The title of Steven Bank’s recent article asks a provocative question: “When Did Tax Avoidance Become Respectable?” Interested readers may be relieved to know that Bank also addresses other questions, including whether tax avoidance is respectable. Bank marshals a fascinating dataset (tracking newspaper ads about tax advice over time) to show that tax avoidance became more acceptable over the 1950s and 1960s. He then explains this change by suggesting, among other factors, that unsustainably high tax rates in the post-war period eroded public confidence in the tax system.
As Bank notes, 2016 brought with it news of several major tax scandals: the Panama Papers, tax fraud investigations of the world’s biggest soccer players—players important enough that I’d even heard of them, and, of course, Donald Trump’s, shall we say, very aggressive tax planning. As a tax academic, it felt at the time like there might be a real public fury over aggressive efforts to lower tax payments. My Facebook feed certainly suggested outrage. These were big stories, or at least so it seemed to me.
But, not for the only time in 2016, my Facebook feed failed me. It turned out, many of my fellow citizens may not have cared that much. Bank’s paper seeks to understand why that might be the case, while focusing on an earlier time period. He argues that the real change in taxpayer attitudes toward avoidance occurred during and after World War II. The paper traces the U.S. public’s attitude toward tax evasion and avoidance from the 1920s to the post-World War II era and then offers some reflections on how these changes continue to explain attitudes today.
As Bank tells the story, tax avoidance and evasion were rampant during the inter-War period, and the government’s efforts to police aggressive tax planning in this era gave birth to the economic substance doctrine. Nevertheless, because the income tax was not yet a mass tax, these avoidance behaviors were concentrated among a small group of taxpayers. Those engaging in this avoidance saw nothing wrong. Or as J.P. Morgan quipped, “[i]f the government doesn’t know enough to collect taxes, a man’s a fool to pay.” Such sentiments did not win popularity contests in the mid-1930s, however. Morgan later issued a half-hearted retraction, arguing that he had been misinterpreted.
Bank argues that while avoidance was common during the interwar period, it was not yet respectable to engage in such behavior. As proof, he points to changes in the way tax professionals advertised their services. Such advertisements were relatively rare until the 1950s, but in the ensuing decades they became both more common and more explicit.
As an example, Bank compares an ad from 1939 published in the New York Times which informed readers that “investors can effect substantial savings in their tax payments by a proper adjustment of securities held for short and long term periods.” Even the most puritanical of tax advisors wouldn’t have a problem with that kind of advice. By 1956, however, an ad in the Wall Street Journal advertised an “oil tax shelter” and offered to show investors how to “turn your tax dollars into future income and capital value” and to “invest in oil largely with tax dollars then receive 27 1/2% of gross receipts TAX FREE year after year.” These advertisements are the most entertaining part of the paper, and they also make Bank’s point. Something does seem to have changed in the way people talked about tax planning in public.
Of course, that doesn’t necessarily tell us about taxpayer’s private behavior. Perhaps everyone had always been cheating, and it was only in the 1950s and 1960s that people began to talk about it. Bank’s explanation of the shift suggests this is not the case. Rather, he argues that after World War II, a greater portion of the U.S. population got swept up into the tax system that imposed extraordinarily high rates. He argues that the rhetoric of self-sacrifices and communal ties boosted tax moral and allowed those rates during the War years, but it lost its appeal once the War was over. Taxpayers sought relief from Congress and obtained special tax breaks. While the statutory rates remained high, everyone knew effective rates were actually much lower. As Bank informs readers, there was even a bill that proposed a deduction for “human depletion” starting at age forty-five. And those that didn’t get such breaks felt cheated by the system. Bank quotes Professor Jerome Hellerstein’s 1963 observation that “it’s not uncommon to hear people boast of how they got away with this or that unwarranted deduction.” Bank also notes the growth of tax professionals (and tax professional networks) over time meant there were more experts available to provide tax planning services.
Bank’s evidence for a shift in public perception of tax avoidance is compelling, and I hope he finds a way to make his database of newspaper advertisements publically accessible. It’s a fascinating glimpse into the history of U.S. tax morals. What this history can tell us about our own times is, of course, less certain. Did dramatic reductions in top individual statutory rates result in great stigmatization of tax avoidance or were these high rates permanently harmful? I would be interested in seeing further research about attitude changes since the 1970s. We no longer see advertisements for tax shelters in newspapers, but we’re still not shocked to discover wealthy people engage in a variety of chicanery to lower their tax burden.
Bank concludes by suggesting a parallel story can be told about corporate tax avoidance. While U.S. statutory rates are high, effective corporate tax rates are much lower, in part because of special exemptions and in part because of aggressive tax planning. With corporations focused almost exclusively on their duties to maximize shareholder profit, it would seem to take a herculean public outcry for multi-national companies to change their attitudes toward tax compliance.