The ethics of paying taxes — or not

Seeing as how tax time brings out the best and the worst in people, it might be a good time to talk about the ethics of paying — or not paying — our taxes. Actually, I have to admit, it’s not a pressing issue for me because I filed my taxes electronically within an hour of receiving my W-2 forms.

But a reader raises the question and has some interesting observations:

“Maybe I’ve missed it, but I have never seen your article address, reference or otherwise challenge the ethics of filing taxes.More specifically, what happens to integrity, honesty and personal values during the annual tax season?

“Doesn’t everyone cheat on their taxes to keep a few additional dollars in their pocket? Or, do the majority of tax filers do so with absolute accuracy? I imagine taxpayer cheating represents the substantial majority of this annual activity with totally accuracy relegated to a small minority of Americans.

“Here is my dilemma: If the game is not fair, do you play a fair game? While some will express the virtues of ‘doing one’s part,’ I doubt many will argue that taxes represent social fairness and personal equality. Indeed, many will express a long-standing view of discontent and dissatisfaction with the overall process. So, if I’ve made a lot of money and have a lot of money, I pay the smallest percentage of taxes? In contrast, the poor soul that works from paycheck to paycheck can little afford to challenge anything because survival takes precedence. If the process is fair and ethical, how can these statements be true?

“Today’s tax game is so complicated that experts are unable to fully comprehend its features. Once again, how can this be a fair game? If you create a game that is inherently so complicated that no reasonable person can understand it, only one of two things will likely happen. Either the players will refuse to play the game or they will resort to cheating. On this subject, the latter is the likely outcome because the need to play the game is a requirement that is backed up by a threat of incarceration.

“I should not go down the path of AMT, but I can’t resist. The Alternative Minimum Tax rule alone seems to prove my point. How can somebody that has made nothing be responsible to pay huge sums of money to the government? Fortunately for me, this is not a problem that I’ve had to manage.

“Is the tax game fair? Do people play an honest game? I suspect that when the game is unfair, most people throw ethics and integrity out the window … and in the process, keep a few extra dollars in their pocket.

“Of course, this is all just hypothetical. I would never cheat on my taxes.”

Well, I’d like to state up front that I never cheat on my taxes either, and I would like to make sure that someone in the government puts that in my “permanent record,” while they’re recording all my phone calls, magazine subscriptions, and grocery purchases. Seriously, I think we can safely say that it’s wrong to break the law, but as the writer notes, the law is often so confusing and convoluted that it’s hard to know in some cases whether you’re breaking the law or being “creative.”

Do we have an obligation to pay taxes? As much as no one I know likes to pay them, I think the answer is in the affirmative. We do enjoy the things that the taxes provide for us — even if we may disagree with government policy at some level. But that doesn’t address the question of how much we have to pay in taxes and how lenient we’re allowed to be with ourselves in avoiding, if not evading, taxes.

The reader who submitted the question raised an important issue, however. If you’re in a crooked game, do you have to play fair? And I don’t think there’s any doubt that the game is crooked. The tax code is so unwieldy, so overloaded with twists and turns designed to specifically benefit one group of taxpayers at the expense of another, that there’s no way it can be construed as a fair system.

The reader raised the question of the Alternative Minimum Tax, which he insinuates is unfair. But the truth of the matter is that the AMT was enacted simply because in the “no-tax” flurry that began in the early 1980s, corporations got so many tax breaks that many ended up with a negative tax rate. Some corporate behemoths were not only paying no taxes, but were getting rebates on taxes they didn’t pay. This wasn’t because they weren’t making any money, as the reader assumes, but because they had been so favored by the regulations that the government was giving them money. There’s a good explanation of this, including a chart, at http://www.ctj.org/html/whyamt.htm.

A few months back when I was talking about corporate corruption, I raised the issue of corporations that avoided taxes by setting up a dummy mail account in some tax haven and then claiming that they’re foreign corporations. Another reader complained that these corporations were only availing themselves of a tax loophole, just as others (in his words) claim a deduction for mortgage interest.

I disagree. First, the mortgage interest deduction isn’t a loophole. It’s an integral part of the tax system, deliberately put there for a purpose — to encourage home ownership. On the other hand, using an off-shore maildrop isn’t a loophole either. It’s a purposeful evasion of taxes by dishonest means. A corporation that has all its buildings, all its employees, all its equipment, and all its customers in this country, and merely a post office box in another, is hardly a foreign corporation. To claim so is dishonest, whether or not it meets muster under the ponderous tax code.

I think you can make a good argument that you have an obligation to pay your “fair share.” How you determine that fair share is another question, and probably something that requires an argument way too long for a column this size.

Deliberately underreporting income or claiming non-existent exemptions don’t fall within ethically accepted practice. On the other hand, there is so much gray territory in the tax rules, that I don’t see any problem in resolving confused or conflicting situations in your own favor.

I’ve had occasion to call the IRS help line and once got three different answers to the same question by asking three difference people. And from what I understand, that’s not unusual. In an area that’s this murky, you’d be foolish to disadvantage yourself when even the experts can’t agree.

I don’t think it’s a question of “throwing ethics and integrity out the window,” when you’re presented with an unfair game. You play the game by the rules that are in force. That’s not necessarily unethical. However, playing by one set of rules when the game is being run by another could be foolish and you could end up cheating yourself.

I don’t know about the frequency and prevalence of actual tax cheating. I don’t do it, the reader who asked the question says he doesn’t, but he seems to think other people do. I don’t know anyone who does — or at least who admits to it. Maybe the other readers have a line on that. I’m sure they’ll let me know.