Tax Avoidance towards Anti-democracy and Social Inequality - Essay Example

Tax avoidance towards anti-democracy and social inequality Name of the Student: Name of the Instructor: Name of the course: Code of the course: Submission date: Examining the extent to which tax avoidance schemes are anti-democratic, and contribute to social inequality Introduction Recent years have seen increased debates on the detrimental role of tax avoidance in the efforts of diverse countries around the world to meet their development objectives. This is founded on the fact that corporate bodies as well as individuals tend to take advantage of the loopholes in the tax regimes of different countries to reduce the amount of tax that they have to remit to the government. This is often through profound tax avoidance schemes which are central in minimizing the amount of government revenue which is collected for utility in public projects. This is founded on the assumption by Christensen and Murphy (2004) who cited that tax revenues are at the core of social contract, integral to the national infrastructural establishment and maintenance. In addition, they are primary to the sustenance of the justice frameworks which reinforces market economy as well as liberty. Against this backdrop, this paper will examine the extent to which tax avoidance schemes are anti-democratic and make significant contribution to social inequality. Is tax avoidance anti-democratic? Before interrogating this question, perhaps it is integral to gain a brief definition of democracy as perceived among different countries around the globe. In a generic sense, Campbell (2008) cited that the basic notion of democracy is that there is an inherent among people in determining the person (s) who is entrusted with governing them. In majority of the cases, the people are engaged in the processes of electing the principle governing officials and proceed to hold them accountable for their actions and behaviors. In addition, democracies have been cited of being able to impose legal limitations on the authority of the government through guaranteeing specific freedoms rights to the citizens. This is connected to the four basic conceptual aspects of democracy which have also been instigated in the recent past. These are rights and liberties, economic democracy, popular sovereignty as well as democratic values (Campbell, 2008). Against this backdrop, tax avoidance can be perceived as being anti-democratic based on several facts. Firstly, it is worth noting that governments are mandated with the role of providing different services to their citizens through democratic processes. These services are in the realms of education, healthcare, transport and communication networks as well as peace and security among other roles. The delivery of these services is usually funded by taxes which are collected from the citizens through well-tailored tax systems. However, tax avoidance erodes the amount of revenues which are collected by the government over a particular period of time. This is evidenced in the US whereby according to the estimates by the US treasury, the country might be losing over $345 billion each year as a result of different tax avoidance schemes. This is coupled with the fact that an approximated 68% of the foreign corporations and 66% of domestic corporations in the country failed to pay any federal corporate taxes in the period between 1998 and 2005 (Sikka, 2010). This poses detrimental impacts on the delivery of public serviced to members of the population in this country which is acclaimed o being highly democratic. The failure by the government to offer these services to the citizens is bound to trigger unrest among the people and possibly spill over to violent response to the inadequacy of the government to fulfill its mandated role. As a result, Sikka and Hampton (2005) determined that the tax avoidance industry around the globe poses severe challenges not only to the nation state itself but also to the future of democracy. This is founded on the fact that governments which are democratically elected might be entrusted by the people with the role of raising and spending tax revenues on healthcare, pensions, clean water, education and telecommunication networks but the highly sophisticated and commercialized tax avoidance industry does not respect such mandates to the government. Thus, tax avoidance can be perceived as having a significant influence on democracy in diverse countries. On the other hand, tax avoidance has also been credited for derailing the development efforts among most developing countries in the world. This is evidenced by the fact that an estimated $500 billion is lost through diverse tax avoidance scheme.$365 billion of this loss is credited to the practices of transfer pricing which relocate profits from the developing countries to the developed ones (Sikka, 2010). These lost resources could extensively be used in the enhancement of infrastructure and improvement of democratic institutions in these countries. Thus, tax avoidance can be viewed as having significant influence on democracy of these countries. Contribution of tax avoidance to social inequality Just like the influence of tax avoidance in promoting anti-democratic practices in different countries, it has also been perceived as being central in contributing towards social inequalities. Firstly, it is imperative to note that a significant share of the tax revenues accumulated by the government are used in promoting social welfare programs to take care of the least disadvantaged in the society. Thus, tax avoidance by both the individuals and corporate bodies means that there are limited funds which are committed by different governments in creating a society which is founded on social equality. This fact is supported by Sikka (2010) who cited that there has been an increasing pressure by the non-governmental organizations (NGOs) among other pressure groups which have outlined the inconsistencies between the claims in the corporate world of their social responsibility as well as their tax avoidance practices. These practices incapacitate the governments’ ability to provide healthcare, pensions, education or engage in wealth redistribution for the purposes of poverty eradication. This also halts the efforts of the government which are geared towards fostering an equitable and peaceful society. Majority of the practices which are propelled by the accounting firms in the corporate world which contribute to reduced government revenues and subsequent social inequality are problematic in regard to gaining their data. These include issues like tax avoidance and evasion, transfer pricing, money laundering as well as off-balance sheet financial undertakings (Arnord, 2009). These activities are aimed at shareholders’ profit maximization which has been credited for being a major incentive towards tax avoidance. Subsequently, it has been pointed out that these practices detrimentally contribute to the reduction of the amount of revenues that the government collects from the corporate bodies and invest in social programs. Thus, despite indirectly, these practices fuel tax avoidance which has significant contribution to social inequality. Lastly, tax avoidance has been credited by increasing the tax burden of the ordinary citizens in different countries which negatively affects their social standards. This is founded on the fact that through tax avoidance schemes, the wealthy people are able to evade payment of tax and this burden is left to the ordinary citizens. This fact is best epitomized in the UK whereby Sikka and Hampton (2005) cited that some 65,000 wealthy individuals are projected to have paid little or no tax at all in the year 2004. In addition, the top fifth of the earners in the country often submit a smaller proportion of their income to the government in terms of taxes when juxtaposed with the bottom fifth. This reality points to the fact that tax avoidance by the wealthy serves the purpose of propelling social inequality in different countries. This is whereby the ordinary citizens are subjected to paying hefty taxes to their governments leading to deterioration of their social standards. They are thus obliged to accept goods of poor quality as well as poor services from the government. On the other hand, the wealthy evade paying and eventually retire in private gated estates. This can thus be perceived as a major contribution of tax avoidance towards propelling social equality in different societies. Conclusion The above analysis has evidenced the fact that the debates on tax avoidance have increased in the recent past. This is based on the fact that this practice not only contributes to social inequality but also promoting the development of anti-democratic regimes in various countries. This reality has been evident in the UK, US among other developed countries as well as in the developing world. References Arnord, P.J. (2009). Global financial crisis: The challenge to accounting research. Accounting, Organizations and Society, 34: 803–809. Campbell, D. F. (2008). The Basic Concept for the Democracy Ranking of the Quality of Democracy. Vienna: Democracy Ranking. Christensen, J. & Murphy, R. (2004). The Social Irresponsibility of Corporate Tax Avoidance: Taking CSR to the bottom line. Development, 47(3): 37–44. Sikka, P., (2010). Smoke and mirrors: Corporate social responsibility and tax avoidance. Accounting Forum, 34: 153–168. Sikka, P. & Hampton, M.P. (2005). The role of accountancy firms in tax avoidance: Some evidence and issues. Accounting Forum, 29: 325–343. Read More