We admit to being (all at the same time) bemused, astonished and frustrated at the ongoing controversy about "tax inversions" that move a corporate or individual taxpayer's domicile outside the United States. The amount of public comment, much of it obvious political posturing, has been extraordinary, even to the point that President Obama spoke out.

Consider these examples:

  • In a spring Senate hearing about Apple's tax practices, CEO Tim Cook testified that its non-U.S. earnings have not been taxed here, but that it did pay $6 billion in local and federal income taxes in 2013. Afterwards, Sen. John McCain was quoted as saying, "What [Cook and other executives] often leave out is the second part of the story, that Apple is one of the largest tax avoiders." He also called the company the "most egregious offender."
  • Eduardo Saverin, co-founder of Facebook, gave up his U.S. citizenship in 2012 to, among other reasons, avoid paying taxes on the gain he would realize from his shares; the Los Angeles Times commented: "Saverin made his riches off Facebook-loving U.S. taxpayers and is now defriending the country that made him rich when it comes time to add some of that money back to U.S. tax coffers."
  • In "Positively Un-American," the cover story of the July 21 issue of Fortune, Allen Sloan rails against corporate inversions, claiming they'll cost the U.S. treasury $19.5 billion over the next 10 years without acknowledging that that amount is not even a rounding error on the Congressional Budget Office's prediction of $4.5 trillion of corporate tax collections in the same period. Throughout his piece, he complains that these taxpayers aren't paying their "fair share." His description of the U.S. tax structure also fails to mention how double taxation of dividends can greatly increase the effective rate.
  • President Obama was quoted as saying in Los Angeles on July 24 that, "[Inversion] sticks you with the tab to make up for what they're stashing offshore through their evasive tax policies." In addition, the president said in August that, "You have accountants going to some big corporations ... and these accountants are saying, you know what, we found a great loophole - if you just flip your citizenship to another country, even though it's just a paper transaction, we think we can get you out of paying a whole bunch of taxes. Well, it's not fair. It's not right."


Frankly, we're dumbfounded by these critics' lack of knowledge of and/or respect for the long-established legal doctrine that has guided tax policy, enforcement and compliance for at least 80 years. Specifically, we refer to the distinction between tax avoidance and tax evasion. Avoidance is perfectly legal income management to pay less tax while complying with the law. Evasion is illegally misreporting taxable income to escape paying the required amount.

Ironically, Senator McCain's criticism of Apple for being a "tax avoider" almost sounds like praise for legally reducing its taxes. In contrast, President Obama mischaracterized moving offshore as "evasive," apparently using that word's vernacular definition instead of its legal meaning. In both cases, the speakers' mistakes are lamentable.

In all four situations, the critics maligned managers and accountants who, as far as we know, abided by the law. We noted that the president of the New York State Society of CPAs struck back with this response to President Obama's criticism: "I believe [he] should be aware that U.S. corporations hire accountants for their distinct ability and expertise in seeing that clients fulfill their tax obligations as required by the laws adopted by Congress."



Two quotations attributed to Judge Learned Hand are fundamental to the body of tax law as practiced by both the legal and accounting professions.

This first one dates back 80 years: "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." (Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934))

Here is the second: "Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: Taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant." (Commissioner v. Newman, 159 F.2d 848, 851 (2d Cir. 1947) -- dissenting opinion.)

(So you don't have to look up the definition like we did, "cant" means "hypocritical and sanctimonious talk, typically of a moral, religious or political nature.")

At their core, Hand's statements establish that taxpayers' wealth and income are theirs to do with as they wish, as long as they pay at least the absolute minimum tax required by the law. They cannot be condemned for doing so and they should not be cajoled or harassed into paying more.

Note that we're not saying that it would be wrong if someone responded to these criticisms by choosing to pay more taxes than the law requires. However, we would consider their behavior to be irrational and bizarre. (We say more on this point later.)



The words "fair" and "fair share" often come up in these hyper-critical diatribes. Of course, the critics ought to comprehend that no one really knows what share is fair, although we suspect that most people think that the tax system would be more fair if they paid less while others paid more.

Simply put, there's no way to build a clear consensus on what is indeed fair. Instead, we have to rely on a legislative process to establish the amount that must be paid. Of course, the present laws are not evenhanded because they reflect innumerable political compromises reached and maintained over decades. Like it or not, those laws provide the only workable (and enforceable) definition of "fairness."

In our eyes, those who legitimately avoid taxes simply try to pay no more than their mandated fair share. Therefore, all the whining that someone isn't paying a fair amount is, well, "mere cant."

The plain truth is the only legitimate recourse for those who find the tax law to be inequitable is campaigning and voting for legislators who might enact new statutes.

In our mind, the critics' worst tactic is to use the press or their positions of authority to browbeat a small group of taxpayers into paying more than the very least they're required to pay. This ill-conceived approach aims to bypass legislative processes to produce de facto changes in the tax law.

To sum it up, what's fair is what's in the law, period.



We cringe when critics propose denying people (including corporations) their fundamental right to move from place to place whenever and wherever they'd like. In 1972, Paul Miller had the gut-wrenching experience of going through the Berlin Wall that kept people in East Germany from leaving for elsewhere. Everyone should despise what that wall stood for while grieving those who died trying to escape. The people who created it are among the most inhumane in history.

In that vein, it's totally clear that there must be no effort to prevent anyone from leaving the U.S. to find another home they will find more favorable in terms of its economic, climatic, cultural, religious, professional, political, or tax environment. Restricting their freedom to relocate is not merely unconstitutional but violates their basic human rights.



Our plea to complainers about inversion is to cool their rhetorical attacks on those who are exercising their freedom to do as they wish within the law.

Instead, they should take their opinions to appropriate legislative bodies to encourage changing tax laws to reflect their own peculiar idea of fairness. Of course, they will encounter differing opinions and resistance and will more than likely have to cope with getting nowhere. As for those in the government who are trying to discourage inverting through some sort of regulatory scheme, instead of changing the tax law, they face the danger of crossing lines that shouldn't be crossed. At the time we were writing, expectations were unfortunately rising that the administration was looking into this scheme.

For those who think this non-legislative initiative would be a good idea, look out. If you think it's OK to have one set of government bureaucrats circumvent laws to impose your view on others, think again! That power can just as easily be turned against you by others who come to power later. It's a losing game.

In other words, either stifle your cant or put up the effort to legitimately change the laws.



As a solution, we propose an option that could avoid drastically rewriting the law while satisfying those who think today's tax structure is unfair.

Specifically, Congress could vote to add a "fair share adjustment" line to tax returns right below the line for the year's tax. Each taxpayer could lower their own liability to their perceived "fair" level by simply subtracting whatever amount they'd rather not pay. On the other hand, taxpayers who believed they had legally reduced their tax obligation too much could use the same line to add the extra amount they think they ought to pay.

Obviously, this idea is satirical hyperbole. Nonetheless, it has just as much logic behind it as criticizing managers and individuals who move to less taxing jurisdictions to avoid, not evade, higher taxes.

Paul B. W. Miller is an emeritus professor at the University of Colorado at Colorado Springs and Paul R. Bahnson is a professor at Boise State University. The authors' views are not necessarily those of their institutions. Reach them at paulandpaul@qfr.biz.

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