Tax evasion is an illegal attempt to defeat the imposition of
taxes
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, o ...
trusts
A trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for another's benefit. In the Anglo-American common law, the party who entrusts the right is known as the "settl ...
, and others. Tax evasion often entails the deliberate misrepresentation of the taxpayer's affairs to the tax authorities to reduce the taxpayer's tax liability, and it includes dishonest tax reporting, declaring less income, profits or gains than the amounts actually earned, overstating deductions, using bribes against authorities in countries with high corruption rates and hiding money in secret locations.
Tax evasion is an activity commonly associated with the informal economy. One measure of the extent of tax evasion (the "tax gap") is the amount of unreported income, which is the difference between the amount of income that should be reported to the tax authorities and the actual amount reported.
In contrast,
tax avoidance
Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdi ...
is the legal use of tax laws to reduce one's tax burden. Both tax evasion and tax avoidance can be viewed as forms of
tax noncompliance
Tax noncompliance (informally tax avoision) is a range of activities that are unfavorable to a government's tax system. This may include tax avoidance, which is tax reduction by legal means, and tax evasion which is the criminal non-payment of ...
, as they describe a range of activities that intend to subvert a state's tax system, but such classification of tax avoidance is disputable since avoidance is lawful in self-creating systems. Both tax evasion and tax avoidance can be practiced by corporations, trusts, or individuals.
Economics
In 1968, Nobel laureate economist
Gary Becker
Gary Stanley Becker (; December 2, 1930 – May 3, 2014) was an American economist who received the 1992 Nobel Memorial Prize in Economic Sciences. He was a professor of economics and sociology at the University of Chicago, and was a leader of ...
first theorized the ''economics of crime'', on the basis of which authors M.G. Allingham and A. Sandmo produced, in 1972, an economic model of tax evasion. This model deals with the evasion of income tax, the main source of tax revenue in developed countries. According to the authors, the level of evasion of income tax depends on the detection probability and the level of punishment provided by law. Later studies however, pointed limitations of the model, highlighting that individuals are also more likely to comply with taxes when they believe that tax money is appropriately used and when they can take part on public decisions.
The literature's theoretical models are elegant in their effort to identify the variables likely to affect non-compliance. Alternative specifications, however, yield conflicting results concerning both the signs and magnitudes of variables believed to affect tax evasion. Empirical work is required to resolve the theoretical ambiguities. Income tax evasion appears to be positively influenced by the tax rate, the
unemployment rate
Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refere ...
, the level of income and dissatisfaction with government. The U.S.
Tax Reform Act of 1986
The Tax Reform Act of 1986 (TRA) was passed by the 99th United States Congress and signed into law by President Ronald Reagan on October 22, 1986.
The Tax Reform Act of 1986 was the top domestic priority of President Reagan's second term. The ...
appears to have reduced tax evasion in the United States.
In a 2017 study Alstadsæter et al. concluded based on random stratified audits and leaked data that occurrence of tax evasion rises sharply as amount of wealth rises and that the very richest are about 10 times more likely than average people to engage in tax evasion.
Tax gap
The tax gap describes how much tax should have been raised in relation to much tax is actually raised.
The tax gap is mainly growing due to two factors, the lack of enforcement on the one hand and the lack of compliance on the other hand. The former is mainly rooted in the costly enforcement of the taxation law. The Iatter is based on the foundation that tax compliance is costly for individuals as well as firms (tax filling, bureaucracy), hence not paying taxes would be more economical in their opinion.
Evasion of customs duty
Customs duties are an important source of revenue in developing countries. Importers attempt to evade customs duty by (a) under-invoicing and (b) misdeclaration of quantity and product-description. When there is
ad valorem
An ''ad valorem'' tax (Latin for "according to value") is a tax whose amount is based on the value of a transaction or of property. It is typically imposed at the time of a transaction, as in the case of a sales tax or value-added tax (VAT). An ...
import duty, the tax base can be reduced through under-invoicing. Misdeclaration of quantity is more relevant for products with specific duty. Production description is changed to match a H. S. Code commensurate with a lower rate of duty.
Smuggling
Smuggling is import or export of products by illegal means. Smuggling is resorted to for total evasion of customs duties, as well as for the import and export of contraband. Smugglers do not pay duty since the transport is covert, so no customs declaration is made.
Evasion of value-added tax and sales taxes
During the second half of the 20th century,
value-added tax
A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the en ...
(VAT) emerged as a modern form of
consumption tax
A consumption tax is a tax levied on consumption spending on goods and services. The tax base of such a tax is the money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a value-added tax. However, a consumpti ...
throughout the world, with the notable exception of the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
. Producers who collect VAT from consumers may evade tax by under-reporting the amount of sales. The US has no broad-based consumption tax at the federal level, and no state currently collects VAT; the overwhelming majority of states instead collect
sales taxes
A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow the seller to collect funds for the tax from the consumer at the point of purchase. When a tax on goods or services is paid to a gover ...
