What’s surprising about the documents exposing tax shelters in Panama is that so many people seem surprised. Tax shelters as Satan’s bank account are a staple of popular culture – in novels by Scott Turow and John Grisham, for example, the films based on them, and Sarah Caudwell’s The Sirens Sang of Murder, about tax havens in the Channel Islands. The latter comic mystery novel is particularly apt in that it mentions the lawsuit that makes these shenanigans legal in many instances, The Duke of Westminster’s Case. There, the Judicial Committee of the House of Lords distinguishes tax avoidance – which is legal and euphemized as “tax planning” – from tax evasion, which is illegal but in certain circles rationalized as … tax planning. As Lord Tomlin puts it:
Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts [(legislation)] is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow tax-payers may be of his ingenuity, he cannot be compelled to pay an increased tax.
Such “ordering” is avoidance. It is true, of course, that if you’re setting up corporations, and in many cases, corporations within corporations, to “shelter” your wealth offshore, hiding the principal shareholder (often, the lawyer who creates the company will be identified as its director), there’s a better than even chance that you are slinking into the far territory of evasion. What the news media miss about this is that, where we can identify the tax-evading owners (or owners who are using the corporations to launder funds or hide money obtained illegally), we have a legal remedy: we can “pierce the corporate veil” and pursue the owners personally, for civil as well as criminal remedies.
True enough, Panama (or Liechtenstein or Jersey or the Caymans…) is a bit of a schlep just to avoid a few hundred bucks in tax. Even if the sheltering corporation is perfectly lawful, a really solid citizen would not engage in what has become known as “aggressive avoidance” of this sort. Aggressive avoiders are probably not paying their way at home, never mind that they “order their affairs” lawfully (more or less) to remit less tax. Thus do we suddenly hear politicians – the same politicians who take money from high rollers for lobbying opportunities at “dinners” (see also) – say that they are thinking about making such “aggression” a species of (unlawful) evasion. Don’t hold your breath. People who pay lawyers and accountants big money so as to avoid tax enjoy the means to keep on keepin’ on avoidin’, never mind – and often because of – political machinations. Thus Warren Buffett’s purported bafflement about having a lower tax rate than his secretary. The tax lawyer’s motto might as well be, When a loophole closes, a crack opens.
What we’re really looking at here – what really has the news media and public fulminating, though mostly the outrage is more reflexive than thoughtful – is the gap between law and justice. That is, tax avoidance might be lawful, but to the extent that it places a disproportionate burden on other taxpayers, it’s unjust. Consider “How a couple with a net worth of $10 million and annual income of $215,000 can pay $0 in income tax,” while middle-class taxpayers in Canada can be “tithed” for as much as 33 per cent of their income.
Even some lawyers forget that, in Nazi Germany, the United States as late as the 1960s, and apartheid-era South Africa, homicidal racism was lawful. Tax avoidance might be legal, but where it verges on evasion, particularly evasion of social responsibility, it is at least unethical and anti-social, and can be immoral. Justice melds morality and ethics onto law, demanding that the individual contribute to the community according to that individual’s abilities. Ordinary taxpayers understand that paying their fair share includes taking advantage of legitimate deductions and shelters, such as tax-free savings plans and, to assist national economic development, lower taxation rates on certain investment income such as dividends and capital gains. What angers them is their neighbours cadging a free ride when they can afford the fare.