The Shame of Tax Loopholing

In the movie Bubble, a woman visiting a man’s room waits until he goes to the bathroom, and then searches for cash, which she finds and keeps.  Abstractly I understand why someone might do this, but I would feel completely ashamed to do it.  It is not just that such theft is uncommon or illegal, or that I had a connection to the victim; I would feel ashamed even if it were legal, if most everyone did it, or if the victim were a stranger.  And I suspect most people feel this way.

I feel the same strong sense of shame about tax loopholing – the act of working to find a way to present myself on my tax form so that I pay less taxes.   The very idea revolts me, and I just can’t bring myself to do it.   But here I seem to be unusual – most people I know seem proud to find better tax loopholes.

As an economist, I can argue the consequences are similar – in both cases you use effort to transfer resources from other people to yourself.   Yes, perhaps you need the cash more than they do, or perhaps there is some "evolution in action" benefit of moving resources to the clever from the not-so-clever.  But usually such gains don’t seem worth the effort expended to create such transfers, or to prevent them.

I feel similarly about the idea of buying a bigger car to protect my family in a collision.   If small cars crashing together create the same casualties as larger cars crashing together, then buying a bigger car to avoid casualties is in essence working to move casualties from your family to other families.   

To the extent that an act’s shame should be tied to its consequences, being ashamed of taking cash from a stranger’s wallet, but not of tax-loopholing or big-car-protecting, seems biased to me.   But perhaps shame is just not about the consequences.

Added:  My complaint is mainly about lost effort, not so much the transfer itself.  The main effect of your efforts to pay less taxes is that others pay more later, via tax rate increases.  Any required adjustments to your behavior are unlikely to be social beneficial.  Any resulting change in tax emphasis will have little social benefit.  The resulting government spending reduction will be small compared to your gain, and most of that spending pays for services most people value.  It will not spark the great libertarian revolution, and your feeling less like a sucker will come at the expense of others feeling more like a sucker.

Also: The same applies to buying a taller car in order to see past other cars. 

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  • michael vassar

    I completely agree here, on the taxes and much more so regarding SUVs. People seem so strange in this respect. OTOH, all sorts of price shopping, bargaining have some resemblance to the tax loophole case. There is an awful lot of rent-seeking inevitably associated with normal life, partly because setting up rant-seeking situations is a standard way of price discriminating. I am basically unsuitable for an academic environment primarily because competing for grades and tenure rather than knowledge, working to get financial aid, etc also present instances of this dynamic.

  • Tom

    What if I decide to grow my own food and use the money saved to buy luxuries? I’ll be consuming more than others in my income bracket, but not paying any more tax. Is this a loophole? Should I feel guilty?

  • US

    There need not be any bias when it comes to tax loopholing. If one considers taxation as theft, the search for tax loopholes is not any different from hindering the visitor in your appartment from stealing your money.

    Wrt. the SUV’s: The fact that most people will do almost anything to protect people they love and know well, even if it is by imposing large costs on those they don’t, is not a bias that we are to overcome any time soon.

  • Tom West

    First, shame tends to be a consequence of “knowing” the victim. Victimize a friend? Much shame. Victimize a unknown, but particular person? Some shame. Victimize a huge number of strangers by some minuscule amount? Not much shame at all.

    Secondly, I think most of us are likely in agreement that there is a difference between active and passive acts (there’s a difference between stealing the food of the starving and not selling all your possessions to provide for the starving despite the fact that the end result is the same).

    I’d say that most people would put legal, socially accepted acts such as tax loopholing (tax loopholing?) and SUV buying into the same category as passive acts. The end result may be the same, but there’s a difference nonetheless. It’s why social engineers (i.e. most of us) try to get behaviors we wish to reduce classified as “active”.

  • Imagine a village of peaceful people.

    Imagine a band of nomads, exactly equal in size to the female population of the village.

    Once per year, the nomads arrive and begin raping. Each nomad has an appetite for one rape. All thing being equal, each woman will get raped once.

    According to the thinking above, it is immoral for a woman to fight off a rapist – if she succeeds, he will only go and rape someone else. Thus, inequality will be created: one woman (may) get raped twice, while one woman will get raped only once. The only fair (“fair”) thing to do is to spread the raping around equally.

    I reject this thinking.

  • Michael, competing for grades or publications is not nearly as clearly negative sum as working to grab cash.

    US, unless you try hard not to take advantage of the services that the taxes pay for, you won’t get much sympathy from me for tax loopholing.

    Tom, I would feel more shame stealing money from a stranger than from a friend. I don’t get how pursuing tax loopholes and big cars are “passive.”

  • Thermopyle

    “tax loopholing – the act of working to find a way to present myself on my tax form so that I pay less taxes.”

    First off, this makes the assumption that the government is morally entitled to your tax dollars.

    Let’s say that they are. So they set up a framework of rules determining how much you morally owe them. How can following this framework to the letter be something to induce shame?

