Tax nature of the benefits in exchange for the

Tax Evasion
and Avoidance:

Causes and Effects

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Adam McNeill

St. Thomas University

December 11, 2017

Table of
Contents

 

Executive Summary………………………………………………………………………………………………….. 1

Introduction   …………………………………………………………………………………………………………….. 3

Literature Review………………………………………………………………………………………………………. 4

            Causes…………………………………………………………………………………………………………… 4

                        Lack of Morale to Pay Taxes……………………………………………………………….. 5

                        High Costs to Comply with the Rules…………………………………………………… 6

                        Lack of A Strong Collection System…………………………………………………….. 7

                        The Way Revenue is Earned and
Changing Laws………………………………. 8

            Effects…………………………………………………………………………………………………………….. 9

                        Loss of Governmental Revenue………………………………………………………….. 9

                        Waste of Recourses Trying to Catch
People……………………………………….. 10

                        Increased Tax Rates……………………………………………………………………………. 11

Conclusion    …………………………………………………………………………………………………………….. 12

References   …………………………………………………………………………………………………………….. 13

 

Executive Summary

            Tax
evasion refers to illegal activities to escape tax collections. Tax avoidance
is completely legal, and the government encourages people to take advantage of
these opportunities in the tax laws. The causes of tax evasion and avoidance
can be recorded in two classifications. The first classification includes
factors that cause taxpayers to choose to not pay taxes. The second classification
contains factors for the inability of the government to enforce the tax laws it
imposes. In the first classification the person who is avoiding the taxes is
the cause and in the second the government collecting is the cause.

            Citizens’
readiness to pay their taxes varies broadly over the world. The “readiness
to pay” of the citizen is impacted by the low nature of the benefits in
exchange for the payment of taxes, the low clarity and responsibility of public
foundations, and the tax structure and impression of fairness in the structure.
The costs to follow the rules are one reason for an individual or a company to
commit tax avoidance and evasion. There are situations where people and
organizations are in the informal section of the economy to avoid the taxes
they owe. The way individuals earn their income influences the way they report
their taxes and therefore their ability to commit tax evasion.

            Tax
evasion is a hindrance to a country’s capacity to work. With an increasing
national debt, America’s capacity as a country to give employment, medicinal
services, and unemployment benefits lessens greatly. These issues would impact
government revenue and ways of managing money. However, by and large, there are
few studies about the subject; and they are obsolete. The issue can point to
the crumble of the national government by the increasing tax gap, and further
to the degree of a butterfly impact on other nations. The assets used to catch
evaders could be utilized for different purposes, such as school improvement
and street repairs. Governments must make up for these lost revenues one way or
another; therefore, they increase the tax rates.

Introduction

            Every
year, in the winter and early spring there is an obligation that all people
across the United States must consider doing and are committed to doing. This
obligation is filling one’s tax return with the government. Regardless of what
government the taxes are owed to, it is an obligation to pay one’s fair share
of taxes, which pay for the goods and services the government provides. Some
individuals try to escape this yearly obligation to pay their taxes by evading
or avoiding them.

            Typically,
each year realizes new changes in the tax structure, with some years having
more changes than others. Consistently with these progressions, the IRS faces
new difficulties in combatting the offenders of tax avoidance. Every year the
nation loses billions of dollars because of this tax evasion. If this issue was
to be decreased by a stricter requirement of recording, the nation would
produce revenues for goods and services more effectively. Some examples of the governmental
use of tax payments include providing poor people with public services such as
welfare, giving alleviation towards those seeking after advanced education, or assuring
that all the military expenses are paid for by the revenues generated from
taxes.

            There
are numerous causes and reasons that people commit tax evasion. This could fall
under any of the following categories: lack of morale to pay taxes, high costs
to comply with the rules, lack of a strong collection system, the way revenue
is earned and changing laws. Individuals who evade their taxes often do not
realize the effects that they have. The effects of tax evasion include loss of
governmental revenue, waste of resources trying to catch people, and increased
tax rates.

Literature Review

Tax
evasion refers to illegal activities to escape tax collections. Individuals may
try to hide their taxable earnings, revenues subject to taxation or avoid other
tax practices, causing the amount of income reported to be distorted. Also,
individuals may deliberately overstate deductions or exemptions to misrepresent
their income (Alm and Vazquez, 2001). According to Chiumya, tax evasion alludes
to the intentional refusal of an individual to pay his/her tax commitment
(Malkawi and Haloush, 2008). Refusal to accurately represent one’s income to
the IRS with the goal of paying nothing or something less than one’s fair share
of taxes is an evasion of taxes. Tax evasion is a criminal crime as portrayed
by the law, thus the punishments are extremely serious.