.
Canada
Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
uses both a VAT at the federal level (the Goods and Services Tax) and sales taxes at the provincial level; some provinces have a single tax combining both forms.
In addition, most jurisdictions which levy a VAT or sales tax also legally require their residents to report and pay the tax on items purchased in another jurisdiction. This means that consumers who purchase something in a lower-taxed or untaxed jurisdiction with the intention of avoiding VAT or sales tax in their home jurisdiction are technically breaking the law in most cases.
This is especially prevalent in federal countries like the US and Canada where sub-national jurisdictions charge varying rates of VAT or sales tax.
In liberal democracies, a fundamental problem with inhibiting evasion of local sales taxes is that liberal democracies, by their very nature, have few (if any) border controls between their internal jurisdictions. Therefore, it is not generally cost-effective to enforce tax collection on low-value goods carried in private vehicles from one jurisdiction to another with a different tax rate. However, sub-national governments will normally seek to collect sales tax on high-value items such as cars.
Objectives to evade taxes
One reason for taxpayers to evade taxes is the personal benefits that come with it, thus the individual problems that lead to that decision Additionally, Wallschutzky's exchange relationship hypothesis presents as a sufficient motive for many. The exchange relationship hypothesis states that tax payers believe that the exchange between their taxes and the public good/social services as unbalanced. Furthermore, the little capability of the system to catch the tax evaders poses as another incentive. Most often, it is more economical to evade taxes, being caught and paying a fine as a consequence, than paying the accumulated tax burden over the years. Thus, evasion numbers should be even higher than they are, hence for many people there seem to be moral objective countering this practice.
Government response
The level of evasion depends on a number of factors, including the amount of money a person or a corporation possesses. Efforts to evade income tax decline when the amounts involved are lower. The level of evasion also depends on the efficiency of the tax administration. Corruption by tax officials makes it difficult to control evasion. Tax administrations use various means to reduce evasion and increase the level of enforcement: for example, privatization of tax enforcementChowdhury, F. L. (1992) ''Evasion of Customs Duty in Bangladesh'', unpublished MBA dissertation, Graduate School of Management, Monash University, Australia. or tax farming.
In 2011
, the UK tax collection agency stated that it would continue to crack down on tax evasion, with the goal of collecting £18 billion in revenue before 2015. In 2010, HMRC began a voluntary amnesty program that targeted middle-class professionals and raised £500 million.
Corruption by tax officials
Corrupt tax officials co-operate with the taxpayers who intend to evade taxes. When they detect an instance of evasion, they refrain from reporting it in return for
bribe
Bribery is the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official, or other person, in charge of a public or legal duty. With regard to governmental operations, essentially, bribery is "Corru ...
s. Corruption by tax officials is a serious problem for the tax administration in many countries.
Level of evasion and punishment
Tax evasion is a crime in almost all developed countries, and the guilty party is liable to
fines Fines may refer to:
* Fines, Andalusia, Spanish municipality
* Fine (penalty)
* Fine, a dated term for a premium on a lease of land, a large sum the tenant pays to commute (lessen) the rent throughout the term
*Fines, ore or other products with a s ...
and/or imprisonment. In Switzerland, many acts that would amount to criminal tax evasion in other countries are treated as civil matters. Dishonestly misreporting income in a tax return is not necessarily considered a crime. Such matters are handled in the Swiss tax courts, not the criminal courts.
In Switzerland, however, some tax misconduct (such as the deliberate falsification of records) is criminal. Moreover, civil tax transgressions may give rise to penalties. It is often considered that the extent of evasion depends on the severity of punishment for evasion.
Privatization of tax enforcement
Professor
Christopher Hood
Christopher Cropper Hood (born 1947) is a visiting Professor of the Blavatnik School of Government at the University of Oxford, and an Emeritus Fellow of All Souls College, Oxford. Hood was Gladstone Professor of Government at All Souls Coll ...
first suggested
privatization
Privatization (also privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when ...
of tax enforcement to control tax evasion more efficiently than a government department would, and some governments have adopted this approach. In
Bangladesh
Bangladesh (}, ), officially the People's Republic of Bangladesh, is a country in South Asia. It is the eighth-most populous country in the world, with a population exceeding 165 million people in an area of . Bangladesh is among the mos ...
, customs administration was partly privatized in 1991.
Abuse by private tax collectors (see tax farming below) has on occasion led to revolutionary overthrow of governments who have outsourced tax administration.
