The Ethics of Tax Evasion and Trade Protectionism from an Islamic Perspective
Robert W. McGee (1)
My distinguished colleagues have done a superb job of outlining the Islamic tax system in their recent paper, (2) so I will not rehash what they have already said. In this paper, I would merely like to make some additional comments about the ethics of tax evasion in Islam, and then say a few things about the Islamic view of trade protectionism, which will come as a breath of fresh air to western free traders, since protectionism is viewed as evil by Islam.
The Ethics of Tax Evasion
According to Islam, Muslims have a moral obligation to pay zakat (3) for the support of the poor and for the legitimate functions of government. Thus, evading one's duty to pay zakat is classified as an immoral act. The Islamic system of taxation is a voluntary one, at least partially, although Islamic literature makes it clear that a government is justified in forcing people to pay taxes if the amount raised by zakat is insufficient to cover all the legitimate costs of government. However, "This right of interference with the individual's personal property will be limited to the extent required by the general welfare of the society." (4)
However, it does not follow that Muslims have a moral obligation to pay whatever taxes the government demands, (5) and it does not follow that any and all forms of taxation are legitimate. Thus, a case can be made that some forms of tax evasion, under certain conditions, may not be immoral. For example, if the government engages in activities that are beyond its legitimate functions, it might not be immoral to withhold taxes. (6) It might also not be immoral to evade certain kinds of taxes.
Ahmad (7) cites Yusuf's Economic Justice in Islam, which provides a list of practices that would be immoral for an Islamic state to engage in:
(a) It is immoral on the part of the state to use its power and privilege to make monopolistic gains or to tax the common people indirectly for replenishing the exchequer thereby. (8)
(b) There is no room in Islam for custom barriers, restrictive tariffs or exchange control. The Islamic state, therefore, must not resort to them. (9)
(c) It is illegitimate and unlawful for the state to tax directly or indirectly the general body of consumers and to give "protection" to the interests of a class of producers in the name of industrialization. (10)
(d) Since it is the duty of the state to dispense justice free of charge, therefore, there must not be any court-fees, revenue stamps or fees of any kind for the transaction of any official business. (11)
(e) There must not be any "income" tax as such. Besides curbing the initiative it assumes illegitimacy of the income of the rich. The state should levy, if need be, a proportional tax on the pattern of zakat on the accumulated wealth of the capable tax-payers. (12)
(f) The state should not resort to indirect taxation. If the state has to tax, then, it should do so directly so that the taxes represent a conscious contribution of the people to the cause of public interest. (13)
(g) That there is no justification for imposing death duty. Islamic laws of inheritance take care of the wealth left by the deceased. (14)
If these are the parameters, then it would seemingly not be immoral for a Muslim not to pay indirect taxes, which include excise taxes, customs duties and perhaps corporate income taxes. (15) Muslims could also morally evade paying tariffs and could engage in smuggling, as long as the good smuggled is not against Islam, such as alcohol or cocaine. Evading income taxes would also not be immoral although evading a property tax might be. The evasion of inheritance, estate and gift taxes would not be immoral.
Ahmad elaborates on some of the points made by Yusuf. Protectionism is condemned because it amounts to a direct or indirect tax placed upon consumers by the state. The general public must pay higher prices because the favored few (domestic producers) are being enriched. Traders and consumers are not morally bound to pay the increased price, whether the price increase is the result of protectionism or price fixing. (16)
According to Ahmad, "the adoption of any methods that create an artificial rise in the prices is strictly forbidden." (17) Price fixing and protectionism are only two actions that cause prices to artificially rise. Other causes mentioned by Ahmad include the sales tax and excise taxes.
