The Effect of Tax Avoidance on the Economy - Term Paper Example

The Effect of Tax Avoidance on the Economy Importance of the Arguably, economists have ranked taxation as the leading source of revenue globally. The reasons behind choosing tax avoidance as a study emanates from the urge to establish the various practices used in evading taxes. Implementing of taxes on various transactions of different product categories must be at a level that allows the country an opportunity to achieve the desired objectives in the economic spheres, social programs and defense. Taxation is significant in terms of increasing a country’s reserve amount and regulating business policies, with the aim of maintaining national development and competence at the international scale (Moffat, Bean, & Dewar, 2005, p.45). Therefore, the study of tax avoidance is important in the implementation of a couple of constitutional loopholes upon which tax payers evade taxation for their own advantages. Tax Avoidance Tax avoidance is a subject concerned with the identification of the various legal loopholes surrounding taxation. The purpose of the study is to implement the various ways through which individuals benefit from the avoidance approach. Further, concerns rise as to whether the approach is ethical and of equal importance to the general economy. Studies reveal that mitigation and evasion of taxes differ from tax avoidance as they present a subject of illegality in the taxation clause. Tax avoidance is a legal taxation approach upon which the beneficiaries acquire a constitutional right to avoid taxes (Brooks & Dunn, 2010, p.56). The study reveals the implications emanating from tax avoidance, examples of tax avoidance in relation to the benefits cheat, the ethical issues arising thereof, and a comparison of the ethical issues to the subject of legality. The Implications of Tax Avoidance Articulation of ethical considerations in relation to the issue of tax avoidance remains of essence in avoiding measures that may eventually harm the economy. Governments consider the intended purpose for erasure and implementation of a tax measure accordingly. The resulting variable of both approaches of erasure and imposition of a tax is significant to the intended economic outcome. For example, an economy may focus on ensuring a healthy and competitive business platform that will create revenue for national growth. However, the dream may be short-lived because of malicious proprietors who sought to identify loopholes in the taxation system and eventually avoid the taxes. Such acts may result in unhealthy competition in a country’s business economy and income imbalances (Ferrell, Fraedrich & Ferrell, 2011:36). In the long-run, the business abiding by the set taxing criterion may suffer unhealthy competition from malicious competitors, thus resolving to exit the market. Global economies perceive taxation as the key to growth and implementation of adequate consumer and producer policies. As governments impose taxes to limit consumption of health hazardous products, the businesses involved in production and selling of the products will extend the total amount of the imposed tax to the final consumer. This approach will serve to reduce the consumer’s income as he tries to maintain marginal consumption of the restricted product. The eventual outcome is that the reduced income of the consumer will injure the purchase of vital commodities as the addicted consumer maintains consumption of the restricted product (Moffat, Bean & Dewar, 2005, p.48). At this level, tax avoidance by the producers shall lead to reduced incomes among the consumers and increased poverty levels. Ethical Concepts in Tax Avoidance and Related Cases In accordance to taxation theorists, tax avoidance would pose a fair reflection whenever meant to imply the positive use of money. Authorities may assess different business entities and establish those which should avoid taxes and those that should remit through a constitutional approach. The business will eventually evade taxation but through ethical and legal approaches. However, the avoidance shall comply with the rules set by the authorities to ensure that the amount of money in circulation does not cause harm to the economy. For example, tax avoidance in a company aims to limit price escalations, which is consequential to the risk of inflation (Ferrell, Fraedrich & Ferrell, 2011, p.38). Therefore, tax avoidance will affect the economy positively, thus implying an ethical approach to currency controls and gross national development. Secondly, tax avoidance as a tax system remains ethical whenever applied to control tax rates in relation to the negative use of money. For example, a case about a U.K citizen who sought to acquire benefits and salaries amounting to $3,300 was argued to be a negative use of money, and similarly an unethical and fraudulent affair to other taxpayers (Brooks & Dunn, 2010, p.56). The fraudster faced charges for illegally accessing benefits from tax payers while