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Tax Avoidence

Why do people pay tax?

Most of us would happily make some voluntary contribution to essential services, it is only the threat of prison that makes us stump up taxes at today's eye-watering levels.

"A tax may either take out or keep out of the pockets of the people a great deal more than it brings into the public treasury, in the four following ways.
First, the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose perquisites may impose another additional tax upon the people.
Secondly, it may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so.
Thirdly, by the forfeitures and other penalties which those unfortunate individuals incur, who attempt unsuccessfully to evade the tax, it may frequently ruin them, and thereby put an end to the benefit which the community might have received from the employment of their capitals. An injudicious tax offers a great temptation to smuggling. But the penalties of smuggling must arise in proportion to the temptation. The law, contrary to all the ordinary principles of justice, first creates the temptation, and then punishes those who yield to it; and it commonly enhances the punishment, too, in proportion to the very circumstance which ought certainly to alleviate it, the temptation to commit the crime.
Fourthly, by subjecting the people to the frequent visits and the odious examination of the tax-gatherers, it may expose them to much unnecessary trouble, vexation, and oppression; and though vexation is not, strictly speaking, expense, it is certainly equivalent to the expense at which every man would be willing to redeem himself from it."

   --  Adam Smith

The theory goes, that you would like to have a fire service in your area. The fire service would be there for everyone as fires are contagious. If the system of voluntary payment occurs, there would be free-riders. People would opt not to pay for it as others would pay it on their behalf. This increases the costs for those that do pay for it, making it unaffordable for them, eventually no-one ends up paying for a fire service.
Introducing a tax resolves this problem, and is justified by saying everyone benefits from the fire service provided.
The downside is that force is used.

What is "Tax avoidance"?

Tax avoidance is any legal means to not pay tax. 
An example would be a business that increases the debt in the company, meaning interest costs goes up. As interest costs go up, profit falls and therefore less tax is paid.

Tax avoidance should be distinguished from a similar sounding term "Tax evasion". Tax evasion is any illegal means of paying tax.

The so-called windows tax was first brought in by King William III in 1696, and was deemed progressive for its time. People with 10 or more windows in their property had to pay a higher charge. Rich people saw it as a “tax on light and air”, hence the term “daylight robbery”.

Why do the authorities allow Tax Avoidance?

They are not so much allowing tax avoidance as allowing people to comply with the rules. The authorities set up the rules and then let people work within them. Sometimes the taxpayers behaviour changes to minimise tax within the rules, but then the Authority can change the rules. 

There is a limitation to how many and good the rules can be. 
  • Too many rules mean no-one will understand them and may contradict.
  • Achieving the aim of the perfect set of rules, will lead to more tax take, and hence more incentive to ignore the rules if the tax take is deemed too high.
  • If the rules are changed too often, it will be interpreted a there being no rules.

Why do people avoid tax?

Quote 987

"Higher tax rates have two important effects, among others. They make it worthwhile for people to avoid them by employing accountants to minimize their tax exposure via tax shelters, or to evade them by simply not declaring income and dealing in cash where they can. The former is legal, the latter criminal, but both mean a smaller tax base to levy the new rate upon. Both are encouraged by higher rates, and made less worthwhile at low rates. The second effect is that earners have less incentive to work more. If they keep only half of any extra they earn, this is less of an incentive than if they can keep 60 percent."

   --  Masden Pirie

People avoid tax for many reasons

  • It's practical - More money is always useful
  • It's smart - Only a fool would pay more than they have to
  • It's their duty

People are often criticised as being immoral for tax avoidance, but it is almost in every case your duty not to pay more than you have to. Some people are legally obligated to minimise tax bills. Company directors have a duty of care with investors funds.
A father/mother may feel an obligation to pay tax, but at the same time feel they have to save up for a child's education they are more morally obligated to pay for the child's education as they are responsible for it, but are not responsible for government.

Man refuses to pay tax

Former IRS Agent Joe Banister and Ron Paul On CNBC

  • The tax authorities mislead people in to paying more tax than they have to.
  • Some people avoid tax out of desperation or to feed there families
  • There is not an entitlement that this administration does not like
  • The tax department tries to intimidate.

Do tax havens “serve no useful economic purpose” ?

No - National tax systems are often badly designed, and the interactions between them are even worse. 
Having a tax haven mitigates the problems caused by this.