads in a well-thought-out national tax policy. Rather, each is an ad hoc response arising from an expedient political calculation intended to benefit one limited constituency at the expense of another.
Aristotle offers the following admonition that, while addressed to the law generally, applies as well to a discussion of tax cheating. “In all well-attempered governments there is nothing which should be more jealously maintained than the spirit of obedience to law, more especially in small matters; for transgression creeps in unperceived and at last ruins the state.” Ruining the state, in the context of tax cheating, implies an economic dimension that may exceed Aristotle’s original meaning. But tax cheating, whatever it is ultimately determined to include, is certainly a transgression that may creep in unperceived. At present, over twenty percent of the nation’s income goes unreported and untaxed, and the problem has grown over recent decades.
Cicero, in On Obligations, wrote: “This is the aim and purpose of laws, to keep intact the unifying bonds between citizens.” The growing problem of tax cheating represents the severing of these bonds. David Callahan, author of The Cheating Culture reports, “Scholars who have examined ‘the psychology of taxation’ say that a tax system is in big trouble if it lacks legitimacy. Distrust in a society also spells trouble for tax collectors. Research across nations has found that tax evasion is higher in societies with lower levels of trust between people. People must want to pay taxes at some level, believing not only that their tax bill is fair, but that their destiny is bound up with that of their fellow citizens.” Another observer tells us, “Without trust, there is little basis for social cooperation and voluntary compliance with the laws that could potentially benefit everyone.” I don’t see a great deal of trust or a sense of common destiny—especially in matters involving Congress—as major players in our current national psyche. As John Fox notes, “If we do not trust Congress’s behavior in general, we cannot be expected to embrace the tax system by which it conducts its affairs.” And as trust breaks down, the law’s legitimacy is called into question as well.
Thomas Hobbes also chided reluctant taxpayers: “Those levies therefore which are made upon men’s estates, by the sovereign authority, are no more but the price of that peace and defence which the sovereignty maintaineth for them.” ”But John Stuart Mill observed, “It is not admissible that the protection of persons and that of property are the sole purposes of government.” Thus the numerous intangible benefits paid for by taxation, which facilitate the process of earning and keeping income and making the undertaking more predictable and less risky—by regulating potentially disruptive factors in the market—cannot be ignored. Friedrich Hayek, the Austrian economist, recognized the necessity of taxes for a number of purposes. “Far from advocating . . . a ‘minimal state’,” he claims, “we find it unquestionable that in an advanced society government ought to use its power for raising funds by taxation to provide a number of services which for various reasons cannot be provided, or cannot be provided adequately, by the market.”