    Last year my business was based out of a small office away from my home. This year I moved my office into my home because I realized I could make larger deductions…I worked to find a way to present myself on my tax form so that I could pay less taxes. I see no shame in that.

    In fact, the shame should be on the government. If there is a legal way for you to reduce your tax debt and you haven’t taken it, is not the government taking something that doesn’t belong to them (this again assuming the government is morally entitled to your money)? I know many small business owners who don’t take a home office deduction. This is not because they are not legally entitled to it, but because they are afraid of the time and effort involved in the audit they are more likely to be subjected to because they took a home office deduction. The government got more money from them than they were due because these people were intimidated.

  • Carl Shulman

    If our sense of shame is well-adapted to lead us to signal our quality as a potential mate or ally, then such a difference is not surprising. A willingness to exploit ‘faceless’ organizations, or other tribes, for the benefit of those with whom one personally interacts can make one a more attractive social partner.

    One practical solution for those having doubts about tax-avoidance would be to donate a fixed percentage of any savings to organizations that produce a greater marginal benefit per dollar than additions to general government revenues, such that one’s fellow taxpayers benefit on average.

  • David Gordon

    How exactly does using a tax loophole transfer resources? Is the argument that if the government could rightly assume that people wouldn’t use loopholes, it would set taxes at lower rates, since lower rates would suffice to generate the same revenue as higher rates with the use of loopholes? This consequence is possible but not necessary; the government might instead welcome the extra money that would be available if rates were not lowered. Maybe the government would take the refusal to use loopholes as an indication of a decrease in resistance to taxation.

  • Those of you who suggest that you avoid taxes in order to reduce government spending, your altruism would be believable if you, as Carl suggests, donated the money to some other organization benefitihg other taxpayers.

  • michael vassar

    The fact that people try to get acts they disagree with labeled as active is a strong argument for the belief that active vs. passive is just a framing bias and not a legitimate basis for decision making. Socially acceptable vs. not is clearly a legitimate and ubiquitous basis for decision-making. In fact, I assume that ethics, evolutionarily speaking, *is* a mislabeling of our evaluation of whether something is socially acceptable. Despite this, the fact that SUVs (and even Hummers) and avoiding taxes remain socially unacceptable remains odd. I suspect locked in status effects. If poor people had started doing these things with high frequency before rich people did them they would be socially unacceptable.

    Humorously, maybe we need a caste of anti-trend setters. A group of designated social outcasts sustained at the expense of society and encouraged to do predictably harmful things that are at risk of becoming socially acceptable.

  • michael vassar

    I think that many of you are missing the point of this post. The issue is not one of dessert, nor of the government-mandated values being somehow “right” but rather of the rightness of exerting effort doing something unpleasant and socially harmful. Social norms aligning shame with negative sum activity are utility maximizing. In practice however it seems to me that personal imperatives to refrain from rent-seeking, independent of the rate of return and established social norms are a type of request for the sort of radical altruistic self-sacrifice that economists usually refrain from. In reality, if you are enough of a Kantian to make this a temptation your Utilitarian friends will be telling you that money in the hands of a person as ethically dedicated as yourself is more valuable than money in the hands of the government and you have a duty to seek out tax loopholes because doing so is what you would have universally done by rational moral agents facing coercion by those who are not rational moral agents.

    Robin: In my experience, beyond the B level, working harder to master a subject or generate good new ideas requires about 2-10 times more work than working harder with efforts focused on grade maximization with only math and physics in the 2-4 times more work range. Effort aimed at grade maximization has reciprocally little reward in terms of understanding of a subject, and I’m pretty sure effort aimed at tenure is similar. My impression is that tenure track is similar, but with Math and Computer Science as the odd subjects out.

  • Robin,

    Well, you have just given one of the better arguments for serious tax simplification.

  • US

    Robin, I don’t use tax loopholes myself and I never said I did. I just fail to see how it is immoral to do so, or why there needs to be any bias here.

    By using the loopholes you are paying the government the amount of money you are _required by law_ to pay – nothing more, nothing less. If you think what is morally wrong here is that some people are using the loopholes and others are not – that is, that those who use the loopholes are not paying their “fair share” – you might as well blame people for going to college (a somewhat less extreme example than the rape-scenario above). They take advantage of an opportunity open to most people as well, and by doing so they benefit from it, while others are left behind.

    If you don’t like the asymmetry, blame the government for making the rules and regulations so complicated that it is possible for a subset of the population to benefit from these activities.

  • TGGP

    Robin, the government does not really give us the option of avoiding their services in exchange for paying fewer taxes. If they did, they wouldn’t be taxes, and the rich would not accept the lousy deal they are getting. Carl’s suggestion to give to “organizations that produce a greater marginal benefit per dollar than additions to general government revenues” is a very wide criterion. I can think of plenty of organizations that do not wage war on Iraq or non-violent drug users.

