ETHC445: Cheating on Tax Returns- An Ethical Perspective

Cheating on Tax Returns: An Ethical Perspective

In the current economy, a large number of Americans do not pay the Federal Income Tax. This is not fair to the citizens who are required by law to pay taxes. Why should only half of the country bear the burden of paying taxes to support the United States? What would happen if everyone believed that it was alright to sit home and wait for others to give him or her everything needed to sustain life? The nation as a whole would no longer exist.  I know several successful business owners who feel penalized for working hard and being taxed on their income level. The way our income tax system is constructed, you are taxed based on your income and those who are successful entrepreneurs usually pay higher taxes. What if all these accomplished entrepreneurs decided it was alright to cheat on their taxes because they were already paying more tax than most of the Americans?  While there are thousands of strict regulations and rules, and many checks and balances, a lot depends on our own integrity. With the Internal Revenue Service able to audit so few returns, the tax code becomes dependent to a surprising degree on the honor system, and that can lead to strong temptations to cheat.

Would it be ethical to decide to lie and cheating on tax returns to save money if you were still paying more tax than 75% of the country? 

My proposal for this paper is to demonstrate that it is unethical to lie or cheat on one’s tax return.  I will do this using Kant’s Categorical Imperative and other theories I have encountered in our lecture material and the readings.  These materials and readings will include Rogers, Rousseau, Augustine, Aquinas, and others supported in our textbook.  I will also support my opinion with at least 5 articles published within the past five years that address the ethics behind cheating on tax returns.

In an article from Current Together with other scholars and in an article published Current Directions in Psychological Science, Shalvi suggests that people engage in immoral actions when they are targeting profits from them, and they interestingly feel moral. Directions in Psychological Science, Shalvi and colleagues propose, “people behave immorally only to a certain extent so that they can profit from their misconduct but still feel moral. Behaving “too immorally” causes people to experience a threat to their self-concept as being a good person. While someone may balk at taking candy from a baby, treating a friend to a fancy lunch and charging it to the company expense account may not seem so bad” (Shalvi, Gino, Barkan, & Ayal, 2015). Shalvi’s statement will be further examined in this paper using our lecture from week 2 detailing feelings and conscience.  As mentioned earlier I will also use Augustine, Aquinas, and Socrates teachings in supporting the unethicalness of cheating. In his Categorical imperative theory, Kant argued that people should only act based on guideline that what is laid down as a universal law should be observed.  This is further explained in our text, “Applying this to ethical leadership: Don’t make yourself an exception to a rule that you implicitly or explicitly expect others to follow. You have the responsibility not to take privileges that are not yours to take; that is, follow an ethical style that applies the same rules and regulations to yourself that you require of those who report to you”(lecture week 4). While this dilemma poses a conflict between conscience, feelings, right and wrong, good and evil, I am sure I will be able to justify my belief that it is unethical to cheat on one’s tax return.

The hallmark of the ethical dilemma highlighted above is the question of whether it would be principled to lie and cheat on your tax returns if you were paying more tax than the majority of other Americans. According to Shalvi, Gino, Barkan, & Ayal (2015), people have the tendency of behaving immorally to some extent when they want to profit from their actions. Interestingly, they feel morally justified when behaving in such a manner. To understand Shalvi’s argument, it is important to assess the ethical dilemma by examining the paying of taxes in the USA.

The federal law describes tax evasion as a type of fraud in which a purposeful and unlawful attempt by a taxpayer to fail to pay the correct amount of tax or give misleading tax returns is executed (Morse, 2015). The law provides that such a person is legally liable for prosecution and conviction might result in hefty fines or imprisonment (Slemond, 2007). In particular, Section 7201 of the Internal Revenue Code stipulates that a person or corporation convicted for tax noncompliance is liable for a fine not exceeding $100, 000 for an individual or $500,000 for a corporation (Morse, 2015). Based on what the presiding judge might decide, the convict could also be liable for a prison sentence of not less than five years in addition to paying prosecution expenses. The application of Section 7201 of the Internal Revenue Code has been real. In 2015, IRS established that more than 150 million taxpayers engaged in tax fraud. However, it managed to charge only 1,330 people. Although this number is significantly small, Americans have a reason to fear that one day, the tax audit by IRS will catch up with them.

