The Evolution Of Tax Avoidance And Tax Evasion: A Historical Overview

The High Earners as an Object of Disgust Due to Tax Avoidance and Evasion

Question:

Discuss about the Lectures on the relation between law and public.

In the article Graham Aronson has given arguments in respect of the steps taken up by the statute that lead to the development of an environment wherein the high earners were seen as an object of disgust who have increased their fat from the income of honest tax payers and by avoiding the tax altogether that they were bound to pay the government of the country. The author draws several instances wherein the social and other constituents of tax environment were not even ready to talk about the difference between ‘tax avoidance’ and ‘tax evasion’.in order to chronologically present the changes that took over the last 100 years which ultimately formed the basis of current mind-set of the jurisdiction and the general public towards the concept of tax avoidance, the author started from the period of 2008-2016 and then took up the preceding time frames (Stiglitz and Rosengard 2015). For reference we can take up some instances that have been presented by the author himself. The author started with the collapse of the Lehman Brothers. This was one of the worst case scenarios that shook the entire banking and financial service providers’ industries world-wide. After the collapse the author points out that many famous politicians and public figures categorised tax avoidance as morally wrong and very stringent tax policies were brought forward by the government. The author points out that even the judicial system was favouring the sentiments of the common public as is relevant from the fact that during that period around 38 cases were file and only 7 were in the favour of the tax-payer. This is due to the fact that inspire of the fact that the judges are not appointed by public elections and are not subjected to selection in the legislative assembly it is the experience of the people working with the judges in the court rooms that suggests that they are influenced subtly by the public opinion which gets reflected in their attitudes and approaches as judges (Henrekson and Waldenström 2016). After this the author takes the reference of the era of 1973-2007. In respect of this period the author points out how Rossminster turned tax-avoidance into full-fledged industry. In order to describe the pretext of the actions or products or services designed by Rossminster the author draws our attention to the fact that how the shadow chancellor of the exchequer had announced that the rich people will be taxed heavily with taxation reaching 75% on their last slice of earnings and later on this was ultimately increased to 83% and in addition to this there was additional surcharge of 15% on the income on investment. This provided an immense opportunity to the company who devised policies that would require the tax payer to pay a major chunk of the tax saving to the company (Braithwaite 2017). But, in spite of such huge commission or service payment the customer were able to save a huge amount of tax which otherwise would have been subsumed by the statute with the help of its stringent tax policies. The strategies devised by the company were like product being manufactured and they were presented to the customers as if there were lines of products being offered by the production line of the company. This was due to the fact that the problem faced by the tax payers were huge but in most cases were of similar nature and hence the company was able to form or devise methods that would help the customers or taxpayers to avoid their tax liability most effectively and efficiently. Even after such drastic measures being taken by the taxpayers they still got the sympathy for the drastic measures being taken against them by the statute.

Difference Between Tax Avoidance and Tax Evasion

I completely agree with the views presented by Graham and I also believe that due to the huge tax burden being levied by the statute on the richer section of the society they were forced to search for alternatives that will enable them to keep some portion of their hard money with them instead of the treasury of the government (Storey 2016). The taxpayers were previously adopting tax avoidance measures which was later substituted by them with tax evasion measures due to the catastrophic effect of the tax laws formulated by the statute of the country on their income and thereby their wealth.

The policies taken out by the government play a very vital role in determining the attitude of the taxpayers towards the compliance with the laws of the statute. If the government formulates its policies with a view that a particular section of the society has to pay more taxes or the effect or implication of the laws will be such that the particular section of the society will face immense pressure and would have immense negative effect on the earnings or wealth of that section then consequently the persons belonging to the category which is worst hit by tax laws will look for not only minimising their tax but also evading it altogether (Payne and Raiborn 2018). The government policies should be focussed on the amount collected from the tax rather should focus on increasing the tax base of the country.

It is because of these reasons that places like Panama have become a go to destination for taxpayers especially the wealthy individuals as they have become desperate to save some of the substantial portion of their earning form being taxed or taken altogether by the treasury of the government (Frecknall-Hughes et al. 2017).

In real terms there are moral and ethical justifications for the tax avoidance measures. It is to be noted that only the individuals are not responsible for abiding by the laws taken out by the government, the government itself should carefully look into the laws formulated by it. If the individual is able to save some of his taxes by staying within the jurisdiction of the law he should be allowed to do that up to a certain extent (Dicey 2017). It must also be kept in mind that the individuals or companies have to work very hard in order to earn their income hence it is not their fault that they have huge money rather the award for their pursuit.

The management of tax affair in an efficient and effective manner helps the taxpayer in reducing their tax liability. In order to provide appropriate advice a complete understanding of the tax affair of the client affair is obtained. The tax advice is provided in a manner so that the individual can save tax by availing the tax allowances and benefits. The main aim of the tax advice is to manage the tax affair in a manner that the individual is not required to pay more tax that it is required (Becker et al. 2015). An individual always looks for effective tax planning to reduce his or her income tax liability. However, the tax planning have to be done within the income tax provisions as provided in the income tax act of the country. In this section an attempt is made to critically evaluate the tax affair of Mr Aina’s.

