Tax Authority’s Effectiveness and Implications

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Table of Contents

Introduction
Objectives of a tax system
Tax Evasion and Avoidance
Conclusions
References

Introduction

From the statement that “A National Audit Office analysis of the 700 companies whose affairs are handled by HM Revenue & Customs’ large business service recently revealed that 50 businesses paid 67% of the total tax collected by the service last year, while 220 paid none and 210 paid less than 10 million pounds. Discuss the extent to which this demonstrates a failure of the tax system,” questions the principles and aims of taxations. To address this problem we can start at examining the principles of and aims of taxation.

To begin with, I will define a good tax system. A good tax system should be applied in a fair, reliable and transparent manner. It should provide ways in which proper communication to taxpayers about their rights and obligations as well as the available complaint procedures and redress mechanisms.

It should also consistently deliver quality information and treat inquiries, requests and appeals from taxpayers in an accurate and timely fashion; provide an accessible and dependable information service on taxpayers rights and obligations with respect to the law; ensure that compliance costs are kept at the minimum level necessary to achieve compliance with the tax laws; where appropriate, give taxpayers opportunities to comment on changes to administrative policies and procedures; use taxpayer information only to the extent permitted by law; develop and maintain good working relationships with client groups and the wider community.

Apply the provisions of tax treaties in a fair and consistent manner; promote the fair sharing of taxing rights in tax treaties and the development of domestic laws; not promote or facilitate tax evasion or avoidance by residents of other countries; improve access to bank and financial information for tax exchange purposes; provide the same treatment and redress mechanisms to all otherwise similarly situated taxpayers regardless of their nationality; treat the information obtained from tax treaty partners with the same or greater confidentiality protection as that required under domestic laws; make recommendations and provide assistance to policy makers for the renegotiations of areas of mutual concern in existing tax treaties. (www.oecd.org/dataoecd)

Objectives of a tax system

Taxation systems can be thought of as facilitating four main objectives. Most obviously, taxes raise the revenue with which governments can drive human development by providing systems of health, education and social security as well as the basis for a successful economy through regulation, administration and investments in infrastructure.

A second goal is redistribution, to reduce poverty and inequality and ensure that all feel the benefits of development. Gemmell & Morrissey (2005) summarize two decades of tax studies as follows: income taxes are progressive (although evasion is generally ignored); corporate taxes are regressive at low incomes and then become progressive; property taxes (more or less absent from the consensus and o en generating only small revenues, but important in a number of low-income countries, e.g. Namibia) are progressive; indirect taxes are generally regressive; and the overall picture is mixed, although structures are o en regressive at low incomes.

A third key goal is that of ‘re-pricing’ – that is, of using taxes and subsidies as appropriate to ensure that all social costs and benefits of production or consumption of a particular good are reflected in the market price. Most obviously, this may include taxing tobacco to limit damage to health, or petrol to limit environmental costs. Finally, and perhaps most importantly – although o en underappreciated – is the goal of strengthening and protecting channels of political representation.

Ross (2004) uses a panel of data on countries at all levels of income to show that these channels are systematically strengthened when the share of tax revenue in government expenditure is higher – that is, when governments rely most on tax Mahon (2005) shows that the strongest relationship exists for direct tax revenues: where citizens contribute most to expenditures through taxation of personal income and corporate profit

Tax Evasion and Avoidance

Before any concluding about the case of people who are not paying taxes in this case, one needs to understand the issues underlying the tax evasion and avoidance. One is legal and another is illegal. The risk in tax evasion is not beyond the taxpayer’s control. In fact, sophisticated kinds of tax planning blur the line between legality and crime and therefore reduce the likelihood that the transaction will be questioned. The distinction stressed here is in terms of the cost to the taxpayer: informally speaking, activities where the ultimate tax treatment is uncertain, with the risk imperfectly controlled by tax collection agency, could be classified as evasion.

Activities where costs have a different nature are avoidance. When a tax -saving scheme is illegal, it is uncertain whether a preferential tax treatment will be ultimately available, and therefore such a scheme is naturally considered evasion according to this classification. Taking advantage of tax incentives does not involve uncertainty about the ultimate tax treatment and is considered avoidance.

Many kinds of real-life tax planning are likely to have elements of both. The concept of avoidance has a number of implications within the framework that we have just discussed. First, taxpayers have a range of options: there is no single kind of tax avoidance. Second, probabilities of detection are lower than for outright tax evasion, and they may be reduced further if the taxpayer chooses to invest in protecting herself by hiring an adviser, paying for a legal opinion, or structuring the transaction appropriately.

