TAXATION

GROUP COURSEWORK

2011-2012SEMESTER B

“Analyze the phenomenon of tax evasion and indicate ways to prevent such practices”

CONTENTS

INTRODUCTION………………………………………………………......…..3

TAX DEFINITION AND PURPOSE OF TAXATION…………………...….3

DISTINCTION OF TAXES………………………………………………..…..4

WHAT IS TAX EVASION AND FACTORS FOR TAX COMPLIANCE….6

CONSEQUENCES OF TAX EVASION…………………………………..…..9

WAYS TO PREVENT TAX EVASION…………………………………...…10

CONCLUSION……………………………………………………………..…..10

REFERENCES…………………………………………………………….…...12

INTRODUCTION

According to Zimmern (1956), in the ideal Athens of the fifth century B.C., the

liturgy system was very successful, where the liturgy was a form of tax for the

wealthy in order to afford titles in exchange for tax payments for the state. The Greek

Golden age with its magnificent monument of the Parthenon is the perfect result of

the Athenian government regarding the collection of taxes. Especially from 454 BC,

the sixtieth annual tax went for godness Athena and Pericles saved the money to build

the famous temple. Tax compliance was an achievement of the democratic

functioning of Ancient Athens. The Latin word evadere, which means escape, and

avoid in taxation law, is used to describe forms of illegal behavior related to tax

payment. The Tax evasion phenomenon has its causes not only in economic factors,

but also in social and psychological causes. Tax morality, human egoism, and social

norms, ethics and culture, are some causes of tax evasion worldwide.

TAX DEFINITION AND PURPOSE OF TAXATION

Dalton (1920) implies that tax is the compulsory contribution which imposes a public

authority without regard to the exact amount of services supplied in exchange to the

taxpayer and without imposing a criminal violation of any law. According to

Andreadis (1935), in the Greek constitution of 1864, influenced by Montesquieu,

Thiers, Locke and Smith, there is the theory of premium for the citizen before the

state such as the insured and the insurance company and the tax is the price for the

benefits from the this type of guarantee for this safety. Finokaliotis (1999) implies that

there is also the theory of exchange for the services from the state. But Andreadis

(1935), Finokaliotis (1999), Theocharopoulos (1975), imply that the most important

reason for the existence of taxation is the necessity for the survival of the state. The

taxation is imposed by this necessity and it is an inevitable sacrifice by the citizens.

This sacrifice is also a duty of the citizens. The term “legitimate” evolves questions

about the fairness but under special circumstances is fair. The imposing of taxes is

justified, because nobody could be able to possess income or assets without the

support of constitutional, organized society in the form of a state. According to

Georgakopoulos and Patsouratis (1993), the cost of providing free public goods and

funding of other activities of public bodies, it is called “tax burden”. The tax burden

must be distributed fairly. The progressive tax income is an excellent example to

highlight one advantage of taxation, the distribution of income from richest to poorest

because the progressive tax income is very important for the reduction of income and

social inequalities and it gives the State the opportunity to give basic benefits to those

who are very poor and weak. An example of statutory set of principles regarding

taxation is the Greek Constitution that sets out the basic tax principles to be observed

by the legislator and enforcer of the law on tax laws. In Articles 4 (paragraph 1 and

5), 20 (paragraph 1), 36 (paragraph 2), 73 (paragraph 5), 76 (paragraph 7), and 78 of

the Constitution 1975/1986/2001 are the foundation of the Tax Law. The principles

ensure the rule of law and social state of law in Greece : “ 1)The principle of legality

of the tax, 2)The principle of the annual consent of parliament for the establishment

and collection of tax, 3) The principle of certainty of tax 4)The principle of equality of

tax, 5) The principle of universality of the tax, 6) The principle of non-retroactivity of

tax, 7)Principles derived from the provisions of civil rights.”