"The term maks is used for sales-tax. The Prophet (peace be on him) had reportedly said: 'He who levies maks shall not enter Paradise'. Since the imposition of sales-tax (or, for that matter, of octroi and excise duties) results in raising the prices unjustly, therefore, Islam does not approve of it. The Caliph 'Umar ibn 'Abd al-'Aziz had abolished maks, interpreting it as bakhs (diminution in what is due to others) which is expressly prohibited by the Qur'an." (18)
This prohibition on sales taxes places Muslims in a bit of a quandary, since nearly every state in the USA levies a sales tax. Many European and other countries levy value-added taxes, which are basically the same thing as a sales tax. While it might be expedient for a Muslim consumer to pay a sales tax, and for a Muslim merchant to charge a sales tax, because they are required to do so by law, there is apparently nothing immoral about not collecting or paying them according to Islam.
Excise taxes are more difficult to avoid paying, since they are incorporated into the price of certain products. Of course, the excise tax on alcohol is easy to avoid. Just refrain from purchasing alcoholic beverages. But the excise tax on gasoline is more difficult (but not impossible) to avoid. In fact, the only way I can think of offhand to avoid paying the excise tax on gasoline is to buy gas from certain gas stations on Long Island, where the local mafia has made the evasion of the excise tax on gasoline into a profitable business. However, doing business with the mafia might run afoul of other Islamic tenets.
Another, less obvious form of tax evasion that is not immoral is the evasion of compliance with certain government regulations. A number of studies have pointed out that regulations can be equivalent to a tax, (19) and many examples can be given. One of the more obvious examples is rent control. If a landlord who owns a rent controlled building is prohibited from charging more than 500 a month for an apartment that would fetch 1,500 in a free market, he is, in effect, being forced to subsidize his tenant to the tune of 1,000 a month. The effect of this regulation is exactly the same as if the landlord were allowed to charge the 1,500 market rate, then pay a tax of 66 2/3 percent. (20) Rent control laws force the transfer of wealth from property owners to a favored group (tenants), which is immoral according to the tenets of Islam.
The strongest argument for complying with government regulations is when the regulation benefits the general public. However, many regulations are not of this genre. At least two other categories of regulations exist, those that benefit some special interest at the expense of the general public and those that are actually harmful to the general public. A number of trade regulations fall into one or both of these categories. The United States Trade Representative publishes a book each year that summarizes some of these protectionist regulations. (21)
One study estimated that regulations increase product prices and the taxes needed to pay the salaries of government bureaucrats to the extent of between 4,000 and 5,000 per year per household. (22) Another study estimated that the regulatory burden just for administering the U.S. federal tax system is more than 600 billion if one considers both the direct cost of government administration plus the private sector costs. (23)
Numerous studies in recent years have attempted to measure the cost of various regulations. (24) Some of these studies have concluded that certain regulations cost more than they are worth, or actually do more damage than good. (25) For example, banning DDT resulted in farmers being exposed to far more dangerous chemical substitutes. The federal government closed 35 wells in California even though the well water was less harmful than California's public drinking water. Regulations in the health care field, especially Medicare and Medicaid, as well as the tax laws, have overstimulated demand for medical services while cutting back the supply, thus causing prices to skyrocket. (26)
The Ethical Bankruptcy of Trade Protectionism
Under Islam, any and all kinds of trade protectionism are morally bankrupt, and there is no ethical duty to comply with any kind of protectionist trade legislation. One might also logically conclude that it is immoral under Islam to use a piece of protective trade legislation as a weapon against competitors. (27)
Under Islam, all price fluctuations are the work of Allah and no human agency should interfere with the operation of the law of supply and demand, which is considered part of the natural law. (28)
"Protection is disapproved, writes Abu Yusuf, because it provides affluence to the favoured ones at the expense of the general public." (29) "
"Ibn al-Qayyim regards protectionism as the worst form of injustice and predation. He declares it harmful to both the protector and the protected on the ground that they restrict the freedom of trade granted by Allah." (30)
"The customs duties are all outlawed. The Muslims and the dhimmis have the fundamental right to free import." (31)
