Tax Evasion and Avoidance: The Root Causes
Tax evasion and avoidance are complex issues with far-reaching consequences. A recent study by Fuest/Riedel (2009a) sheds light on the reasons behind this phenomenon, highlighting the importance of understanding these factors in developing effective strategies to combat tax evasion and avoidance.
Factors Contributing to Tax Evasion and Avoidance
The study identifies two primary categories of reasons for tax evasion and avoidance:
Low Compliance Motivation
- Low Tax Morale: A lack of trust in the government’s ability to provide public goods and services in return for taxes paid is a significant contributor to tax evasion.
- Factors influencing taxpayers’ willingness to pay include:
- Low quality of service in return for taxes
- Tax system and perception of fairness
- Low transparency and accountability of public institutions
- High level of corruption
- Lack of rule of law and weak fiscal jurisdiction
- Factors influencing taxpayers’ willingness to pay include:
High Compliance Costs
- Compliance Costs: The time and resources required to prepare and pay taxes can be a major deterrent to taxpayers.
- Examples of significant differences in compliance costs include:
- OECD countries: 210 hours on average
- Bolivia: 1080 hours
- Vietnam: 1080 hours
- Brazil: 2600 hours
- Examples of significant differences in compliance costs include:
Weak Tax Administration Capacity
- Insufficiencies in Tax Collection Procedures: Inadequate procedures can contribute to tax evasion and avoidance.
- Weak Capacities of Tax Administrations: The inability to detect and prosecute tax violators hinders the enforcement of tax liabilities.
Conclusion
Tax evasion and avoidance are complex issues that require a deep understanding of their root causes. By addressing factors that contribute to low voluntary compliance and high regulatory costs, governments can improve tax administration capacity and promote a culture of trust and transparency. Effective strategies must be developed to combat these challenges, including improving tax administration capacity and promoting a culture of transparency and accountability.