Tax Avoidance: Does Legality=Morality?
Tax. It’s something that the world’s largest businesses attempt to manipulate in order to minimise costs, despite incredibly high risks. With HMRC estimating a £1.7 billion loss due to tax avoidance in the 2015/16 tax year, the government is trying to avoid any possibility for legal loopholes to be exploited. But, in such a complex area of the law, there is no quick solution.
In this article, I will explain some key arguments on both sides of the debate of whether conducting tax avoidance can be deemed a moral decision.
If I ask you if you think adultery is moral, what would you say? I would expect you to say no — in spite of it being completely legal. Here, we have already dismantled the common defence for tax avoidance, which is that it must be moral because it is legal. Of course, the law can be seen as a template for acting morally, as many immoral acts do cause danger and harm, and so they are rightfully regulated by the law. But, I think this argument lacks the unequivocal nature required for us to conclude that legality=morality.
If companies don’t pay tax, whether legally or not, there is less money for the government to fund public services, such as schools. As a result, society will indirectly be harmed. For example, a reduction in the quality of education can hinder someone’s range of future job opportunities. This is essentially the rich stealing from the poor, but the global organisations don’t seem to see it this way. As a result, however, the same organisations will be in increased competition to employ an educated workforce. Therefore, avoiding tax might just be them shooting themselves in the foot, so to speak.
Furthermore, a government’s fiscal policy exists to control the economy, and taxation is a major aspect of this. I like to see the economy as a set of dominoes. For example, if every UK business avoided corporation tax, then income tax would likely increase, GDP activity would likely decrease, government borrowing would likely increase… need I continue? This knock-on effect must be governed. So, although it is legal, avoiding tax would undermine the government’s efforts to maintain economic order.
Another defence for tax avoidance is based on The Friedman Doctrine. Milton Friedman outlined that a business’ principle responsibility is to serve its shareholders. It is therefore argued that the directors of a company have a fiduciary duty to manage the business in a way that maximises profits, which would result in higher dividend payments for the shareholders. Paying more tax than legally required would contradict this. So, as there is a moral duty to maximise profits, it can be argued that businesses have a moral duty to conduct tax avoidance — regardless of the consequences for society.
To counter this, we can look at Carroll’s pyramid of corporate social responsibility. It highlights what society expects from a business; the two top levels to fulfil are philanthropic responsibilities and ethical responsibilities. This showcases a drastically different outlook on a business’ priorities in the strategic decision-making process to Friedman. After all, society, and a firm’s potential customers are essentially the same thing, and the only way to satisfy shareholder needs is to attract customers. Therefore, Friedman’s proposal of focusing on shareholder needs should actually be fulfilled by prioritising customers.
With this being said, Carroll did acknowledge that the economic responsibilities level is a prerequisite for the others — but I would not associate his reasoning with Friedman’s because Carroll based this simply on the need for survival. If a company fails to survive, it’s not just the shareholders who suffer, but other stakeholders such as employees and suppliers too. Moreover, in today’s modern world, consumers are increasingly interested in a company’s ethical and social stance. So I would argue that engaging in tax avoidance was perhaps a logical strategy 50 years ago, but would be counter-productive for a business nowadays.
Furthering the idea of corporate social responsibility, experts insist that companies are in a degree of ‘debt’ to the wider public. It’s argued that they must answer this by behaving in a way that benefits society: not breaking the social contract and paying their fair share of tax. But what does ‘fair share’ actually mean? Its definition is hugely malleable and unsurprisingly disputed by businesses, but I would refer to it as the amount owed to the government under both the spirit and letter of the law, proportional to the size of the business.
Linking with the notion of a fair share, less wealthy companies are placed at a competitive disadvantage because they end up paying proportionately more corporation tax than their larger competitors. This diminishes their ability to benefit from economies of scale, thus being less able to provide products of high value to consumers, and being more susceptible to liquidation in harsh economic climates. It may catalyse a vicious cycle whereby only the biggest firms are capable of growing and smaller ones are suppressed by toxic tax struggles.
Gone are the days where powerful businesses not only avoid tax, but avoid responsibility. Regardless of the side of the argument you stand on, in this eagle-eyed modern world, companies will face consequences for engaging in tax avoidance. One part of me admires the strategic, calculated endeavour to maximise short-term growth to meet shareholder demands. But, because of the wider impact, the other part of me cannot support it. What’s your take?
This article was inspired by an online business ethics course offered by the University of Leeds, which provided some of the key arguments mentioned. However, other sources were also used to support my writing.