Now, with such kind of penalties, it becomes confusing why some Americans could still be courageous to commit tax fraud. Each year, the USA loses approximately $70 billion in tax revenues following widespread tax evasion (Zucman, 2017). Corporations have mastered the art of shifting profits to offshore tax havens such that the tax authorities never come across any information regarding the corporations’ profits. Statistics wise, 20% of the corporate taxes never make it to the exchequer. About $8.7 trillion is stashed in tax havens abroad, and this is equivalent to approximately 11.5% of the country’s gross domestic product (Zucman, 2017).  In a democratic society where citizens revere their country and demonstrate a high degree of patriotism, it is puzzling why one would engage in tax evasion behaviors. According to Morse (2015), many people believe that their money can be spent well elsewhere. Tax evaders argue that they see little benefits of their dollars when given as taxes. Besides, the majority of them complain about unfair taxing and complexity of the tax procedures as the key deterrents to paying of taxes. Some, according to Morse (2015), have the perception that the value of public goods and services provided through tax revenues is lower than taxes they contribute. With a very low number of tax evaders being indicted yearly; 1,330 people in 2015, people believe that the chances of being caught are too low.

In a study by Slemond (2007), “while 96 percent of those surveyed in 2005 mostly or completely agreed, “It is every American’s civic duty to pay their fair share of taxes,” 62 percent also said that “fear of an audit” had a great deal or somewhat of an influence on whether they report and pay their taxes.” To sum up, the motivation of tax evasion, despite the heightened need to demonstrate patriotism by paying taxes, is the risk-reward model (Morse, 2015). From the aforesaid discussion, it is manifest that cheating on tax returns is itself a dilemma as the taxpayers are torn between paying taxes to abide by the laws and show patriotism, and evade tax to maximize their financial rewards. To back my argument that tax evasion is unethical, and hence resolve the dilemma, I will apply Kant’s Categorical Imperative concept.

Immanuel Kant proposed an ethics theory that has been a point of reference by many philosophers to date. Kant’s Categorical Imperative proposes that people should behave in a manner that their conduct is not only reasonable but also applicable on a universal scale (Mazur, 2015). The choices made by individuals ought not to be conditional or possess a hidden motive. Categorical imperatives are the complete opposite of their hypothetical counterparts (Mazur, 2015). The latter is applicable to individuals who aim to attain particular goals. Driven by the goal-achieving quest, such people are compelled to do what it takes to make their dreams come true. For instance, a student who looks forward to achieving a high grade knows that he/she should put more effort in his/her studies.

In contrast, categorical imperatives are the unrestricted obligations that must be observed irrespective of the prevailing circumstance.  Kant proposed that people should follow the moral principles that they can be comfortable with if those maxims were enacted to become universal laws (Mazur, 2015). The resultant theory, therefore, directs individuals to conduct themselves with decorum at all times, the same way they would like to see others behave. The common directive that people ought not to steal qualifies to be a categorical imperative. For one thing, there is no desire attached to the tenet. However, if a motive is added to the law, say “do not steal if you want to be rich,” the rule switches from a categorical to become a hypothetical imperative. The new proposal means that stealing is good if a person is not doing it for self-enrichment. In itself, the act of stealing does not foster common good and, hence, cannot be approved to become a universal behavior. According to Kant, hypothetical imperative systems are deficient when it comes to moral judgments as they only apply to individuals who wish to achieve particular objectives (Bowie, 2017). The subjective considerations render the hypothetical systems useless for moral action. More to the point, they cannot be referenced when judging others. The voice of reason must always direct people to promote particular good actions while withdrawing from other destructive ones.

Kant further indicated that people are obligated to attend to two forms of duties: perfect and imperfect. All human beings are required to meet some basic requirements. Defying these duties result in blame. Firstly, individuals are obliged to act against the maxims that contradict logic in the event of universalization (Bowie, 2017). For example, stealing cannot be permissible on a universal scale because it denies the public the right to own private property. Secondly, the imperfect duties are optional as they do not evoke blame when not met. These duties have some space for desires. Imperfect duties are met by individuals who wish to go the extra mile to foster the common good. For this reason, they can bestow praise on the subject individual. By way of example, cultivating one’s talents and making the most out of them is a task that all people should do. All the same, no one can punish an individual who opts not to do so.