Tax farming
Tax farming
Farming or tax-farming is a technique of financial management in which the management of a variable revenue stream is assigned by legal contract to a third party and the holder of the revenue stream receives fixed periodic rents from the contrac ...
is an historical means of collection of revenue. Governments received a lump sum in advance from a private entity, which then collects and retains the revenue and bears the risk of evasion by the taxpayers. It has been suggested that tax farming may reduce tax evasion in less developed countries.
This system may be liable to abuse by the "tax-farmers" seeking to make a profit, if they are not subject to political constraints. Abuses by tax farmers (together with a tax system that exempted the aristocracy) were a primary reason for the
French Revolution
The French Revolution ( ) was a period of radical political and societal change in France that began with the Estates General of 1789 and ended with the formation of the French Consulate in coup of 18 Brumaire, November 1799. Many of its ...
customs duty
A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and po ...
through under-invoicing and misdeclaration.
However, PSI agencies have cooperated with importers in evading customs duties. Bangladeshi authorities found Cotecna guilty of complicity with importers for evasion of customs duties on a huge scale. In August 2005, Bangladesh had hired four PSI companies – Cotecna Inspection SA, SGS (Bangladesh) Limited, Bureau Veritas BIVAC (Bangladesh) Limited and INtertek Testing Limited – for three years to certify price, quality and quantity of imported goods. In March 2008, the Bangladeshi National Board of Revenue cancelled Cotecna's certificate for serious irregularities, while importers' complaints about the other three PSI companies mounted. Bangladesh planned to have its customs department train its officials in " WTO valuation, trade policy,
ASYCUDA The Automated System for Customs Data (ASYCUDA) is a computerized system designed by the United Nations Conference on Trade and Development (UNCTAD) to administer a country's customs. In 2004 there were more than 50 operational projects with expendi ...
system, risk management" to take over the inspections.
Cotecna was also found to have bribed Pakistan's prime minister Benazir Bhutto to secure a PSI contract by Pakistani importers. She and her husband were sentenced both in Pakistan and Switzerland.
By continent
Asia
United Arab Emirates
In early October 2021, 11.9 million leaked financial records in addition to 2.9 TB of data was released in the name of
Pandora Papers
The Pandora Papers are 11.9 million leaked documents with 2.9 terabytes of data that the International Consortium of Investigative Journalists (ICIJ) published beginning on 3 October 2021. The leak exposed the secret offshore accounts of 3 ...
by the
International Consortium of Investigative Journalists
The International Consortium of Investigative Journalists, Inc. (ICIJ), is an independent global network of 280 investigative journalists and over 140 media organizations spanning more than 100 countries. It is based in Washington, D.C. with ...
(ICIJ), exposing the secret offshore accounts of around 35 world leaders in
tax havens
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or ...
to evade taxes. One of the many leaders to be exposed was the ruler of Dubai and prime minister of the United Arab Emirates, Sheikh
Mohammed bin Rashid al-Maktoum
Sheikh Mohammed bin Rashid Al Maktoum ( ar, محمد بن راشد آل مكتوم, links=no; ; born 15 July 1949) is the vice president, prime minister, and minister of defence of the United Arab Emirates (UAE) as well as the ruler of Dubai. H ...
. Sheikh Mohammed was identified as the shareholder of three firms that were registered in the tax havens of
Bahamas
The Bahamas (), officially the Commonwealth of The Bahamas, is an island country within the Lucayan Archipelago of the West Indies in the North Atlantic. It takes up 97% of the Lucayan Archipelago's land area and is home to 88% of the ar ...
and
British Virgin Islands
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through an Emirati company, partially owned by an investment conglomerate, Dubai Holding and Axiom Limited, major shares of which were owned by the ruler.
As per the leaked records, the Dubai ruler owned a massive number of upmarket and luxurious real estate across Europe via the cited offshore entities registered in tax havens.
Additionally, the Pandora Papers also cites that the former Managing Director of IMF and French finance minister,
Dominique Strauss-Kahn
Dominique Gaston André Strauss-Kahn (; born 25 April 1949), also known as DSK, is a French economist and politician who served as the tenth managing director of the International Monetary Fund (IMF), and was a member of the French Socialist P ...
was permitted to create a consulting firm in the United Arab Emirates in 2018 after the expiry of tax exemptions of his Moroccan company, which he used for receiving millions of dollars worth of tax free consulting fees.
Europe
Germany, France, Italy, Denmark, Belgium
A network of banks, stock traders and top lawyers has obtained billions from the European treasuries through suspected fraud and speculation with dividend tax. The five hardest hit countries have lost together at least $62.9 billion. Germany is the hardest hit country, with around €31 billion withdrawn from the German treasury. Estimated losses for other countries include at least €17 billion for France, €4.5 billion in Italy, €1.7 billion in Denmark and €201 million for Belgium.