Tax
avoidance is the legal use of the tax laws to limit or diminish one’s duty to
pay taxes (Pyle, 1989). Tax evasion is the unlawful practice of evading the
requirement to pay one’s fair share of taxes; and tax avoidance takes advantage
of the benefits that are given in the loopholes, shortcomings, and unclear
statements in the tax laws to decrease or wipe out their taxes (Mponguliana,
2002). Tax avoidance is completely legal, and the government encourages people
to take advantage of these shortcomings in the tax laws.

Causes

There
are different causes of tax avoidance and evasion. These causes can be recorded
in two classifications. The first classification includes factors that cause
taxpayers to choose to not pay taxes. These variables are either a low tax
morale (unwillingness to pay one’s taxes) or too high expenses to follow the
imposed laws (Kirchler et al., 2007). The second classification contains
factors for the inability of the government to enforce the tax laws it imposes.
These variables originate from the inadequacies in the organization and the inability
to monitor tax collections from individuals which restrict the capability to
find violators (Kirchler et al., 2007). The key difference between the two
classifications is the person that causes the event to occur. In the first
classification, the person who is avoiding the taxes is the cause. In the other
classification, the government is the cause of the tax evasion or avoidance.

Lack
of Morale to Pay Taxes

Citizens’
readiness to pay their taxes varies broadly over the world. People’s willingness
to pay is not solely based upon the amount of taxes they must pay. Alm
demonstrates that citizens all through the world pay more taxes than can be
justified by even the most attainable levels of examining and punishing (2007).
These elevated amounts of tax obedience result from the tax morale of society. Tax
Morale is difficult to build up in nations without a profound established
‘culture’ and propensity for paying the taxes they owe (Alm et al. 1992). The
“readiness to pay” of the citizen in such nations is impacted by the
low nature of the benefits in exchange for the payment of taxes, the low
clarity and responsibility of public foundations, and the tax structure and
impression of unfairness in the structure.

By
and large, residents expect benefits or advantages as a byproduct of the taxes
paid. If the administration neglects to give fundamental public merchandise and
amenities or gives them inadequately, residents may not pay the taxes they owe;
and tax evasion will be the outcome (Pashev, 2005). The absence of
straightforwardness and responsibility in the utilization of public assets adds
to citizens disapproval both regarding the tax structure and the legislature (Kirchler
et al., 2007). This, thus, builds the readiness of people to evade the taxes
they owe to the government.

Some
investigations recommend that high tax rates encourage evasion. The instinct is
that high tax rates cause people to suffer a larger burden and, subsequently,
bring down the discretionary income of the citizens (Chipeta, 2002). Therefore,
people expect the government to provide more for the things they cannot
purchase because of the taxes they pay. Nonetheless, the level of the tax rate
may not be the main factor impacting individuals’ choice about paying their
taxes. Truth be told, the structure of the general tax structure has an effect
too. For instance, if the tax rate on corporate income is moderately low, yet
people are confronting a high tax rate on their own wages, they may see their
own tax rate as unreasonable and an unjust part of their wages. “Often, huge
organizations can more effectively exploit tax loopholes, adding to the
apparent injustice of the framework” (Pashev, 2005). Tax rates and the general
structure of the tax framework, significantly affect people’s mindset and aids
in the evading of their taxes.

High Costs to Comply with
the Rules

High
compliance costs are the costs the citizen must bear to assemble the vital data
to complete their tax documents. These costs are one reason for an individual
or a company to commit tax avoidance and evasion. Especially small and medium
estimated ventures (SME) experience the ill effects of high compliance costs. A
study among South African firms on the administrative expenses of working
together uncovered that taxes are the most challenging arrangement of
directions to follow (Pashev, 2005). Most importantly the forms that must be
learned to comply with the laws is deflecting firms from paying their share of
taxes. When questioned about their procedure to adopt the administrative
expenses of maintaining their business, around 18 percent reacted to just
attempt to keep away from or evade tax collection.

