Endogenous Tax Law: Regulatory Capture and the Ethics of Political Obligation

In a world of polarized public opinion, agreement reigns on at least one legal topic: Special interests wield a disproportionate and undue influence over the creation, implementation, and reform of business regulations. From the political right, Chicago school economists articulate the “capture theory” whereby business actors use the regulatory process to secure private economic advantages, most notably by erecting barriers to entry that generate economic rents.1 Similarly, political scientists espouse “public choice theory,” examining how lobbying, campaign contributions, and conflicts of interest tilt law in favor of wellconnected actors.2 From the political left, neo-Marxian critiques emphasize wealth polarization, market power, and the seemingly inevitable corruption of government that results.3 In short, everyone from Hayek to Marx seems to agree that law is endogenous to, or co-determinant with, economic and political forces, and that law is as much a product of those forces as a determinate of them. Notwithstanding widespread agreement on the endogenous nature of law, in discussions of corporate regulatory compliance, including tax compliance, the law is typically portrayed as an exogenously imposed constraint on business activities.4 Employing the rubric of financial risk management (FRM), the corporate tax advisor frames the taxpayer’s legal obligations with sole reference to the likely pecuniary consequences of alternative actions. This framing poses several ethical difficulties. First, FRM frames tax law in strictly positive terms, ignoring the moral dimensions of legal obedience.5 Second, tax law is highly influenced by the lobbying process; yet FRM tends to ignore the influence that corporate expertise and resources have on law and legal outcomes. Or, perhaps more accurately, FRM incorporates the role of private prerogatives when conducting a marginal benefit equals marginal cost calculation upon which FRM turns. Third, sometimes tax evasion goes undetected; or alternatively, it can be characterized as tax avoidance to move taxpayer exposure from the criminal to the civil docket.6 When tax laws are underenforced, myopic financial calculations counsel willful evasions, and tax obligations are reduced to a licentious admonition to do whatever one can get away with.