Tax Adam McNeill St. Thomas University December

Tax Evasionand Avoidance:Causes and EffectsAdam McNeillSt. Thomas UniversityDecember 11, 2017Table ofContents Executive Summary…..

……..

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

……

……..

……..

……..

……

……..

……

……..

……..

….

……

……..

…..

….. 1Introduction   .

……..

….

……

….

…..

…….

……

…..

……..

…….

…….

……

……..

……

…….

…….

.. 3Literature 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 andChanging Laws………………………………. 8            Effects…………………………………………………………………………………………………………….. 9                        Loss of Governmental Revenue………………………………………………………….. 9                        Waste of Recourses Trying to CatchPeople……………………………………….. 10                        Increased Tax Rates……………………………………………………………………………. 11Conclusion    …………………………………………………………………………………………………………….. 12References   …………………………………………………………………………………………………………….. 13 Executive Summary            Taxevasion refers to illegal activities to escape tax collections. Tax avoidanceis completely legal, and the government encourages people to take advantage ofthese opportunities in the tax laws. The causes of tax evasion and avoidancecan be recorded in two classifications. The first classification includesfactors that cause taxpayers to choose to not pay taxes. The second classificationcontains factors for the inability of the government to enforce the tax laws itimposes. In the first classification the person who is avoiding the taxes isthe cause and in the second the government collecting is the cause.             Citizens’readiness to pay their taxes varies broadly over the world. The “readinessto pay” of the citizen is impacted by the low nature of the benefits inexchange for the payment of taxes, the low clarity and responsibility of publicfoundations, 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 tocommit tax avoidance and evasion. There are situations where people andorganizations are in the informal section of the economy to avoid the taxesthey owe. The way individuals earn their income influences the way they reporttheir taxes and therefore their ability to commit tax evasion.            Taxevasion is a hindrance to a country’s capacity to work. With an increasingnational debt, America’s capacity as a country to give employment, medicinalservices, and unemployment benefits lessens greatly. These issues would impactgovernment revenue and ways of managing money. However, by and large, there arefew studies about the subject; and they are obsolete. The issue can point tothe crumble of the national government by the increasing tax gap, and furtherto the degree of a butterfly impact on other nations. The assets used to catchevaders could be utilized for different purposes, such as school improvementand street repairs. Governments must make up for these lost revenues one way oranother; therefore, they increase the tax rates.Introduction            Everyyear, in the winter and early spring there is an obligation that all peopleacross the United States must consider doing and are committed to doing. Thisobligation is filling one’s tax return with the government. Regardless of whatgovernment the taxes are owed to, it is an obligation to pay one’s fair shareof taxes, which pay for the goods and services the government provides. Someindividuals try to escape this yearly obligation to pay their taxes by evadingor avoiding them.            Typically,each year realizes new changes in the tax structure, with some years havingmore changes than others. Consistently with these progressions, the IRS facesnew difficulties in combatting the offenders of tax avoidance. Every year thenation loses billions of dollars because of this tax evasion. If this issue wasto be decreased by a stricter requirement of recording, the nation wouldproduce revenues for goods and services more effectively. Some examples of the governmentaluse of tax payments include providing poor people with public services such aswelfare, giving alleviation towards those seeking after advanced education, or assuringthat all the military expenses are paid for by the revenues generated fromtaxes.            Thereare numerous causes and reasons that people commit tax evasion. This could fallunder any of the following categories: lack of morale to pay taxes, high coststo comply with the rules, lack of a strong collection system, the way revenueis earned and changing laws. Individuals who evade their taxes often do notrealize the effects that they have. The effects of tax evasion include loss ofgovernmental revenue, waste of resources trying to catch people, and increasedtax rates.Literature ReviewTaxevasion refers to illegal activities to escape tax collections. Individuals maytry to hide their taxable earnings, revenues subject to taxation or avoid othertax practices, causing the amount of income reported to be distorted. Also,individuals may deliberately overstate deductions or exemptions to misrepresenttheir income (Alm and Vazquez, 2001). According to Chiumya, tax evasion alludesto the intentional refusal of an individual to pay