Lack
of A Strong Collection System

Many
emerging nations confront challenges establishing a well-working tax structure,
particularly for recognizing those citizens and firms that are subject to pay
taxes. Although there have been advancements, these nations’ ability to present
and support a well-working tax system still face extreme challenges. Issues of
collecting taxes may happen due to failed government setups in their attempt to
collect taxes and its relationship to a nation’s economic council. Regularly,
the tax structure and gathering by the economic council were viewed as wasteful
corrupt, and expansive (Bird and Zolt 2008). As a result, the formation of
semi-self-ruling tax experts has been sought after in these nations.

Many
of these nations struggle to collect the taxes they are owed. Qualified,
trained and respected tax authorities are essential for the collection and the
execution of tax organization bodies. To encourage tax authorities to work with
the best interest of the legislature and to decrease their ability to become
corrupt, consideration must be given to compensation and different incentives
(Kirchler et al., 2007). If the authorities creating and collecting the taxes
are corrupt and untrustworthy, people will evade their taxes without getting
caught.

Likewise,
deficiencies in collecting taxes result from the way that economies of most
emerging nations include an informal division (Bird and Zolt 2008). Firms and
people in the informal division do not pay taxes on individual or business
salaries, and they do not charge a sales tax. The state loses these potential
tax incomes and, consequently, does not have the essential funds to operate an
effective government. Frequently, the motivations to be in the informal
division are not identified with endeavors to stay away from being taxed but
instead to avoid the extreme regulatory prerequisites or the expensive costs to
follow labor laws. There are situations where people and organizations are in
the informal division of the economy with the expectation to get away from the
taxes they owe. In any case, tax evasion should not be the main motivation
behind why firms remain or end up in the informal division.

A
well-working assortment of tax examinations is fundamental for the discovery
and prosecution of tax evasion. The absence of tax examination organizations
lessens the likelihood of identification. This impacts the choice of a citizen,
between committing tax evasion or not. Also, the legal structure is an
imperative essential for any tax enforcement activity. For instance, the size
and nature of punishments that are brought about after evasion has been
discovered to be associated with the willingness of individuals to pay or not
to pay their taxes (Kirchler et al., 2007).

The
Way Revenue is Earned and Changing Laws

The
way individuals earn their income influences the way they report their taxes
and therefore their ability to commit tax evasion. Bruce contends that a few
people become independently employed to dodge their fair share of taxes (2000).
This may be because of business receipts, the way things are written off, or
simply because of the ineffectual tax data reporting. Moreover, the absence of
monitoring of the salaries of the independently employed urges citizens to
change to this identity, because it is easier to evade taxes when an individual
is self-employed.

Tax
regulation in numerous nations, particularly in emerging nations, changes
quickly, consequently delivering unsteadiness and low openness in the tax code.
Complex tax laws and constant changes in the tax regulations can baffle
government tax collectors and citizens alike. The changing tax regulations open
the door for individuals to commit tax evasion (Alm and Vazquez, 2001). This
results in a tax avoidance and evasion which is not deliberate yet occurs
because of the absence of learning. In outrageous cases, tax avoidance and
evasion even end up becoming unavoidable when the tax framework turns out to be
excessively mind-boggling and conflicting.

Effects

Loss
of Governmental Revenue

Tax
evasion is a hindrance to a country’s capacity to work. On the off chance this
issue was to be decreased in any capacity, a government would improve its
ability to provide goods and services for its citizens. Research done by Demos
demonstrates the effects of the monetary losses from tax evasion in the years
2000-2010. (Demos, 2011). After some time, if this issue were to continue, the
revenue lost every year from this would keep on growing. If taxpayers of a
nation and its organizations would assume greater liability by paying their fair
share of taxes, the nation would be less in danger of bankruptcy.

The
United States’ financial deficiency is the principal worry for its economy.
With an increasing national debt, the United States capacity as a country to
give employment, medicinal services, and unemployment benefits lessens greatly.
On the off chance that the deficiency keeps on developing in this nature, the
country will be subject to significant distress. As indicated by Kimberly
Amadeo, a recent financial year spending shortage is at $474 billion. Her
article clarifies these shortages are caused by the recession and the War on
Terror. These issues would impact government revenue and ways of managing money.
On the off chance that America documented its taxes to a more noteworthy degree
for citizens and corporations, the capacity of the nation to pay for these national
responsibilities would expand (Amadeo, 2015).

