Which are the causes of tax evasion?

I intend to share with you some ideas regarding the real causes of tax evasion.

It is very important for every country to be aware of the causes of a phenomenon as complex as tax evasion, since it is the only way to find a strategy for combatting it.

The issue is extremely complex, but undoubtedly, it is an exercise, which all countries must undertake.

In a previous comment,[1] we pointed out the importance and seriousness of tax evasion currently existing in Latin America and likewise, the significant inequality in the distribution of income, stressing the scarce redistributive capacity of the tax policy.

We said that in many countries there is no institutionalized and systematized estimation of evasion, with adequate periodicity and dissemination of the results.

With respect to the causes of evasion, it is usually said that there are as many causes, as authors who have written about the subject.

On the other hand, it is important to point out that the causes vary from one country to another and even, within the same country through time and moments of its history.

Some of the causes of tax evasion, among others are:

  • The very structure of the countries’ tax system.

  • Anarchic distribution of powers among the different government levels, especially in federal countries.

  • Low educational level of the population.

  • Lack of simplicity and accuracy of the tax legislation.

  • Inflation.

  • Tax pressure – high rates.

  • A significant informal economy

  • Permanent regularization regimes (moratoriums, whitewashing, etc.)

  • Possibility of failing to comply without greater risks.

  • Promotional regimes (tax incentives, exemptions and tax expenses).

  • Lack of dissemination regarding the use of resources originating from taxes.

  • Lack of citizens’ tax integrity.

  • Inefficiency of the Tax Administrations (AATT).

  • Presence of multinational enterprises with aggressive tax planning.

  • Tax havens – jurisdictions of null or low taxation or as it is said in many countries, non-cooperating jurisdictions.

  • Great weight of intangibles, which makes it difficult to assign them their true value and determine their place of origin.

  • Financial system with multiple sophisticated figures that allow for mobilizing money in a speedy and simple manner.

  • Proliferation of special tax regimes for attracting investments (e.g. tax rulings)

  • Difficulty to control the transfer prices of related multinational enterprises: currently over 60% of world trade is carried out through these enterprises and 50% are intragroup operations.

  • Digital economy, with the significant technological development: electronic commerce, collaborative platforms, digital currencies and new ways of commercializing goods and services, there are increasing difficulties for taxing and controlling.

A paper written by Michel Jorratt[2] mentions the following variables that influence the complex evasion phenomenon. These are effectiveness of examination by the TA, the sanctions system, the simplicity of the tax structure and finally acceptance of the tax system.

The effectiveness of examination is related to the probability of detecting evasion.

As for the system of sanctions, one must analyze, among other things, the level of the sanctions, the juridical accuracy of the verdicts, the timeliness of their application and the effectiveness of the collection.

With respect to the simplicity of the tax structure, it is clear that complex tax systems favor evasion and avoidance, inasmuch as they create uncertainty with respect to scope of the tax regulations, increase the costs of examination and compliance and multiply the evasion and avoidance formulas or mechanisms.

No less important is the acceptance of the tax system because if a taxpayer perceives that the tax system is unfair, he will be less willing to comply.

The acceptance of the system depends, among other aspects, of the moderation of the tax burden, the equity of the tax structure, the use made of the collection, the compliance costs and taxpayer service.

On the other hand, we must mention that evasion has been examined through various models that attempt to explain its causes and motivations. In these models, an attempt was made at examining the multiple causes or interaction of factors that are attributed the origin of tax evasion.[3]

Thus, among others, one may point out:

  • Economic models: the evader endeavors to maximize his earnings (expected revenues vs expected costs)
  • Empirical evidence models: based on surveys and interviews – sampling –. In this respect, the Spicer y Lundstedt model (1980) indicated that evasion decreases when there is greater coercivity (level of sanctions), when the perception of detection is greater, when the age is greater there is less aversion to risk, etc.
  • Simulations and experimental methods: individuals are subjected to hypothetical decisions of evasion and their behavior is analyzed when certain conditions of their environment are modified.
  • Psycho-economic models of tax fraud: the decision to evade is a complex issue (inclination to defraud, ability to defraud and opportunity to defraud). When examining fraud, in addition to the economic interests one must analyze the taxpayer’s psychological factors and his social environment.

As we may see, it is a complex phenomenon and its causes are difficult to precisely determine, but this should not discourage its analysis, it should rather be quite the reverse.

If one is aware of the causes and magnitude of the problem, the phenomenon may be tackled more efficiently.

This is a key issue for our TAs, since in order to be more efficient, every control policy must begin with the knowledge of evasion in each country, its causes, magnitude, types of maneuvers and above all, the taxpayers or sectors that contribute thereto to a greater extent.

Therefore, as I always say, it is better to carry out sectorial evasion or comparative studies, rather than global noncompliance studies.

These sectorial studies allow for determining which taxpayer or sector evades, as well as the maneuvers used for such purpose.

Only with an in-depth knowledge thereof may one be more efficient in achieving the main objective of the TAs, which is to increase the voluntary compliance levels.

I understand that the complexity of the phenomenon calls for more cooperation between organizations of the country and other TAs.

Combatting the scourge should be a State issue, especially in Latin America, the most unpredictable region of the planet.

The State’s social perception is basic for approaching the causes and importance of evasion.

Situations of impunity and corruption generate more fraud and discourage the compliant taxpayer.

Undoubtedly, I believe that this issue of corruption illustrates most of the causes of evasion I have listed.

In a recent document entitled: “The Struggle against corruption in the State”,[4] it is said that no country is immune to corruption. Abuse of the public function for one’s own benefit reduces the people´s trust in the government and institutions, undermines the effectiveness and equity of the public policies, and misappropriates the taxpayers’ money, originally intended for schools, roads and hospitals.