his/her tax commitment(Malkawi and Haloush, 2008). Refusal to accurately represent one’s income tothe IRS with the goal of paying nothing or something less than one’s fair shareof taxes is an evasion of taxes. Tax evasion is a criminal crime as portrayedby the law, thus the punishments are extremely serious.Taxavoidance is the legal use of the tax laws to limit or diminish one’s duty topay taxes (Pyle, 1989). Tax evasion is the unlawful practice of evading therequirement to pay one’s fair share of taxes; and tax avoidance takes advantageof the benefits that are given in the loopholes, shortcomings, and unclearstatements in the tax laws to decrease or wipe out their taxes (Mponguliana,2002). Tax avoidance is completely legal, and the government encourages peopleto take advantage of these shortcomings in the tax laws. CausesThereare different causes of tax avoidance and evasion. These causes can be recordedin two classifications. The first classification includes factors that causetaxpayers to choose to not pay taxes. These variables are either a low taxmorale (unwillingness to pay one’s taxes) or too high expenses to follow theimposed laws (Kirchler et al., 2007). The second classification containsfactors for the inability of the government to enforce the tax laws it imposes.These variables originate from the inadequacies in the organization and the inabilityto monitor tax collections from individuals which restrict the capability tofind violators (Kirchler et al., 2007). The key difference between the twoclassifications is the person that causes the event to occur. In the firstclassification, the person who is avoiding the taxes is the cause. In the otherclassification, the government is the cause of the tax evasion or avoidance. Lackof Morale to Pay TaxesCitizens’readiness to pay their taxes varies broadly over the world. People’s willingnessto pay is not solely based upon the amount of taxes they must pay. Almdemonstrates that citizens all through the world pay more taxes than can bejustified by even the most attainable levels of examining and punishing (2007).These elevated amounts of tax obedience result from the tax morale of society. TaxMorale 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 thelow nature of the benefits in exchange for the payment of taxes, the lowclarity and responsibility of public foundations, and the tax structure andimpression of unfairness in the structure.Byand large, residents expect benefits or advantages as a byproduct of the taxespaid. If the administration neglects to give fundamental public merchandise andamenities or gives them inadequately, residents may not pay the taxes they owe;and tax evasion will be the outcome (Pashev, 2005). The absence ofstraightforwardness and responsibility in the utilization of public assets addsto citizens disapproval both regarding the tax structure and the legislature (Kirchleret al., 2007). This, thus, builds the readiness of people to evade the taxesthey owe to the government.Someinvestigations recommend that high tax rates encourage evasion. The instinct isthat 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 cannotpurchase because of the taxes they pay. Nonetheless, the level of the tax ratemay not be the main factor impacting individuals’ choice about paying theirtaxes. Truth be told, the structure of the general tax structure has an effecttoo. For instance, if the tax rate on corporate income is moderately low, yetpeople are confronting a high tax rate on their own wages, they may see theirown tax rate as unreasonable and an unjust part of their wages. “Often, hugeorganizations can more effectively exploit tax loopholes, adding to theapparent injustice of the framework” (Pashev, 2005). Tax rates and the generalstructure of the tax framework, significantly affect people’s mindset and aidsin the evading of their taxes.High Costs to Comply withthe RulesHighcompliance costs are the costs the citizen must bear to assemble the vital datato complete their tax documents. These costs are one reason for an individualor a company to commit tax avoidance and evasion. Especially small and mediumestimated ventures (SME) experience the ill effects of high compliance costs. Astudy among South African firms on the administrative expenses of workingtogether uncovered that taxes are the most challenging arrangement ofdirections to follow (Pashev, 2005). Most importantly the forms that must belearned to comply with the laws is deflecting firms from paying their share oftaxes. When questioned about their procedure to adopt the administrativeexpenses of maintaining their business, around 18 percent reacted to justattempt to keep away from or evade tax collection.Lackof A Strong Collection SystemManyemerging nations confront challenges establishing a well-working tax structure,particularly for recognizing those citizens and firms that are subject to paytaxes. Although there have been advancements, these nations’ ability to presentand support a well-working tax system still face extreme challenges. Issues ofcollecting taxes may happen due to failed government setups in