not remitting any significant amount in accordance with the government’s stipulations. However, the arguments are that tax avoidance is important to control the extent of oppression over a business unit which is subject to ill tax rates. Despite the fact that tax rates are important to draw support from businesses meant for national growth, avoidance serves to safeguard and ensure survival for continuity of infant firms. The essence of the above discussion is that some of excise duties required from firms do not take into account the firm’s successes, thus imposition of the duties will serve to stalk the business’ prosperity (Mcgee, 2012, p.56). Thirdly, ethics imply that tax avoidance may apply as a tool to shelf success for a given business unit under the threat of rivalry and unfair taxes. Although tax avoidance is distinct from tax evasion, the two are components of evading taxation either legally or illegally. For example, a U.K resident sold his properties and travelled overseas in order to evade taxes. This implied to an illegal practice of misinterpreting the tax avoidance clause, thus attracting a court trial. The aspects are capable of economic downfall to the extent that the country amasses a minute revenue amount that is incompetent to service its reserve amount and the balance of payment against foreign states (Longenecker, 2010, p.45). An understanding that tax avoidance is capable of slowing down the rate of foreign investment since the country’s economy reflects a poor rate of growth in the global platform, thus it will not be attractive to the foreign investors (Moffat, Bean & Dewar, 2005:49). Tax avoidance by the local firms in a country may injure importing firms of the given commodity, and at this point, the importing firm may quit the market, which will impact negatively to the demand and supply mechanisms. The Ethical Issues Raised by Tax Avoidance Taxation remains a necessity towards general economic propulsion and growth. On the contrary, economists argue that a country should avoid taxing its businesses for national building and foreign competence. Their stance is that whenever businesses avoid taxes, the surplus revenue from their operations is directly reinvested in the economy (Mcgee, 2012, p.57). This may occur through the establishment of new subsidiaries and innovation of other products for consumption and of vital use to the economy. Whenever a company reinvests its surplus amount, the new subsidiary shall reflect an increased rate of employment, increased production to cater for the consumer needs, and increased income among the involved parties (Ferrell, Fraedrich & Ferrell, 2011, p.47). The increased amount of money will affect the gross domestic product (GDP) and gross national product (GNP) of the country’s economy positively. In accordance to the above arguments, the expected changes observable from a stable economy are a continuous positive reflection and competence throughout the economy’s stakeholders. During such a period, theorists observe that the threat of inflation will be minute. For example, competing producers and suppliers will perform tasks in reference to the rate of demand without surpluses (Brown, 2012, p.46). Ethics of avoiding taxation argue that economic growth is directly implicit to individual citizen participation and the per capita income rather than the government imposing taxes to reshape the economy. Therefore, the economists observe taxation as a retrogressive approach to economic propulsion whereas avoidance remains the most appropriate method to stimulate growth. However, the concept challenges the economic approach to currency controls as they revolve around the aspect of taxation. A second concept argued upon by libertarians from the U.S.A establishes a similar approach towards taxation. The scholars argue that economic forces are capable of reshaping gradually in the absence of policies, citing that every aspect presumes its admirable position in the economic platform. They observe money as intrinsic to the success of the economy only when it circulates freely among the stakeholders (Longenecker, 2010, p.49). Their view is that the players’ earnings are justified by production to meet demand adequately, and engage in innovative ventures after earning enough capital. The approach is perceived as significant to creation of employment, increasing incomes and spending patterns, which eventually bolster the economy to the desired level. At this juncture, it is of essence to comprehend that avoidance of taxation could positively affect an economy (Mcgee, 2012, p.58). The general concepts that seek to erase and avoid taxation may lack significance to the extent that very little of their arguments would apply to adequately face broader economic threats. Businesses may perceive avoidance of taxation as the best option to exploit operations in the absence of subsequent costs (Brown, 2012, p.48). Further, avoidance of taxation will reflect a little or no development of the national economy. Therefore, most