  • Add me to the list of people who disagree with your analogies in this case.

    Tax laws are fairly arbitrary and unjust in the view of many (including me). Finding legal loopholes is akin to salvaging some belongings from your second home before it is condemned and destroyed by the state (probably to make room for a mall, i.e., Eminent domain abuse).

    Legally minimizing your taxes is therefore entirely different from theft. With theft, Party A has clear, unquestioned possession of an item. Party B has no claim whatsoever, but steals it.

    With taxes, Party B passes a law to claim Party A’s property. We’re not talking about equal burden-sharing ($X in taxes per head, or X% of income). We’re talking tax laws designed to arbitrarily reward some groups over others for political reasons (owners vs. renters, city dwellers vs. red staters, rich folks who flex-spend for Armani sunglasses while poor folks can’t deduct ER visits).

    The state is playing games with tax policy. Your choice is to play well, or play badly. I fail to see the inherent bias in choosing the latter over the former.

  • I should read the comments before commenting, but I couldn’t comment yesterday about “Jane Gault’s” ethics question I was appalled to even think of the temptation. Odd to see such a question in the bias forum as well. Shame is about the man in the mirror, at least that’s my personal totally biased experience.

  • I agree with the principle Robin is describing, but I would differentiate the cases based on the magnitude of the harm. If you find a loophole to save, say, $1000 in taxes, this harm is spread out over 300 million people (the population of the U.S.). The harm per person is undetectable. Probably I do more harm to affected individuals when I make a foolish post on this blog. Similarly, driving an SUV transfers risk to others but the actual magnitude of the risk is very low and the transfer is spread across a very large number of people.

    I wouldn’t feel very guilty about taking a penny from a friend (say I found it on his floor when he wasn’t there) and these other examples represent even less harm than that. Imagine something much less valuable than a penny – say, a grain of rice spilled on his counter which I pick up and munch on. Now the guilt is almost nil.

  • If by loophole, you mean deductions and exclusions that Congress has enacted (or Treasury has promulgated), then you are missing the point. They make such “loopholes” in order to incentivize some action, or to bring equity to taxation. A home office deduction is available because of horizontal equity.

    If by loophole, you mean falsifying your charitable deduction, then, yes, you should be ashamed, because you are breaking the law and cheating.

  • Stuart Armstrong

    Your choice is to play well, or play badly. I fail to see the inherent bias in choosing the latter over the former.

    If you judge that taxation is either unjust, or that it’s moral precisely to the level that it’s legal, then that’s true. But if you turn your everyday instincts about fairness and cheating to bear this situation – then it isn’t so simple.

    A similar situation, that may push your “fairness” button a bit more: suppose that you work in a company with friends, and that one of them organises great dinners each month, but asks for a contribution. For various reasons, he uses a very complicated system to determine how much each person pays.

    You spot a loophole in that system. You can exploit the loophole to pay less money (but then the meal will be slightly less good for everyone) or you can pay your “fair” share – the one that you were intended to pay.

    The only differences between the two set-ups is that you know the people in meal case, that the effect of paying less is higher, and that you may have more issues with the government than with your friend.

  • anon

    If someone lets you into their room, and leaves you alone in it, then clearly they are trusting you.

    If you take advantage of that opportunity to take their money, you are betraying that trust.

    Should I trust someone who does not feel it is morally wrong to betray a trust?

    The other examples did not involve a breach of trust.

    If you find a tax loophole that does not require lying, and use it, you are still being honest. The goverment has given you criteria to use in deciding how much money you should give it, and you have followed those criteria. You could have chosen to give more, but then you could have chosen to give more to charity last year.

    Nor does buying an SUV involve betraying anyone.

  • rcriii

    Robin, your description of “tax loopholing” is awfully vague. Are you saying that you take no deductions? Or that you only take obvious ones? or only legal ones? My feeling on taxes is that Congress decides how much I should pay in taxes, so why should I pay more than that? If that means keeping track of my charitable giving (including in-kind) or applying for a credit for a hybrid car, I see no problem.

    You are on stronger ground with the car, but you do have a duty to protect your family (specifically your children), that arguably is stronger than your duty to protect others (particularly when many of the others are already in large cars, SUVs and minivans). I consider this duty stronger because they are largely dependent on you. How do you feel about buying a minivan for the larger interior room?

    But perhaps shame is just not about the consequences.
    Here it certainly isn’t. In these cases there seems to be elements of the following:
    1) Your right to take those resources (money, tax deductions, safety)
    2) Other’s roghts to retain those (money, taxes, safety)
    3) Things you personally find distasteful

    I am hesitant to theorize further because I still haven’t read the basic ethics literature…

  • This is clearly a topic which many people frame in terms of rights, rather than consequences. To such people let me ask: if the government made it legal to take someone’s wallet as long as they didn’t notice it was gone within five minutes, would you feel free to take wallets?

