Quarter 4, 1999
by Lee McIntyre

Is there a difference between what is legal and what is ethical? Should our views about morality influence our understanding of the law, and vice versa?

Such questions are at the heart of Leo Katz’s provocative book Ill-Gotten Gains (University of Chicago Press, 1996), in which he presents us with several “puzzles of the law” in search of the relationship between law and ethics.

Consider this scenario: a wealthy shoemaker desires to give his son $1,000 a year and deduct it from his taxes. But he can’t; gifts are not legally tax-deductible. So, the shoemaker consults his attorney who suggests that he give his son $10,000 and then later ask him for a $10,000 loan to run his business, for which he will pay him $1,000 annually in interest. Since the purpose of the loan is to run his business, the $1,000 annual payment is now a business expense and therefore arguably legally deductible.

Although this strategy puts its toes very close to the fuzzy line that demarcates tax avoidance (which is legal) from tax evasion (which is not), Katz suggests that the difference in form between the two scenarios — notwithstanding their identical end result — marks off a crucial distinction between them. Indeed, most questions in tax law as well as in other areas of business law, such as how to legally disinherit your spouse or how to go bankrupt while still retaining most of your assets, are of this sort. But is the scheme dreamed up by the shoemaker’s attorney ethical? Surely, the standards here are more exacting.

FORM OR CONSEQUENCES?

Katz seeks to show that the shoemaker’s gift and other similar legal puzzles make sense when one views them from a moral perspective that emphasizes the importance of form over outcome. Indeed, in the law, Katz tells us, we are struck by the ubiquity of form — the reluctance to let legal questions be decided wholly (or even primarily) by their consequences. That is to say, how we arrive at a result is often as important to the law as the result itself. Was the confession coerced? Was the search illegal? In the law, we rely on the guidance of formal principles, even in those cases where doing so may lead to a “worse” outcome. Although he never says it outright, Katz seems to think that in the shoemaker’s case — even though the outcome of the gift and the loan would be identical — the loan is legitimately judged to be both legal and ethical, since it is based on the principle that one is allowed to deduct business expenses.

Thus, Katz reveals his belief that formal principles are the foundation of ethical judgments. Whether given by God, nature, or intuition, this view, known as “deontology,” holds that morality is determined solely by adherence to a strict set of behavioral guidelines. Do unto others as you would have them do unto you. Thou shalt not kill. Keep your promises.

Those who would object that a wolf in sheep’s clothing is still a wolf (i.e., that the shoemaker’s gift is merely disguised as a loan) would advocate the “utilitarian” position. Utilitarians, as a species of consequentialists, judge actions by their outcomes. How do we know which actions are moral? For the utilitarian, they are those that maximize the happiness of the greatest number of people.

Which view is best? In ethics as in law, Katz maintains, form is paramount; he dismisses utilitarianism as a guide to our ethical behavior, and presumably also to our legal and even to our economic judgments, by following the characteristic philosophical strategy of questioning its fit with our ethical intuitions. Consider, as he does, a doctor with five patients, each of whom will be at death’s door unless he or she receives an immediate organ transplant. Two need kidneys, two need lungs, and one needs a heart. Suddenly, a perfectly healthy patient walks in the door — a veritable bounty of usable organs. Is it moral to sacrifice the life of an innocent person in order to save five others? Most people’s moral intuition tells them no, which Katz takes as compelling belief in deontology.

But craftier than any tax attorneys, 24 centuries of philosophers have spun alternative scenarios to foul the net of anyone who hoped to make ethics so easy. Immanuel Kant, the most famous of all deontologists, maintained, for example, that it was always wrong to lie to anyone about anything, damn the consequences. Such reliance on principle over outcome should warm Katz’s heart. But it would also mean that if you were hiding Anne Frank in your attic, and the Nazis happened to knock on your door inquiring as to her whereabouts, it would be your ethical duty to tell them where she was! So much for the obvious intuitive superiority of deontology.