their attempt tocollect taxes and its relationship to a nation’s economic council. Regularly,the tax structure and gathering by the economic council were viewed as wastefulcorrupt, and expansive (Bird and Zolt 2008). As a result, the formation ofsemi-self-ruling tax experts has been sought after in these nations.Manyof these nations struggle to collect the taxes they are owed. Qualified,trained and respected tax authorities are essential for the collection and theexecution of tax organization bodies. To encourage tax authorities to work withthe best interest of the legislature and to decrease their ability to becomecorrupt, consideration must be given to compensation and different incentives(Kirchler et al., 2007). If the authorities creating and collecting the taxesare corrupt and untrustworthy, people will evade their taxes without gettingcaught.Likewise,deficiencies in collecting taxes result from the way that economies of mostemerging nations include an informal division (Bird and Zolt 2008). Firms andpeople in the informal division do not pay taxes on individual or businesssalaries, and they do not charge a sales tax. The state loses these potentialtax incomes and, consequently, does not have the essential funds to operate aneffective government. Frequently, the motivations to be in the informaldivision are not identified with endeavors to stay away from being taxed butinstead to avoid the extreme regulatory prerequisites or the expensive costs tofollow labor laws. There are situations where people and organizations are inthe informal division of the economy with the expectation to get away from thetaxes they owe. In any case, tax evasion should not be the main motivationbehind why firms remain or end up in the informal division.Awell-working assortment of tax examinations is fundamental for the discoveryand prosecution of tax evasion. The absence of tax examination organizationslessens the likelihood of identification. This impacts the choice of a citizen,between committing tax evasion or not. Also, the legal structure is animperative essential for any tax enforcement activity. For instance, the sizeand nature of punishments that are brought about after evasion has beendiscovered to be associated with the willingness of individuals to pay or notto pay their taxes (Kirchler et al., 2007).TheWay Revenue is Earned and Changing LawsTheway individuals earn their income influences the way they report their taxesand therefore their ability to commit tax evasion. Bruce contends that a fewpeople become independently employed to dodge their fair share of taxes (2000).This may be because of business receipts, the way things are written off, orsimply because of the ineffectual tax data reporting. Moreover, the absence ofmonitoring of the salaries of the independently employed urges citizens tochange to this identity, because it is easier to evade taxes when an individualis self-employed. Taxregulation in numerous nations, particularly in emerging nations, changesquickly, consequently delivering unsteadiness and low openness in the tax code.Complex tax laws and constant changes in the tax regulations can bafflegovernment tax collectors and citizens alike. The changing tax regulations openthe door for individuals to commit tax evasion (Alm and Vazquez, 2001). Thisresults in a tax avoidance and evasion which is not deliberate yet occursbecause of the absence of learning. In outrageous cases, tax avoidance andevasion even end up becoming unavoidable when the tax framework turns out to beexcessively mind-boggling and conflicting.EffectsLossof Governmental RevenueTaxevasion is a hindrance to a country’s capacity to work. On the off chance thisissue was to be decreased in any capacity, a government would improve itsability to provide goods and services for its citizens. Research done by Demosdemonstrates the effects of the monetary losses from tax evasion in the years2000-2010. (Demos, 2011). After some time, if this issue were to continue, therevenue lost every year from this would keep on growing. If taxpayers of anation and its organizations would assume greater liability by paying their fairshare of taxes, the nation would be less in danger of bankruptcy.TheUnited States’ financial deficiency is the principal worry for its economy.With an increasing national debt, the United States capacity as a country togive employment, medicinal services, and unemployment benefits lessens greatly.On the off chance that the deficiency keeps on developing in this nature, thecountry will be subject to significant distress. As indicated by KimberlyAmadeo, a recent financial year spending shortage is at $474 billion. Herarticle clarifies these shortages are caused by the recession and the War onTerror. These issues would impact government revenue and ways of managing money.On the off chance that America documented its taxes to a more noteworthy degreefor citizens and corporations, the capacity of the nation to pay for these nationalresponsibilities would expand (Amadeo, 2015).            