Finding creative–and sometimes criminal–ways to avoid taxes can sometimes seems like the norm in our society. The following article examines the extent to which Jewish law demands honesty in paying income and sales tax. Reprinted with permission from The Jewish Ethicist: Everyday Ethics for Business and Life (Ktav Publishing), a compilation of the author’s weekly syndicated ethics columns.
One of the more onerous obligations we face as citizens is the requirement to pay taxes. By the time we are done with federal taxes, state taxes, property taxes, sales taxes, Social Security, user and license fees, and so on, a pretty substantial chunk of our income finds its way to the government. It is hardly surprising that citizens are always looking for ways to minimize their tax burden.
At the same time, today’s citizen is, to an unprecedented extent, the beneficiary of government expenditures. In most advanced countries we take for granted an extensive system of roads and highways, an efficient legal system, well-planned neighborhoods with sidewalks and green spaces, national defense which gives most people lifetime security, an impressive level of public school education, and generous retirement benefits.
Enjoyment of these benefits implies an ethical obligation to be fair dealers in the tax arena. We are entitled to minimize our tax burden, but we must not engage in or abet tax evasion.
An instructive passage in the Talmud teaches us about the important relationship between the general obligation to obey legitimate laws and the special legitimacy of taxes that are used for our benefit. “Samuel stated, ‘The law of the land is the law.’ Rava said, ‘Observe that this must be true. For [the government] fells trees and builds bridges, and we cross them.'” The passage suggests that if it were illegitimate for the government to appropriate private property through taxes (felling trees), it would be equally illegitimate for us to make use of the stolen property by crossing the bridges.
Let us examine some pressing dilemmas regarding tax evasion.
QUESTION: Some of my friends are taking advantage of an innovative and rather elaborate scheme to save taxes. They explained to me that it is based on a novel interpretation of the tax law. Is it ethical for me to take part in this scheme?
ANSWER: Your confusion is understandable. No less a genius than Albert Einstein is quoted as admitting that “the hardest thing to understand in the world is the income tax.”
To begin, we must note the difference between tax avoidance and tax evasion–between exploiting the law and flouting it. It’s okay to minimize taxes by taking advantage of legitimate provisions of the tax law, or even by taking a reasonable position on an unresolved question of law. But we cross the line into tax evasion, which is a criminal act, when there is no sincere claim of lawfulness. This is the basic ethical distinction; now let us examine some criteria that will help us evaluate any given scheme.
A good way for the average person to distinguish between a prudent plan to save money and an illegal and immoral scam–which may ultimately be extremely expensive–is to ask a reputable tax adviser. If this professional clearly advises that you need not declare sheltered income, then you may assume that your acts are solidly defensible. But an evasive answer, such as “Nothing will happen to you if you don’t report,” or “I know that many people employ these methods,” is a sign of danger.
Another guide is the degree of secrecy called for. Watch out when ordinary, prudent discretion crosses the line into “cloak and dagger” activities, like wiring small amounts repeatedly, moving cash, or using way stations in moving money.
An ordinary person can rely on a reputable accountant, but the accountants themselves cannot just pass the buck. They have to answer to a higher authority–not to mention the Higher Authority. Their obligation to know and conform to generally accepted accounting procedures is legal, ethical, and professional. An accountant who deviates from these principles is in violation of the professional code of conduct and may be subject to prosecution. From a Jewish point of view, the accountant is abetting wrongdoing by the client.
Of course an accountant, like a lawyer, is permitted to interpret the law in a new light–if the interpretation is professional and defensible. But it is unethical to make an audacious claim, based on the hope that the tax authorities won’t notice.
QUESTION: Some businesses in my area are run on a “cash-only” basis. Can I patronize these businesses, or is this encouraging tax evasion?
ANSWER: There are three possible answers to your question:
1. It’s fine; paying taxes is the proprietor’s responsibility, not yours.
2. It’s all right to patronize these businesses, but demand a receipt so that you are not encouraging deceit.
3. You should boycott dishonest businesses.
Which answer is correct? All three. It depends on the exact situation. Jewish law distinguishes three levels of cooperation with wrongdoing and prohibits anything that would abet wrongdoing. The three levels, in decreasing order of gravity, are:
• Enabling a transgression. If the transgression could not take place without your participation, you are enabling the wrongdoing to take place. This is categorically forbidden by the biblical injunction, “Do not place a stumbling block before the blind.” Our tradition explains that this refers primarily to a spiritual stumbling block, which causes someone to transgress.
• Abetting a transgression. This means that you take an active role in the unethical activity, but if you didn’t do so, someone else would.
• Condoning a transgression. Normally, we are obligated to protest wrongdoing. Whenever we remain silent and even benefit from it, we may seem to be condoning it. The ethical status of condoning depends on the degree of identification we show with our participation as well as our ability to make an effective protest; these factors vary according to the situation.
In short, Jewish tradition urges us to exercise moral leadership and take responsibility for the moral progress of the world. This means that we cannot shirk responsibility when our actions encourage wrongdoing.
But we should not jump to the conclusion that we should immediately boycott or even turn in the suspected tax evader. An equally important principle of Jewish tradition is that we should give others the benefit of the doubt, as the very next verse tells us, “Judge your neighbor favorably.” And certainly it is not a mitzvah to be a busybody.
Therefore, Jewish law states that even if someone may seem to be involved in wrongdoing, we do not have to scrutinize his or her activities if a favorable interpretation is reasonable, even if it is less than probable. The example given in the Mishnah is someone who buys an ox during the Sabbatical year. Even though most oxen are used for plowing, which is forbidden during the Sabbatical year, it is not unusual for someone to buy an ox for its meat. So we may give the buyer the benefit of the doubt and sell him the ox.
Thus, if the cash basis of the business has a reasonable explanation besides tax evasion, we do not need to scrutinize the proprietor’s motives. Possible examples: a retail business constantly dealing with small amounts of cash, or someone for whom writing receipts would be impractical, such as a peddler. (Practically speaking, we must admit that such examples would be fairly rare nowadays, when even small businesses are generally required to have cash registers and issue receipts.)
However, if a permissible explanation is quite improbable, or if the seller admits right out that he is trying to evade taxes, then we must avoid helping. In this case, explain that you will be able to patronize the business only if you can obtain a proper receipt.
In some cases it would be necessary to avoid the business altogether. This is because of an additional problem called marit ayin, or giving the appearance of wrongdoing. If the business in question is well known as one that evades taxes and others can easily see that you are patronizing the business but do not know that you are demanding a receipts then you could be giving the impression of abetting the seller’s subterfuge. In this case it would be proper to find a way to publicize your insistence on a receipt, or to avoid the place of business altogether.
Pronounced: MISH-nuh, Origin: Hebrew, code of Jewish law compiled in the first centuries of the Common Era. Together with the Gemara, it makes up the Talmud.
Pronounced: TALL-mud, Origin: Hebrew, the set of teachings and commentaries on the Torah that form the basis for Jewish law. Comprised of the Mishnah and the Gemara, it contains the opinions of thousands of rabbis from different periods in Jewish history.