In this case the objective for the tax adviser is to reduce the liability of the tax payer to pay income tax on the taxable income of the tax payer. The individual resident of the United Kingdom, Mr Ola Aina is a 40 year old person who has income from different sources. The tax adviser is responsible to reduce the income tax liability of the Mr Ola Aina by providing him valuable tax advises. A tax adviser have to follow certain procedures to reduce the income tax liability of an individual in the country. Let us explain the various steps and processes which a tax adviser must follow in order to reduce the income tax liability of the tax payer.

Instances of Tax Avoidance and Tax Evasion

The sources of income of an individual has to be assessed first. There are numerous sources from which an individual may earn income. A tax adviser must identify the different sources of income of an individual correctly, in this case that of MR Ola Aina, to compute the gross total income of the tax payer correctly (Besley and Persson 2014). Proper classification of sources of income will enable the tax adviser to ascertain the gross total taxable income of the resident individual. After ascertaining the proper sources of income and accordingly, computation of income the tax adviser should take all necessary deductions available as per the provisions of the income tax act in the country to ascertain the net taxable income of the resident individual to calculate the income tax liability of the individual.

In this regard it is important to note here that the taxable income and income tax liability of Mr Aina has been calculated assuming that the gross taxable income of ?72,000 of Mr Aina is not inclusive of the items from point (2) to point (8). Thus, in addition to the gross taxable income of ?72,000 the additional items have been included and excluded where necessary to ascertain the net taxable income of Mr Aina and subsequently his income tax liability for the tax year 2017/18 (England 2017).

In case of Mr Ola Aina the gross total income of his will include the following:

1. The gross total income for tax purpose, i.e. ?72,000.
2. The perquisite valuation for the car benefit has been calculated and added to ascertain the taxable income of Mr. Aina as the car was provided to Mr Aina by his employer and the use f the car was not made exclusively for the official purposes. Had the car only been used for the official purposes then the car benefit would not have been taxable in the hands of Mr Aina.

• The fuel which was provided for the private use of the employee will not be included in calculating the taxable income of Mr Aina since the fuel was only provided till the previous year and not for the current tax year 2017/18.

1. The taxpayer can earn income from interest in savings bank account. The interest of savings bank accounts both of ?850 and ?500 shall be included to ascertain the taxable income of Mr Aina to calculate his income tax liability as the interests of savings bank account is taxable in the hands of the recipient. However, he will be allowed to receive a personal allowance of ?500 and this will be deducted from the total interest income.
2. The taxpayer can receive dividend payments from the investments made in the shares. It should be notes that as per the law the individual is not required to pay tax on the dividend amount of ?5,000. In this case the taxpayer has received the net dividend of ?5,000. Therefore, it shall not be included in the income tax liability of Mr Aina.
3. The profit from private consultancy of Mr Aina of ?42,000 will be included in the taxable income under profit and gains from business and profession to calculate the taxable income and income tax liability of the Mr Aina.

• The profit from sale of antique clocks, though from hobby of the individual, since the transaction is commercial and business sin nature will be included in computation of taxable income of Mr Aina. Thus, the profit ?7,000 and ?4,700 will be included in computing the taxable income of Mr Aina.

There are number of deductions which are allowed to an individual for ascertaining the net taxable income of an individual to ascertain the income tax liability of the individual. In this case also Mr Aina is eligible to take deduction of ?12,000 for the contribution made to the personal pension scheme and ?2,000 for the charitable donations paid under gift and aid scheme. Thus, total deduction of ?14,000 will be allowed to Mr Aina from gross taxable income of Mr Aina to calculate his taxable income and subsequently the income tax payable on the taxable income. It should be noted that as per the law the tax payer is entitled to receive tax relief on the private pension contribution up to 100% of the annual earning. Therefore it can be suggested that in order to reduce the tax liability the taxpayer can increase the pension contribution so that higher tax relief can be received.       

Thus, taking into consideration the above it is clear that an individual must avail the benefits which have been provided in the income tax act of the country to reduce his taxable income and subsequently his income tax liability in a tax year.

Reference

Becker, J., Reimer, E. and Rust, A., 2015. Klaus Vogel on Double Taxation Conventions. Kluwer Law International.

Besley, T. and Persson, T., 2014. Why do developing countries tax so little?. Journal of Economic Perspectives, 28(4), pp.99-120.

Braithwaite, V. ed., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Dicey, A.V., 2017. Lectures on the relation between law and public opinion in England during the nineteenth century. Routledge.

England, P., 2017. Households, employment, and gender: A social, economic, and demographic view. Routledge.

Frecknall-Hughes, J., Moizer, P., Doyle, E. and Summers, B., 2017. An examination of ethical influences on the work of tax practitioners. Journal of Business Ethics, 146(4), pp.729-745.

Henrekson, M. and Waldenström, D., 2016. Inheritance taxation in Sweden, 1885–2004: the role of ideology, family firms, and tax avoidance. The Economic History Review, 69(4), pp.1228-1254.

Payne, D.M. and Raiborn, C.A., 2018. Aggressive tax avoidance: A conundrum for stakeholders, governments, and morality. Journal of Business Ethics, 147(3), pp.469-487.

Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the Public Sector: Fourth International Student Edition. WW Norton & Company.

Storey, D.J., 2016. Understanding the small business sector. Routledge.

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