Katz never says explicitly that he thinks deontology is victorious in the ethical debate with utilitarianism. Nor is he explicit in saying that there is no real difference between the ethical and the legal in the debate over form and consequences. Yet, these seem to be his views, and thus it is incumbent upon Katz to state clearly the formal principles that he thinks stand behind our moral and legal judgments. Unfortunately, he does not do this. This is somewhat like telling us that we should salute a flag but not being able to tell us which country it represents. Moreover, throughout the book, Katz often writes as if behaving according to principle amounts to little more than a formal maneuver for rearranging things slightly, in order to do what one really wanted in the first place. But surely adherence to principle, either in law or in ethics, requires more than this.

THE THORNY CASE OF INSIDER TRADING

What Katz does well is provide a rich diet of thought-provoking examples. Can I warn someone that I possess incriminating information about her, just so long as I don’t threaten to use it, which would amount to blackmail? Is it acceptable for me to tie up all my liquid assets in the year before my son goes to college, knowing that this will increase his eligibility for financial aid? Katz is at his best when raising the sort of complex situations that challenge our most basic ethical beliefs, even if he doesn’t offer any easy answers for how to resolve them. Consider, for example, the case of insider trading.

Some utilitarians argue that insider trading is actually good. It operates as a form of incentive pay by encouraging insiders to take actions that will increase the stock price. It may also promote economic efficiency by quickly sending signals to the market about the future fortunes or misfortunes of the firm. Moreover, the alleged victim of this crime is an unusual one — the person who would have bought (or sold) the stock if the inside trader hadn’t. But does this person have a legitimate claim against the actions of the inside trader? And couldn’t firms simply announce their intention to engage in insider trading in advance, and let the buyer beware?

Yet, most people find it hard to avoid the feeling that insider trading is nonetheless wrong. But what precisely is wrong about it? Katz argues that certain acts are wrong in principle because they violate the integrity of the individual, for which no greater good can compensate. We don’t kill one person to save five. We don’t send the alcoholic to prison because he may drive drunk, even if we were sure that it would save many lives. Indeed, certain of our rights are so strong — like the right not to be murdered or enslaved — that, even if we wish to, we cannot contract our way out of them.

But is insider trading one of those situations? Katz seems to think so. He argues that insider trading is a form of fraud, and that one’s right not to be defrauded is so strong that it is morally impermissible for us to breach it. We may not sell it and even if we choose to do business with someone who announces his intention to engage in insider trading, we still have a claim on the state to protect us; just as we cannot legally sell ourselves into slavery, someone cannot legally defraud us just because we have consented.

Yet, this begs some crucial questions. How can we know which rights are so basic that they cannot be trumped even by our preferences? Is the right not to be defrauded one of them? Should insider trading even be considered an instance of fraud? And if not, does this leave us back in bed with the utilitarians?

Katz causes us furiously to think about such questions and, even though his own position is too underdeveloped to be wholly convincing, he clearly demonstrates the value of thinking about these issues from an ethical point of view.

REALITY BITES

The upshot is that there is no substitute for thinking through such difficult puzzles of morality and the law in the way that Katz has actually done — piecemeal, slowly, with due reflection on their intricacies. No single theory will do the work of allowing us neatly to cleave the legal from the illegal, the ethical from the unethical, in one fell swoop. Indeed, this is why, despite our respect for the letter of the law, we need judges for their interpretation, and philosophers and others trained in ethics to present us with a full range of challenges to our ethical intuitions.

Leo Katz has written a spirited and engaging book that presents us with dozens of such scenarios against which to sharpen our judgments. What a pity if we were to agree with him, and conclude from his book that all such cases could be decided by appeal to a single dry philosophical theory. Better, I think, is to learn from the form of Katz’s own journey through the examples in his book — that the value of such an exercise is not in the production of some grand final theory, but in the refinement it gives to our capacities for ethical judgment, so that we will have some ethical intuitions worth defending in the first place.