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UNPACKING "ENDOGENOUS TAX LAW" FOR THE "TAX EVASION, CORRUPTION, AND JUSTICE DISTORTION" COLLOQUIUM


Leading up to the International Colloquium entitled “Tax Evasion, Corruption and the Distortion of Justice,” which will be held on Zoom on the 19th of May 2023, we are releasing a synopsis of the article “Endogenous Tax Law: Regulatory Capture and the Ethics of Political Obligation,” recently published in the Duke University Law School’s Journal of Law and Contemporary Problems.

Join on Zoom what promises to be a fascinating discussion using the following link (free registration): https://mmu-ac-uk.zoom.us/webinar/register/WN_nBM4DatiRAarKkbShqoSeQ

The event is aimed at disseminating the publications included in the Special Issue “Tax Evasion, Corruption and the Distortion of Justice,” which has been edited by Prof. Diane Ring, Dr. Costantino Grasso, and Dr. Lorenzo Pasculli, and has been recently published in the Duke University Law School’s Journal of Law and Contemporary Problems. The articles included in the Special Issue will be discussed with top-level experts and relevant stakeholders to establish a fruitful knowledge-exchange process.


“Endogenous Tax Law” has been authored by Prof. Daniel Ostas, who serves as James G. Harlow, Jr. Chair in Business Ethics at the University of Oklahoma. During the International Colloquium, the article will be discussed by Prof. John Cioffi, who is an Associate Professor of Political Science at UC Riverside.


“Endogenous Tax Law" explores the ethical considerations surrounding tax compliance in democratic societies. It argues that paying taxes is an ethical duty based on the political obligation to follow just laws, and tax evasion is not justifiable. The article also examines the different frameworks for legal compliance, the role of public perception in shaping tax policies, and the challenges in closing the tax gap. Ultimately, the author calls for a reevaluation of Archie Carroll’s pyramid of social responsibility to prioritize ethics above economic concerns in the corporate world.


The article can be conceptually divided into three main sections.


In the first section, the article discusses the symbiosis between taxpayers and government officials that allows the tax gap to persist. It argues that the tax gap curbs monetary policies affects fiscal policy, and exacerbates income polarization. The main takeaways from this section can be stated as follows:


• Paying taxes is an ethical duty based on the political obligation to follow just laws in just societies. Civil disobedience is only acceptable when the state is unjust. However, in democratic societies, where consent, reciprocity, fairness, and pragmatism are valued, tax evasion is not justifiable. Philosophers like Robert Nozick who oppose mandatory taxation can lead to tax evasion and corrupt enforcement of tax laws, which undermines the democratic justification for tax policy.

• The tax gap results generally from tax evasion, insolvency, and avoidance. Tax interpretation disputes involve tension between the letter and the spirit of the law. Two frameworks for legal compliance are discussed - one ignores ethical aspirations, and the other uses interpretive tools and professional honesty. The former follows the economic logic of Financial Risk Management (FRM), and the latter requires self-restraint in adopting cost-effective interpretations.

• The FRM approach to tax compliance focuses solely on projected liabilities, ignoring moral obligations and the impact of corporate expertise on legal outcomes. It also exacerbates the tax gap by advising tax evasion in cases of underenforcement. This approach conflicts with the Socratic virtue of legal obedience and disregards democratic values promoted by tax law. Taxpayers have legal strategies to influence tax law, and when it's underenforced, aggressive tax positions may be justified, even if unlikely to prevail in court.

• Taxpayers can choose to follow an honest interpretation of tax laws, even if it's not financially advantageous. Courts use traditional methods of interpretation, but when laws are ambiguous, further investigation is needed. Tax advisors must consider their clients' broader duties and adhere to ethical obligations to ensure a professional and honest interpretation of tax laws.