DISTINCTION OF TAXES

The basic distinction between taxes, are the direct and indirect taxes. Direct taxes are

those imposed in the resulting income and wealth, while indirect taxes are imposed on

trade, incidental or transitional. Personal taxation and corporate taxation according to

ESA 95 are considered as the total of direct taxes along with profit taxation from

lottery and dividend taxation. VAT and Consumption tax are considered Indirect

Taxation. According to Atkinson (1977) the direct taxes refer to certain individuals or

entities and they are imposed on the income or the property owned by the tax payers

(e.g.income tax). Indirect taxes are imposed on the income spent and they are

collected when certain transactions or events occur (VAT, value added tax). Also, the

direct, the operative fact is the periodicity and regularity exists (e.g.the income tax

collected each year) while the indirect tax is not periodicity. The indirect taxes are

extensively used to excise tax, are not considered fair taxes, because they are not

progressive and they do not take into account minimum exceptions and differences in

personal circumstances. The major indirect tax is the Value Added Tax and the major

direct Tax is the Income Tax. Atkinson (1977) implies that Direct taxes are more fair

and just because they are imposed in greater amounts on citizens with greater income.

Indirect taxes are paid by all individuals with no exception. The Direct taxes are more

stable and expected. Indirect taxes have immediate results and significant returns for

the State because they are imposed easily to all citizens and entities. The taxation cost

regarding the collection of indirect taxes is less than the cost of collection of direct

taxes. According to Palaiodimos (2006), after the comparison of tax systems in EU

countries, an important aspect of tax systems in the EU is that all the Nordic countries

make their tax revenues over direct taxation and a similar picture emerges for Ireland,

the United Kingdom, Belgium and Luxembourg. At the other extreme are Germany,

France, Holland and Greece, whose share of direct taxes in total tax revenue is low

and approaching that of the new Member States in EU. Corporations depict the state

economy and tax view of a business is consisting of: a) the tax income, b) the VAT, c)

by withholding taxes, d) from the property tax e) transfer taxes property, f) the tax of

duties g) fees. The tax subject is not only citizens of a state but other persons,

including foreigners residing permanently or temporarily, or transit or when economic

relationship is by inheritance, by exercising business, from property and more. The

State has more interest in the corporate taxation, because the legislature for fairness

and universality and of course because of the amount of taxes. There is also a

distinction of taxes relating to the tax base and distinction of taxes in accordance with

the method of calculation. According to tax base distinction, they are real and

personal taxes that are imposed on certain real economic data without taking into

account the status and economic power of the taxpayer (eg.tax, real estate transfer

tax). In contrast, for the determination of personal taxes, taxpayer's personal situation

(marital status, annual costs affinity for the donor / deceased etc) are taken into

account, eg. Income tax. There is another distinction according to the method of

calculation, there the actual and implicit taxes. Another distinction regarding the

calculation is the specials and at value : at value are those calculated on the price of

the tax component such as tax income and Vat, and the specials are calculated on

specific kind such as oil. Distinctions are the personal taxation and the corporate

taxation and capital gains tax. Of course there are taxes regarding the property, work

and etc.

WHAT IS TAX EVASION AND FACTORS FOR TAX

COMPLIANCE

According to the Greek national operational programs against tax evasion (2011), Tax

evasion is, the illegal in any way hiding of income of individual or entities, aiming to

reduce or eliminate tax liability. Costas(2011), president of Chair of the Taxation

Committee of the Chamber, imply that “Per Greek Tax legislation and the reporting of

the economic crime prosecution body (SDOE), the following Illegal actions are con-

sidered tax evasion, such as the omission to declare any kind of taxable income ,

omission to issue tax documents, omission to pay withholding taxes (VAT), omission

to declare and pay social security contributions, the illegal use of tax documents

(forged, fictitious) and sometimes the non monetary barter of legal services and

goods”. The term illegal, indicates the separation from tax avoidance, which is a re-

lated concept where a taxpayer, e.g. Corporation record transactions in order to min-

imize tax payment. Feldman and Kay (1981), imply that there is strong similarity

between tax evasion and tax avoidance. In Advanced Corporate Reporting the finan-

cial statements must depict the economic reality and the tax basis where the tax will

be calculated, will be real. Rice (1992), implies that the big firms have the greatest

tendency to tax evade, but also in much smaller companies , he concluded that tax non

compliance in companies with low profits, it was a strategy by the managers in order

to reduce cost. The tax evasion and the resistance towards the obligation to pay taxes,

has many causes. There are microeconomic approaches based on mathematical mod-

els to analyse the tax evasion. Allingham and Sandmo (1972) developed the expected

utility maximization approach where the taxpayer has to choose between the declara-

tions of the actual income and to declare less than his actual income. The first choice

