Tackling tax avoidance and evasion

Some definitions…

Tax avoidance: Using legal means to minimise tax obligations, such as exploiting loopholes or investing in deliberately  tax-exempt financial instruments.

Tax evasion: Refusing to pay tax, or paying less tax than legally required, and hiding it from the eyes of the law.

The first is legal, if arguably unethical sometimes. The distinction between the two isn’t always clear-cut. This is often decided by the court of law.

Whenever you hear of rich individuals or large corporations not paying tax, often the knee-jerk reaction is to take these entities to court to reclaim the tax revenues. However, this only works when there is something to get back. Furthermore, tax avoidance may be unethical, but it isn’t actually illegal (by definition). Thus if a court rules that it is a case of tax avoidance rather than tax evasion, you would have wasted a lot of time and money to get nothing back.

The problem with tackling tax avoidance and evasion directly through legislative action is that, to force companies to pay up, it costs more and more money in terms of bureacracy and court actitivities. It won’t be long before the costs to claw back these tax revenues exceeds the amount gained, not to mention the economic burden to the rest of the law-abiding economy.

A more efficient way of tackling the problem is to reduce the incentive for tax avoidance and evasion. When it becomes cheaper for companies to simply pay tax than to set up complex tax avoidance or evasion schemes, the companies will have no motivation to do it. This is why you hear free marketers argue for simpler and lower tax. Not only will you reduce tax avoidance and evasion, you will also ease the financial and bureaucratic burden on law-abiding businesses. This will have the greatest beneficial impact for small businesses and sole traders who cannot afford accountants and administrators, so it will greatly increase their productivity.

Given that the majority of the UK economy is made up of small to medium sized businesses, this move will directly result in economic growth due to small businesses thriving. It will attract international businesses to set up in the country, further improving the economy. This will translate into greater tax revenues, despite a lower tax rate.

This is the reason why countries with low tax rates tend to be rich and successful economies.

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Author: Hoong-Wai

I'm a sinner. I have an interest in economics, philosophy, politics, science, sociology, technology, theology (in alphabetical order). I care about truth and justice. I can be a contrarian.

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