Over 180 countries were analyzed and the interesting conclusion was that the most corrupt countries collect less taxes, because the people pay bribes to avoid them; for example, through tax gaps conceived in exchange for bribes. In addition, when the taxpayers believe that the State is corrupt, tax evasion becomes more probable.

The study states that, globally, less corrupt governments collect 4% more GDP in tax revenues than the countries having the same level of development with the highest levels of corruption.

I fully share this analysis noting that facing corruption is a challenge that requires perseverance in many fields, but which undoubtedly has enormous dividends logically beyond the tax sphere.

A key aspect stated is the political will, the continuous strengthening of the institutions to promote integrity, greater transparency, accountability and international cooperation.

I also wish to add what was recently stated in an OECD[5] report; namely, that integrity is essential for the tax system, thereby upholding trust among the taxpayers and the governments, as well as being a vital component of the tax morale.

The willingness of taxpayers to pay taxes is linked to their trust in the institutions, the perceptions of corruption, as well as satisfaction with the public services.

I hereby highlight the statement by Juan Francisco Redondo Sanchez[6] with respect to what the TAs can do in relation to corruption, since assuming that there is a strong political support, the basic requirements which should be considered for a more effective cooperation model would be:

  • The existence of entities specialized in investigating corruption.

  • Promoting the work of multidisciplinary and highly specialized teams.

  • The preparation of sound protocols, intervention guides and procedure manuals that may favor communication between the various responsible entities.

  • Promoting international cooperation and exchange of information and mutual assistance agreements.

  • The availability of adequate technical tools and infrastructures.

  • The reinforcement of systems for the formulation and follow-up of accusations.

 

Finally, as we may see, many of the causes listed are interrelated and many have a common denominator in corruption, which, I understand, calls for a firm political decision to promote greater transparency, education and justice in each of our countries.

To conclude, I hope you may excuse me for certainly having omitted many more causes of tax evasion. I only intended to open up the topic for discussion.

[1] Tax evasion in Latin America: an urgent call for attention. Alfredo Collosa. CIAT BLOG 22/4/2019.

[2] Tax Evasion: causes, measurement and strategies for facing it. Michel Jorratt

[3] Tax Evasion: Some models that attempt to explain it – Argentine Association of Fiscal Studies -Alfredo Lamagrande –

[4] Vitor Gaspar, Paolo Mauro and Paulo Medas https://blog-dialogoafondo.imf.org/?p=10957

[5] https://www.oecd.org/tax/tax-global/tax-morale-and-integrity-in-developing-countries-march-2019.htm

[6]  Against corruption, more cooperation. CIAT BLOG 31/05/2019.

Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

16 comments

  1. Robert Feinschreiber Reply

    Very important analysis, Bob Feinschreiber

  2. Alfredo Collosa Reply

    Bob, good morning, thanks a lot for your expert comment.

  3. Tori Reply

    I study taxation in different countries, low tax jurisdictions. Your article has an excellent analysis of tax evasion. Thanks for the information! I can use it in my student work!

    1. Alfredo Collosa Reply

      Tori thanks a lot for your comment, it means a lot for me.

    2. mohamadhasan Reply

      Hello
      Do you have an article about this?

  4. Anuoluwapo Falas Reply

    This post is awesome, and I concur with the fact that it has an excellent analysis of tax evasion. It’s been really helpful. I didn’t even want to open it, I Sha just clicked it, but I am so glad I did.

  5. Alfredo Collosa Reply

    Dear Anuoluwapo Falas thanks a lot for your comments and kind words. Best regards

  6. Joshua Owino Reply

    Your work is rather helpful and resourceful

    1. Alfredo Collosa Reply

      Joshua thanks a lot for your comment. Hope you are well

  7. Brigid Benson Reply

    Hi, I feel that this summary about tax evasion rings more true of LA, the Caribbean & African states than eg Nations like the UK, many European countries & US for many reasons. These countries had previously developed numerous policies which generated tax as well as systems for collecting tax, Eg building infrastructure & public services, Education, housing and health Which generate jobs and prosperity in the private as well as public sector, where salaries paid with tax deducted, with much lower numbers in the informal economy. Less resistance to paying tax as people see practical benefits of their tax contributions. acknowledging of course that tax is always a contested matter, no one actually likes paying tax but The principle was accepted. There were always a number of wealthy, some high profile, who managed to find ways to pay less tax but the problem has become much graver with the rise of neo liberalism in the 80’s, with governments in the US & UK who believed that the private sector should predominate and who privatised or underfunded/undermined the public sector, reduced taxes and turned a blind eye to the rising trend for multinationals to place their profits in offshore locations. This is only a brief & crude summary of a complex topic but for those who want to know more, I highly recommend The Tax Justice Network which publishes regular articles and research about the effects of tax evasion, who and how the wealthy, politicians and corporates manage to avoid paying the same share as the rest of us and why we should be concerned.
    See also a number of superbly researched books by Eg Nicholas Shaxson – Financial Times journalist, Stewart Lansley – with figures described as impeccable by the FT etc.

  8. Alfredo Collosa Reply

    Dear Brigid, thanks a lot for your comments. Best regards

  9. Yeshi mequanint Reply

    I got your article very helpful for my research work on “analysis on fraud prevention,detection and control…”.If you have time please say few statements about the similarly and difference between tax evasion and tax fraud.can we say tax evasion is one phenomenon of tax fraud?

    Thank you very much!

  10. Ibrahim Mohammed Awal Reply

    Thank you so much sir , your article is great and is really going to be of a great important toward my project work . God bless you

  11. Sorcha Ryan Reply

    The inequity of the tax structure has a lot to do with tax evasion.

    1. Alfredo Collosa Reply

      thanks a lot dear Ibrahim and Sorcha for your comments. I agree. Kind Regards,

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