"Protectionism is only an offshoot of nationalism, 'the Western ideological disease,' (32) which is repugnant to Islam. The gain of the common man lies in his acquisition of the best quality product at the cheapest price. This is only possible when full play is allowed to the comparative advantage and the efficiency of labour in the various parts of the world. The comparative advantage of one part of the world becomes the advantage of the entire people of the world when exchange is free from all restrictions and uninhibited by any prejudice, national or religious." (33)
"The 'crafty and insidious animal called the statesman or politician' generates nationalism and the robber barons pounce upon the unreasonable hatred of the foreigner to protect themselves against all foreign competition, of course, at the expense of the vast multitude of their own countrymen. Protectionism soon becomes a vested interest of the political and financial wizards, entailing a crushing burden upon the common people." (34)
"Protectionism ... sets the train of callous exploitation and corrupts the morals of all industrialists and business men. Business morals cannot be restored to purity so long as protectionism whips up the greed of the business man. Moral health is dependent on healthy ways of economic activity." (35)
"A protected industry is no fair business proposition it is at bottom supported by taxes extorted from the general body of consumers in the form of artificial prices. Only a fraction of these taxes goes into the pockets of the working man. The industrialist exploits the situation only to swell his ill-gotten profits." (36)
"... protectionism initiates a process of robbing Peter to Pay Paul Peter is the general body of consumers and Paul the protected industrialist." (37)
"Islam is jealous of political sovereignty for the Muslims. But it would keep the political borders open for trade, commerce and industrial co-operation with all the Muslim and the non-Muslim countries of the world so long as economics does not conflict with defence organisation. It will be noted that there is no room in Islam for customs barriers, restrictive tariffs or exchange control." (38)
"The state is there only to guard the free play of the natural economic forces, including the unrestricted flow of goods and services done in the cosmopolitan spirit of Islam, which repels nationalism and protectionism alike." (39)
The most common forms of trade protectionism are tariffs and quotas. Both tariffs and quotas increase the price that consumers must pay for both foreign and domestic products, and thus are considered to be evil under Islam. However, there are other, less obvious forms of trade barriers that protect domestic producers from foreign competitors. "Trade barriers elude fixed definitions, but may be broadly defined as government laws, regulations, policies, or practices that either protect domestic products from foreign competition or artificially stimulate exports of particular domestic products." (40) These, too, are prohibited under Islam. The U.S. Trade Representative publishes an annual report that summarizes many protectionist practices that other countries use against U.S. companies. These practices might be broken down into the following categories:
Import policies (e.g., tariffs and other import charges, quantitative restrictions, import licensing, customs barriers)
Standards, testing, labeling, and certification (including unnecessarily restrictive application of sanitary and phytosanitary standards and environmental measures, and refusal to accept U.S. manufacturers' self-certification of conformance to foreign product standards)
Government procurement (e.g., "buy national" policies and closed bidding)
Export subsidies (e.g., export financing on preferential terms and agricultural export subsidies that displace U.S. exports in third country markets)
Lack of intellectual property protection (e.g., inadequate patent, copyright, and trademark regimes)
Service barriers (e.g., limits on the range of financial services offered by foreign financial institutions, (41) regulation of international data flows, and restrictions on the use of foreign data processing)
Investment barriers (e.g., limitations on foreign equity participation and on access to foreign government-funded research and development (RD) programs, local content and export performance requirements, and restrictions on transferring earnings and capital
Anticompetitive practices with trade effects tolerated by foreign governments (including anticompetitive activities of both state-owned and private firms that apply to services or to goods and that restrict the sale of U.S. products to any firm, not just to foreign firms that perpetuate the practices) and
Other barriers (barriers that encompass more than one category, e.g., bribery and corruption, (42) or that affect a single sector). (43)
One glaring omission from the U.S. Trade Representative's annual report on foreign trade barriers is the antidumping laws. In fact, since the inception of the World Trade Organization, the 120 signatories to that agreement have officially recognized antidumping laws as a legitimate part of trade policy. As a result, antidumping laws can expect to take on increasing importance in the years to come. (44) Yet they are inherently protectionist and necessarily lead to artificially higher prices. Thus, antidumping laws would also be prohibited under Islam.
