taxation coursework
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COURSEWORKTRANSCRIPT
TAXATION
GROUP COURSEWORK
2011-2012SEMESTER B
“Analyze the phenomenon of tax evasion and indicate ways to prevent such practices”
CONTENTS
INTRODUCTION………………………………………………………......…..3
TAX DEFINITION AND PURPOSE OF TAXATION…………………...….3
DISTINCTION OF TAXES………………………………………………..…..4
WHAT IS TAX EVASION AND FACTORS FOR TAX COMPLIANCE….6
CONSEQUENCES OF TAX EVASION…………………………………..…..9
WAYS TO PREVENT TAX EVASION…………………………………...…10
CONCLUSION……………………………………………………………..…..10
REFERENCES…………………………………………………………….…...12
INTRODUCTION
According to Zimmern (1956), in the ideal Athens of the fifth century B.C., the
liturgy system was very successful, where the liturgy was a form of tax for the
wealthy in order to afford titles in exchange for tax payments for the state. The Greek
Golden age with its magnificent monument of the Parthenon is the perfect result of
the Athenian government regarding the collection of taxes. Especially from 454 BC,
the sixtieth annual tax went for godness Athena and Pericles saved the money to build
the famous temple. Tax compliance was an achievement of the democratic
functioning of Ancient Athens. The Latin word evadere, which means escape, and
avoid in taxation law, is used to describe forms of illegal behavior related to tax
payment. The Tax evasion phenomenon has its causes not only in economic factors,
but also in social and psychological causes. Tax morality, human egoism, and social
norms, ethics and culture, are some causes of tax evasion worldwide.
TAX DEFINITION AND PURPOSE OF TAXATION
Dalton (1920) implies that tax is the compulsory contribution which imposes a public
authority without regard to the exact amount of services supplied in exchange to the
taxpayer and without imposing a criminal violation of any law. According to
Andreadis (1935), in the Greek constitution of 1864, influenced by Montesquieu,
Thiers, Locke and Smith, there is the theory of premium for the citizen before the
state such as the insured and the insurance company and the tax is the price for the
benefits from the this type of guarantee for this safety. Finokaliotis (1999) implies that
there is also the theory of exchange for the services from the state. But Andreadis
(1935), Finokaliotis (1999), Theocharopoulos (1975), imply that the most important
reason for the existence of taxation is the necessity for the survival of the state. The
taxation is imposed by this necessity and it is an inevitable sacrifice by the citizens.
This sacrifice is also a duty of the citizens. The term “legitimate” evolves questions
about the fairness but under special circumstances is fair. The imposing of taxes is
justified, because nobody could be able to possess income or assets without the
support of constitutional, organized society in the form of a state. According to
Georgakopoulos and Patsouratis (1993), the cost of providing free public goods and
funding of other activities of public bodies, it is called “tax burden”. The tax burden
must be distributed fairly. The progressive tax income is an excellent example to
highlight one advantage of taxation, the distribution of income from richest to poorest
because the progressive tax income is very important for the reduction of income and
social inequalities and it gives the State the opportunity to give basic benefits to those
who are very poor and weak. An example of statutory set of principles regarding
taxation is the Greek Constitution that sets out the basic tax principles to be observed
by the legislator and enforcer of the law on tax laws. In Articles 4 (paragraph 1 and
5), 20 (paragraph 1), 36 (paragraph 2), 73 (paragraph 5), 76 (paragraph 7), and 78 of
the Constitution 1975/1986/2001 are the foundation of the Tax Law. The principles
ensure the rule of law and social state of law in Greece : “ 1)The principle of legality
of the tax, 2)The principle of the annual consent of parliament for the establishment
and collection of tax, 3) The principle of certainty of tax 4)The principle of equality of
tax, 5) The principle of universality of the tax, 6) The principle of non-retroactivity of
tax, 7)Principles derived from the provisions of civil rights.”