  • Robin,

    The negative utility of theft isn’t linear with the amount stolen. If two elderly people each have a million dollars in the bank, defrauding each out of a half-million might get me some nasty lawsuits from their children. Picking one of these two people at random and taking *all* of their money might get me murdered with a WWII-era rifle. I can make myself safer still by taking a quarter million from each of four elderly people, and so on. With tax loopholes and insurance fraud, the pool of people is so large it hires people to be outraged in its place (the IRS, private investigators for insurance companies) because nobody is affected enough to personally care. If such representative revenge-getters existed in our hunter-gatherer environment of adaptation, maybe we would feel terrible about lying on taxes. But they didn’t, so we don’t.

  • Doug S.

    What’s the difference between a tax loophole and a tax incentive? For that matter, in a competitive video game, what’s the difference between taking advantage of an “abusive exploit” and simply playing well? In both cases, the rules are established in advance, and the “players” are expected to seek out every advantage consistent with the established rules. If there is an apparent loophole in the rules, it still applies equally to everyone, so it’s as “fair” as anything else one might do to advance one’s own interest. From inside the system, there really isn’t any difference between a bug and a feature!

    Regarding your initial example of the woman taking cash, if “most everyone did it” then couldn’t we consider that the person whose money was taken would know that the woman would take any money she found, and by not taking action to prevent said theft, he implicitly gave her permission to do so? It’s a flimsy argument that doesn’t actually apply to this case of theft (because the man did not actually give implicit permission for the woman to take the money), but social norms do affect a person’s perception of when he has been wronged. If you have a bowl of potato chips sitting around when a friend is visiting, and he ate some without asking, you probably wouldn’t mind because you and he both shared the assumption that by leaving the potato chips out, you were implicitly offering him permission to eat them. Painting graffiti on a wall is usually wrong, but it’s not wrong if it’s done with the permission of the owner of the wall. If the potential “victims” understand the consequences of exploiting tax loopholes and agree that it is okay for people to do so – which may very well be the case in our society – then it actually does become okay to exploit them!

  • Thanks for the response, Stuart. Again, I disagree with your new analogy.

    one of them organises great dinners each month, but asks for a contribution. For various reasons, he uses a very complicated system to determine how much each person pays.

    …You can exploit the loophole to pay less money… or you can pay your “fair” share – the one that you were intended to pay.

    Respectfully, I think bias here is in the assumption that rules are made to be not only followed, but exceeded by a wide margin. (There’s also the assumption that I “may have more issues with the government than with your friend”.)

    First, the situations are different because I can send a clear message to my friend that his rules are fair or unfair. I can tell him/her how I plan to exploit the rules. I can decline to participate without having to move 700 miles or more.

    However, even to the extent that the situations are the same, I can (and do) make a strong argument that there is inherent value in exploiting the rules to the extent permitted. You are probably familiar with arguments for simpler regulations, flatter simpler taxes, etc… Only when regulatory excess is highlighted does anyone do anything about it. By analogy, we did not hear much about earmark reform until the sitation grew from a few $700 toilet seats to billions of dollars in bridges to nowhere. The situation had to get so consipicuously bad before the system was fixed… I’d argue the same for tax law.

    (In addition, there is the issue of efficiency in spending. If a friend used the proceeds to buy ingredients for dinner, then yes, paying less would limit the ingredient quality/quantity. If we assume some level of “deadweight loss” in government spending, whether the economics definition or the additional waste in public procurement departments vs. private investment/consumption decisions.)

    Lastly, “fair” is a tricky concept… There is some bias in the notion that nominal tax rates are generally “fair” but “loopholes” written into the same tax code are unfair. By example, is the “community chest ” square unfair on a Monopoly board? It’s part of the same rules.

    Moreover, tax rates change. Was 28% fair under Reagan? Was 70% fair under Kennedy?

    And looking at the distribution of tax incidence… Is it “fair” that a majroty of Americans pay nothing in federal income taxes (or less with the EIC and other refundable credits)?

    In summary, there is a lot of inherent bias required to reach the conclusion that filing the short form 1040A is the only fair thing to do in spite of qualifying for “loopholes” that would otherwise lower your tax bill.



  • Robin, I respect your ethical reservations and applaud you for following your ethics. With that said, it’s not the way I would frame the problem myself. I believe that tax rates are too high for the good of this civilization, and also that when the government gets more money it simply increases spending. Given these beliefs of mine, I would wish, all else being equal, that the government get less of your money. If you freely offered to me to either donate an extra $1000 to the government or keep it, I’d tell you to keep it.

    Of course I am not a professional economist, and to no small extent this is a consequentialist question of fact: what produces the greater social benefit, defined say in conventional hedonic/utilitarian terms? Do you wish to invoke Aumann on this? I’d be willing to overwrite my opinion with yours if you tell me to do so, since I’m sure you have already taken into account all the arguments I’ve heard and then some. I wouldn’t shift opinions on the moral question of forced taxation, but I would change my response to the question about voluntary donations.