            Waste of Resources Trying to Catch
People

The
issue with recognizing the monetary impact of tax evasion is that it must be more
than theoretical. There are few studies identifying with the subject and they
are obsolete. The issue can in any case intelligently point to a weakening of
the national government by the increasing tax gap and further to the degree of
a domino impact. On the off chance that one country was to crumble due to its
powerlessness to cover misfortunes produced by the absence of tax collections, other
nations would lose chances to work with that country, causing those nations to
also lose income created by taxes.

To
catch people in the act of tax evasion, the nation must utilize assets. These
assets could be utilized for different purposes, for example, school
improvement and street repairs. Hamel explains that “an efficient capitalist
economy relies on competition among businesses, but when one company is evading
taxes, and another is not, it creates an artificial advantage for the company
evading taxes. This could lead to companies with fewer business practices
outlasting those with more efficient practices, which would be detrimental to
the economy” (Bruce, 2000) He also expresses the financial concern that taxes
are wasteful. This is a direct result of the organizations being too greedy to help
the general population; governments are important to come in and gather taxes
to aid the public (Gleeson, 2009).

Increased Tax Rates

Tax
evasion and avoidance decrease the amount of revenue that a government
collects. Governments must make up for these lost revenues one way or another, so
they increase the tax rates. When people get the same goods and services while
paying more taxes, they become disappointed (Spicer, 1987). This causes more
people to evade their taxes and the government to lose more revenue. As a
result, a vicious cycle is created from the raising of the tax rates to
compensate for people avoiding their taxes.

Conclusion

            Tax
morale and the lack of a strong collection system in many emerging nations
creates challenges in establishing a well-working tax structure. The way
individuals earn their income influences the way they report their taxes, and
therefore some commit tax evasion without even knowing it. Tax regulation in
numerous nations, particularly in emerging nations, changes quickly, often
delivering confusion about the tax laws. Whether the cause of people’s evading
their taxes is intentional or unintentional, tax evasion still has the same
effect on a government.

            The
impacts of tax avoidance are clear each year, and the measure of government
income lost is large enough to raise the worry of the general population. If a nation
could enhance its capacities to gather taxes from organizations and people, the
country would be in an ideal situation. Streets would be legitimately kept up,
schools would be enhanced, human services could be offered across the country,
and citizens could protect this nation during war. People who do not pay their
taxes often forget how negatively they impact a government’s ability to provide
goods and services to its people.

            Tax
evasion is a serious problem that affects governments, and something must be
done to change it. Increasing efforts to prosecute violators and enforcing the
tax laws may be an ideal approach to reducing harm done by tax evasion. The
costs to do this initially would be high, but it would create more revenue; and
if the tax laws were stricter, people and organizations would be more inclined
to pay their taxes and not evade them. Therefore, there will be fewer people to
prosecute for evading their taxes and the initial high costs would be decreased
and society will ultimately become better.

References

Alm, James, Betty Jackson and Michal
McKee (1992). Institutional Uncertainty and Taxpayer Compliance. American
Economic Review

Alm, James and Jorge Luis
Martinez-Vazquez (2001). Societal institutions and tax evasion in developing
and transition countries. Georgia State University.

Alm, James and Jorge Luis
Martinez-Vazquez (2007), Tax morale and tax evasion in Latin America, Andrew
Young School of Policy Studies.

Amadeo, Kimberly. About News. (2015).
Current US Federal Budget Deficit

Bird, R. M., & Zolt, E. M. (2008).
Tax Policy in Emerging Countries

Bruce, D. (2000). Effects of the United
States tax system on transitions into self-employment. Labour Economics

Chipeta, C. (2002). The Second Economy
and Tax Yield in Malawi, African Research Consortium, Nairobi.

Demos. (2011). Federal Revenue Lost to
Tax Evasion.

Gleeson, P. (2009). How
Does Tax Evasion Affect the Economy?

Kirchler, Erich, Stephan Muehlbacher,
Barbara Kastlunger and Ingrid Wahl (2007). Why Pay Taxes? A Review of Tax
Compliance Decisions, Georgia State University.

Malkawi, B. and Haloush, h. (2008). The
Case of Income Tax Evasion in Jordan: Symptoms and Solutions. Journal of
Financial Crime

Mponguliana, R.G (2000). The theory and
Practice of Taxation in Tanzania tax payer services & Education Department

Pashev, K. (2005). Tax Compliance of
Small Business in Transition Economies: Lessons from Bulgaria.

Pyle D. J. (1989). Tax Evasion and Black
Economy the Macmillan press.

Spicer, M. W. (1987). The effect of tax
evasion on tax rates under leviathan. National Tax Journal,