Tax Avoidence

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Contents

1 Why do people pay tax?
2 What is "Tax avoidance"?
3 Why do the authorities allow Tax Avoidance?
4 Why do people avoid tax?
5 Man refuses to pay tax
6 Links
7 References

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.

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.

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?

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.