    Oh, and a minor quibble: I would feel ashamed even if it were legal, if most everyone did it, or if the victim were a stranger.

    You don’t actually know this. We all would like to believe that we would be in the forefront leading the charge against slavery if this were the 1800s, but we have not been thus tested. It is very rare to find people who will protest against something hideous, like religion or not freezing corpses, when the rest of society thinks it is normal. I will admit your feeling about income tax forms as legitimate evidence that you would feel equally ashamed about taking money from someone’s pocket, even if society approved; it is evidence but you still do not actually know.

    Unless you meant simply that your present mind, with its present upbringing, evaluating the counterfactual case where society approves of pickpocketing, judges it as shameful; where the counterfactual is evaluated inside your own mind, rather than inside the mind of the person you would counterfactually be.

  • I neglected to address your main point (I was too focused on the shortcomings I perceived in the analogy).

    In my view, shame is not always about consequences. Shame (to the extent shame we should bother with it) is often better reserved for breached of process.

    Your proposition assumes that
    1. Undesireable ends invalidate the means that would otherwise be justifiable.
    2. Lower tax receipts are udesireable.
    3. Therefore, loopholing is not a justifiable means to save money. It is shame-worthy.

    Putting aside my competing assumptions regarding #1 and #2…

    a. Theft of a wallet is shameful becuase it breaches a trust never established with tax law. Tax law is rules-oriented. Theft is principles-oriented. Stealing a wallet violates a princible. Loopholing does not.

    b. We are neglecting other consequences. Property theft leads to distrust, higher security measures, etc. Rampant tax avoidance should lead to better tax laws. That sounds like a benefit to me.

  • Eliezer, I agree that I do not actually know how I would feel in a world where theft was common and legal; I can at best try to project my feelings from the most similar situations I have found. When you manage to pay $1000 less in taxes, I estimate this has only a small effect of government spending, say less than $100. And this will not necessarily be a reduction in the spending you most object to. The main effect will be to raise the tax rate so as to collect at least another $900, which will do more to discourage people from working.

    Stuart, I am claiming that you should use principles to think about taxes, just as you use them to think about theft.

    Doug, I think competitive video games have taught you the wrong lessons about real life.

    Riley and Hal, taking a penny from a million people does about the same total harm as taking $10000 from one person, regardless of how they feel it.

  • Robin, I see, so the argument is not that the government needs the money, but that if it doesn’t take it from you it will take it from someone else. I guess I can understand that, though personally I lean more toward TJIC’s viewpoint.

  • It is very rare to find people who will protest against something hideous, like religion or not freezing corpses,

    Some would call a belief in the future revival of frozen corpses (and the “Singularity”, and strong AI) as a secular form of religion. And one not so very far removed from the mummification rituals of ancient Egypt. . . Although hopefully they would label this belief as “curious” and “amusing” rather than “hideous”.

  • I don’t feel shame strictly due to a calculation of my behavior’s effects on others. Rather, I feel shame because I’ve violated an internalized moral rule, in this case, “don’t steal from others”. Thus, I would feel shame if I stole someone’s wallet, even though they may not miss it much, and even though I may not be caught. (My estimation of the effects may modulate the degree of shame I feel though–I’d feel greater shame about stealing a car vs. a piece of candy.)

    Likewise, I feel no shame in depriving the government of as much money as I can, as I’m not stealing anyone else’s property, I’m merely trying to prevent others from extorting money from me.

  • You Commentors and Posters should each note that you are raving with such vigor BECAUSE each of you have within each of you:

    A Loopholer and a Loophole resister;
    A Thief and a Saint;
    A Hummer and a VW Bug.

    What if you don’t pretend you have only one within you?

    The question is: What do you do about having both within you?

  • michael vassar

    Robin: Am I missing the point? Am I wrong to assume that you are working within a Utilitarian or Deontological framework rather than discussing your legal rights and are asserting that you are unhappy to participate in negative sum games?

  • Douglas Knight

    Robin, how long have you felt this revulsion?
    The concept of rent-seeking has had more impact on my view of the world than any other idea from economics, yet I think it came too late to produce revulsion.

    Also, does comparison shopping disgust you? (as michael vassar suggests)

  • Robin,

    It certainly feels like bias. We don’t need society to teach us that taking money from someone’s wallet is a transfer they voluntarily agree to. It’s easier for us to put out of our minds that we’re doing the same thing when we use a loophole or buying an SUV.

    Strangely, before reading your post, I’d been thinking about the zero-sum like character of killings like those a Virginia Tech. When I protect myself in such a situation the killer just moves on (I over simplify here) and kills someone else. Of course there was very little time to think that through in the context.

