1. Introduction: Why Ethics Matter in Taxation

This idea goes back to the 19th century German lawyer and philosopher Lorenz von Stein, see Vogel (1988).

The OECD Average is a weighted average by GDP for all countries excluding the United States.

The story is apocryphal, however. The coined phrase appeared for the first time in the Redland’s Daily Facts on March 15, 1952. Sutton denied in his autobiography (1976, 160) that he ever said it and credits an enterprising journalist.

This is, however, not an argument against progressive taxation per se, but a demonstration of the practical difficulty with implementing such a tax fairly.

That explains why in practice there exists no uniform rate of graduation. The progressive income taxes applied around the world are levied at different rates and use varying income brackets to which these are applied. For example, the U.S. has 7 tax rates for federal personal income tax: 10, 12, 22, 24, 32, 35, and 37% for income over $500,000. In comparison, the Netherlands applies 4 brackets on earned income with the top rate of 51.75% kicking in at income over €68,508; Germany has 3 rates with the top rate of 45% applying to income over €256,304; Australia has 4 rates of 19, 32.5, 37%, and a top rate of 45% which applies to income over AU$180,001.

Tax law could also violate constitutional norms. For the U.S., Vance (2013) argues that Congress has made the tax code so complex that it violates the due process requirement of the Fifth Amendment that a person of ordinary intelligence must be able to understand how to conform their behavior to the requirements of the law.

See, e.g., Alm et al. (1992), Alm, and Torgler (2006), Cummings et al. (2005), Picur and Riahi-Belkaoui (2006), Slemrod (1992), Torgler and Schneider (2007), Fjeldstad et al. (2012).

The terminology used to describe unfavorable human actions in the area of reducing tax payments are not neutral but value-based (Sage-Fuller and Lippe 2014). The adjective ‘aggressive’ in aggressive tax planning, or the word ‘abuse’ in abuse of law, or ‘harmful’ in harmful tax planning are purposefully used to convey moral condemnation of the action with the intent to steer public opinion towards moral rejection as well. And with notable success as press coverage is also mostly negative towards tax avoidance and arguments defending the practice are generally ignored. The public perception is of course relevant as it determines both the latitude given to companies and individuals in the area of tax planning and the extent and methods available to the state in combatting tax avoidance.

Determining such standards is no sinecure if we take to mind Judith Freedman’s caution (drawing on the work of Onora O’Neill) that increased transparency can actually lower tax morale and the willingness of taxpayers to pay their taxes voluntarily (Freedman 2018, 130).

Such sentiments are often attributed to Adam Smith’s canons of taxation. It is however instructive to quote the full sentence on which this view is based: ‘Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state.’ (The Wealth of Nations Book 5, Chap. 2 [emphasis added]).

IRC v WT Ramsay Ltd. [1982] AC 300. See Freedman (2007).

See, e.g., Furniss v. Dawson (1984) 55 TC 324; IRC v. McGuckian [1997] 1 WLR 991; MacNiven v Westmoreland Investments Ltd. [2001] STC 237; Barclays Mercantile Business Finance Ltd. v Mawson [2005] STC 1.

See, Brederode and Krever (2017).