Benedict XVI: Tax Evasion Is Immoral

An interesting news leak from the Vatican over the weekend, carried by Times Online (U.K.) and Free Republic, claims that Pope Benedict XVI is crafting his second encyclical, one that will focus on social development challenges and denounce tax evasion as an immoral act. According to the Times:   

Pope Benedict XVI is working on a doctrinal pronouncement that will condemn tax evasion as “socially unjust”, according to Vatican sources. In his second encyclical – the most authoritative statement a pope can issue – the pontiff will denounce the use of “tax havens” and offshore bank accounts by wealthy individuals, since this reduces tax revenues for the benefit of society as a whole…Benedict intends to argue for a world trade and economic system “regulated in such a way as to avoid further injustice and discrimination”, Ignazio Ingrao, a Vatican watcher, said yesterday.

According to an Associated Press story, Italian premier Romano Prodi has been "call[ing] on Roman Catholic priests to help him battle Italy’s widespread tax evasion by invoking the seventh commandment — thou shalt not steal."

The Pope’s expected declaration is sure to arouse passionate and diametrically opposed moral opinions. My own views, briefly, are that equating the protection of property obtained legally and ethically (ie, without theft, fraud, or coercion) to "stealing" is preposterous, and consistency would require condemnation of other sanctioned forms of tax evasion as well, such as the tax advantaged status conferred on non-profit organizations, certain types of investors, and certain kinds of securities and activities. As one reader pointed out in response to the Times online article:

Oh Dear. The Pope is condemning tax evasion and all those who do it and those who promote it. This is either very naive or very stupid (and hypocritical). For a start, the Vatican is a tax free zone. Employees in the Vatican pay no income tax. The Vatican is also as secretive in its financial dealings as any good Swiss Bank. Secondly, the condemnation will embrace good Catholic families like the Grimaldis in Monaco and the Liechtensteins of Liechtenstein who run well known tax havens.Third, the Vatican is itself an investor in tax havens (at the very least indirectly)…John Stenhouse, Wolverley, Worcestershire, UKI

Furthermore, although tax evasion of the kind being condemned is not typically available to the bulk of legal income earners and property owners in an economy, it may still provide an important signalling mechanism regarding optimal levels of taxation.

If the Pope and the Premier are truly concerned about tax collections (and the social challenges they want to address with public resources), they might be better served to ask how governments can make taxation feel less like "stealing" to those who carry its burden. And doing so could have very positive economic effects in Italy. There’s no question that the country has been a chronic underperformer in Europe for decades. And it’s reasonable to assume that this stems from a relative underdevelopment of its financial system, which in turn arises from a high proportion of domestic economic activity occurring ’underground’ (an academic and empirical case for this argument is made in this paper from the Bank of Italy). That said, a higher level of taxation, whether through stepped up enforcement, additional taxes, or higher tax rates, is unlikely to provide the additional resources needed to address the social challenges that are Prodi and Pope Benedict’s concern. By threatening to push the country in that direction, they are threatening to undermine their own agendas.

Moral opinions and economic theory aside, the economic and financial implications of heavier tax burdens interest us, especially here in the U.S.. We are at a unique point in history, where effective tax burdens have been declining for roughly five straight decades. But that trend is now at serious risk from a confluence of political, social, economic, and demographic factors. As a firm, we are well attuned to the reciprocal effects and sometimes unintended consequences that can occur at the nexus between tax and monetary policies. For that reason, we continue to believe that, barring a change in the current political trajectory of the U.S., fiscal and monetary currents beyond 2008 are likely to change significantly–reading and navigating those currents successfully will be critical for investors.

Update 9/7/2007: A response to the Pope via open letter from George Mason University economist (and libertarian firebrand) Walter Williams:

The pope might say that the welfare state reflects the will of the people. Would that mean the church interprets God’s commandment to Moses "Thou shalt not steal" as not an absolute, but as "Thou shalt not steal unless you got a majority vote in parliament or congress"?

I share Pope Benedict’s desire to assist our fellow man in need. But I believe that reaching into one’s own pocket to do so is praiseworthy and laudable. Reaching into another’s pocket to assist one’s fellow man in need is despicable and worthy of condemnation.