Ethics@Work: Tax indemnity

Some people accused of tax evasion are never brought to court - instead, they reach a negotiated settlement with the tax authority.

taxes 88 (photo credit: )
taxes 88
(photo credit: )
The most interesting business ethics story I found this week was the statement of the State Comptroller, Micha Lindenstrauss, on tax indemnities in Israel. Some people accused of tax evasion are never brought to court - instead, they reach a negotiated settlement with the tax authority. The Comptroller's statement, confirmed by news reports, indicates that these negotiations are shrouded in secrecy. No one knows who is engaged in them or what considerations apply. The report strongly urges that the names of those paying indemnities should be published, together with the amounts they pay. Two reasons are given: * "Publicity and transparency obligate publicizing the decisions on imposing indemnities." Here the concern is that lack of publication may lead the tax authorities to show favoritism to some accused individuals, or to all of them. The problem is excessive discretion combined with a lack of accountability. * Publicizing the names of tax evaders has "deterrent value of the highest order." Here the concern is that people may evade taxes with little concern. Perhaps they will not get caught at all, and even if they do, they will get off with back taxes and a moderate fine, without any damage to their good name. I always teach my economics students the quote attributed to Thomas Carlyle that you can make a parrot into an economist by teaching him two words: Supply and demand. I often think that the same parrot could be an ethicist with the two words "transparency and accountability." So I am fully in favor of the first proposal. In fact, the tax authority has conceded this point, agreeing to publicize details of all indemnity hearings but without the names. I am much more concerned about the second point. In fact, reading the statement leaves me with the impression that a very basic assumption of our legal system is neglected. Lindenstrauss writes: "The process of imposing an indemnity is a substitute for ordinary criminal procedure. In an ordinary criminal procedure, an indictment is presented to the tax evader, and a judicial deliberation is conducted in which the prosecution must bring its witnesses and prove the accusations, which it attributes to the accused who transgressed tax crimes, and the accused in this case can bring his own witnesses. After the court deliberations a judgment is delivered, in which the accused can expect, according to the severity of his crimes, a significant jail sentence and a heavy fine. By contrast, in the indemnity assessment procedure a drawn-out trial is avoided and he pays only a monetary indemnity." Isn't there something very strange about this paragraph? I always thought that indictments were presented to accused individuals, not to "tax evaders." The same paradox exists in "the accused who transgressed tax crimes." Is he accused, or did he transgress? And while the Comptroller's statement mentions only one outcome "prison and a fine," I seem to recall that in every trial there is yet another possibility: vindication. In fact, I distinctly recall that in our legal system, not only is vindication a theoretical possibility but in fact the accused is innocent until proven guilty. Later on, he writes: "Tax evaders who pay indemnities are doing the state a "favor" by paying indemnities; rather, the state does a favor to them by allowing them to pay an indemnity." This is certainly true, but the possibility also exists that people who are not tax evaders do the state a favor by paying indemnities rather than endure the expense, trouble and embarrassment of a public trial. As I understand the entire document, those who pay indemnities have never been convicted of any crime. They merely agree to pay an indemnity (the Hebrew word is kofer, which also means "ransom") in return for cessation of all legal action. It's true that in a plea bargain, the details of the plea are made public. But in the case of the tax negotiations, no indictment is served at all. Again, if I understand the document correctly, formally, the taxpayer hasn't even been accused of a crime. It sounds more like a pre-trial settlement than a plea bargain, and details of such settlements are generally not made public. Part of the problem is that the Comptroller is addressing the problems of accountability and transparency in the tax indemnity procedure without addressing the equally serious problem of accountability and transparency in the original tax assessment procedure, which itself gives the tax authority wide discretion. The assessment process used in Israel, like that found in many European countries, does indeed make the taxpayer "guilty until proven innocent." Given the power imbalance the current assessment system creates between the tax authority and the taxpayer, and given the interest the tax authority has in making indemnity an attractive option to those accused of tax evasion, I think the best solution would be the compromise suggested by the Tax Authority: Certainly full details of the deals should be made public, but without names. The writer is research director at the Business Ethics Center of Jerusalem (, an independent institute in The Jerusalem College of Technology. He is also a rabbi.