Tax avoidance
Tax is a compulsory contribution of revenue by the citizens of a country by the citizens to facilitate the provision of goods and services that the private investors are not willing to provide due to the unprofitability of such goods and services. By this, it means that the fact that one pays taxes does not mean that he/she has to demand particular goods and services from the government. In this response, some people will find mechanisms that are meant to ensure that they do not pay taxes or they reduce the burden they incur in the payment of taxes. One of the issues that tax system of various governments deal with is tax avoidance. This research paper will evaluate how tax avoidance happens, its causes and how it can be reduced.
Tax avoidance is mainly taking advantage of the weak laws relating to the tax system to reduce the tax that will be paid by an individual. An individual acts within the law hence cannot be fined for his/her actions. There are various ways through which tax avoidance can occur. People sometimes transfer their property from their country of residence to avoid taxation. In most cases, tax is levied on income generated within the country (Weber, 2005). Therefore when property is transferred to another country, such property is not taxed since it is not earned in the country to which it is transferred to. As a result, such people are able to avoid tax.
Some individuals create their own legal entities where they donate their funds. These may be in form of nongovernmental organizations. The amounts that are donated to such organizations are not taxed. As a result, such individuals end up avoiding payment of tax. This is regardless of the fact that the entities they donate funds to belong to them (Reuter, 2012).
Tax shelters are also avenues that can be used to avoid tax. There are some funds that are not usually taxed. These include pension scheme funds, mortgage and retirement benefits. Individual who wish to avoid tax increase their contribution to these funds to ensure that they pay less tax to the government.
Tax refunds help individuals to avoid tax. There are a variety of tax refunds that individuals are allowed to claim (Weber, 2005). They include tax reliefs for individuals who are married and with children. The taxpayers who are aware of these tax refunds utilize them to ensure that they pay the least amount of tax possible.
Tax avoidance is caused by various factors. One of the factors is the weak administrative systems. Tax avoiders use the loopholes present in the tax administrative systems to reduce the amounts due from them (Garman, 2011).
High tax rates motivate people to find all the avenues of avoiding tax payment. For example, high tax rates on alcohol makes people to consume the illegal local beer so as to avoid the tax payment (Weber, 2005). Therefore the high tax rates imposed on tax payers facilitate tax avoidance.
Unfairness in the payment of taxes facilitates tax avoidance. Those people who feel that they are treated unfairly in the payment of taxes find avenues that they can use to avoid the payment of taxes. This is because every citizen aims at achieving maximum utility in the given the amount of income earned (Brown, 2012).
There are various negative effects of tax avoidance. First, the government will not be in a position to collect enough revenue to meet its expenses. As a result, some of the government projects will be left unimplemented. This may hinder the economic development of the country.
The other negative impact of tax avoidance is that some people suffer from the excess burden of tax payment. Those who are not able to avoid the payment of taxes are overburdened since they contribute more to the government.
There is a lot of difficulties in dealing with tax avoidance because the people who engage in the activity do not break any law in their activities. However, there are various methods that the government can use to avoid this activity hence ensure high tax revenue. First, each government should ensure reasonable tax rates (Brown, 2012). With these tax rates, people will not be overburdened hence they will have no reason to find ways of reducing their tax burden. As a result, the government will be able to collect more revenue in form of taxes.
Taxing income regardless of the country where it is earned plays an important role in reducing tax avoidance. People who transfer their income to countries where they do not reside as a way of avoiding taxes will have no incentive to do so and therefore tax avoidance will be reduced.
The other method of reducing tax avoidance in a country is through implementation of multiple taxes. This will ensure that there are little chances of avoiding taxes. In addition, the government can avoid tax avoidance by ensuring equality in tax payment such that some people do not feel oppressed. However, care should be taken to avoid making tax system complicated (Garman, 2011).
In conclusion, tax avoidance is an issue that requires careful attention to solve. This is necessary to eliminate the negative impacts it has on the economy. However, this issue should be dealt with carefully to avoid making the tax system more complex which may limit tax collection.
References.
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Kirchler, E. (2007). The economic psychology of tax behaviour. New York [u.a.: Cambridge Univ. Press.