Third, each of these extra options has various kinds of costs associated with it that are not present under the simplest kind of tax evasion. One of these costs has already been mentioned: taxpayers can invest in reducing the probability of detection. In addition, there may be a fixed cost necessary in order to even attempt tax avoidance: hiring a professional may not be optional but rather a necessary condition for pursuing a particular kind of tax avoidance, and so can be the cost of having an offshore account, a foreign subsidiary, or a charitable foundation of a future estate taxpayer. Furthermore, pursuing an avoidance strategy may require modifying real economic decisions or subjecting oneself to extra constraints.

On the other hand, combating tax avoidance is harder for tax authorities. Because taxpayers are blurring the line between legal and illegal, establishing that the behavior in question is in fact illegal requires expending resources. Auditing a single taxpayer may no longer be enough: transactions may have many participants. A court battle may ensue as a result. Tax auditors need considerable knowledge to cope with tax planning.

Accordingly, their qualifications and compensation have to increase with the sophistication of those who practice avoidance strategies. Understanding that tax avoidance adds extra costs are the key point, because the costs affect how harmful the activity is from a social point of view, and therefore how much it should be discouraged.

Availability of simple tax evasion is a fact of nature—one can always cheat—but tax avoidance is not. Tax avoidance is a function of ambiguity in the tax system. This is not to say that ambiguity can always be avoided in real life. Still, what and how many avoidance opportunities are available depend on the structure of the tax system ( Kopczuk W, 2006). From

Conclusions

The main aim of this of the paper is examine the principles and effectives of a tax authority and system. The issues mentioned in this write up touches matters of policy implications on tax complexity, tax evasion and tax avoidance. From the case represented tax evasion and tax avoidance similarly costly from the social point of view, despite differences in their legal status. A comprehensive compliance policy should target both. While penalties and increased probability of detection is the main tools of targeting tax evasion, a reduction in complexity of the tax code would reduce opportunities for both tax evasion and tax avoidance, and it would additionally make penalties a more viable policy choice.

Complexity in the tax code should be thought of as the extent of variation in possible tax treatments of economically related activities. This kind of complexity naturally creates opportunities for tax avoidance, and it also causes difficulties for otherwise honest taxpayers. As a result, it leads to confusion and mistakes that are often hard to distinguish from dishonesty. Consequently, penalties become a less appealing approach to enforcement while, simultaneously, detection becomes more costly. ( Kopczuk W, 2006).

In this case the principles and involved can be tax avoidance, tax evasion or failure to collect taxes by the authority. Therefore, it should be invested to know why taxes are not well collected. What reason that will be found will fall in those categories discussed.

References

Adam, C., and Bevan, D., 2004, ‘Fiscal policy design in low-income countries’, in T. Addison & A. Roe (eds.), Fiscal Policy for Development, Palgrave Fiscal Policy for Development Fiscal Policy for Development Macmillan/UNU-WIDER: Basingstoke.

Blumenthal, Marsha and Charles Christian, (2004); “tax Preparers,” in Henry J. Aaron and Joel Slemrod, eds., The Crisis in tax Administration, Brookings Institution Press.

Bosco, L., and Mi one, L., 1997, ‘Tax evasion and moral constraints: Some experimental evidence ‘, Kyklos.

Centre for Tax Policy and Administration (2001); Principles of Good Tax Administration Principles of Good Tax Administration. Web.

Christensen, J., 2007, ‘Mirror, mirror, on the wall: Who is the most corrupt of all?’ Tax Justice Network Briefing Paper, presented at the World Social work Briefing Paper.

Cobham, A., 2005, ‘Tax evasion, tax avoidance and development finance’, Queen Elizabeth House Working Paper 129, University of Oxford.

Erard, Brian, (1999) “Taxation with Representation: An Analysis of the Role of tax Feldstein.

Gordon, Roger, Laura Kalambokidis and Joel Slemrod, (2004); “Do We Now Collect Any Revenue from Taxing Capital Income?,” Journal of Public Economics.

Heady, C., 2004, ‘Taxation policy in low-income countries’, in T. Addison & A. Roe (eds.), Fiscal Policy for Development, Palgrave Macmillan.

Kesselman, Jonathan R. (1997), “Policy Implications of Tax Evasion and the Underground Economy,” in Owen Lippert and Michael Walker eds., the Underground Economy: Global Evidence of Its Size and Impact, Vancouver, BC, Canada: The Fraser Institute.

Kopczuk W, (2006); Tax simplification and tax compliance: an economic perspective.

Martin S., (1999) “tax Avoidance and the Deadweight Loss of the Income tax,” Review of Economics and Statistics.

Mi one, L., 2006, ‘Dynamic behaviors in tax evasion: An experimental approach’, Journal of Socioeconomic.

Saez, Emmanuel, (2004); “Reported Incomes and Marginal Tax Rates, 1960-2000: Evidence and Policy Implications,” in James Poterba, ed., Tax Policy and Economy, Cambridge, MA: MIT Press.

Torgler, B., and Schneider, F., 2007a, ‘The impact of tax morale and institutional quality on the shadow economy’, CREMA Working Paper 2007-01.

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