Tax Avoidance Or Tax Evasion? There Is A Difference

According to a recent poll, voters in the United Kingdom don’t see a distinction between tax avoidance and tax evasion, at least not a moral one. According to a YouGov survey, 59 percent considered avoidance “unacceptable,” while only 32 percent thought it was legitimate.

The pollsters took pains to emphasize the distinction between avoidance and evasion. In the process, however, they actually managed to muddy the issue. The question read:

As you may know, there is a difference between tax AVOIDANCE, whereby companies/people use artificial but legal methods to minimise the tax they pay, and tax EVASION, where companies/people act illegally to pay less tax, or no tax at all. In general, do you think it is acceptable or unacceptable to LEGALLY avoid paying tax?

Nice try, but no cigar. The legal/illegal distinction is evident, but the qualifier is problematic. McGill University law professor Allison Christians made the point in a tweet: “They described avoidance as ‘artificial but legal.’ That seems like priming to get avoidance conceptually closer to evasion.”

Indeed it does. But if the pollsters are a little confused, they’re in good company. “As a tax specialist, I feel obliged to say here that there’s a clear distinction to be made between legitimate tax planning and tax avoidance, something that both major parties seem to ignore,” noted David Bennett, a tax adviser at the U.K. firm Moore and Smalley.

American politicians also ignore the distinction, at least when it’s convenient. Unlike the pollsters, their conflation seems deliberate. Politicians blur the line because it suits their purposes: Outrage attaches more securely to “artificial” scheming than it does to careful tax planning.

Back in the 1930s, President Franklin Roosevelt understood the political utility of blurring the line, excoriating corporations and wealthy individuals for gaming the tax system. As his Treasury secretary declared in 1937 : “Legalized avoidance or evasion by the so-called leaders of the business-community is not only demoralizing to the revenues, it is demoralizing to those who practice it as well.”

To some degree, the inclination to conflate avoidance and evasion is understandable. Legality is important when passing judgment on particular tax minimization techniques, but it’s not the only relevant issue. Most people would agree, I think, that not all tax avoidance is created equal. Some forms of avoidance are more creative and aggressive than others.

Tax avoidance, in other words, embraces a multitude of sins – and even some virtues. Avoidance is often the declared intent of specific legislative provisions, especially when lawmakers are trying to encourage certain behaviors, like saving for retirement and college. Taxpayers and voters don’t consider their 401(k) accounts to be a form of tax avoidance, but that’s what they are.

Ultimately, we need a better way of talking about tax behavior. One that allows for finer distinctions that our current dichotomous distinction. In the meantime, however, we could do with less manufactured outrage about tax avoidance. Justice Learned Hand made the point in 1947: “Taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

Politicians traffic in cant, especially around taxes. But that’s because they’re desperate to shift blame. After all, it’s their legislative handiwork that makes tax avoidance possible.

It may be that governments are unable to write bulletproof income tax laws, especially in today’s complex world economy. In which case we should start thinking about other taxes that might function better.

If the income tax, either corporate or individual, is too easy to game, then we should be looking for a replacement.