Greece
Scandinavia
A paper by economists Annette Alstadsæter, Niels Johannesen and Gabriel Zucman, which used data from HSBC Switzerland (" Swiss leaks") and
Mossack Fonseca
Mossack Fonseca & Co. () was a Panamanian law firm and corporate service provider.Panama Papers"), found that "on average about 3% of personal taxes are evaded in Scandinavia, but this figure rises to about 30% in the top 0.01% of the wealth distribution... Taking tax evasion into account increases the rise in inequality seen in tax data since the 1970s markedly, highlighting the need to move beyond tax data to capture income and wealth at the top, even in countries where tax compliance is generally high. We also find that after reducing tax evasion—by using tax amnesties—tax evaders do not legally avoid taxes more. This result suggests that fighting tax evasion can be an effective way to collect more tax revenue from the ultra-wealthy."
, the UK tax collection agency, estimated that in the tax year 2016–17, pure tax evasion (i.e. not including things like hidden economy or criminal activity) cost the government £5.3 billion. This compared to a wider tax gap (the difference between the amount of tax that should, in theory, be collected by HMRC, against what is actually collected) of £33 billion in the same year, an amount that represented 5.7% of liabilities. At the same time,
tax avoidance
Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdi ...
was estimated at £1.7 billion (this does not include international tax arrangements that cannot be challenged under the UK law, including some forms of base erosion and profit shifting (BEPS)).
In 2013, the Coalition government announced a crackdown on
economic crime
Financial crime is crime committed against property, involving the unlawful conversion of the ownership of property (belonging to one person) to one's own personal use and benefit. Financial crimes may involve fraud ( cheque fraud, credit card fra ...
. It created a new criminal offence for aiding tax evasion and removed the requirement for tax investigation authorities to prove "intent to evade tax" to prosecute offenders.
In 2015, Chancellor
George Osborne
George Gideon Oliver Osborne (born Gideon Oliver Osborne; 23 May 1971) is a former British politician and newspaper editor who served as Chancellor of the Exchequer from 2010 to 2016 and as First Secretary of State from 2015 to 2016 in the ...
promised to collect £5bn by "waging war" on tax evaders by announcing new powers for HMRC to target people with offshore bank accounts. The number of people prosecuted for tax evasion doubled in 2014/15 from the year before to 1,258.
United States
In the United States of America, Federal tax evasion is defined as the purposeful, illegal attempt to evade the assessment or the payment of a tax imposed by federal law. Conviction of tax evasion may result in fines and imprisonment.
The Internal Revenue Service (IRS) has identified small businesses and sole proprietors as the largest contributors to the tax gap between what Americans owe in federal taxes and what the federal government receives. Small businesses and sole proprietorships contribute to the tax gap because there are few ways for the government to know about skimming or non-reporting of income without mounting significant investigations.
the most common means of tax evasion was overstatement of charitable contributions, particularly church donations.
Estimates of lost government revenue
The IRS estimates that the 2001 tax gap was $345 billion and for 2006 it was $450 billion. A study of the 2008 tax gap found a range of $450–$500 billion, and unreported income to be about $2 trillion, concluding that 18 to 19 percent of total reportable income was not being properly reported to the IRS.
Tax evasion and inequality
Generally, individuals tend to evade taxes, while companies rather avoid taxes. There is a great heterogenic among people who evade people as it is a substantial issue in society, that is creating an excessive tax gap. Studies suggest that 8% of global financial wealth lies in offshore accounts. Often, offshore wealth that is stored in tax havens stays undetected in random audits. Even though there is high diversity among people who evade taxes, there is a higher probability among the highest wealth group. According to Alstadsæter, Johannesen and Zucman 2019 the extent of taxes evaded is substantially higher with higher income, and exceptionally higher among people of the top wealth group. In line with this, the probability to appear in the Panama Papers rises significantly among the top 0.01% of the wealth group, as does the probability to own an unreported account at HSBC. However, the upper wealth group is also more inclined to use tax amnesty.
See also
Further reading
* Slemrod, Joel. 2019. "Tax Compliance and Enforcement." ''Journal of Economic Literature'', 57 (4): 904–54.
*
Emmanuel Saez
Emmanuel Saez (born November 26, 1972) is a French, naturalized American economist who is Professor of Economics at the University of California, Berkeley. His work, done with Thomas Piketty and Gabriel Zucman, includes tracking the incomes of t ...
and
Gabriel Zucman
Gabriel Zucman (born 30 October 1986) is a French economist who is currently an associate professor of public policy and economics at the University of California, Berkeley‘s Goldman School of Public Policy. The author of '' The Hidden Wealth o ...
. 2019. ''The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay''. W.W. Norton.
The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Eco ...
IRS
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory tax ...