Conclusion
Since there is no moral obligation for a Muslim to comply with a law that causes prices to rise unnecessarily or that enhances the wealth of some protected group at the expense of the general public -- such as price fixing and protectionist trade legislation -- and since some regulations cause prices to rise unnecessarily or protect some favored group at the expense of the general public, it is logical to conclude that Muslims have no moral duty to comply with regulations that either cause prices to rise unnecessarily or that protect some special interest at the expense of the general public. It would also be logical to conclude that there is no moral duty for a Muslim (or anyone, for that matter) to comply with a regulation that is actually harmful to the general public.
What is clear is that it is not always unethical for a Muslim to evade taxes and regulations that have the same effect as taxes. Furthermore, it is clear that there is no ethical duty for a Muslim to comply with protectionist trade legislation, since any such legislation is inherently evil. Whether, and under what circumstances, a Muslim has a duty to evade certain taxes, regulations or protectionist trade legislation is a question we will leave for another day.
0 W. Paul Stillman School of Business, Seton Hall University.
0 Athar Murtuza and S.M. Ghazanfar, Tax as a Form of Worship: Exploring the Nature of Zakat, 1 J. Acct., Ethics Pub. Pol'y (spring, 1998), reprinted in The Ethics of Tax Evasion (Robert W. McGee, ed., 1998).
0 Zakat in Islam is similar to tithes in Christianity and Judaism. It is based on the religious belief that there is some moral obligation to contribute to the church or to the less fortunate.
0 Mushtaq Ahmad, Business Ethics in Islam 134 (1995).
0 S.M. Yusuf, Economic Justice in Islam 96 (1971).
0 For more on the legitimate role of the government under Islam, see M. Nejatullah Siddiqi, Role of the State in the Economy: An Islamic Perspective. (1996).
0 Ahmad, supra note 4, at 135-136.
0 Yusuf, supra note 5, at 96.
0 Id., at 68, 101.
0 Id., at 9-10.
0 Id., at 67.
0 Id. Since there must not be any income tax, there definitely must not be any graduated income tax, which necessarily treats the rich less favorably than the poor. According to Yusuf (p. 67): "There is no tax on income, which curbs initiative and enterprise. The progressive taxation assumes illegitimacy of the income of the rich. The rising slabs represent taxation with vendetta. Only a proportional tax at a fixed rate (on the pattern of Zakat) is to be levied on the accumulated wealth of the capable taxpayers without any distinction."
0 Yusuf, supra note 5, at 67.
0 Id.
0 A simplified definition of a direct tax is a tax that individuals or corporations pay directly Joseph E. Stiglitz, Economics of the Public Sector, second edition (1988), 387. Indirect taxes are taxes on commodities. However, the burden of a corporate income tax is ultimately borne by individuals, either shareholders, consumers or the corporation's employees. So a case can be made that a corporate income tax is actually an indirect tax. For more on the distinction between direct and indirect taxes, as well as the ethics of tax evasion in general, see Robert W. McGee, Is Tax Evasion Unethical? 42 U. Kan. L. Rev. 411-435 (1994).
0 Ahmad, supra note 4, at 122.
0 Id., at 123.
0 Ahmad, supra note 4, at 123.
0 For examples, see Ronald Utt, The Growing Regulatory Burden: At What Cost To America? Policy Report No. 114, (Lewisville, TX: Institute for Policy Innovation (November, 1991) James L. Payne, Unhappy Returns: The 600-Billion Tax Ripoff, Pol'y Rev. 18-24 (Winter 1992) Murray L. Weidenbaum and Robert DeFina, The Cost of Federal Regulation of Economic Activity, (Washington, DC: American Enterprise Institute, 1978) Lawrence J. MacDonnell, Government Mandated Costs: The regulatory burden of environmental, health and safety standards, 15(1) Resources Pol'y 75-100 (March 1, 1989) U.S. General Accounting Office, Regulatory Burden: Recent Studies, Industry Issues, and Agency Initiatives (December, 1993), GAO/GGD-94-28 Wayne B. Gray, The Cost of Regulation: OSHA, EPA and the Productivity Slowdown, 77 Am. Econ. Rev. 998-1006 (1987) Thomas D. Hopkins, Cost of Regulation. An RIT Public Policy Working Paper, Rochester Institute of Technology (1991) Bruce Yandle, Regulatory Takings, Farmers, Ranchers and the Fifth Amendment, Center for Policy Studies, Clemson University, 1994 Jonathan H. Adler, Property Rights, Regulatory Takings, and Environmental Protection. Washington, DC: Competitive Enterprise Institute, 1996.
