The Extent to Which Tax Avoidance Schemes Are Anti-democratic, and Contribute to Social Inequality - Essay Example

Tax avoidance Name of the Student: Name of the Instructor: Name of the course: Code of the course: Submission date: Examine the extent to which tax avoidance schemes are anti-democratic, and contribute to social inequality Introduction In a generic sense, tax avoidance refers to the modification of an individual’s financial situation aimed at lowering the amount of tax owed. The accomplishment of this objective is often through claiming credits and permissible deductions. However, it is important to point out that this practice if different from tax evasion which is illegal. Majority of the taxpayers have been revealed to use different form of tax avoidance schemes. This is best exemplified whereby employees who make contribution to retirement plans sponsored by the employer which has pre-tax funds often engage in tax avoidance. This is founded on the fact that the amount of tax which will be owed during withdraw is usually less than the amount which individual employees would owe at the present time. In addition, retirement plans permit the taxpayers to engage in deferment of their tax payment to a much later date. This allows a faster growth of their savings. Research literature in the past has revealed an increasing trend of tax avoidance in diverse countries around the world. This is evidenced by increasing book-tax differences, increasing proportion of firms with no tax liability as well as decreasing effective tax rate. This trend recorded significant growth through the 1990s as well as in the last decade (Plesko, 2004; Yin, 2003). This paper will examine the extent to which tax avoidance schemes are anti-democratic, and contribute to social inequality. Tax avoidance leading to reduced national revenues In basic terms, tax can be defined as charges which are imposed by governments in different regions of the world on companies, individuals, property or transactions aimed at raising money for public utility (Olabisi, 2010). This includes the money which the government invests into social welfare aimed at elevating the social standards of citizens, mostly those from low income class. As a result, tax avoidance reduces the amount of revenue that the government collects and subsequently invests in social welfare programs. As a result, this has the overall impact of entrenching social inequalities in diverse states. In addition, the decrease of money invested in healthcare programs, education and poverty alleviation which can be attributed to tax avoidance translates to the increase of social inequality among members of a given population. As a result, the poverty levels among members of the lower income class continue to deteriorate in the long-term which has the overall impact of influencing the increase of crime rates and illegal businesses among members of this class as they make efforts to improve their social standards. Thus, tax avoidance by individuals or collectives can be perceived as being not only central in reduced government revenue and subsequent investment into social welfare programs but also in increasing social inequality in the society. On the other hand, the advancement of the tax avoidance industry mostly affects the ordinary people based on the fact that they are obliged to pay higher taxes while the rich peoples and corporations avoid theirs. This is evident in the UK whereby individuals earning the minimum wage are forced to pay income taxes while on the contrary, some 65,000 rich persons who live in this country are anticipated to pay little or no income tax. This tends to contribute to the elevation of social inequality in the country, widening the gap between the rich and the poor members of the population (Shar, 2013). Tax avoidance in promoting unfair advantage According to the Australian Taxation Office for Commonwealth of Australia (2012), promotion of tax avoidance schemes not only poses negative implications on the taxpayers but also negatively impacts on the level playing grounds of the tax profession. This is founded on the fact that advisers who promote these schemes are deemed to obtain unfair advantage over those who do the right thing. This fact is evident in the UK whereby HM Revenue & Customs (2012) revealed that tax avoidance accounts for nearly 14% of the tax gap in this country. This is whereby it entails the use of tax law aimed at gaining an advantage which was not initially intended by the law makers. This mostly entails the frequent use of schemed, artificial transactions which sorely serves the purpose of reducing tax liability, either at the individual or corporate level. As a result, this enable some taxpayers to gain some sought of unfair advantage over others, and even public weakening confidence in the tax system. As a result, this can be perceived to contravene the ideals of democracy in different states which are founded on equality, fairness and level playing grounds for all the citizens. In this light, tax avoidance can be viewed as