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Journal of Business Ethics (2020) 165:83–94
https://doi.org/10.1007/s10551-018-4088-7
ORIGINAL PAPER
Ethics ofTax Interpretation
DanielT.Ostas1
Received: 15 April 2018 / Accepted: 7 December 2018 / Published online: 19 December 2018
© Springer Nature B.V. 2018
Abstract
This article joins a somewhat nascent, but growing, body of scholarship addressing the ethical obligation to pay tax. The
analysis is grounded to the ethical duty to obey law generally and highlights two competing orientations to statutory inter-
pretation. The norms of self-interested advocacy suggest that tax planners should assert that interpretation that will generate
the most wealth for the client. The norms of professional advising, by contrast, direct the tax planner to interpret tax law
with reference to plain meaning, interpretive maxims, court precedents, and legislative purpose. When the two orientations
differ, the ethical duty to obey law requires the tax planner to recommend, and for the taxpayer to follow, the latter view.
Case studies drawn from a Louisiana sales tax avoidance scheme and from Google’s profit-shifting activities illustrate the
ethical issues incumbent in tax interpretation.
Keywords Tax avoidance· Tax advising· Legal interpretation
Introduction
Too often, a literal interpretation of a tax regulation is used
to circumvent the policy goals and normative compromises
that inform the regulation itself. This article compares and
contrasts a literal, plain-meaning interpretation of regulatory
language with an interpretation that employs the full pano-
ply of interpretative steps, including deference to legisla-
tive policy compromises, respect for judicial precedents, and
most importantly, an application of traditionally embraced
maxims of statutory construction. The article contends that
the ethics of tax interpretation require due deference to the
latter approach.
The article begins by considering and accepting the prop-
osition that there is an ethical obligation to obey reasonably
just laws promulgated in reasonably just societies, includ-
ing most local, state, and federal tax laws. The article then
explores the implications of this ethical duty. It defends the
idea that in tax planning and in professional tax advising, the
duty of legal obedience requires a fair-minded application of
the full array of interpretive tools. The ethical dimensions
of tax interpretation are illustrated with an example drawn
from a dispute over a state sales tax law, and then extended
to the global arena where profit-shifting to international tax
havens has generated widespread attention.
Tax scholars draw a distinction between tax compliance,
tax evasion, and tax avoidance (Prebble and Prebble 2010).
To comply means to abide by both the letter and the spirit of
the law. Evasion violates both letter and spirit, and avoidance
follows a literal interpretation of the law while purposefully
circumventing its spirit. Whereas tax evasion is criminal,
tax avoidance is not, and judicial remedies for the latter are
limited to civil penalties, nullification of the tax position,
and payment of back taxes with interest (Kahan 1997).
The scholarly literature identifies a so-called “tax gap,”
defined as the difference between taxes owed and taxes col-
lected. Estimates place the U.S. tax gap at about $450bil-
lion per year, or one-fifth of all taxes due (U.S. Govern-
ment Accountability Office 2017). About two-thirds of
this gap derives from tax evasion, one-sixth from taxpayer
insolvency, and one-sixth ($75billion annually) from tax
avoidance, that if challenged, would be invalidated in court
(Ostas and Hilling 2016, pp.748–749). To the extent that
abusive tax shelters and other avoidance schemes are per-
ceived as manipulations of one’s legal obligations, general
cynicism rises and voluntary compliance erodes (Kovach
2008, p.275).
* Daniel T. Ostas
dostas@ou.edu
1 Michael F. Price College ofBusiness, University
ofOklahoma, 307 W. Brooks Street, Room 206, Norman,
OK73019, USA
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