Social Inequality and Anti-Democratic Implications of Tax Avoidance Schemes - Literature review Example

Social Inequality and Anti-Democratic Implications of Tax Avoidance Schemes Name: Student Number: Course Code: Word Count: Date of Submission: Introduction Tax avoidance is an internationally experiences issue and, consequently, of global concern as well. Being a financial factor, its economical impacts are far reaching. This discussion, therefore, explores the phenomenon of tax avoidance from economical, political and social perspectives. Almost all governments depend on taxation, apart from other sources, as a major source of income or revenue with which it uses to provide public and social services to the citizen and at time non-citizens too. Essentially, taxes can be said to obligatory in which the taxpayer’s opinion or will makes no difference. This is because the policies that implement payment of taxes are designed by the government and enacted without consideration of the taxpayer’s views. On the contrary, the same governments have accepted other policies the facilitate avoidance of tax by entities. This paper appreciates the fact that the many types of taxes can be broadly categorized as either direct or indirect taxes, depending on how visible they are to the taxpayer. Direct taxes are those levied directly on an individual, without the possibility of shifting them on another person. On the other hand, indirect taxes are imposed on the products or services that the taxpayer consumes. These are less visible to the taxpayer and the eventual tax outcome collection out of it depends on the rate of consumption of the taxpayers, on a particular good or service (Slemrod & Jon, 2001). National needs have grown as influenced by factors like population. Resultantly, taxation has become heavier. On the same course, in as much as avoidance of taxation is a civil offence in most countries, implementation of taxation policies is more difficult due to the significant discovery of plans that enable tax avoidance. This cripples governments financially. Hence, it is necessary to study the dimensions of tax avoidance and to design appropriate strategies to deal with it. So far, it is notable that tax avoidance can be realized legally for the entities that want to avoid taxation. In simple definitions, it involves the steps that individual or firm puts into place to minimize on tax liabilities (Studymode.com, 2008). The point of interest is that implementation of these strategies must be lawful. There are a number of reasons why individuals, firms or business companies would want to review their expenditures and liabilities but the most evident one is to save money or maximize on profits. However, it must be noted that the consequential impacts of these schemes developed to achieve tax avoidances are greatly felt in the political, social (Christensen & Richard, 2004) and economical sectors. Political impacts herein refer to its anti-democratic nature while social impacts refer to how it contributes to social inequality. These two are the areas of interest in this discussion. The legalities followed to avoid paying taxes fully only take advantage of loopholes in the governing policies and laws. This legal nature differentiates it from tax evasion, which is completely illegal and has adverse criminal consequences (Braithwaite, 2003). It is therefore, necessary for any entity to separate these two if saving money from taxes is to be possible without going against the laws of the land. Nevertheless, following the right legal procedures to avoid tax will only achieve a goal for the individual entity. Most European nations implement measures that cut down on the expenditure of the government, expenditure of revenue collected by tax from the citizens. Such measures are criticized due to their capacity to undermine democracy (Shah, 2013). Techniques for minimization of corporate tax include the use of offshore tax havens and setting up competition between localities and countries for tax advantages. Research indicates that most of beneficiaries of the tax avoidance industry are corporate societies, big firms and international companies. According to Sikka and Hampton (2005), the anti-democratic nature of this industry is evident when it collides with the civil society. A primary view is that as a government puts in resources, including time of long periods, to design and develop tax laws, professional firms easily undermine these efforts. Corporate companies employ professional firms like accountancy and law firms to fabricate ways of avoiding tax, which is pride to these firms yet ordinarily anti-democratic and antisocial (Sikka, 2005). Looking at this scenario, as the corporations afford law and accountancy firms to avoid taxation, the burden is left with the ordinary citizens who are taxed the more. It then brings social inequality since as the ordinary citizens struggle to pay more tax, these companies, their managers and employees gain more tax-free profits and earn more at the expense of the others. The anti-democratic side of this is seen in the fact that as much the government puts in more effort to come up with laws that police taxation. The same government has allowed respective firms to figure out ways of manipulating these laws so as to avoid tax for their clients. Such put power in the hands of the haves and makes the have-nots subjects to them. Subjects in the sense that the ordinary people with middle level and low income pay more tax yet these same taxes go into repetitive government business like review of tax-laws which accountancy and law firms will always influence. They, therefore, pay tax for services they hardly get from the government; this is an undermining of democracy. In the United Kingdom, the population of people and business that avoid tax form the minority yet they achieve the avoidance by aid from firms that design tax avoidance schemes (HM Revenue and Customs, 2012). The extent to which tax avoidance is antidemocratic is even more worrying when studied by evaluating the governments’ contribution. Apart from designing laws that implement