Waste of Resources Trying to CatchPeopleTheissue with recognizing the monetary impact of tax evasion is that it must be morethan theoretical. There are few studies identifying with the subject and theyare obsolete. The issue can in any case intelligently point to a weakening ofthe national government by the increasing tax gap and further to the degree ofa domino impact. On the off chance that one country was to crumble due to itspowerlessness to cover misfortunes produced by the absence of tax collections, othernations would lose chances to work with that country, causing those nations toalso lose income created by taxes.Tocatch people in the act of tax evasion, the nation must utilize assets. Theseassets could be utilized for different purposes, for example, schoolimprovement and street repairs. Hamel explains that “an efficient capitalisteconomy relies on competition among businesses, but when one company is evadingtaxes, and another is not, it creates an artificial advantage for the companyevading taxes. This could lead to companies with fewer business practicesoutlasting those with more efficient practices, which would be detrimental tothe economy” (Bruce, 2000) He also expresses the financial concern that taxesare wasteful. This is a direct result of the organizations being too greedy to helpthe general population; governments are important to come in and gather taxesto aid the public (Gleeson, 2009).Increased Tax RatesTaxevasion and avoidance decrease the amount of revenue that a governmentcollects. Governments must make up for these lost revenues one way or another, sothey increase the tax rates. When people get the same goods and services whilepaying more taxes, they become disappointed (Spicer, 1987). This causes morepeople to evade their taxes and the government to lose more revenue. As aresult, a vicious cycle is created from the raising of the tax rates tocompensate for people avoiding their taxes.Conclusion            Taxmorale and the lack of a strong collection system in many emerging nationscreates challenges in establishing a well-working tax structure. The wayindividuals earn their income influences the way they report their taxes, andtherefore some commit tax evasion without even knowing it. Tax regulation innumerous nations, particularly in emerging nations, changes quickly, oftendelivering confusion about the tax laws. Whether the cause of people’s evadingtheir taxes is intentional or unintentional, tax evasion still has the sameeffect on a government.             Theimpacts of tax avoidance are clear each year, and the measure of governmentincome lost is large enough to raise the worry of the general population. If a nationcould enhance its capacities to gather taxes from organizations and people, thecountry 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 theirtaxes often forget how negatively they impact a government’s ability to providegoods and services to its people.             Taxevasion is a serious problem that affects governments, and something must bedone to change it. Increasing efforts to prosecute violators and enforcing thetax laws may be an ideal approach to reducing harm done by tax evasion. Thecosts to do this initially would be high, but it would create more revenue; andif the tax laws were stricter, people and organizations would be more inclinedto pay their taxes and not evade them. Therefore, there will be fewer people toprosecute for evading their taxes and the initial high costs would be decreasedand society will ultimately become better.ReferencesAlm, James, Betty Jackson and MichalMcKee (1992). Institutional Uncertainty and Taxpayer Compliance. AmericanEconomic ReviewAlm, James and Jorge LuisMartinez-Vazquez (2001). Societal institutions and tax evasion in developingand transition countries. Georgia State University.Alm, James and Jorge LuisMartinez-Vazquez (2007), Tax morale and tax evasion in Latin America, AndrewYoung School of Policy Studies.Amadeo, Kimberly. About News. (2015).Current US Federal Budget DeficitBird, R. M., & Zolt, E. M. (2008).Tax Policy in Emerging Countries Bruce, D. (2000). Effects of the UnitedStates tax system on transitions into self-employment. Labour EconomicsChipeta, C. (2002). The Second Economyand Tax Yield in Malawi, African Research Consortium, Nairobi.Demos. (2011). Federal Revenue Lost toTax Evasion.Gleeson, P. (2009). HowDoes Tax Evasion Affect the Economy? Kirchler, Erich, Stephan Muehlbacher,Barbara Kastlunger and Ingrid Wahl (2007). Why Pay Taxes? A Review of TaxCompliance Decisions, Georgia State University.Malkawi, B. and Haloush, h. (2008). TheCase of Income Tax Evasion in Jordan: Symptoms and Solutions. Journal ofFinancial CrimeMponguliana, R.G (2000). The theory andPractice of Taxation in Tanzania tax payer services & Education DepartmentPashev, K. (2005). Tax Compliance ofSmall Business in Transition Economies: Lessons from Bulgaria.Pyle D. J. (1989). Tax Evasion and BlackEconomy the Macmillan press.Spicer, M. W. (1987). The effect of taxevasion on tax rates under leviathan. National Tax Journal,

x

Hi!
I'm Ruth!

Would you like to get a custom essay? How about receiving a customized one?

Check it out