Situ 1

Bruce Situ
2/15/17
ENGW3304
Professor Ethan Whittet

Unit Two: Researched Argument

Research Topic: The Ethics of Tax Avoidance

Abstract

This paper examines the practice of tax avoidance in a business setting and attempts to

answer the question of whether it is ethical or unethical. It analyses the question through the lens

of several peer-reviewed research papers and articles. It also provides a definition of what

corporate social responsibility is, and the difference between tax avoidance and tax evasion. The

conclusion finds tax avoidance to be an unethical practice as it enables companies to avoid

paying their fair share of taxes to help the government, and this supports the hypothesis

presented.

Introduction

In our modern world where technological advances have allowed companies to connect

to the populace near instantaneously, where information is readily available at the click of a

button, it is more important than ever for them to adhere to rules and to keep a clean image.

Management must ensure that their employees are working in a professional manner thats not

only within the law but also ethical. Ethical behavior has become such an important trait for an

employee that individuals are evaluated thoroughly on the bases of skills, experiences, and

ethical record by a company before they are offered a job, with even one occurrence of

unacceptable behavior capable of being the deciding factor of employment. (Hall 1) Of course,

this also, and perhaps especially, applies to upper level management, whose actions have a more
 Situ 2

direct impact on the companys standing. This brings to attention the topic of tax avoidance and

how large companies use it to minimize their tax liabilities. While this is legal, the general

thought is that it is an unethical action to take, and that is the argument that I will be making

throughout this paper. Tax avoidance is an unethical behavior because, while legal, it allows

companies to avoid paying their fair share of taxes, and thereby not living up to their social

responsibility.

Tax Avoidance versus Tax Evasion

Before continuing on, it is important to highlight the difference between tax avoidance,

the subject of this paper, and tax evasion. The two are sometimes incorrectly used

interchangeably, but there is a very fine line between the two. This fine line is legality; tax

avoidance is completely legal while tax evasion is very much illegal. Tax avoidance is the legal

minimizing of taxes, using methods that are approved by the IRS. From www.thebalance.com,

some examples of tactics that companies use to avoid tax are: taking legitimate tax deductions

to minimize business expenses and thus lower your business tax bill, setting up a tax deferral

plan such as an IRA, SEP-IRA, or 401(k) plan to delay taxes until a later date, and taking tax

credits for spending money for legitimate purposes, like taking a Work Opportunity Tax Credit.

On the other hand, tax evasion is when you just dont pay the taxes, perhaps by misreporting

income and/or expenses. So if tax avoidance is legal, why is it unethical? One common way to

look at it is that avoiding taxes is following the letter of the law, rather than the spirit of it. Just

because something is legal does not make it ethical to do.

What is Corporate Social Responsibility?

The term corporate social responsibility, or CSR for short, refers to company policy and

practices that encourage actions that go beyond the monetary interests of the company. CSR
 Situ 3

includes initiatives that benefit society, thus creating a positive image for the company. Among

the broad categories of social responsibility that companies take part in are environmental

efforts, philanthropy, ethical labor practices, and volunteering. Practicing good CSR is very

important for an organization as it allows for their reputation to improve and thus positively

satisfy their customers and shareholders. As global social issues continue to exist and

consumers awareness of them grows, CSR becomes more and more important as a deciding

factor of where people choose to shop at. In her article The Curious Case of Corporate Tax

Avoidance: Is it Socially Irresponsible?, Grahame Dowling poses the question, If the law and CSR

suggest that a company should pay its fair share of tax, yet many successful companies actively

avoid this social obligation, should they be considered socially irresponsible? (Dowling) My

answer to this question would be no; regardless of how successful a company is, the fact that

they actively try to avoid paying taxes, which benefits society as a whole (unless the government

is corrupt), means that it is an unethical action to take.

Research

In Roman Lanis and Grant Richardsons article Is Corporate Social Responsibility

Performance Associated with Tax Avoidance?, they examine whether the level of corporate

social responsibility a company shows is associated with its use of corporate tax avoidance. In

their observations of over 400 firms over a 6 year period (from 2003 - 2009), their results

indicated that more socially responsible firms are likely to display less tax avoidance. (Lanis

and Richardson) Similarly, Christopher Armstrong et al., in their article Corporate Governance,

Incentives, and Tax Avoidance, examine the link between corporate governance, managerial

incentives, and corporate tax avoidance. (Armstrong et al.) Their results indicated that these

governance attributes have a stronger relation with more extreme levels of tax avoidance, which
 Situ 4

are more likely symptomatic of over- and under-investment by managers. This fully supports

my argument; the more socially responsible a company is, and thus the more ethical actions they

take, the less tax avoidance they use. If they are socially responsible, they know they have to

pay their fair share of taxes and would not actively look to pay less. Lanis and Richardson also

make an interesting claim that corporate tax policy is usually separate from a firms CSR policy,

but I disagree with this. I believe that tax avoidance is most definitely in line with CSR policies

because paying taxes is directly associated with social responsibility. Its important to link a

firms CSR policies with its business practices. According to Porter (Porter and Kramer, 84, qtd.

in Lanis and Richardson):

The mutual dependence of corporations and society implies that both business decision

and social policies must follow the principle of shared value. That is, choices must

benefit both sides. If either business or a society pursues policies that benefit its interests

at the expense of the other, it will find itself on a dangerous path. A temporary gain to

one will undermine the long term prosperity of both.