taxation, governments have also outlined policies that fight tax avoidance. The problem is that these policies are bias and partly implemented. The government charges minor fines on this industry, amounts which the big companies can easily recover in short periods. The same firms that design tax avoidance schemes win contracts from the government, yet they remain aids to the industry. Much less has been done to carefully study the constitution of tax avoidance, its key players and the operations therein (Weir, 2012). This only indicates that the government is doing very little to make its austerity measures work against these big firms. For an ordinary person, the perception of these would be that the big firms and corporations have governmental security since most probably the owners of such firms hold top offices in the same government. In the global context, it is amazing how inconsiderately international companies exploit their global reach to avoid tax contribution to national and social needs of their areas of operation. Desai and Dharmapala. (2008) suggests that most global companies do not pay same taxes as national companies alongside which they operate. They achieve this by threatening to move out countries in which they have invested, to other places with better tax levels or incentives. This puts pressure on the government to lower corporate income taxes on international companies, to remain an attractive investment location. This is one technique of corporate tax minimization. The end result is loss of democracy as the national companies with no global effect remain to pay more taxes. Another technique is offshore tax havens but the interesting technique is transfer pricing which takes advantage of the great percentage of global commerce which occurs within global corporations. The corporations avoid taxes by manipulating prices of transferring goods and services. It easily favors global firms only than the national counterparts. All of these lead to the fact that real tax contribution from corporate sectors to the society is generally declining. This reminds one of the social inequality effects of tax avoidance. Tax avoidance can also be viewed from the social point of view in which variables like reputation and social norms greatly impact taxpayer’s perception. Lack of equality in the society is inculcated by lack of policies that increasing the public’s sense of moral duty to pay tax. As certain entities succeed in avoiding tax while others are left with the burden, it stings the people’s reputation and so they feel undervalued in the society. Hannah (2011) refers to this as moral injustice to the society as he explains that not only banks and other corporations are to blame. He also blames it on public ignorance of how the economy really works. Then the concerned parties who want to avoid tax acquire information by their means and then use it to their advantage. Availing tax avoidance to a section of the society, by whatever body, is unequal treatment by say banks. By avoiding tax, very rich personalities accumulate large amounts of money as profits and yet they spend not on the main drivers of an economy but on luxuries and competitive purchasing. According to Young (2004), this only makes the rich richer since resources do not easily rich the ordinary people down there yet basic fairness dictates that corporations and companies have a responsibility to the society. The directors and managers of such corporations are perceived as without respect to social equality and to be breaching the social contract which demands that they hold up social morals. It is thus evident that tax avoidance contributes to social inequality when others avoid tax yet others have no option but to comply. Conclusion Tax avoidance leaves one with a little more to spend but then the effects on democracy and social equality disqualifies its justification. It frustrates the legislative efforts on tax to favour distribution of ownership in the economy as determined by the machinations of tax avoiders. It is a vital factor that contributes to social and financial inequality as it hardly ever enriches everyone but managers and directors who already have. A correctly targeted appeal to conscience and social responsibility should improve compliance to taxation. This implies that people will pay taxes because they are, by social norms and morals, committed. References Braithwaite, V. (2003) Taxing Democracy, Understanding Tax Avoidance and Evasion. New York: Ashgate Publishing Company. Christensen, J. & Richard, M. (2004). The Social Irresponsibility of Corporate Tax Avoidance: Taking CSR to the bottom line, 47(3) Desai, M., & D. Dharmapala. (2008). Corporate Tax Avoidance and Firm Value. The Review of Economics And Statistics. Hannah, J. (2011). The moral injustice of tax avoidance: Social Europe, 1, 1. Retrieved January 26 , 2013 from Magazine Theme on Genesis Framework database. HM Revenue and Customs. (2012). Lifting the Lid on Tax Avoidance Schemes. London: HM Revenue and Customs. Shah, A. (2013, January 7). Tax avoidance and tax havens; undermining democracy. Retrieved from http://www.globalissues.org/article/54/tax-avoidance-and-havens-undermining-democracy Sikka, P. & Hampton, M. P. (2005). AccountantsThe Role of Accountancy Firms in Tax Avoidance: Some Evidence and Issues. Colchester: University of Essex. Sikka, P. (2010). Smoke and Mirrors: Corporate Social Responsibility and Tax Avoidance, Colchester: University of Essex. Slemrod J & Jon B. (2001). Taxing Ourselves. A Citizen’s Guide to the Great Debate over Tax Reform, U.S.A: MIT Press. StudyMode.com. (2008, December 01). Tax avoidance vs. tax evasion. Retrieved January 26, 2013, from http://www.studymode.com/essays/Tax-Avoidance-Vs-Tax-Evasion-130209.html Weir, S. (2012, December 11). Tax avoidance: indignation only gets us so far. Retrieved from http://www.opendemocracy.net/Tax%20avoidance%20%20indignation%20only%20gets%20us%20so%20far...%20_%20openDemocracy.html Young, D (2004). Tax avoidance - an abuse of society Retrieved from http://www.havingtheircake.com/content/Tax%20avoidance%20-%20an%20abuse%20of%20society.php Read More