The importance of the revenue to a country is well known in the world. The global financial system has more interconnections now than at any other time in history. (Simser.J, 2008, p.131). Tax evasion is one of most common crimes that damage the order of revenue. This is closely affecting the market economy and daily lives. Normally, most commentators consider tax evasion profoundly unethical. There are some ambiguities regarding the meaning of the very word “taxation” that must be addressed. It is maintained that the meaning of taxation depends neither on the agents who collect it, nor on their objectives. (Bagus, Block, Eabrasu, Howden,Rostan, 2011, p376). With the development of “market economy”, new ways of tax evasion have appeared which can damage the social economy. This essay will argue that tax evasion affect the society from three main aspects; economic effect, distribution of income and allocation of resource in society. That is whether it is beneficial to the increase of GDP; whether the behavior of tax evasion distort the signals of market, led to the loss of efficiency, cause the waste of resources; whether it lead to the distribution of income inequality.
Tax evasion, by its very nature is difficult to observe. It is an illegal practice where a person, organization or corporation intentionally avoids paying his or her or its true tax liability, failing to report, or reporting inaccurately. Tax evasion is treated as “an effort to convert this coercive behavior into voluntary transactions” (Bagus, Block, Eabrasu, Howden, Rostan, 2011, p375). By altering the conditions of payment and receipt of goods and services, taxation veils preferences of both consumers and producers. Tax evasion might result in increased economic efficiency. Large scaled of tax evasion would not only affect the fiscal revenue of the government, but also will cause the distortion of the social allocation and the income distribution might be out of control, this may badly hurt the social economy. Keep the scale of tax evasion accurately is the foundation of studying and administering the issue of tax evasion. Moreover, budget the scale of tax evasion is essential precondition of analysis the tax evasion.
Body1: Tax evasion has a huge influence on the economy. It might affect GDP and the financial income of the society. According to some general words, only a few articles have made a discussion on the influences of economic growth made by tax evasion. According to the principle of economic analysis, tax evasion can be regarded as a kind of reducing the tax burden of social economy, the economic effect is equivalent to that formatted by tax cuts. On one hand, enterprises will be enable to reduce the procedure of tax burden, thus enterprises could have more capital in increasing the investment. On the other hand, personal tax evasion may increase the personal disposable income, leading to the consumption increase, although the government investment may be reduced and public revenues may decline (Goerke L.& Runkel M, 2011, p713.) due to the loss of income tax. However, in general, if private investment increases, the benefit of private investment will be higher than the government investment.
Therefore, the increase of private investment and consumption will directly affect the increase of supply and demand of the society, so as to promote the growth of GDP. It is proposed that, in some countries with serious tax evasion, the government will generally increase seignior age through financial repression and raising inflation rate. Moreover, government tends to reduce the services to social economy provided by financial repression, which will lead to lower growth rate of the economy. However, from some survey data, tax evasion has a negative correlation with GDP, this means that the scale of tax evasion has disadvantageous influence to the GDP. Investigating its reason, it is mainly because the income by enterprise and individual tax evasion which does not all through the legal ways of investment and consumption, there is a big part of the capital flight. In addition, some investments and spend of consumers are illegal. Therefore, on the whole, no matter from the view of current or in the future, tax evasion can be viewed as a negative influence on the national economy. The government should do some positive macro-controls to the economic phenomenon, and resolutely crack down on the behavior of tax evasion.
Tax evasion may affect the income distribution. Tax is an important function of adjusting income distribution, which makes social income distribution trend to fair, tax evasion make this function, cannot be fully realized. All kinds of tax evasion are through the way of reducing the financial income to increase the disposable income of taxpayer. It is proposed that, the tax liability of a taxpayer is normally only a fraction of his income. This will change the original pattern of income distribution between the government and taxpayers; reduce the finally disposable share in national income distribution and increase the disposable share of enterprise and individual taxpayers. When the tax rate increases, taxpayers could end up reporting less income under decreasing absolute risk aversion (Panades. J, 2004, p.185). In addition, there is no any standard or rules in tax evasion, whether taxpayers choose tax evasion and the degree of tax evasion might change the income of the taxpayer, which may change the condition of income distribution between taxpayers and government.
It might be against the macroeconomic control of the whole social income redistribution by the government. At present, the gini coefficient is a general standard of judging the degree of fair income distribution. In general, as the system itself is not perfect, the increase of total amount of tax evasion is beneficial to the income redistribution. However, this does not mean that the phenomenon of tax evasion can be indulged. On the contrary, the tax evasion should be battle against and the size of tax evasion should be reduced. At the same time, the more important thing is to improve the tax system, reduce the burden of tax and relax the regulation of market step by step. Try to improve the public service quality, making the function of income redistribution can be realized by the taxation.
Tax evasion might affect the allocation of resources. The sign of the relationship between the tax rate level and the amount of income declared by taxpayers in one of the questions that still is not satisfactorily resolved currently (Panades. J, 2004, p.183). As a general rule, all tax evasion behavior can cause waste of resources. First of all, taxpayers should spend a lot of time, energy and money to research scheme of tax evasion or hire a professional consultant as they may use all sorts of tax loophole. Secondly, as tax departments, in order to try to reduce the occurrence of tax evasion, they have to additional added various hardware and software facilities, which lead to the increased cost of tax collection and administration.
From the view of the whole society, the use of various resources on tax evasion and against tax evasion is a pure waste of the resources. Among all kinds of taxes, the effect of commodity tax evasion on market allocation of resources is the most serious. For consumers, value-added tax is part of the price of commodity consumer, if tax evasion exists in certain commodities production and business operation activities, it will make these goods with a price advantage among the market competition. That is, it can make more profit with a lower price. Thus on one hand, it might expand the demand of the commodity in the market, on the other hand, more resources can be attracted into this production and management. This is not in line with the principle of fair competition. Therefore, under the current conditions of the world, reducing the VAT tax evasion is the main aspect to reduce the distortion of the allocation of resources by tax evasion.
In conclusion, this essay has discussed that how tax evasion affects our society from three aspects, including the economy, distribution of income and allocation of resources. According to the above analysis, some basic conclusions showed that some certain degrees of negative effects caused by tax evasion are existed. Even if in some particular period of economic development and particular system of social economy, tax evasion may produce some positive effects to some aspects of social economy. However on the whole, tax evasion is always a negative factor for a country achieving effective macroeconomic regulation. In order to administer the tax evasion of one country, the current status of the country should be combined into consideration. First of all, starting from the fundamental cause of tax evasion, the cost of taxpayers should be increased. Secondly, eliminate the institutional environment that tax evasion produces, perfect the system of the country. Creating a positive environment of marketing economy to speed up the transition of the economic system and optimize the financial tax system. Finally, enhance the whole society of citizen’s awareness to pay tax and increase the tax knowledge and laws and regulations the popularization and the publicity.
Simser.J. (2008), “Tax evasion and avoidance typologies”, Journal of Money Laundering Control,11.
Bagus.P, Block.W, Eabrasu.M, Howden.D & Rostan.J,(2011), “The ethic of tax evasion”, Center for Business Ethic,UK.
Goerke L. & Runkel M. (2011), “Tax evasion and competition”, School of Economic and Management, Berlin.
Panades.J. (2004), “Tax Evasion and relative tax contribution”, Public Finance Review,32.