leads to the full amount of tax payment, and the second although he can pay less

taxes, he may be detected and punished. The individual but especially a company

wants to maximize the expected utility which comes from the income after tax and

penalty (in the case of detection for tax evasion). The decision for tax evasion by de-

claring less income is risk averse. The tax rate effect on the reported income is inde-

terminate but in this theory the increased tax rate because of the tax evasion effect to

state on collecting taxes, it finally leads the taxpayer to avoid the risk. The probability

of detection is less attractive. To conclude, rational taxpayers decide how much to

evade, given their income the marginal tax rate, and of course the possibility of detec-

tion. Srinivasan (1973), implies that the expected income maximization approach of

that the taxpayer has accepted that his goal is to maximize his expected income after

taxes and penalties and that the “higher the probability of detection, the lower the pro-

portion of income being evaded. If there is a progressive tax rate the richer the person,

the large the unreported income. Both approaches are related to tax rates, and this

factor is important to lead a Company or a person to declare directly less income in

order to avoid the reduction of its income. According to Frey and Torgler (2007), a

social norm is related to a type of behaviour of an individual or social group with gen-

eral social approval or disapproval. Bordingnon (1993) implies a compliance model

under Kantian principles, in order to promote fairness among taxpayers by consider-

ing fair amount of taxes. The effect will be the avoidance of tax evasion because of

selfish behaviour. Benjamini and Maital (1985), imply that in societies where most

tax payers evade, the social stigma is small and the result is the reduction of tax com-

pliance. On the contrary in societies where a few only evade the stigma effect is great.

Frey and Torgler (2007), imply that some governments promote a moral appeal for

the taxpayer who complies and a low social standing of tax evaders in a great degree.

This kind of compliance is greater in countries with a strong sense of social cohesion,

patriotism. Tax morality is also a part of total morality of one society, and it reflects in

the relation of social environment. Alm et al. (1995), imply after comparing tax com-

pliance experiments that there is higher tax compliance in United States which is re-

lated to higher social norm than in Spain. Both countries have different culture and

history. The United States in this research had the highest tax morale followed by

Austria and Switzerland. There is also a strong negative correlation between the size

of unofficial economy and the degree of tax morale in those countries. The Greek

national operational programs against tax evasion (2011), indicates clearly that the

increasing intensity of tax evasion have overcome the reflexes of society against of

tax evasion and there is permanent perception for the impunity of this phenomenon. It

is of course a matter of complete morality of each individual taxpayer or corporation.

Tax compliance is different for firms or corporations in contrast to individual

taxpayers. Crocker and Slemrod (2005), and Chen and Chu (2005), imply that the

existence of internal procedures such as the internal audit , affect their tax reporting

and the importance of the firm’s external activities in the market where the corporate

tax evasion can influence negatively the shareholders and stakeholders interest and

the whole market in generally. According to KPMG survey (2011), every official

authority has to reduce corporate income taxes but with consideration for the effects

at the shareholder level because in many countries the income tax systems are based

on the concept of integration. The shareholders have a credit for the underlying tax

paid related to corporation. But many countries lately choose to give no credit and to

reduce the corporate income tax rate. The reduction of rate has a minimum effect than

the expected at the shareholder’s level. According to the results of the KPMG

Benchmark Survey (2011) on VAT, corporations have to deal with the problem to

manage their indirect tax risk and creating value and simultaneously to achieve full

compliance. In many countries there is also the lack of confidence regarding the

reliability of institution. According to Schneider and Enste (2000), Greece and Italy

had the largest unofficial economy at 30 percent and 27 percent of GDP. There is a

disposition towards public institutions, tax authorities and in general to government

authorities. The low quality of services and the increase of public cost of the state,

economic scandals and the public disposition regarding the legality of certain taxes

especially in countries such as Greece where tax evasion is so common and the people

trust the system less, leads to low tax morale. Tatsos (2001) implies that high earners

in Greece were more inclined to tax evasion. Costas (2011), implies that the education

factor regarding the Lack of education and conscious acceptance of the role of taxa-

tion is very important. The efficiency of the tax authorities’ mechanism for the detec-

tion and audit are very important in order to promote the tax compliance especially to

corporations. According to KPMG survey (2011), governments choose to rely on in-

direct taxes than the direct taxes such the tax income in order to promote competitive-

ness for investments. This political first off all act, set barriers to social change by not

redistributing wealth to lower income citizens and smaller companies. According to

OECD (1990), in most countries, companies and individuals can make a deal with tax

inspectors in order to pay fewer penalties in order to collaborate.

