Is Tax Avoidance Economically Efficient?

Do Americans owe a duty to pay taxes?    To pay the most possible?   Or should we minimize – or avoid – the payment of taxes, when such an action completely complies with law?    What is the difference between ‘tax avoidance’ and ‘tax evasion?’   Finally, is tax avoidance an economically efficient activity?

The “tax inversion” debate is heating up. I covered this issue in yesterday’s blog (https://terryliebman.wordpress.com/2016/04/05/much-ado-about-nothing/).  I discussed the pending merger between Pfizer and Allergan.

Today, that $160 million merger is off.   Cancelled.   Because of the ‘tax policy’ paper put out by the White House and the Treasury earlier this week.

The debate is compelling because there is a meaningful difference between tax avoidance and tax evasion:

Avoidance is perfectly legal.   Evasion is not.   The Pfizer and Allergan merger was designed as an avoidance strategy.  Perfectly legal under today’s US tax code.  100% compliant.

So what’s the issue then?  If the strategy is legal, but – perhaps, in the opinion of some – unethical, is Pfizer and Allergan under some sort of American duty to avoid that behavior?

Perhaps we could debate, but I think the answer is no.   And with precedent.

Learned Hand, a highly respected and often quoted (by the US Supreme Court) federal Court of Appeals judge, said:

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not  bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.  Over and over again the Courts have said that there is nothing sinister  in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”

This morning, on CNBC, a commentator opined that ‘tax avoidance is not economically efficient.’   Meaning that efforts to minimize taxes are less valuable to the company than, say, efforts to increase revenue or cut costs.

I disagree.  And I think shareholders disagree.  Actions taken to increase the ‘after tax’ income of a company are typically perceived as wise.

We all know:  It’s not what you make … it’s what you keep.   Legally.   If the White House and the Treasury don’t like today’s laws, they should work to change them.

Of course, that isn’t going to happen soon.  🙂

• Terry Liebman