The link between CSR and tax avoidance is still a relatively unexplored topic, and in due time

the ethics of tax avoidance and its effect on society will become more apparent. For now, I

would like to argue and try to provide information as to why it is unethical.

Taxes have always been a key factor in many of the decisions that a manager or a

corporate leader make. In terms of pure financial matters, it is intuitive to try and pay the least

amount of taxes that you can legally pay. As such, more and more managers are making

business decisions that reduce corporate tax, regardless of the morality of it. Lanis and

Richardson claim that if the payment of corporate taxes is merely perceived as a business

transaction and one of the many costs of operating a firm, the aim would be to minimize, as
 Situ 5

much as possible, the amount of corporate tax payable. (Lanis and Richardson) However, this

is not the case. When corporate tax is paid to the government, the government uses this money

to benefit society as a whole, and thus tax paying is linked to CSR. If a company pays too little

tax due to tax avoidance, then they are paying too little to society. When tax is minimized, it

frequently generates hostility, reputational damage for a firm with various stakeholders, and at

worst, could even result in the cessation of a firms business operations. (Lanis and Richardson)

Although the majority of people believe tax avoidance to be unethical, there are two sides

to every argument and there are indeed some people who believe it to be ethical, such as the

managers and leaders who make the decision to practice it. As such, it is necessary to view this

issue through different ethical lens to make it clear. In Utilitarian ethics, the ethics of an action is

fairly simple. Actions are right in proportion as they tend to promote happiness, wrong as they

tend to produce the reverse of happiness. (Bio, qtd. in Hall, 7) As such, under the Utilitarian

approach, tax avoidance is indeed unethical as doing so would be the opposite of promoting

happiness. Taxes are intended for companies to redistribute their earnings to the world, with the

government using it to improve living standards. When a company actively takes this away, they

are performing an unethical action.

Another approach to look at is the rights approach, where what makes human beings

different from mere things is that people have dignity based on their ability to choose freely what

they will do with their lives, and they have a fundamental moral right to have these choices

respected. (Velasquez et al., qtd. in Hall, 8) Under this approach, as long as the action taken

does not harm other individuals, it is not unethical. If tax avoidance is done in a legal way,

others have no right to judge that action. However, not paying your fair share of taxes can

indeed be seen as harmful to society, so even under the rights approach tax avoidance is
 Situ 6

unethical, but the line is a bit more blurred here. In addition, Hall says that, under an ideological

approach, it all depends on how an individual views taxes. If they view tax as an investment

that goes into beneficial improvements for society, then taking away this investment would be

unethical. (Hall, 8)

An additional approach is used by Ronaldo de Melo Parreira Filho in his paper The

Ethics of Tax Avoidance, called the Deontological approach. Under this approach, the ethical

analysis of an act depends not on its consequences, like in Consequentialism and Utilitarianism,

but on whether this act followed a moral norm or not. (Melo Parreira Filho, 39) In summary,

Melo Parreira Filho determined the following (45):

Therefore, the widespread use of tax avoidance arrangements will reduce State revenues

to an insufficient level, leading to efforts to somehow increase their revenues, the most

common way being elevating the amount collected by the existing tax or to create new

taxes altogether.

This supports my earlier claim that paying fewer taxes is equal to contributing less to the

government, and ultimately the fact that this will negative affect the community is why tax

avoidance is unethical.

Conclusion
 Situ 7

Through extensive analysis of tax avoidance, I conclude that it is an unethical practice because it

allows companies to work through legal loopholes to minimize their tax payments, thus paying less to the

government and contributing less to society. After examining tax avoidance through different lenses, the

Utilitarianism approach, the rights approach, and the Deontological approach, all three methods produced

results that indicated tax avoidance is unethical. Companies in general wish to pay fewer taxes, but this

does not necessarily mean that they are actively trying to be a detriment to society. In a sense, they want

more from the government without giving as much back to them. This is a very hard goal to accomplish,

which is why they should always pay their fair share of taxes, and not take part in the unethical practice of

tax avoidance. According to Melo Parreira Filho (46) the government has introduced new laws to try

and combat tax avoidance, but companies are able to combat this due to having tax specialists that are

able to take advantage of those laws. Even when States rare truly efficient in setting a tax framework,

taxpayers are usually more efficient than States. Still, just because companies are able to get away with

tax avoidance, it does not make it any more ethical. Works Cited

Lanis, R. & Grant Richardson. Is Corporate Social Responsibility Performance Associated with Tax
Avoidance? Journal of Business Ethics, vol. 127, no. 2, 2015, pp. 439-457.

Hall, K. The Ethics of Tax Avoidance and Tax Evasion Neumann Business Review, 2015.

Dowling, G. The Curious Case of Corporate Tax Avoidance: Is it Socially Irresponsible? Journal of
Business Ethics, vol. 124, no. 1, pp. 173-184, September 2014.

Armstrong, C., Jennifer Blouin, Alan Jagolinzer, & David Larcker. Corporate Governance, Incentives,
and Tax Avoidance Journal of Accounting and Economics, vol. 60, no. 1, pp.1-17, August 2015.

Melo Parreira Filho, R. The Ethics of Tax Avoidance The George Washington University, 2014.