CONSEQUENCES OF TAX EVASION

According to Slemrod and Bakija (2004), tax evasion has a great influence on the

distribution of tax burden as well the resource cost of raising taxes and effect to social

inequality and poverty. Tax evasion also forces governments to reduce the amount of

tax free bracket in order to collect taxes and cut other tax free benefits. Greece’s huge

sovereign debt has almost limited the financial opportunity and survival in the

European Community, the tax evasion is the most pressing challenge for any Greek

government and perhaps is the main cause of the deficit. Vagianos et al. (2010), imply

that the main cause of the deficit in Greece is the lack of public income because of tax

evasion. The above is concluded by the comparison between the Greek Government

expenditure with the average of the European Union but revenue is much lower

because of tax evasion. Behrens et.al (2009), indicate that market distortions by the

two transfer pricing rules in the OECD guidelines the Comparable Uncontrolled Price

and the Comparable Uncontrolled Price, because the transfer pricing can be use for

tax evasion. Sadmo (2005) implies that firms are able to allocate labor freely between

official and unofficial economy. In this way workers and firms do not face incentives

and disincentives to participate in the shadow economy and this has moral

consequences in society. Matsaganis et al. (2010), indicate that tax evasion influences

the redistribution of income, and the social benefits. Guth and Mackscheit (1984),

emphasize that the redistribution of taxes and public goods comes from tax revenues.

According to Gupta (2007), imply that tax revenue have a positive correlation with

economic development. Reduction of the tax revenue because of tax evasion or tax

avoidance restricts the development opportunities. Tax refunds can be used in order to

promote research and development in countries. Vagianos et. al (2010) , indicate that

Tax evasion enhances the low technology and low activity against the growth of high

technology and high growth activities because many of self employed individuals are

not detected by tax authorities easily and tax burden falls in a great percentage to

large firms. Fredericksen et. al., (2005) imply that lower tax revenues may ultimately

lead to higher tax burdens to the reliable tax payers and that tax evasion will also

distort labor supply decisions.

WAYS TO PREVENT TAX EVASION

Costas (2011), Chair of the Taxation Committee of the Chamber indicates measures

to prevent taxation. Tax morale can be influenced with the education of taxpayers.

Education regarding the acceptance of the role of taxation in society must be pro-

moted. The education will enhance the morality and the patriotism of citizens in order

to face the question of the quality of state institutions and the quality of public ser-

vices, the doubt about the use of tax revenues because of scandals. Economic benefit

also must be included in the reform of tax system, regarding the individuals or entities

with high tax compliance behaviour in order to promote the tax compliance. Motiva-

tions for individuals but also for the entities must be included in order to increase the

high compliance. Receipts measures regarding the personal taxation and tax credit in

cases of payment in advance for companies are examples. A tax system reform will

demand more participation to tax burden from self employed and independent profes-

sionals with increase of tax rate. The detection and the tax audit authorities must be

more efficient. It would be better to emphasize in searching the resources of personal

income and not just the corporate income or emphasizing to revenues of an entity. An

example is that in Greece there are many entities with low corporate income for years

but their boards are rich. It is obvious that there are tax evasion benefits from unre-

ported transactions in these companies. Floropoulos et al. (2010) imply regarding the

Taxis system, that Greek authorities in order to use successfully the Information

Technology must provide higher service quality. The tax code also must be stricter by

increasing the penalties quantity and quality.

CONCLUSION

Shelmrod (1990), implies that optimal taxation as general framework for higher tax

receipts, lower poverty, reduced inequalities, and a more progressive tax system, is

costless but it is related to the structure of economy, and the availability of tax instru-

ments. The policy in general is the most important factor in order to educate citizens

and enhance the tax morals, to reform tax systems, to emphasize in direct taxes rather

than indirect taxes , more progressive tax system and to create a just tax system to

help the State to avoid increase of deficit. This leads governments to increase foreign

or domestic borrowing. The first means less independence and freedom of economic

and other options for the country, but an increase in debt due to the high rate of

external borrowing. The political intention to control economy worldwide is obvious.

The question is how serious is the connection between Political morals and tax morals

of citizens.

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