governments would result to imposing taxes on the business entities as a worthwhile course to independent economic propulsion. Critics claim that avoidance of taxation may not serve to reshape economic imbalances as argued upon by the libertarians. For example, an argument that a business should regulate pricing and costs may not sufficiently harbor the threat of inflation. The stakeholders may observe an increase in demand as a crucial opportunity to increase prices whilst maintaining costs (Brooks, & Dunn, 2010, p.56). At such a point, it is obvious that the business will tame salaries and employment rates at a stunted level whereas the pricing mechanism exploits consumers. In the long run, the country will experience an incline in poverty levels as well as inflation resulting in the exaggerated prices of inadequate products. (Brown, 2012, p.49). Therefore, as businesses argue that taxation is unethical, the authorities decline to erase taxation from the economy in fear of the subsequent economic fallout. Ethical Issues and Legality on Tax Avoidance Approach Avoidance of taxation may serve for the best of the organisation as well as a country. The fact remains tailored to the extent at which the given business unit is relevant to a nation’s population in relation to its output. At such extremes, a country may presume to fund a business’ expenditure in processing of given products, which would reflect in reduced prices of the products, thus maximising demand to benefit the citizens. Further, avoidance of taxation may be ethical if the authorities put into consideration the various business categories comprised in the economy, scaling among them those liable to taxation and those that are safe to avoid. This approach of avoidance serves to propel growth of infant business to a state whereby they can readily remit taxes without the fear of subsequent downfall. Therefore, avoidance of taxation is a sensitive tool of controlling the economy (McGee, 2012, p.59). Ethical concerns arise in relation to the issues of avoidance and evasion, with equated criticisms towards economic propulsions (Longenecker, 2010, p.46). Different constitutions from different countries denote the importance of taxation to their economies, and similarly relate the issue to various aspects. However, the constitutions further implement different approaches to tax avoidance. For example, the law may allow a given group in the society to stand immune against the taxation policies and without any remittances to pay to the government (Mcgee, 2012, p.57). In spite of avoidance being lawful in relation to the constitution, those paying the taxes may resent to the practice terming it as unethical. Leading global economies improvise ethical approaches that would curb avoidance, evasion, or manipulation of taxes among their citizens. The nations strictly implement critical approaches to establish various income brackets of the individual citizens, and adequate laws of taxation to apply to each citizen. The economies derive ethics on taxation as the citizens adhere to the laws, which at other times may shield them from the taxation bracket. Therefore, tax avoidance preserves different ethical methods as at times it may restrict individuals from remitting their duties while on the contrary enquiring them to pay promptly (Brooks & Dunn, 2010, p.56). From the above study, conclusions are that the aspect of tax avoidance remains a critical issue of a country’s businesses. It is considered as ethical to the extent that it safeguards the will of the majority beneficiaries depending on a business’ operations. For instance, avoidance of taxes for a company that produces necessities is vital to benefit the whole population depending on its output. However, avoidance of taxation in a business that seeks to maximise profits may not serve to benefit the entire nation. Findings from different sources have reflected tax avoidance as a key to economic propulsion through diversification of investments, provision of employment, and increase in the gross domestic product (GDP). Finally, establishments are that the ethics of avoiding taxes may not serve adequately and in accordance with the will of individuals, rather should attend to the demand and supply mechanisms. References Brooks, L. J. & Dunn, P. (2010) Business & Professional Ethics for Directors, Executives, & Accountants. Mason, OH: South Western Cengage Learning. Brown, K. B. (2012) A Comparative Look at Regulation of Corporate Tax Avoidance. Dordrecht: Springer. Ferrell, O. C., Fraedrich, J. & Ferrell, L. (2011) Business Ethics: Ethical Decision Making and Cases. Mason: South-Western Cengage Learning. Longenecker, J. G. (2010) Small Business Management: Launching & Growing Entrepreneurial Ventures. Australia: South-Western Cengage Learning. McGee, R. W. (2012) The Ethics of Tax Evasion: Perspectives in Theory and Practice. New York: Springer. Moffat, G., Bean, G. M. D. & Dewar, J. (2005) Trusts Law: Text And Materials. Cambridge: CUP. Read More