DISTINCTION OF TAXES
The basic distinction between taxes, are the direct and indirect taxes. Direct taxes are
those imposed in the resulting income and wealth, while indirect taxes are imposed on
trade, incidental or transitional. Personal taxation and corporate taxation according to
ESA 95 are considered as the total of direct taxes along with profit taxation from
lottery and dividend taxation. VAT and Consumption tax are considered Indirect
Taxation. According to Atkinson (1977) the direct taxes refer to certain individuals or
entities and they are imposed on the income or the property owned by the tax payers
(e.g.income tax). Indirect taxes are imposed on the income spent and they are
collected when certain transactions or events occur (VAT, value added tax). Also, the
direct, the operative fact is the periodicity and regularity exists (e.g.the income tax
collected each year) while the indirect tax is not periodicity. The indirect taxes are
extensively used to excise tax, are not considered fair taxes, because they are not
progressive and they do not take into account minimum exceptions and differences in
personal circumstances. The major indirect tax is the Value Added Tax and the major
direct Tax is the Income Tax. Atkinson (1977) implies that Direct taxes are more fair
and just because they are imposed in greater amounts on citizens with greater income.
Indirect taxes are paid by all individuals with no exception. The Direct taxes are more
stable and expected. Indirect taxes have immediate results and significant returns for
the State because they are imposed easily to all citizens and entities. The taxation cost
regarding the collection of indirect taxes is less than the cost of collection of direct
taxes. According to Palaiodimos (2006), after the comparison of tax systems in EU
countries, an important aspect of tax systems in the EU is that all the Nordic countries
make their tax revenues over direct taxation and a similar picture emerges for Ireland,
the United Kingdom, Belgium and Luxembourg. At the other extreme are Germany,
France, Holland and Greece, whose share of direct taxes in total tax revenue is low
and approaching that of the new Member States in EU. Corporations depict the state
economy and tax view of a business is consisting of: a) the tax income, b) the VAT, c)
by withholding taxes, d) from the property tax e) transfer taxes property, f) the tax of
duties g) fees. The tax subject is not only citizens of a state but other persons,
including foreigners residing permanently or temporarily, or transit or when economic
relationship is by inheritance, by exercising business, from property and more. The
State has more interest in the corporate taxation, because the legislature for fairness
and universality and of course because of the amount of taxes. There is also a
distinction of taxes relating to the tax base and distinction of taxes in accordance with
the method of calculation. According to tax base distinction, they are real and
personal taxes that are imposed on certain real economic data without taking into
account the status and economic power of the taxpayer (eg.tax, real estate transfer
tax). In contrast, for the determination of personal taxes, taxpayer's personal situation
(marital status, annual costs affinity for the donor / deceased etc) are taken into
account, eg. Income tax. There is another distinction according to the method of
calculation, there the actual and implicit taxes. Another distinction regarding the
calculation is the specials and at value : at value are those calculated on the price of
the tax component such as tax income and Vat, and the specials are calculated on
specific kind such as oil. Distinctions are the personal taxation and the corporate
taxation and capital gains tax. Of course there are taxes regarding the property, work
and etc.
WHAT IS TAX EVASION AND FACTORS FOR TAX
COMPLIANCE
According to the Greek national operational programs against tax evasion (2011), Tax
evasion is, the illegal in any way hiding of income of individual or entities, aiming to
reduce or eliminate tax liability. Costas(2011), president of Chair of the Taxation
Committee of the Chamber, imply that “Per Greek Tax legislation and the reporting of
the economic crime prosecution body (SDOE), the following Illegal actions are con-
sidered tax evasion, such as the omission to declare any kind of taxable income ,
omission to issue tax documents, omission to pay withholding taxes (VAT), omission
to declare and pay social security contributions, the illegal use of tax documents
(forged, fictitious) and sometimes the non monetary barter of legal services and
goods”. The term illegal, indicates the separation from tax avoidance, which is a re-
lated concept where a taxpayer, e.g. Corporation record transactions in order to min-
imize tax payment. Feldman and Kay (1981), imply that there is strong similarity
between tax evasion and tax avoidance. In Advanced Corporate Reporting the finan-
cial statements must depict the economic reality and the tax basis where the tax will
be calculated, will be real. Rice (1992), implies that the big firms have the greatest
tendency to tax evade, but also in much smaller companies , he concluded that tax non
compliance in companies with low profits, it was a strategy by the managers in order
to reduce cost. The tax evasion and the resistance towards the obligation to pay taxes,
has many causes. There are microeconomic approaches based on mathematical mod-
els to analyse the tax evasion. Allingham and Sandmo (1972) developed the expected
utility maximization approach where the taxpayer has to choose between the declara-
tions of the actual income and to declare less than his actual income. The first choice
leads to the full amount of tax payment, and the second although he can pay less