In the case of the discussed dilemma, a sizeable proportion of adult Americans subscribe to the idea that evading taxes does not hurt their patriotism. The statistics indicate that many Americans dodge the IRS by paying less, or no taxes at all (Morse, 2015). Kant’s imperative theory is used here to evaluate whether the growing culture of tax avoidance is moral or immoral. In this case, both law and morality are involved. Kant suggests that patriotic citizens must always take it upon themselves to do that which is good for everyone else and not only themselves (Bowie, 2017). In the public domain, paying taxes is a requirement of all individuals whose income exceeds a particular threshold. The public has no problem with those who comply with this constitutional requirement. The fraction that tries to avoid meeting their tax obligations is the subject of debate.

One of the characteristics defining payment of tax is that the taxpayer pays without expecting certain favors in return. In other words, the individual must trust the government to utilize the tax revenue for the betterment of everyone in the economy. The lack of desires denotes Kant’s categorical imperative theory. By dodging taxes, a person introduces some personal interests. Tax evaders seek to profit more by tapping into the funds meant for tax and using it for other expenses (Filipczyk, 2014). In so doing, they introduce a hypothetical imperative which is denoted by their “greed” to benefit only themselves. Sustaining spotless tax plans is both a perfect and an imperfect duty. In any case, the government expects every earner to donate a specified proportion of their income to the government. Even so, the government lacks the mechanisms to follow up on every citizen and ensure that they pay their deserved taxes. For this reason, the moral question steps in. According to Kant, a moral person ought to take it upon him/herself to acknowledge and meet the taxpaying duties even when there is no benefit in it. In conclusion, tax evaders are doomed unethical individuals going by Kant’s theory.

Although Kant’s Categorical Imperative is a theory that helps to substantiate why it is unethical to lie or cheat on one’s tax returns, there are other theorists who contributed immensely to the topic of an ethical dilemma. They include Socrates, Plato, and Aristotle. Socrates is one of the earliest Greek philosophers who brought the question of morality to the public domain. In his value theories that were never documented by him, Socrates argued that what determined good and bad was the payoffs. For instance, if paying tax results in poor quality of public goods and services delivered to the taxpayers, then there is no point of willfully paying the tax since the payoffs are undesirable. From Socrates’ point of view, tax evasion is justifiable if the payoffs are much higher that consequences of the action. Plato argued that human well-being was supreme with regard to moral thoughts or actions. On the other hand, Aristotle argued that what was good is what contributed to living well.

With regard to the dilemma of tax compliance, I would prefer to use the Socrates’ method or approach to ethics. We pay taxes so that the revenues can be used to deliver public good and services. In America, incidences of tax revenues misappropriation are minimal. Besides, Americans enjoy quality and reliable delivery of public goods and services such as health care. Paying of tax results in higher payoffs, and from Socrates’ point of view, tax evasion is wrong and unethical.

Altogether, it is beyond reasonable doubt that tax evasion is an ethical act. Kant holds that “individuals are obliged to act against the maxims that contradict logic in the event of universalization.” Paying of tax is a universal requirement for all Americans. Failing to honor this duty is a contradiction to logic as tax revenues are used to provide public goods and services. Value theories also support Kant’s argument as they are opposed to violation of anything that has high payoffs. Controversies arise when taxpayers feel that taxes collected from them are not equivalent to the substandard public goods and services which are delivered to them. In the USA, however, taxes are put into good use, and, therefore, it is unethical to fail pay taxes. I believe that tax evasion is strongly correlated to the risk-reward model, and, hence, I would like to offer more analysis on this model in the future.

References

Bowie, N. E. (2017). Business ethics: A Kantian perspective (2nd ed.). New York, NY: Cambridge University Press.

Filipczyk, H. (2014). Why is tax avoidance immoral? Ethics, metaethics and taxes. SSRN Electronic Journal, 28-48.

Mazur, T. C. (2015). Lying. Santa Clara University. Retrieved from https://www.scu.edu/ethics/ethics-resources/ethical-decision-making/lying/

Morse, M. (2015). Effects of tax evasion in the United States (Unpublished doctoral dissertation). University at Albany, New York, NY.

Shalvi, S., Gino, F., Barkan, R., & Ayal, S. (2015). Self-serving justifications. Current Directions in Psychological Science, 24(2), 125-130. doi:10.1177/0963721414553264

Slemrod, J. (2007). Cheating ourselves: The economics of tax evasion. Journal of Economic Perspectives, 21(1), 25-48. doi:10.1257/jep.21.1.25

Zucman, G. (2017, November 10). How corporations and the wealthy avoid taxes (and how to stop them). New York Times. Retrieved from https://www.nytimes.com/interactive/2017/11/10/opinion/gabriel-zucman-paradise-papers-tax-evasion.html