  • I find this discussion puzzling. For a blog dedicated to objective truth, it seems very disconnected from any known reality. Perhaps the root cause is a tendency to think in economic terms while ignoring the relationship of economics and the political system that underlies it. This is especially hard to do in the case of taxes, but somehow people here seem to be managing it.

    That people will try to minimize their individual tax burden should come as no surprise to anybody. There are some who believe that no taxation is ever justified. There’s no hope for them, so leave them out. The rest of you believe that some taxation is justifiable, and presumably, being fair-minded people, want to pay your fair share, for some meaning of fair.

    If the law were fair, then paying your fair share would simply involve paying what the law required. Maybe you would arrange your affairs to minimize your tax burden; that’s only to be expected, but if the law were reasonably fair then there wouldn’t be too many ways to do that.

    The real problem is that the law is anything but fair. It’s distorted in all sorts of ways, some of which favor the middle class (the mortgage interest exemption) and many others which favor the very wealthy. Given the existence of legal loopholes, it is almost obligatory to make use of them, or else you are being a sucker. The proper response is to try to plug the loopholes, but that requires politics, not individual acts of conscience.

    Unfortunately the political system is easily corruptible by money, and that is nowhere more visible than in the tax code and enforcement policies, especially in recent years, as documented here.

    The libertarian response to the corruption of politics is the desire to give up on politics altogether. Good luck with that.

  • Stuart Armstrong

    The most important feature here is the fact that the marginal difference you can make by exploiting or not a loophole is tiny. This means that people feel better about cheating, but it also means that some of the arguments given here about why we should exploit loopholes are completely unconvincing. Unless you are fearsomely rich, you using a loophole will not improve the tax code. It will not reduce government spending (an even more tenous link there).

    Now if you are involved in a mass movement, it’s different. If you make a big public spectacle of exploiting the loophole, call in the press, start a political party – then you are truly acting to change something you disagree with. Then your arguments make sense.

    But alone and anonymous in your own room, finding an obscure tax loophole – that’s just greed, or a virtuous (but meaningless) feeling that you are not subsidising things you disagree with.

  • Stuart Armstrong

    Stuart, I am claiming that you should use principles to think about taxes, just as you use them to think about theft.

    The problem is that our principles don’t always scale well. Small scale, we have lots of social cues to reinforce our principles – fear of getting caught, of betraying a friend, etc… These are stories, moral tales. And one story is that exploiting loopholes is unfair, but taking advantages of certain deliberate features is fine.

    But it’s not immediately obvious how this scales. A loophole that allows you to pay less tax if you have a mortgage, may be a way of encouraging house ownership. A feature, not a flaw. But one that allows you, because of a change of summer time say, to pay no tax on certain investments for one hour after midnight on a certain day – that’s evidently a pure loophole.

    Or is it? It feels like a loophole because of our small scale experience – we conclude that this would have been corrected, had the government been aware of it. But then again, it might not have – maybe it was left in as a messy compromise.

    The principled position against exploiting loopholes is clear – but what counts as a loophole isn’t clear at all. Since we have a strong self-serving bias here, I’d say the moral thing to do is to only exploit tax rules you are reasonably certain are deliberate features – not ones that are somewhat likely to be features, or might be features, or could well be.

    Of course, this means that those who pay closer attention to the whole political process can morally pay less than others.

  • Stuart Armstrong

    Just a quick note on shame – it starts off from parents, and from close society – shame imposed on us for outside. As we grow, we start developping our own sense of shame, to go along with our own moral code, but the feeling of shame stays closely tied to social cues.

    Idealy, we should be able to completly connect our sense of shame to our moral code, and prise it away from our social instincts. But that takes a lot of time and effort – and our social skills may well suffer.

  • anon

    Taxation is theft and worse. A decent person is morally obligated to pay no more taxes than is necessary to keep themselves out of jail. Anyone who pays more is voluntarily assisting the initiation of force against the governments’ many victims.

  • Michael, I thought I said clearly that my shame is a reaction to the consequences.

    Douglas, I think I felt this as long as I can remember, from when I understood that by my paying less others would pay more.

  • Keith Elis

    Robin, please clarify if you are shamed by exploiting tax loopholes or lying on your return. There is a significant difference.

    Loopholes have a basis in the tax code. Poorly worded provisions or poorly synchronized rules sometimes offer an opportunity to avoid tax. The complexity of tax codes makes it difficult for legislatures to foresee how particular provisions will interact with the market. Sometimes, admittedly rarely, a taxpayer can avoid tax *and* follow the code to the letter. This is just an unintended consequence of complex areas of statute. The same problem exists in many other areas of statutory law.

    Taxpayers who exploit loopholes provide a valuable service to the authorities. Legislatures must rush to redraft provisions to close loopholes. Moreover, the potential for future loopholing pressures the drafters of statute to clarify meanings, codify the intention of certain provisions, and otherwise use unmistakeable language, thus making it easier for all of us to understand and comply.

