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Is it ethical to minimise the tax you pay?

by Simon Longstaff

While some people strive to maximise legitimate tax deductions when completing annual tax returns, others take a more relaxed approach when it comes to minimising the tax they pay. Simon Longstaff asks what factors influence behaviour at tax time.

One of my annual rituals is to beat a path to my accountant so that he can help me lodge an error-free tax return. My job is to present him with a jumbled assortment of papers – group certificate, receipts, health fund certificates – the bric-a-brac of my financial year. From my accountant’s perspective, I am sure that I present as an extremely boring, ‘plain vanilla’ kind of tax payer. Living (as most do) with a huge mortgage, I have no capacity to experiment with interesting tax arrangements.

But more to the point, I really have no appetite for exotic financial arrangements. In this respect, I wonder if I am a little abnormal. After all, I am told that looking for legitimate (and not so legitimate) ways to minimise tax is a national sport. So, what’s to be said about the ethics of paying tax?

people are easily riled by any suggestion that their taxes are being wasted on ‘worthless’ expenditure

Any discussion of this topic should begin with the question of legitimacy. It seems to me that for a tax to be justified, it must be both for a proper purpose and be ‘reasonable’ in its burden on the community. To speak of what is ‘proper’ or ‘reasonable’ invites heated debate. However, I believe that most people would accept, as ‘proper’, expenditure on public goods such as education, health, police, courts, the arts, national defence etc. As to the test of ‘reasonableness’, my guess is that most Australians support the principle that the wealthy should pay more than the poor – because they can afford to do so without any great hardship.

It is when the tax system suffers a loss of legitimacy that people are most likely to succumb to the temptation to pay as little as possible. For example, people are easily riled by any suggestion that their taxes are being wasted on ‘worthless’ expenditure. Similarly, taxpayers (of the ordinary, garden variety) become really annoyed whenever the super rich boast that they have found ways to pay almost nothing. In those circumstances, people say: “What the hell, the system isn’t fair … why don’t I just look after number one?”

This brings us to the nub of the issue – just what is the ‘fair share’ of tax that anyone should pay? Is it the amount strictly defined by law – or the amount that parliament intended? One might hope that these two things would be one and the same. Alas, it is a forlorn hope. Legislators have found it almost impossible to translate their clear intentions into unambiguous, black-letter law. So, as each loophole is found, a new section of the law is enacted to close the gap. The result of this has been that no single mind can encompass the volume of Australia’s tax law – now measured in cubic meters!

Those who take advantage of loopholes do so out of self-interest. However, they often invoke the principle that no citizen (rich or poor) should have to pay anything more than the law strictly requires. This principle is often linked to ideas about the liberty of citizens and the rule of law – with government prerogatives being limited to what is strictly necessary. On the other hand, any approach that limits our obligations to the letter of the law has the perverse effect of inviting ever increasing amounts of regulation and surveillance – just as we have seen in the case of tax.

Given this, there are strong arguments for preferring the application of general principles which, in the case of tax, would mean going along with the clear intention of parliaments rather than leaping through every loophole in the law.

More generally, we might ask if we, as citizens, place much value on the public (rather than exclusively private) goods mentioned before: health, education, police, courts, the arts, national defence and so on? If so, then what are we to make of the person who is willing to enjoy the benefits of such public goods without helping to meet their fair share of the costs? Is such a person simply ‘canny’ or a ‘freeloader’?

just what is the ‘fair share’ of tax that anyone should pay?

For those inclined to play the tax game, it might be helpful to run through an imaginary exercise developed by the philosopher, John Rawls. The idea is this – imagine that you have to look into the future – but through a ‘veil of ignorance’. You cannot know the conditions of your birth – rich or poor, healthy or sick, male or female – nothing can be known.

In those circumstances, what kind of principles would you choose to govern the society in which you are to be born? More specifically, how would you want your fellow citizens to approach the question of tax?

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