In the second section, the article examines the influence of special interests on tax policy and the perception of tax regulations as self-dealing and negatively viewed. It discusses the theories of regulatory capture and public choice and explores the impact of lobbying on tax legislation, tax avoidance schemes, and the reluctance of tax judges to use general anti-avoidance rules. The article suggests a symbiotic relationship between U.S. presidents and wealthy taxpayers, leading to an endogenous set of tax laws influenced by taxpayers. In summary, the points addressed in this section are the following:


• John Rawls' "A Theory of Justice" advocates for a just society through contractarian logic and the concept of a veil of ignorance. He emphasizes the importance of civility and acceptance of institutional defects for political obligation. Rawls recognizes self-interest but opposes its unrestrained pursuit. His ideas apply to taxpayers and government officials, who should avoid exploiting loopholes in regulations for personal gain.

• Tax policies are shaped by political ideologies, self-interest, and changing public opinions. The article highlights President Kennedy's tax cuts and positive view of lobbying as an example. However, public opinion has shifted to view lobbying with skepticism, and President Reagan's "supply-side economics" played to public sentiments and political favor with business interests. Tax policies disproportionately benefit wealthy taxpayers who influence election results through campaign contributions and electioneering. This suggests a symbiotic relationship between U.S. presidents and wealthy taxpayers, with an endogenous set of tax laws influenced by taxpayers, indicating a market for executive actions.

• This article discusses the shift in public perception of government tax regulations from being seen as a positive ethical duty to a negative view of regulatory capture and self-interest by special interest groups. Regulatory capture theory suggests that businesses use regulations to gain private economic advantages by controlling information flow to regulators and creating barriers to entry. The public choice theory argues that legislators and agency officials respond to special interest groups that lobby and donate for private goals, resulting in regulations that favor narrow interests. A 1957 study found that special tax provisions added complexity and reduced tax system progressivity. Today, corporate entities and tax professionals lobby against efforts to tackle tax avoidance, exacerbating the tax gap.

• The article discusses Google's tax avoidance through the "double Irish with a Dutch sandwich" scheme and the reluctance of tax judges to use general anti-avoidance rules (GAARs) to invalidate such schemes. The application of GAARs has always been controversial due to different legal scholars' views on legal philosophy and the relationship between the legislative and judicial branches. The article suggests that judges' reluctance to use GAARs may be due to the process of selecting tax judges, as politically active judges that threaten power structures are unlikely to be appointed or confirmed.


In the third section, the article examines the relationship between wealthy taxpayers and elected officials and how it creates challenges in closing the tax gap. It affirms that ethical standards must be rethought to remove rationalizations that encourage tax evasion. The author argues that corporate executives have legal and ethical duties to all groups affected by corporate decisions, and proposes a reevaluation of the order of priority in the pyramid of social responsibility to prioritize ethics above economic concerns. The points addressed in this section can be succinctly summarized as follows:


• The relationship between wealthy taxpayers and elected officials creates challenges in closing the tax gap, as there is little lobbying for more internal revenue agents. The Biden Administration has increased the IRS budget, allocating nearly $80 billion to the Inflation Reduction Act of 2022. Ultimately, ethical standards may need to be rethought and reframed to remove rationalizations that encourage tax evasion and public duty neglect, attacking the "rationalization" leg of the corruption-fraud triangle.

• Stoic philosophy emphasizes temperance and self-restraint in adhering to the law. Aristotle's theory of justice holds that moral justice is not merely legal justice, which requires a corrective virtue of decency or equity. The virtue of decency requires taxpayers to go beneath the verbal veneer of law and consult its rationale. Taxpayers need a principle of self-restraint tailored to moderate the incentive and opportunity to capitalize on a legal entitlement not to consider their political obligations. The virtue ethics tradition of moderation and self-restraint runs from Aristotle to John Rawls.

• Corporate executives have fiduciary duties to shareholders, but this economic orientation must be balanced with respect for the law and ethical customs. Milton Friedman's famous formulation suggests that executives should make as much money as possible while conforming to the basic rules of society. Ethical concerns must control tax decisions, even at the expense of shareholder profit. Stakeholder theory expands this to include legal and ethical duties to all groups affected by corporate decisions. Archie Carroll’s pyramid of social responsibility, which depicts economic, legal, ethical, and philanthropic responsibilities ascending from the economic base, highlights the importance of business ethics. However, the author proposes a reevaluation of the order of priority in the pyramid of social responsibility to prioritize ethics above economic concerns.


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