    Pressing it further, loopholers are often not compensated for this service. Even when the basis for the loophole is found in the code, the taxpayer bears nearly all of the risk of exploiting it. There is no guarantee that the loophole can be successfully defended in court, and the taxpayer will be liable not only for the tax due, but for attorney’s fees, fines, interest, and the costs of restructuring to take advantage of the loophole in the first place.

    Given this, there is no place for shame in loopholing.

    In any given domain, the honest can be taken advantage of by the dishonest. In the case of lying on a tax return, the dishonest transfer tax liability to the honest in exchange for additional risk of audit, fines, and having to pay interest on back taxes. When the number of enforcement actions versus the number of returns filed is low, the risk premium of lying on one’s return increases. We can therefore make at least one testable prediction: in times when the number of tax enforcement actions are consistently low, less tax as a fraction of GDP will be paid.

    Does this mean that lying on your return is somehow different than stealing? No, in fact the rational thief’s calculation of risk premiums is at least very similar in both cases. However, I don’t see that there is a bias necessarily involved.

  • I just put an Added section to the post.

  • Robin,

    Actually, just because the government does not take your money because you used a legal loophole, does not mean that the government will be taking _extra_ money from anybody else. Presumably every rational individual will be taking advantage of the legal loopholes (aka “deductions,” “exemptions” and other more neutral terms) that are available to them. Everyone should pay what they are legally required to pay. If that does not cover what our duly elected representatives and president et al have decided to spend, then we borrow from the Chinese, or whomever, to cover the difference. There is not some extra amount suddenly added on to the taxes of those who did not take advantage of legal loopholes available to them (or who were unable to take advantage of any legal loopholes).

  • Brian

    A couple points of (admittedly biased) sanity:

    1. The loopholes exist because a democratic legislature enacted them precisely to shape behavior society deems good. Also, don’t confuse cheating on taxes with loopholes.

    2. Many vehicle collisions, and perhaps most fatal ones, are not car vs. car accidents. Many are single car accidents. Many others are commercial truck vs. car accidents. So in the net sum of things, driving an SUV reduces car fatalities far more than it would increase them for potential “victim” cars. Plus, a large part of vehicular fatalities are caused by drunk drivers on law-abiding drivers and passengers. Assuming one is not likely to drive drunk, it further adds to the balance of responsibility of driving a large, heavy, safe vehicle. Throw kids into the back seat, and it seems irrational NOT to drive an SUV.

  • rcriii

    Barkley: As Robin said, the money will eventually be extracted from taxpayers.

    Robin: I’m wondering if this is not a case of you taking some things you personally dislike and trying to elevate them to universal or moral principles. This appears to me to be a species of bias.

    I don’t particularly like large vehicles, and prefer smaller cars. I can also identify some real externalities associated with driving larger vehicles (note that in the case of safety, the externality is in part a reasult of _my_ preference). But I am not certain that those externalities outweigh the utility of those cars to their drivers. Thus I am reluctant to cast opprobrium on the drivers as you do.

    As a trivial example, consider Opera. I don’t like it, and it is often subsidized, using up resources that could be put to other uses. Should those who use the subsidized tickets feel ashamed, or should I just admit that this is my preference, and move on?

  • TGGP

    mtraven, like you I think the prospect for libertarians succeeding in eliminating politics are slim-to-none. However, I don’t see their prospects being any better if they choose not to give up on politics.

  • Robin complains about lost effort. The effects of loopholes are worse than that implies, because the nature of a complex tax code means that it takes time/expertise/money to exploit all the loopholes. People who do their own taxes won’t get the advantages over somebody who hires an accountant, and people who can afford very smart accountants will get correspondingly more financial benefit. As a result there is a whole tiered industry devoted to finagling the tax code. A software industry too.

    I think probably everybody here would agree that a simplified tax code would be better than what we have now.

  • rcii,

    I am aware that even the borrowed money is not “free,” and that at future generations will have to pay at least some higher taxes for higher interest payments. However, again, this was a conscious (or semi-conscious) decision of our elected officials when they decided on spending, rules for transfer payments, and the details of the tax code. As I already noted above, I happen to support a drastically simplified tax code, with this sort of problem of the eneven impact of all the complications being among several factors.

    For that matter, here is a problem for Robin. Suppose you are right, what tax rate should you pay? Should you not claim exemptions for your children and still pay the rate that comes out? If you are not eligible, should you voluntarily pay the AMT amount? Or, should you make a calculation of what a revenue neutral tax rate would be if there were no loopholes, in short simplification, and pay that rate?

    BTW, this is such a straw man you have set up, I kind of suspect that you did it for kicks just to stir up a lot of discussion about taxes, :-).

  • “The main effect of your efforts to pay less taxes is that others pay more later, via tax rate increases.”