0 For more on the economics of rent control, see Walter Block and Edgar Olsen, Rent Control: Myths Realities (1981).
0 For example, see United States Trade Representative, 1997 National Trade Estimate Report on FOREIGN TRADE BARRIERS (Washington, DC: Superintendent of Documents).
0 Utt, supra note 19.
0 Payne, supra note 19.
0 One of the earliest studies that tackled regulatory cost estimates for numerous sectors was by Weidenbaum and DeFina, supra note 19. A more recent study, by Hopkins, supra note 19, estimated regulatory costs between 1977 and 2000 for environmental regulation, other social regulation, process regulation and the efficiency and transfer costs of economic regulation.
0 For a study that discusses some regulations that actually make things worse rather than better see Richard L. Stroup and John C. Goodman, Making the World Less Safe: The Unhealthy Trend in Health, Safety and Environmental Regulation, NCPA Policy Report No. 137, Dallas: National Center for Policy Analysis, 1989.
0 Terree P. Wasley, What Has Government Done to Our Health Care? (1992).
0 For the application of this principle, from a western, Lockean rights perspective using the antidumping laws as an example, see Robert W. McGee and Walter Block, Ethical Aspects of Initiating Anti-dumping Actions, 24 Int'l J. Social Econ. 599-608 (1997) Robert W. McGee, The Moral Case for Free Trade, 29 J. World Trade (February, 1995) Robert W. McGee, The Fatal Flaw in NAFTA, GATT and All Other Trade Agreements, 14 Nw. J. Int'l L. Bus. 549-565 (1994).
0 Ahmad, supra note 4, at 122.
0Id.
0 Id., at 123.
0 Yusuf, supra note 5, at 68.
0 Toynbee, Civilization on Trial, p. 83.
0 Yusuf, supra note 5, at 98-99.
0 Yusuf, supra note 5, at 99.
0 Id., at 100.
0 Id
0 Id
0 Id, at 101.
0 Id
0 United States Trade Representative, p. 1.
0 The current NTE report covers only those financial services-related market access issues brought to the attention of USTR by outside sources. For the reader interested in a more comprehensive discussion of financial services barriers, the Treasury Department publishes quadrennially (most recently in 1994) the National Treatment Study. Prepared in collaboration with the Secretary of State, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Department of Commerce, the Study analyzes in detail treatment of U.S. commercial banks and securities firms in foreign markets. It is intended as an authoritative reference for assessing financial services regimes abroad.
0 It is difficult to obtain information on specific problems associated with bribery and corruption, particularly since its perpetrators go to great lengths to conceal their activities. Nevertheless, a consistent complaint from U.S. firms is that they have experienced situations that suggest corruption has played a role in the award of foreign contracts....
0 United States Trade Representative, pp. 1-2.
0 For more on this point, see Robert W. McGee, The Case to Repeal the Antidumping Laws, 13 Nw. J. Int'l L. Bus. 491-562 (1993) Robert W. McGee and Yeomin Yoon, Trade Policy for the Computer Industry: Time for a Change, 8 Temple Int'l Comp. L. J. 219-256 (1994) Robert W. McGee and Walter Block, Ethical Aspects of Initiating Anti-dumping Actions, 24 Int'l J. Social Econ. 599-608 (1997) Robert W. McGee, A Trade Policy for Free Societies: The Case Against Protectionism (1994).