taxes, he may be detected and punished. The individual but especially a company
wants to maximize the expected utility which comes from the income after tax and
penalty (in the case of detection for tax evasion). The decision for tax evasion by de-
claring less income is risk averse. The tax rate effect on the reported income is inde-
terminate but in this theory the increased tax rate because of the tax evasion effect to
state on collecting taxes, it finally leads the taxpayer to avoid the risk. The probability
of detection is less attractive. To conclude, rational taxpayers decide how much to
evade, given their income the marginal tax rate, and of course the possibility of detec-
tion. Srinivasan (1973), implies that the expected income maximization approach of
that the taxpayer has accepted that his goal is to maximize his expected income after
taxes and penalties and that the “higher the probability of detection, the lower the pro-
portion of income being evaded. If there is a progressive tax rate the richer the person,
the large the unreported income. Both approaches are related to tax rates, and this
factor is important to lead a Company or a person to declare directly less income in
order to avoid the reduction of its income. According to Frey and Torgler (2007), a
social norm is related to a type of behaviour of an individual or social group with gen-
eral social approval or disapproval. Bordingnon (1993) implies a compliance model
under Kantian principles, in order to promote fairness among taxpayers by consider-
ing fair amount of taxes. The effect will be the avoidance of tax evasion because of
selfish behaviour. Benjamini and Maital (1985), imply that in societies where most
tax payers evade, the social stigma is small and the result is the reduction of tax com-
pliance. On the contrary in societies where a few only evade the stigma effect is great.
Frey and Torgler (2007), imply that some governments promote a moral appeal for
the taxpayer who complies and a low social standing of tax evaders in a great degree.
This kind of compliance is greater in countries with a strong sense of social cohesion,
patriotism. Tax morality is also a part of total morality of one society, and it reflects in
the relation of social environment. Alm et al. (1995), imply after comparing tax com-
pliance experiments that there is higher tax compliance in United States which is re-
lated to higher social norm than in Spain. Both countries have different culture and
history. The United States in this research had the highest tax morale followed by
Austria and Switzerland. There is also a strong negative correlation between the size
of unofficial economy and the degree of tax morale in those countries. The Greek
national operational programs against tax evasion (2011), indicates clearly that the
increasing intensity of tax evasion have overcome the reflexes of society against of
tax evasion and there is permanent perception for the impunity of this phenomenon. It
is of course a matter of complete morality of each individual taxpayer or corporation.
Tax compliance is different for firms or corporations in contrast to individual
taxpayers. Crocker and Slemrod (2005), and Chen and Chu (2005), imply that the
existence of internal procedures such as the internal audit , affect their tax reporting
and the importance of the firm’s external activities in the market where the corporate
tax evasion can influence negatively the shareholders and stakeholders interest and
the whole market in generally. According to KPMG survey (2011), every official
authority has to reduce corporate income taxes but with consideration for the effects
at the shareholder level because in many countries the income tax systems are based
on the concept of integration. The shareholders have a credit for the underlying tax
paid related to corporation. But many countries lately choose to give no credit and to
reduce the corporate income tax rate. The reduction of rate has a minimum effect than
the expected at the shareholder’s level. According to the results of the KPMG
Benchmark Survey (2011) on VAT, corporations have to deal with the problem to
manage their indirect tax risk and creating value and simultaneously to achieve full
compliance. In many countries there is also the lack of confidence regarding the
reliability of institution. According to Schneider and Enste (2000), Greece and Italy
had the largest unofficial economy at 30 percent and 27 percent of GDP. There is a
disposition towards public institutions, tax authorities and in general to government
authorities. The low quality of services and the increase of public cost of the state,
economic scandals and the public disposition regarding the legality of certain taxes
especially in countries such as Greece where tax evasion is so common and the people
trust the system less, leads to low tax morale. Tatsos (2001) implies that high earners
in Greece were more inclined to tax evasion. Costas (2011), implies that the education
factor regarding the Lack of education and conscious acceptance of the role of taxa-
tion is very important. The efficiency of the tax authorities’ mechanism for the detec-
tion and audit are very important in order to promote the tax compliance especially to
corporations. According to KPMG survey (2011), governments choose to rely on in-
direct taxes than the direct taxes such the tax income in order to promote competitive-
ness for investments. This political first off all act, set barriers to social change by not
redistributing wealth to lower income citizens and smaller companies. According to
OECD (1990), in most countries, companies and individuals can make a deal with tax
inspectors in order to pay fewer penalties in order to collaborate.
