Introduction
Tax evasion is generally understood as non-payment or underpayment of tax. An individual, a group, a firm or a trust could be responsible for tax evasion, which is simply understood as illegal evasion of taxes. For a state, it is a serious concern as tax ultimately translates into revenue, which a government uses (allocation of financial resources) to meet various kinds of political-economic objectives. As the role and size of government has increased, even in capitalist political-economic systems; therefore, a government requires more financial resources to deliver its obligations in contemporary times. For instance, most of the industrial and post-industrial states consider healthcare services a right, which increases annual expenditure of state, compelling state institutions to devise more robust and healthy tax policy (as collected tax would eventually translate into financial resources of government).
Types of Taxes
There are several types of taxes that a government levies on individuals and firms. In addition, these taxes are of different natures and their ratios also vary. However, there are two broad categories of taxes, which generally generate most of the revenue for the government.
Income Tax
It is one of the major or primary taxes. It is levied by state upon the income, of an individual. In mixed economies, of developed economies, the size of income tax is extremely large, whereas in developing countries, it is usually small.
Some jurisdictions refer to income tax as corporate tax, which is imposed upon a corporate. Therefore, both the terms, income tax and corporate tax overlap one another.
Sales Tax
It is a type of tax, which a business pays to a government body on selling a good or service. Generally, state allows businesses to collect this fund, as it is straightforward process. It is also a major source of collection of funds (for government/state), as income tax, therefore, it is a major tax with great significance and relevance.
We also learn that taxes could be flat or progressive, which directly affects economy and size of consumption in economy. However, nature of tax, such as progressive or flat, also affects government exchequer; therefore, type and nature of tax are relevant subjects.
Tax Evasion
As revenue is a serious concern for any government; therefore, tax evasion gravely affects the capacity of a state to deliver its obligations and as this capacity deteriorates, so does the ability to realize various political-economic objectives. Therefore, states/governments are very sensitive and serious regarding tax evasion. The sensitivity/seriousness of the state pertaining to this matter, is evident from the sets of laws that are introduced to curb the menace of tax evasion.
From the systematic study of introduction of laws and regulations, pertaining to tax evasion, we learn that the laws and regulations, of developed countries, are more comprehensive and state institutions implement them more robustly in comparison to developing countries. In developing countries, where political systems are still maturing and state institutions are evolving, the real issue is implementation of laws and regulations regarding tax evasion not laws and regulations themselves (Grossman, Letzing, & Barrett, 2014).
When we compare both developing and developed countries, it becomes apparent to us that text-net, of developed countries is more expanded, which allows developed countries to have more financial resources than a developing country. In addition, the size of tax in developed countries, which levies upon individuals/firms/trusts, is also large in comparison to developing countries. However, in developed countries too, tax evasion has reached an epidemic proportion. In quasi-democracies, the situation is far worst. For instance, in Nigeria, Personal Income Tax evasion is around 50% in comparison to United Kingdom, where it is 14%, as per some studies.
Causes and Methods of Tax Evasion
The systematic study of this phenomenon suggests that there are several causes of tax evasion and in each country/economy; some of these causes are more relevant than the others. Therefore, we can say that causes of tax evasions vary from country to country; however, in countries with similar economic and political structures, several of these causes could be common.
Greed: Mostly it is greed that motivates individuals and firms to evade tax, which is illegal. As society is becoming more materialistic; therefore value of monetary assets is increasing (money can buy almost everything). Generally, it is rich people, with a lot of financial assets, who deliberately evade tax.
Lack of Benefits: Tax-payers receive various kinds of benefits from state. However, if the benefits or reward of paying tax are small, then it discourages an individual or firm for paying taxes that are liable.
Method
Banking system plays an important role in aiding individuals in evading tax. For instance, Swiss Banking System is notorious for stashing ill-gotten cash. The secrecy rules and being beyond the jurisdictions of international agencies allow Swiss Banks to provide safe heavens to dirty/stolen money.
The secrecy rules allow Swiss banks not to reveal name of their account holders/clients. As there is lack of information regarding the accountholder and the size of his/her account; therefore, it becomes very difficult for international and national agencies to act. As per some reports, as the account holders, in Swiss banks, are not registered with name, but with numbers; therefore, it is extremely difficult to retrieve any information, from Swiss Banks, pertaining to a person, accused of money laundering or tax evasion.
In some developing countries, tax evaders stash money in their homes and do not deposit dirty money or tax-evasion money in banks. (Note: It is difficult to evade tax on property in comparison to money; however, sophisticated methods have been developed to hide property and evade tax on it. For instance, off-shore companies and free-ports are used as an instrument to hide property. (The Economist, 2013))
Remedies
Governments around the world are using various kinds of methods to get their hands on tax evaders. Governments have introduced various kinds of programs, which encourage people to become whistle blowers. These programs work efficiently and from time to time produce results. One such example is of Bradley Birkenfeld, a former UBS AG banker, who got the reward of $104 million for aiding US government in unleashing international crackdown against American tax evaders. As per some reports, it is one of the biggest amounts that has been given in the form of reward for whistle blowing (Saunders, 2012).
Sometimes, private firms and investigative journalists also get their hands on sensitive information regarding money laundering and tax evasion (by individuals and groups); however, this also requires assistance from inside. For instance, Panama Papers revelation was a consequence of combined efforts; 370 journalists, who got access to large record because of inside help (Mauldin & Saunders, 2016).
Therefore, it is essential to increase the size of reward programs pertaining to whistle blowing, which will encourage more individuals to expose tax-evasion programs. In addition, to deter tax evasion, a country has to introduce a robust and balanced system of tax collection. Furthermore, strong laws and regulations are required to deter tax evasion.
Conclusion
Tax evasion is a serious issue, which is affecting/crippling both developing and developed countries. It is also apparent that most banks facilitate their clients in evasion of tax. However, strong laws/regulations (that are effectively implemented) along with effective/comprehensive tax system can deter individuals or firms from evading tax. In addition, a large reward program for whistleblowers will aid in exposing and catching tax evaders.
References
Grossman, A., Letzing, J., & Barrett, D. (2014, May 19). Credit Suisse Pleads Guilty in Criminal Tax Case. Retrieved from The Wall Street Journal: https://www.wsj.com/articles/credit-suisse-top-brass-dodge-tax-evasion-bullet-1400505829
Mauldin, W., & Saunders, L. (2016, April 5). The ‘Panama Papers’ Scandal. Retrieved from The Wall Street Journal: https://blogs.wsj.com/briefly/2016/04/05/the-panama-papers-scandal-at-a-glance/
Saunders, L. (2012, September 11). Whistleblower Gets $104 Million. Retrieved from The Wall Street Journal: https://www.wsj.com/articles/SB10000872396390444017504577645412614237708
The Economist. (2013, November 23). Über-warehouses for the ultra-rich. Retrieved from The Economist: https://www.economist.com/briefing/2013/11/23/uber-warehouses-for-the-ultra-rich
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