    This is only part of the picture. The tax codes, with all their complexity, are expected to bring in a certain amount of revenue. It is true that if your actions manage to reduce the amount of revenue below this level, there may indeed be tax rate increases to compensate. But it’s also possible that the codemakers expect you to take full advantage of your loopholes and set tax rates with that assumption in mind. In that case, avoiding possible deductions will cause tax revenues to come in higher than intended. That could have bad consequences as well, if we assume that overall tax levels properly reflect society’s goals. So in a way, by taking advantage of your loopholes you are reflecting tax designers’ expectations, making this strategy something of a Schelling point in the game.

  • Barkley, I am not proposing any particular tax choices, just disapproving of effort to change those choices.

    Hal, I do not follow you. Surely the effect of behavior on tax revenue is pretty linear here.

  • Keith Elis

    Robin, as you know saving money on taxes, legally or illegally, takes effort. Even though you’re required to pay only a minimum amount of tax it takes effort to calculate how much. Why not just pay some arbitrarily large amount of tax over and above your marginal rate and spare the effort of this time-consuming calculation (and make an increased contribution to the greater good)?

    Am I wrong in sensing the implicit assumption in your thinking that loopholing takes more effort than the act of filing a return in the first place? I can imagine at least one counterexample to this assumption. Reporting an estimate of your charitable contributions as a deduction is lying. However, this lie requires less effort than tallying up the checks written to the church or adding up the Goodwill receipts. Honest return filing takes more effort than cheating in this example. Many other legitimate deductions are not effortless to report accurately.

    That said, Robin, do you have problem with expending effort to lower your tax bill from *any* arbitrarily high percentage of your income? Say from 99% of your income to your marginal tax bracket? It seems to follow that doing so is even more unlikely to be socially beneficial, and causes others to have to pay even more later.

  • Robin: Do you believe that additional marginal government spending has a net positive effect? I don’t. My hypothesis is that there are diseconomies of scale in government such that outside some optimal range of sizes (I don’t rule out zero as one of them) the bigger government gets, the more net harm it does with each new increment of spending. I further hypothesize that we are currently well outside that range. In that light, consider your claim that:

    “When you manage to pay $1000 less in taxes, I estimate this has only a small effect of government spending, say less than $100.”

    If I made government even $10 or $100 smaller, I’ve done a good thing. Because a government that’s smaller by $100 is closer to its optimum size. It’s not even necessary to believe *all* of the reduction is in stuff I dislike. Just most of it. That should be easy for anyone with libertarian tendencies but doubly easy for *you* given that you think marginal healthcare spending is wasted.

    You add: “The main effect will be to raise the tax rate so as to collect at least another $900, which will do more to discourage people from working.”

    Are you saying that $900 collected from others will discourage more work than does $1000 collected from me?

  • I think that for most people, shame is about reducing potential negative consequences to themselves, not improving social efficiency. A person feeling shame about stealing from a stranger helps prevent him from getting caught and punished. Even if stealing is legal, there’s still the threat of private punishment, or being socially ostracized. But taking advantage of tax loopholes is legal, there is little threat of private punishment or others finding out, so it’s only to be expected that people do not feel shame about it.

    This blog is about trying to make people rational, which is already somewhat utopian. Trying to make them rational *and* selfless definitely crosses the line.

    Glen asks “Are you saying that $900 collected from others will discourage more work than does $1000 collected from me?” If Robin is consistent he should say that he isn’t discouraged at all from working by taxes no matter how high they are, since that would be socially inefficient, and he would feel ashamed if he did work less because of taxes.

  • I just realized that a truly selfless person should actually be encouraged to work harder by taxes. Why? Because the harder he works, the more taxes he can pay, the less taxes others would have to pay, and (assuming at least one person is self-interested) the less discouraged they will be from working.

    So why are you reading a blog instead of working? Shame on you. 🙂

  • doctorpat

    A tax loophole is a change in our behaviour or financial structures that the government has decided to reward by means of reduced tax.

    If government is good and wise, then we are doing the right thing to follow the behaviour the government is trying to encourage.

    If government is stupid or corrupt then we are doing the right thing to minimise the money they have to spend on stupidity or corruption.

    Have I missed anything?

  • Robin, you say “When you manage to pay $1000 less in taxes, I estimate this has only a small effect of government spending, say less than $100.”
    My intuition is that the effect on government spending is larger, as I suspect tax rates are limited more by voters’ willingness to put up with taxes than by any limits on the desire to spend.
    Also, the claim “most of that spending pays for services most people value” seems misleading. I think it would be more accurate to say “most voters” rather than “most people”. Spending money to restrict immigration is supported by a majority of voters, but if you expand the relevant group of people to include potential immigrants then it’s unlikely a majority of that larger group would support the spending. Also, the political system creates few limits on the magnitude of harm that such spending imposes on potential immigrants, whereas the benefits of “good” spending are often limited by rent-seeking. So it might be that most spending produces results that are marginally more valuable than alternative uses of the money, but the harm done by the worst 5 percent of spending exceeds the benefits of the “good” spending.