CONSEQUENCES OF TAX EVASION
According to Slemrod and Bakija (2004), tax evasion has a great influence on the
distribution of tax burden as well the resource cost of raising taxes and effect to social
inequality and poverty. Tax evasion also forces governments to reduce the amount of
tax free bracket in order to collect taxes and cut other tax free benefits. Greece’s huge
sovereign debt has almost limited the financial opportunity and survival in the
European Community, the tax evasion is the most pressing challenge for any Greek
government and perhaps is the main cause of the deficit. Vagianos et al. (2010), imply
that the main cause of the deficit in Greece is the lack of public income because of tax
evasion. The above is concluded by the comparison between the Greek Government
expenditure with the average of the European Union but revenue is much lower
because of tax evasion. Behrens et.al (2009), indicate that market distortions by the
two transfer pricing rules in the OECD guidelines the Comparable Uncontrolled Price
and the Comparable Uncontrolled Price, because the transfer pricing can be use for
tax evasion. Sadmo (2005) implies that firms are able to allocate labor freely between
official and unofficial economy. In this way workers and firms do not face incentives
and disincentives to participate in the shadow economy and this has moral
consequences in society. Matsaganis et al. (2010), indicate that tax evasion influences
the redistribution of income, and the social benefits. Guth and Mackscheit (1984),
emphasize that the redistribution of taxes and public goods comes from tax revenues.
According to Gupta (2007), imply that tax revenue have a positive correlation with
economic development. Reduction of the tax revenue because of tax evasion or tax
avoidance restricts the development opportunities. Tax refunds can be used in order to
promote research and development in countries. Vagianos et. al (2010) , indicate that
Tax evasion enhances the low technology and low activity against the growth of high
technology and high growth activities because many of self employed individuals are
not detected by tax authorities easily and tax burden falls in a great percentage to
large firms. Fredericksen et. al., (2005) imply that lower tax revenues may ultimately
lead to higher tax burdens to the reliable tax payers and that tax evasion will also
distort labor supply decisions.
WAYS TO PREVENT TAX EVASION
Costas (2011), Chair of the Taxation Committee of the Chamber indicates measures
to prevent taxation. Tax morale can be influenced with the education of taxpayers.
Education regarding the acceptance of the role of taxation in society must be pro-
moted. The education will enhance the morality and the patriotism of citizens in order
to face the question of the quality of state institutions and the quality of public ser-
vices, the doubt about the use of tax revenues because of scandals. Economic benefit
also must be included in the reform of tax system, regarding the individuals or entities
with high tax compliance behaviour in order to promote the tax compliance. Motiva-
tions for individuals but also for the entities must be included in order to increase the
high compliance. Receipts measures regarding the personal taxation and tax credit in
cases of payment in advance for companies are examples. A tax system reform will
demand more participation to tax burden from self employed and independent profes-
sionals with increase of tax rate. The detection and the tax audit authorities must be
more efficient. It would be better to emphasize in searching the resources of personal
income and not just the corporate income or emphasizing to revenues of an entity. An
example is that in Greece there are many entities with low corporate income for years
but their boards are rich. It is obvious that there are tax evasion benefits from unre-
ported transactions in these companies. Floropoulos et al. (2010) imply regarding the
Taxis system, that Greek authorities in order to use successfully the Information
Technology must provide higher service quality. The tax code also must be stricter by
increasing the penalties quantity and quality.
CONCLUSION
Shelmrod (1990), implies that optimal taxation as general framework for higher tax
receipts, lower poverty, reduced inequalities, and a more progressive tax system, is
costless but it is related to the structure of economy, and the availability of tax instru-
ments. The policy in general is the most important factor in order to educate citizens
and enhance the tax morals, to reform tax systems, to emphasize in direct taxes rather
than indirect taxes , more progressive tax system and to create a just tax system to
help the State to avoid increase of deficit. This leads governments to increase foreign
or domestic borrowing. The first means less independence and freedom of economic
and other options for the country, but an increase in debt due to the high rate of
external borrowing. The political intention to control economy worldwide is obvious.
The question is how serious is the connection between Political morals and tax morals
of citizens.
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