Chapter 2: Designing Alternative Strategies to Reduce Tax Evasion
James Alm 2.1 INTRODUCTION Although it is often said that the only things certain in life are death and taxes, taxes at least are far from inevitable, and individuals take a variety of actions to reduce their tax liabilities. Some are legal ‘tax avoidance’ activities, such as income splitting, postponement of taxes and tax arbitrage across income that faces different tax treatment. ‘Tax evasion’ consists of illegal and intentional actions taken by individuals to reduce their legally due tax obligations. Individuals and firms can evade taxes by underreporting incomes, sales or wealth; by overstating deductions, exemptions or credits; or by failing to file appropriate tax returns. Indeed, there is widespread, if somewhat imprecise, evidence that tax evasion is extensive and commonplace in nearly all countries, especially in developing countries. Tax evasion is important for many reasons. The most obvious is that it reduces tax collections, thereby affecting taxes that compliant taxpayers face and public services that citizens receive. Beyond these revenue losses, evasion creates misallocations in resource use when individuals alter their behavior to cheat on their taxes, such as in their choices of hours to work, occupations to enter and investments to undertake. Its presence requires that government expend resources to detect noncompliance, to measure its magnitude and to penalize its practitioners. Noncompliance alters the distribution of income in arbitrary, unpredictable and unfair ways. Evasion may contribute to feelings of unjust treatment and disrespect for the law. It affects the accuracy of macroeconomic statistics. More broadly, it is not...
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