being primary in the propagation of anti-democratic systems. On the other hand, Shar (2013) cited that despite many individual citizens and corporate bodies disliking the idea of paying taxes and opting for tax avoidance, it is apparent that this trend can be credited for heightening the struggles among different democracies as they strain to function. As a result, high rates of tax avoidance have been linked with the inability of different democracies to provide fundamental public services to the citizens which has detrimental impacts on both the poor and the rich nations. Subsequently, when particular democracies become unable to provide the basic public services to their citizens due to increased tax avoidance, this creates a the urge to increase tax rates which is bound to trigger public unrest which is detrimental to the democratization of any country. This is best epitomized in Britain which loses an approximated US$170 billion annually in avoided tax. Even for a wealthy nation like Britain, this is a significant sum when the public funds are scarce and citizens are reluctant to see the government spending money on certain programs which they deem insignificant (Shar, 2013). As a result, the long-term impact of this phenomenon which emanates from tax avoidance has been perceived as being a threat to democracy. Tax avoidance and foreign-domestic investment inequality The advent of different schemes of tax avoidance has also been linked to widening the gap of inequality between foreign and local investors. This is mostly associated with an important form of contemporary tax avoidance which consists of international tax arbitrage. This is through the establishment of residence or locating assets by affluent people in low-tax countries (Landier& Plantin, 2011). In this case, most of the mega corporations in high-tax countries as well as wealthy individuals in these states tend to locate their assets in low-tax countries. As a result, they are often exempted from taxation in the latter countries based on their role in promoting foreign direct investment (FDI). Eventually, they avoid taxation of these assets in their home countries as well as in the low-tax countries where they have transferred them to. On the other hand, small and middle enterprises (SMEs) in these high-tax countries which are not able to relocate their assets to low income countries continue to be subjected to huge taxes to cover for the deficit created by the tax avoidance activities of the mega corporations and wealthy individuals. This usually has the overall impact of widening the socio-economic inequality between the SMEs and the large corporations who engage in tax avoidance. This can be epitomized whereby mega companies in high-tax countries like the US or in Britain may opt to locate their major assets in low-income countries in Africa and Latin America. This will result in reducing the tax they pay in their parent countries while on the other hand, they are exempted from taxes in the low income countries. As a result, the small companies and ordinary individuals in the US and in Britain are obliged to shoulder the tax burden of the country, which is influential in propelling socio-economic stability in these countries. Conclusion From the preceding discourse, it is apparent that tax avoidance schemes are anti-democratic, and contribute to social inequality. This is mostly linked to their role in reducing the government revenue and subsequent investment in social welfare which elevates social instability. In addition, tax avoidance schemes have been linked to promoting unfair advantage and eventually jeopardizing democratic countries and thus anti-democratic. Lastly, these schemes have been credited for increasing the socio-economic gap between the domestic and foreign investors as the latter tend to locate their assets in low-tax countries. References Australian Taxation Office for Commonwealth of Australia (2012). Tax adviser: Your referrals quash tax avoidance schemes. Retrieved January 26th 2013 fromhttp://www.ato.gov.au/atp/content.aspx?doc=/content/00341597.htm HM Revenue & Customs (2012). Lifting the Lid on Tax Avoidance Schemes. London: HM Revenue & Customs. Landier, A. & Plantin, G., (2011). Inequality, Tax Avoidance, and Financial Instability. Retrieved January 26th 2013 fromhttp://www.gplantin.net/inequality%2010-26-11.pdf Olabisi, J., (2010). An assessment of tax evasion and tax avoidance in Lagos state. Journal of Research in National Development, 8(1). Retrieved January 26th 2013 from http://www.transcampus.org/JORINDV8Jun2010/JournalsV8NO1Jun201021.html. Plesko, G. A (2004). Corporate Tax Avoidance and the Properties of Corporate Earnings. National Tax Journal 57 (3):729-737. Shar, A., (2013). Tax Avoidance and Tax Havens; Undermining Democracy. Retrieved January 26th 2013 fromhttp://www.globalissues.org/print/article/54#Taxavoidanceunderminesdemocracy Yin, G. K (2003). How Much Tax Do Large Public Corporations Pay?: Estimating the Effective Tax Rates of the S&P 500. Virginia Law Review 89 (8):1793-1856. Read More